-----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, WQRBtm13psyGMbJaMdf08Aw+CF3Fi1+umZdVFQEPBx0nPMNo7dt1hRIEFJB7UmVt NcrsLqL9aAFH0N8LfxeuBg== 0000950136-98-000607.txt : 19980401 0000950136-98-000607.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950136-98-000607 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971221 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001039101 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [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: 98583276 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 (Mark One) 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, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number L-3 COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 13-3937436 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 THIRD AVENUE 10016 NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices) (212) 697-1111 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. 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. [ ] As of December 31, 1997, L-3 Communications Corporation (the "Company" or "L-3 Communications") had 100 shares of common stock oustanding, which were held by its parent, L-3 Communications Holdings, Inc. ("Holdings"). DOCUMENTS INCORPORATED BY REFERENCE None. ============================================================================== PART I As used herein, unless the context requires otherwise: (i) "Holdings" means L-3 Communications Holdings, Inc., (ii) "L-3" means Holdings, its wholly-owned operating subsidiary, L-3 Communications Corporation, their predecessors, and the businesses acquired in the 1998 Acquisitions (as defined), (iii) "L-3 Communications" or the "Company" means L-3 Communications Corporation, (iv) "L-3 Acquisition" means the purchase of the Company from Lockheed Martin Corporation in April 1997 described under "--History", (v) "1998 Acquisitions" means the recently completed acquisition of STS (as defined), ILEX (as defined) and Ocean Systems (as defined) described under "--Recent Developments", (vi) "Notes Offering" means $150 million aggregate principal amount of Senior Subordinated Notes due 2008 to be offered by L-3 Communications, (vii) "Common Stock Offering" means an initial public offering of common stock by Holdings which is made concurrently with the Notes Offering, (viii) "Offerings" means the Notes Offering and the contribution by Holdings of the proceeds of the Common Stock Offering and (ix) unless otherwise indicated, "pro forma" financial data reflect the L-3 Acquisition, the 1998 Acquisitions and the Offerings as if such transactions had occurred in the beginning of the period indicated. ITEM 1. BUSINESS. COMPANY OVERVIEW L-3 is a leading merchant supplier of sophisticated secure communication systems and specialized communication products including 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. The Company's systems and specialized products are used to connect a variety of airborne, space, ground-and sea-based communication systems and are incorporated into the transmission, processing, recording, monitoring and dissemination functions of these communication systems. The Company's customers include the U.S. Department of Defense (the "DoD"), selected U.S. government (the "Government") intelligence agencies, major aerospace/defense prime contractors, foreign governments and commercial customers. In 1997, L-3 had pro forma sales of $894.0 million and pro forma EBITDA (as defined) of $95.1 million. The Company's pro forma funded backlog as of December 31, 1997 was $638.1 million. These results reflect internal growth as well as the execution of the Company's strategy of acquiring businesses that complement or extend L-3's product lines. The Company's business areas enjoy proprietary technologies and capabilities and have leading positions in their respective primary markets. Management has organized the Company's operations into two primary business areas: Secure Communication Systems and Specialized Communication Products. In 1997, the Secure Communication Systems and Specialized Communication Products business areas generated approximately $456.0 million and $438.0 million of pro forma sales, respectively, and $52.3 million and $42.8 million of pro forma EBITDA, respectively. In addition, the Company is seeking to expand its products and technologies in commercial markets. See " -- Emerging Commercial Products" below. SECURE COMMUNICATION SYSTEMS. L-3 is the established leader in secure, high data rate communications in support of military and other national agency reconnaissance and surveillance applications. The Company's Secure Communication Systems operations are located in Salt Lake City, Utah; Camden, New Jersey; and Shrewsbury, New Jersey. These operations are predominantly cost plus, sole source contractors supporting long-term programs for the U.S. Armed Forces and classified customers. The Company's major secure communication programs and systems include: secure data links for airborne, satellite, ground-and sea-based information collection and transmission; strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information and related support contracts for military and national agency intelligence efforts; as well as secure telephone and network equipment. The Company believes that it has developed virtually every high bandwidth data link used by the military for surveillance and reconnaissance in operation today. L-3 is also a leading supplier of communication software support services to military and related government intelligence markets. In addition to these core Government programs, L-3 is leveraging its technology base by expanding into 1 related commercial communication equipment markets, including applying its high data rate communications and archiving technology to the medical image archiving market and its wireless communication expertise to develop local wireless loop telecommunications equipment. SPECIALIZED COMMUNICATION PRODUCTS. This business area includes (i) Microwave Components, (ii) Avionics and Ocean Systems and (iii) Telemetry, Instrumentation and Space Products operations of the Company. Microwave Components. L-3 is the preeminent worldwide supplier of commercial off-the-shelf, high performance microwave components and frequency monitoring equipment. L-3's microwave products are sold under the industry-recognized Narda brand name through a standard catalog to wireless, industrial and military communication markets. L-3 also provides state-of-the-art communication components including channel amplifiers and frequency filters for the commercial communication satellite market. Approximately 76% of Microwave Components sales is made to commercial customers, including Loral Space & Communications, Ltd., Motorola, Inc., Lucent Technologies Inc., AT&T Corp. and Lockheed Martin Corporation ("Lockheed Martin"). Avionics and Ocean Systems. Avionics and Ocean Systems include the Company's Aviation Recorders, Display Systems, Antenna Systems and Acoustic Undersea Warfare Systems operations. L-3 is the world's leading manufacturer of commercial cockpit voice and flight data recorders ("black boxes"). These recorders are sold under the Fairchild brand name both on an original equipment manufacturer ("OEM") basis to aircraft manufacturers as well as directly to the world's major airlines for their existing fleets of aircraft. L-3 recorders are also installed on military transport aircraft throughout the world. L-3 provides military and high-end commercial displays for use on a number of DoD programs including the F-14, V-22, F-117 and E-2C. Further, L-3 manufactures high performance surveillance antennas and related equipment for U.S. Air Force, U.S. Army and U.S. Navy aircraft including the F-15, F-16, AWACS, E-2C and B-2, as well as the U.K.'s maritime patrol aircraft. L-3 is also 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. Telemetry, Instrumentation and Space Products. The Company's 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 parameter data and other critical information and transmit it from air or space to the ground. Telemetry products are also used for range safety and training applications to simulate battlefield situations. L-3 is also a leading global satellite communications systems and services provider offering systems and services used in satellite transmission of voice, video and data. EMERGING COMMERCIAL PRODUCTS. Building upon its core technical expertise and capabilities, the Company is seeking to expand into several closely aligned commercial business areas and applications. Emerging Commercial Products currently include the following three niche markets: (i) medical archiving and simulation systems; (ii) local wireless loop telecommunications equipment; and (iii) airport security equipment. These commercial products were developed based on technology used in the Company's military businesses with relatively small incremental financial investments. The Company is applying its technical capabilities in high data rate communications and archiving technology developed in its Secure Communication Systems business area to the medical image archiving market through a partnership with the General Electric Company's ("GE") medical systems business. Based on secure, high data rate communications technology also developed in its Secure Communication Systems business area, the Company has 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 non-existent. L-3 has completed the development phase for the local wireless loop telecommunications equipment and made its initial shipment in January 1998. In addition, the Federal Aviation Administration (the "FAA") has awarded the Company a development contract for next generation airport security equipment for explosive detection. L-3 has shipped two prototype test units and FAA certification testing commenced in the first half of 1998. To date, revenues generated from L-3's Emerging Commercial Products have not been, in the aggregate, material to the Company. 2 The Company's systems and products are summarized in the following tables: SECURE COMMUNICATION SYSTEMS (1997 PRO FORMA SALES: $456.0 MILLION)
SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES - ------------------------------------- --------------------------------------- ---------------------------------------- SECURE HIGH DATA RATE COMMUNICATIONS o Wideband data links o High performance, secure o Used on aircraft and naval ships and communication links for interoperable unmanned aerial vehicles with military tactical communication and and commercial satellites reconnaissance SATELLITE COMMUNICATION TERMINALS o Ground-based satellite o Interoperable, transportable ground o Provide remote personnel with communication terminals terminals for remote data links to communication links to distant forces distant segments via commercial or military satellites SPACE COMMUNICATION AND SATELLITE CONTROL o Satellite communication and o On-board satellite external o International Space Station; Earth tracking systems communications, video systems, solid Observing Satellite; Landsat-7; Space state recorders and ground support Shuttle; and National Oceanic and equipment Atmospheric Administration weather satellites o Satellite command and control o Software integration, test and o Air Force satellite control network sustainment and support maintenance support for Air Force and Titan IV launch system satellite control network; engineering support for satellite launch systems MILITARY COMMUNICATIONS o Shipboard communication systems o Shipboard and ship-to-ship o Shipboard voice communications systems communications for Aegis cruisers and destroyers and fully automated Integrated Radio Room (IRR) for ship-to-ship communications on Trident submarines o Digital battlefield communications o Communications on the move for o Communication systems for U.S. Army tactical battlefield C(2)V o Communication software support o Value added, critical software o ASAS, JSTARS and GUARDRAIL services support for C(3)I systems INFORMATION SECURITY SYSTEMS o Secure Telephone Unit (STU o Secure and non-secure voice, data and o Office and battlefield secure and III)/Secure Terminal Equipment video communication utilizing ISDN non-secure communication for armed (STE) and ATM commercial network services, intelligence and security technologies agencies o Local management device/key o Provides electronic key material o User authorization and recognition and processor (LMD/KP) accounting, system management and message encryption for secure audit support functions for secure communication data communication o Information processing systems o Custom designed strategic and o Classified military and national tactical signal intelligence systems agency intelligence efforts that detect, collect, identify, analyze and disseminate information and related support contracts - ------------------------------------- --------------------------------------- ----------------------------------------
3 SPECIALIZED COMMUNICATION PRODUCTS (1997 PRO FORMA SALES: $438.0 MILLION)
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES - --------------------------------------- --------------------------------------- ---------------------------------------- MICROWAVE COMPONENTS o Passive components, mechanical o Radio transmission, switching and o Broad-band and narrow-band commercial switches and wireless assemblies conditioning; antenna and base applications (PCS, cellular, SMR, and station testing and monitoring paging infrastructure) sold under the Narda brand name; and broad- band military applications o Safety products o Radio frequency (RF) monitoring and o Monitor cellular base station and measurement industrial RF emissions frequency monitoring o Semiconductors (diodes, capacitors) o Radio frequency switches, limiters, o Various industrial and military end voltage control, oscillators, uses, including commercial satellites, harmonic generators avionics and specialty communication products o Satellite and wireless components o Satellite transponder control, o China Sat, PanAmSat, Telstar, Sirius, (channel amplifiers, transceivers, channel and frequency separation Tempo, Tiros, Milstar, GPS and LandSat converters, filters and multiplexers) AVIONICS AND OCEAN SYSTEMS Aviation Recorders o Solid state cockpit voice and flight o Voice recorders continuously record o Installed on business and commercial data recorders most recent 30-120 minutes of voice aircraft and certain military and sounds from cockpit and aircraft transport aircraft; sold to both inter-communications. Flight data aircraft OEMs and airlines under the recorders record the last 25 hours of Fairchild brand name flight parameters Antenna Systems o Ultra-wide frequency and advanced o Surveillance; radar detection o F-15, F-16, F-18, E-2C, P-3, C-130, radar antenna systems and rotary B-2, AWACS, Apache, Cobra, Mirage joints (France), Maritime Patrol (U.K.) and Tornado (U.K.) Display Systems o Cockpit and mission display systems o High performance, ruggedized flat o E-2C, V-22, F-14, F-117, E-6B, C-130, panel and cathode ray tube displays AWACS and JSTARS Ocean Systems o Airborne dipping sonar systems o Submarine detection and localization o SH-60, SH-2/3, AB-212, EH-101 and Lynx Helicopters o Submarine and surface ship towed o Submarine and surface ship detection o SSN, SSBN, DDG-963 and FFG-7 arrays and localization 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) TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS Airborne, Ground and Space Telemetry o Aircraft, missile and satellite o Real time data acquisition, o JSF, F-15, F-18, F-22, Comanche, telemetry systems measurement, processing, simulation, Nimrod (U.K.), Tactical Hellfire, distribution, display and storage for Titan, EELV, A2100 and ATHENA flight testing o Training range telemetry systems o Battlefield simulation o Combat simulation Space Products o Global satellite communications o Satellite transmission of voice, o Rural telephony or private networks, systems supplier video and data direct to home uplinks, satellite news gathering and wideband applications - --------------------------------------- --------------------------------------- ----------------------------------------
4 INDUSTRY OVERVIEW The defense industry has recently undergone significant changes precipitated by ongoing federal budget pressures and new roles and missions to reflect changing strategic and tactical threats. Since the mid-1980's, the overall U.S. defense budget has declined in real dollars. In response, the DoD has focused its resources on enhancing its military readiness, joint operations and digital command and control communications 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. According to Federal Sources, an independent private consulting group, the defense budget for command, control, communications and intelligence ("C(3)I") is expected to increase from $31.0 billion in the fiscal year ended September 30, 1997 to $42.0 billion in the fiscal year ended September 30, 2002, a compound annual growth rate of 6.3%. The industry has also undergone dramatic consolidation resulting in the emergence of three dominant prime system contractors (The Boeing Company, 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 businesses by AlliedSignal Inc. ("AlliedSignal"), Ceridian Corporation ("Ceridian"), 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 mezzanine 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. RECENT DEVELOPMENTS The Company recently purchased the assets and liabilities of three businesses described below which collectively comprise the "1998 Acquisitions". The combined purchase prices for these acquisitions was $146.4 million of cash, subject to certain post-closing adjustments, and in one case certain additional consideration based on post-closing performance. The Company has financed these acquisitions through the use of its existing cash balances as well as through borrowings under the $375.0 million Senior Credit Facilities. These three businesses complement and extend L-3's product offerings. Ocean Systems On March 30, 1998, L-3 Communications purchased the assets of the Ocean Systems business ("Ocean Systems") of AlliedSignal for $67.5 million in cash. In 1997, Ocean Systems had sales of $73.0 million. 5 Ocean Systems is one of the world's leading products 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 40 years. Ocean Systems is the leading products supplier of airborne dipping sonar systems in the world with substantial market share of the sector and systems in service with the U.S. and 20 foreign navies. Ocean Systems also produces several sea systems products including towed array sonar, integrated side-looking sonar, acoustic jammers, mine detection and torpedo defense systems and supplies commercial navigation and hydrographic survey systems worldwide. Ocean Systems is further supported by ELAC Nautik GmbH ("ELAC") located in Kiel, Germany. ELAC manufactures a broad range of naval defense products including submarine, torpedo and navigation sonars as well as survey and navigation systems for the commercial nautical products industry. ILEX Systems On March 4, 1998, L-3 Communications purchased the assets of ILEX Systems ("ILEX") for $51.9 million in cash plus additional consideration based on post-closing performance which could include up to 540,000 shares of Common Stock over the next three years. In 1997, ILEX had sales of $63.5 million. ILEX is a leading supplier of communication software support services to military and related government intelligence markets. ILEX also provides environmental consulting, software and systems engineering services and complementary products to several commercial markets. Satellite Transmission Systems On February 5, 1998, L-3 Communications purchased the assets of Satellite Transmission Systems division ("STS") of California Microwave, Inc. for $27.0 million. For the fiscal year ended June 30, 1997, STS had sales of $68.0 million. STS is a leading global satellite communications systems and services provider. Its customers include foreign post, telephone and telegraph administrations, domestic and international prime communications infrastructure contractors, telecommunication and satellite service providers, broadcasters and media-related companies, government agencies and large corporations. The Company considers and executes strategic acquisitions on an ongoing basis and may be evaluating acquisitions or engaged in acquisition negotiations at any given time. As of the date hereof, the Company has completed, has reached agreement on or is in discussions regarding certain acquisitions, in addition to the 1998 Acquisitions, that are either individually or in the aggregate not material to the financial condition or results of operations of the Company. HISTORY Holdings and L-3 Communications were 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 (collectively, "Senior Management"), Lehman Brothers Capital Partners III, L.P. and its affiliates (the "Lehman Partnership") and Lockheed Martin to acquire (the "L-3 Acquisition") substantially all of the assets and certain liabilities of (i) nine business units previously purchased by Lockheed Martin as part of its acquisition of Loral in April 1996 (the "Loral Acquired Businesses") and (ii) one business unit, Communication Systems -- East, purchased by Lockheed Martin as part of its acquisition of the aerospace business of GE in April 1993 (collectively, the "Businesses"). L-3 Communications is a wholly-owned subsidiary of Holdings. At December 31, 1997, Messrs. Lanza and LaPenta and certain other members of management collectively own 15.9%; the Lehman Partnership owns 50.1%; and Lockheed Martin owns 34.0% of the outstanding capital stock of Holdings. The Company's executive offices are located at 600 Third Avenue, New York, New York, 10016, and the telephone number at that address is 212-697-1111. PRODUCTS AND SERVICES SECURE COMMUNICATION SYSTEMS L-3 is a leader in communication systems for high performance intelligence collection, imagery processing and ground, air, sea and satellite communications for the DoD and other government agencies. 6 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. 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 Government agencies, many through long-term sole source programs. The scope of these programs include air-to-ground, air-to-air, ground-to-air and satellite communications. Government programs include: U-2 Support 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 7 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 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 100,000 secure telephone units ("STU III") which are in use today by the U.S. Armed Forces to provide secure telephone capabilities for classified confidential communication over public commercial telephone networks. The Company has begun producing the next-generation digital, ISDN-compatible STE. STE provides clearer voice and thirteen-times faster data/fax transmission capability than the STU III. STE also supports secure conference calls and secure video teleconferencing. STE uses a CryptoCard security system which consists of a small, portable, cryptographic module mounted on a PCMCIA card holding the algorithms, keys and personalized credentials to identify its user for secure communications access. The Company also provides LMD/KP which is the workstation component of the Government's Electronic Key Management System ("EKMS"), the next generation of information security systems. EKMS is the Government system to replace current "paper" secret keys used to secure government communications with "electronic" secret keys. LMD/KP is the component of the EKMS which produces and distributes the electronic keys. L-3 also develops specialized strategic and tactical SIGINT 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. O TACTICAL SECURITY SYSTEMS The Company manufactures the IREMBASS, an unattended ground sensor system which uses sensors placed along likely avenues of enemy approach or intrusion in a battlefield environment. The sensors respond to seismic and acoustic disturbances, infrared energy and magnetic field changes and thus detect enemy activities. IREMBASS is currently in use by U.S. Special Operations Forces, the U.S. Army's Light Divisions and several foreign governments. The Company also provides the Intrusion Detection Early Warning System ("IDEWS"), a sensor system designed for platoon-level physical security applications. Weighing less than two pounds, this sensor system is ideal for covert perimeter intrusion detection, border protection and airfield or military installation security. 8 SPECIALIZED COMMUNICATION PRODUCTS MICROWAVE COMPONENTS L-3 is the preeminent worldwide supplier of commercial off-the-shelf, high performance radio frequency ("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. L-3 sells many of these components under the well-recognized Narda brand name and through the world's most comprehensive catalog of standard, stocked hardware. L-3 also sells its products through a direct sales force and an extensive network of premier market representatives. Specific catalog offerings include wireless products, electro-mechanical switches, power dividers and hybrids, couplers/detectors, attenuators, terminations and phase shifters, isolators and circulators, adapters, control products, sources, mixers, waveguide components, RF safety products, power meters/monitors and custom passive products. The Company operates from two sites, Hauppauge, New York ("Narda East"), and Sacramento, California ("Narda West"). Narda East represents approximately 65% of L-3's microwave sales volume, offering high performance microwave components, networks and instruments to the wireless, industrial and military communications markets. Narda East's products can be divided into three major categories: passive components, higher level wireless assemblies/monitoring systems and safety instruments. Passive components are generally purchased in narrow frequency configurations by wireless OEM equipment manufacturers and service providers. Similar components are purchased in wide frequency configurations by first tier military equipment suppliers. Commercial applications for Narda components are primarily in cellular or PCS base stations. Narda also manufactures higher level assemblies for wireless base stations and the paging industry. These products include communication antenna test sets, devices that monitor reflected power to determine if a cellular base station antenna is working and whether the base station radios are operating at peak power levels. Military applications include general procurement for test equipment or electronic surveillance and countermeasure systems. RF safety products are instruments which are used to measure the level of non-ionizing radiation in a given area, i.e., from an antenna, test set or other emitting source, 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 for satellite transponder control and diplexers/ multiplexers, which are used to separate various signals and direct them to the appropriate other sections of the payload. Narda West's primary areas of focus are communications satellite payload products. Channel amplifiers constitute Narda West's main satellite product. These components amplify the weak signals received from earth stations by a factor of 1 million, and then drive the power amplifier tubes that broadcast the signal back to earth. These products are sold to satellite manufacturers and offer lower cost, lower weight and improved performance versus in-house alternatives. On a typical satellite, for which there are 20 to 50 channel amps, Narda West's channel amps offer cost savings of up to 60% (up to $1 million per satellite) and decrease launch weight by up to 25 kilograms. 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 is of an historical nature and involves wideband filters used for electronic warfare applications. AVIONICS AND OCEAN SYSTEMS O AVIATION RECORDERS L-3 manufactures commercial solid-state crash-protected aviation recorders ("black boxes") under the Fairchild brand name, and has delivered over 40,000 flight recorders to airplane manufacturers and 9 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 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 SYSTEMS Under the Randtron brand name, L-3 produces high performance antennas designed for surveillance, high-resolution, ultra-wide frequency bands, detection of low radar cross section ("LRCS") targets, LRCS installations, severe environmental applications and polarization diversity. L-3's main antenna product is a sophisticated 24-foot diameter antenna operational on all E-2C aircraft. This airborne antenna consists of a 24-foot rotating aerodynamic 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. O DISPLAY SYSTEMS L-3 specializes in the design, development and manufacture of ruggedized display system solutions for military and high-end commercial applications. L-3's current product lines include cathode ray tubes ("CRTs"), 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, and F-14 Tomcat and electronics used in aircraft anti-lock braking systems. O OCEAN SYSTEMS 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. TELEMETRY, INSTRUMENTATION AND SPACE 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. 10 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 and MTSAT. 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. 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 recently introduced the NeTstar satellite ground station, which collapses racks of satellite RF receivers, demodulators and related units into a PC. 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. EMERGING COMMERCIAL PRODUCTS O MEDICAL ARCHIVING AND SIMULATION SYSTEMS The Company and GE Medical Systems have jointly developed GEMnet(Trademark), a cardiac image management and archive system. GEMnet(Trademark) eliminates the use of cinefilm in a cardiac catheterization laboratory by providing a direct digital connection to the laboratory. The system provides for acquisition, display, analysis and short-and long-term archive of cardiac patient studies, providing significant cost savings and process improvements to the hospital. EchoNet(Trademark) is a digital archive management and review system designed specifically for the echocardiology profession. Echonet(Trademark) is the result of an exclusive strategic partnership with Heartlab, Inc. The system accepts digital echocardiology studies from a variety of currently available ultrasound systems, manages the studies, making them available on a network, and allows the physicians and technicians to become more productive. DICOMView(Trademark) is a multimodal, low-cost viewing station designed for use with standard IBM-compatible personal computer platforms. It makes full motion, full fidelity diagnostic images accessible for the cardiologist, surgeon and referring physician. EchoNet(Trademark) and DICOMView(Trademark) are trademarks of Heartlab, Inc. GEMnet(Trademark) is a trademark of GE. 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. 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. 11 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. The Company has entered into product distribution agreements with Granger Telecom Ltd. for distribution in parts of Africa, the Middle East and the United Kingdom, and with Unisys for distribution in parts of Mexico and South America. 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 3DX(Trademark) 6000, will analyze the contents of checked baggage at airports for a wide-range of explosive material as specified by the FAA. The eXaminer 3DX(Trademark) 6000 will inspect 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. L-3 has shipped two prototype test units and FAA certification testing commenced in the first quarter of 1998. MAJOR CUSTOMERS The Company's sales are predominantly derived from contracts with agencies of, and prime contractors to, the Government. Various Government customers exercise independent purchasing decisions. Sales to the Government generally are not regarded as constituting sales to one customer. Instead, each contracting entity is considered to be a separate customer. In 1997, the Company performed under approximately 150 contracts with value exceeding $1 million for the Government. Pro forma 1997 sales to the Government, including sales through prime contractors, were $651.1 million. Pro forma sales to Lockheed Martin were $81.6 million in 1997. The Company's largest program, representing 10% of 1997 pro forma sales, is a long-term, sole source cost plus support contract for the U-2 Program. No other program represented more than 5% of pro forma 1997 sales. RESEARCH AND DEVELOPMENT The Company employs scientific, engineering and other personnel to improve its existing product lines and to develop new products and technologies in the same or related fields. As of December 31, 1997, the Company employed approximately 2,000 engineers (of whom over 20% hold advanced degrees). The pro forma amounts of research and development performed under customer-funded contracts and Company-sponsored research projects, including bid and proposal costs, for 1997 were $150.2 million and $46.2 million, respectively. COMPETITION The Company's ability to compete for defense contracts depends to a large extent on the effectiveness and innovativeness of its research and development programs, its ability to offer better program performance than its competitors at a lower cost to the Government customer, and its readiness in facilities, equipment and personnel to undertake the programs for which it competes. In some instances, 12 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 65% of the Company's 1997 pro forma sales related to sole source contracts. The Company experiences competition from industrial firms and U.S. government agencies, some of which have substantially greater resources. These competitors include: AlliedSignal, AMP, Inc., Aydin Corporation, Cubic Corporation, GTE Corporation, Harris Corporation, Hughes, Motorola, Raytheon and Titan Corporation. A majority of the sales of the Company is derived from contracts with the Government and its prime contractors, and such contracts are awarded on the basis of negotiations or competitive bids. Management does not believe any one competitor or a small number of competitors is dominant in any of the business areas of the Company. Management believes the Company will continue to be able to compete successfully based upon the quality and cost competitiveness of its products and services. PATENTS AND LICENSES Although the Company owns some patents and has filed applications for additional patents, it does not believe that its operations depend upon its patents. In addition, the Company's Government contracts generally license it to use patents owned by others. Similar provisions in the Government contracts awarded to other companies make it impossible for the Company to prevent the use by other companies of its patents in most domestic work. BACKLOG As of December 31, 1997, the Company's pro forma funded backlog was approximately $638.1 million. This backlog provides management with a useful tool to project sales and plan its business on an on-going basis; however, no assurance can be given that the Company's backlog will become revenues in any particular period or at all. Funded backlog does not include the total contract value of multi-year, cost-plus reimbursable contracts, which are funded as costs are incurred by the Company. Funded backlog also does not include unexercised contract options which represent the amount of revenue which would be recognized from the performance of contract options that may be exercised by customers under existing contracts and from purchase orders to be issued under indefinite quantity contracts or basic ordering agreements. Backlog is a more relevant predictor of future sales in the Secure Communication Systems business area. Current funded backlog in Secure Communication Systems as of December 31, 1997 was $306.0 million, of which approximately 93% is expected to be shipped in 1998. The Company believes backlog is a less relevant factor in the Specialized Communication Products business area given the nature of its catalog and commercial oriented business. Overall, approximately 85% of the Company's December 31, 1997 funded backlog is expected to be shipped in 1998.
PRO FORMA FUNDED BACKLOG AS OF DECEMBER 31, 1997 -------------------- ($ in millions) Secure Communication Systems ..... $306.0 Specialized Communication Products.......................... 332.1 -------------------- $638.1 ====================
GOVERNMENT CONTRACTS Approximately 73% of the Company's 1997 pro forma sales were made to agencies of the Government or to prime contractors or subcontractors of the Government. Approximately 64% of the Company's pro forma 1997 sales mix of contracts were firm fixed price contracts under which the Company agrees to perform for a predetermined price. Although the Company's fixed price contracts generally permit the Company to keep profits if costs are less than projected, the Company does bear the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contract. Generally, firm fixed price contracts offer higher margin than cost plus type contracts. All domestic defense contracts and subcontracts to which the Company is 13 a party are subject to audit, various profit and cost controls and standard provisions for termination at the convenience of the Government. Upon termination, other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and to an allowance for profit. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the government. To date, no significant fixed price contract of the Company has been terminated. Companies supplying defense-related equipment to the Government are subject to certain additional business risks peculiar to that industry. Among these risks are the ability of the Government to unilaterally suspend the Company from new contracts pending resolution of alleged violations of procurement laws or regulations. Other risks include a dependence on appropriations by the Government, changes in the Government's procurement policies (such as greater emphasis on competitive procurements) and the need to bid on programs in advance of design completion. A reduction in expenditures by the Government for products of the type manufactured by the Company, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to the Company or substantial cost overruns would have an adverse effect on the Company's cash flow. 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 believe that its environmental compliance expenditures will have a material adverse effect on its financial condition or results of its operations. Pursuant to the L-3 Acquisition Agreement, the Company has agreed to assume certain on-site and off-site environmental liabilities related to events or activities occurring prior to the L-3 Acquisition. Lockheed Martin has agreed to retain all environmental liabilities for all facilities no longer used by the Businesses and to indemnify fully the Company for such prior site environmental liabilities. Lockheed Martin has also agreed, for the first eight years following April 1997, to pay 50% of all costs incurred by the Company above those reserved for on the Company's balance sheet at April 1997 relating to certain Company-assumed environmental liabilities and, for the seven years thereafter, to pay 40% of certain reasonable operation and maintenance costs relating to any environmental remediation projects undertaken in the first eight years. The Company is aware of environmental contamination at two of the facilities acquired from Lockheed Martin that will require ongoing remediation. In November 1997, the Company sold one such facility located in Sarasota, Florida, while retaining a leasehold interest in a portion of that facility, to Dames & Moore/Brookhill LLC ("DMB") in a transaction in which DMB contractually agreed to assume responsibility for further remediation of the Sarasota site. Management believes that the Company has established adequate reserves for the potential costs associated with the assumed environmental liabilities. However, there can be no assurance that any costs incurred will be reimbursable from the Government or covered by Lockheed Martin under the terms of the L-3 Acquisition Agreement or that the Company's environmental reserves will be sufficient. In connection with the acquisition of Ocean Systems, the Company has acquired the stock of ELAC. The premises currently leased by ELAC have environmental contamination consisting of chlorinated solvents in the groundwater beneath and adjoining the site. However, Honeywell Inc. ("Honeywell"), the previous owner of ELAC and the current owner of the property, has retained the liability for remediating the ELAC site and has contractually agreed to indemnify AlliedSignal and ELAC. Management believes that any necessary remediation will be covered by the Honeywell indemnification. PENSION PLANS Pursuant to the L-3 Acquisition Agreement, Holdings and L-3 Communications assumed certain liabilities relating to defined benefit pension plans for present and former employees and retirees of certain businesses which were transferred from Lockheed Martin to Holdings and L-3 Communications. Prior to the consummation of the L-3 Acquisition, Lockheed Martin received a letter from 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 (which 14 assumptions result in a larger liability for accrued benefits than the assumptions used for financial reporting under FASB 87). The PBGC underfunding is related to the Subject Plans. As of December 31, 1997, the Company calculated the net funding position of the Subject Plans and believes them to be overfunded by approximately $5.9 million under ERISA assumptions, underfunded by approximately $10.2 million under FASB 87 assumptions and, on a termination basis, underfunded by as much as $57.5 million under PBGC assumptions. With respect to the Subject Plans, Lockheed Martin entered into an agreement (the "Lockheed Martin Commitment Agreement") among Lockheed Martin, L-3 and the PBGC dated as of April 30, 1997. The material terms and conditions of the Lockheed Martin Commitment Agreement include a commitment by Lockheed Martin to, under certain circumstances, assume sponsorship of the Subject Plans or provide another form of financial support for the Subject Plans. The Lockheed Martin Commitment Agreement will continue 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 Agreement, the PBGC agreed that it would take no further action in connection with the L-3 Acquisition. In return for the Lockheed Martin Commitment, the Company entered into an agreement with Lockheed Martin, dated as of April 30, 1997, pursuant to which the Company provided certain assurances to Lockheed Martin including, but not necessarily limited to, (i) continuing to fund the Subject Plans consistent with prior practices and to the extent deductible for tax purposes and, where appropriate, recoverable under Government contracts, (ii) agreeing to not increase benefits under the Subject Plans without the consent of Lockheed Martin, (iii) restricting the Company from a sale of any businesses employing individuals covered by the Subject Plans if such sale would not result in reduction or elimination of the Lockheed Martin Commitment with regard to the specific plan and (iv) if the Subject Plans were returned to Lockheed Martin, granting Lockheed Martin the right to seek recovery from the Company of those amounts actually paid, if any, by Lockheed Martin with regard to the Subject Plans after their return. In addition, upon the occurrence of certain events, Lockheed Martin, at its option, will have the right to decide whether to assume sponsorship of any or all of the Subject Plans, even if the PBGC has not sought to terminate the Subject Plans. The Company 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, 1997, the Company employed approximately 6,100 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. Three of the four collective bargaining agreements expire in mid-1998. While the Company has not yet initiated discussions with representatives of these unions, management believes it will be able to negotiate, without material disruption to its business, satisfactory new collective bargaining agreements with these employees. However, there can be no assurance that a satisfactory agreement will be reached with the covered employees or that a material disruption to the Company's Camden operations will not occur. Approximately 200 employees of Ocean Systems are represented by the United Auto Workers. The collective bargaining agreement expires in mid-1999. 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. The labor contract expires in mid-1998. While the Company has not yet initiated discussions with representatives of these unions, management believes it will be able to negotiate, without 15 material disruption to its business, a satisfactory new labor contract with these employees. However, there can be no assurance that a satisfactory agreement will be reached with the covered employees or that material disruption to operations of ELAC or Ocean Systems will not occur. ITEM 2. PROPERTIES. The table below sets forth certain information with respect to manufacturing facilities and properties of the Company, excluding non-operating properties held for sale.
LOCATION OWNED LEASED - ----------------------------------- ------- -------- (THOUSANDS OF SQUARE FEET) L-3 Headquarters, NY ............... -- 58.7 SECURE COMMUNICATION SYSTEMS: Camden, NJ......................... -- 588.7 Salt Lake City, UT................. -- 457.6 Sierra Vista, AZ................... -- 18.8 Camarillo, CA...................... -- 2.4 El Segundo, CA .................... -- 1.4 Milpitas, CA....................... -- 21.4 Oakland, CA........................ -- 5.2 Santa Ana, CA...................... -- 5.0 Santa Clara, CA ................... -- 6.2 Santa Maria, CA ................... -- 9.8 Colorado Springs, CO .............. -- 5.8 Hartford, CT....................... -- 1.8 Chicago, IL........................ -- 7.3 Boston, MA......................... -- 25.6 Annapolis Junction, MD ............ -- 6.6 Wheaton, MD........................ -- 0.5 Moorestown, NJ..................... -- 2.8 Shrewsbury, NJ..................... -- 22.5 New York, NY....................... -- 5.9 Cleveland, OH...................... -- 1.4 Fairfax, VA........................ -- 1.6 Warrentown, VA .................... -- 0.8 SPECIALIZED COMMUNICATION PRODUCTS: Folsom, CA ........................ -- 57.5 Lancaster, CA ..................... -- 5.4 Menlo Park, CA .................... -- 98.3 San Diego, CA ..................... 196.0 68.9 San Mateo, CA ..................... -- 14.8 Santa Clara, CA ................... -- 2.0 Sylmar, CA......................... -- 240.0 Sarasota, FL....................... -- 143.7 Merritt Island, FL ................ -- 1.2 Atlanta, GA ....................... -- 52.1 Alpharetta, GA .................... 40.0 -- Norcross, GA ...................... -- 4.8 Lowell, MA......................... -- 47.0 Hauppauge, NY ..................... 240.0 -- Warminster, PA .................... 44.7 -- Hampshire (U.K.)................... -- 1.2 Kiel, Germany...................... -- 143.0 ------- -------- Total............................... 520.7 2,137.7 ======= ========
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 or its operations. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no established public trading market for the Company's common stock. All of the issued and outstanding shares of common stock of the Company are held by its parent, Holdings. ITEM 6. SELECTED FINANCIAL DATA. The selected unaudited pro forma data as of December 31, 1997 and for the year then ended have been derived from, and should be read in conjunction with, the unaudited pro forma condensed consolidated financial statements included elsewhere herein. The unaudited pro forma statement of operations and other data reflect the L-3 Acquisition, the 1998 Acquisitions and the Offerings as if such transactions had occurred on January 1, 1997, for the statement of operations and other data. The balance sheet data reflect the 1998 Acquisitions, and the Offerings as if such transactions had occurred on December 31, 1997. The selected consolidated (combined) financial data as of December 31, 1997, 1996, 1995 and 1994, and for the nine months ended December 31, 1997, the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995 have been derived from the audited financial statements for the respective periods. The selected consolidated (combined) financial data as of December 31, 1993 and March 31, 1993, the nine months ended December 31, 1993 and the three months ended March 31, 1993 have been derived from the unaudited financial statements of Communication Systems -- East. In the opinion of management, such unaudited financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations of Communication Systems -- East, which comprised the Predecessor Company for all periods prior to April 1, 1996. These selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated (Combined) Financial Statements of the Company and the Loral Acquired Businesses included elsewhere herein.
1997 YEAR ENDED DECEMBER 31, 1993 ---------------------- -------------------------- -------------------- NINE THREE NINE THREE YEAR ENDED MONTHS MONTHS MONTHS MONTHS DECEMBER 31, 1997 ENDED ENDED ENDED ENDED PRO FORMA DEC. 31(1) MARCH 31 1996(2) 1995(3) 1994(3) DEC. 31(3) MARCH 31(4) ----------------- ---------- ---------- -------- -------- ------- --------- ---------- ----------- STATEMENT OF OPERATIONS DATA: Sales ................................... $894.0 $546.5 $ 158.9 $543.1 $166.8 $218.9 $200.0 $67.8 Operating income ........................ 58.3 55.9 7.9 43.7 4.7 8.4 12.4 5.1 Interest expense, net(5) ................ 43.9 28.5 8.4 24.2 4.5 5.5 4.1 -- Provision (benefit) for income taxes(5) 4.2 10.7 (0.2) 7.8 1.2 2.3 3.8 2.0 Net income (loss)........................ 10.2 16.7 (0.3) 11.7 (1.0) 0.6 4.5 3.1 BALANCE SHEET DATA: Working capital ......................... $138.9 $131.8 $ 98.8 $ 21.1 $ 19.3 $ 24.7 $22.8 Total assets ............................ 896.0 703.4 593.3 228.5 233.3 241.7 93.5 Invested equity ......................... 473.6 194.7 199.5 202.0 59.9 Shareholders' equity..................... 224.7 132.7 OTHER DATA: EBITDA(6) ............................... $ 95.1 $ 78.1 $ 15.7 $ 71.8 $ 16.3 $ 19.9 $ 23.4 $7.0 Depreciation expense .................... 22.0 13.3 4.5 14.9 5.5 5.4 6.1 1.8 Amortization expense .................... 14.8 8.9 3.3 13.2 6.1 6.1 4.9 0.1 Capital expenditures .................... 19.9 11.9 4.3 13.5 5.5 3.7 2.6 0.8 Ratios of: Earnings to fixed charges(7)............ 1.3x 1.8x n.a.(10) 1.7x 1.0x 1.4x 2.5x n.a.(11) EBITDA to cash interest expense(8) ..... 2.3x Net debt to EBITDA(9)................... 4.0x
17 - ------------ (1) Reflects the L-3 Acquisition effective April 1, 1997. (2) Reflects ownership of Loral's Communication Systems -- West and Specialized Communication Products businesses commencing April 1, 1996. (3) Reflects ownership of Communication Systems -- East by Lockheed Martin effective April 1, 1993. (4) Reflects the ownership of Communications Systems -- East by GE Aerospace. The amounts shown herein include only those amounts as reflected in the financial records of Communications Systems --East. (5) For periods prior to April 1, 1997, interest expense and income tax (benefit) provision were allocated from Lockheed Martin. (6) EBITDA is defined as operating income plus depreciation expense and amortization expense (excluding the amortization of deferred debt issuance costs). EBITDA is not a substitute for operating income, net income and cash flow from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity. EBITDA is presented as additional information because management believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. (7) For purposes of this computation, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest on indebtedness plus that portion of lease rental expense representative of the interest element. (8) For purposes of this computation, cash interest expense consists of pro forma interest expense excluding amortization of deferred debt issuance costs. (9) Net debt is defined as long-term debt plus current portion of long-term debt less cash and cash equivalents. (10) For the three months ended March 31, 1997, earnings were insufficient to cover fixed charges by $0.5 million. (11) For the three months ended March 31, 1993, no interest expense was incurred. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is a leading merchant supplier of sophisticated secure communication systems and specialized communication products including secure, high data rate communication systems, microwave components, avionics and ocean systems, 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. The Company's systems and specialized products are used to connect a variety of airborne, space, ground-and sea-based communication systems and are incorporated into the transmission, processing, recording, monitoring and dissemination functions of these communication systems. The Company's customers include the DoD, selected Government intelligence agencies, major aerospace/defense prime contractors, foreign governments and commercial customers. The Company operates primarily in one industry segment, electronic components and systems. 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 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 defense industry has recently undergone significant changes precipitated by ongoing federal budget pressures and new roles and missions to reflect changing strategic and tactical threats. Since the mid-1980's, the overall U. S. defense budget has declined in real dollars. In response, the DoD has focused its resources on enhancing its military readiness, joint operations and digital command and control communications 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. According to Federal Sources, an independent private consulting group, the defense budget for C(3)I is expected to increase from $31.0 billion in the fiscal year ended September 30, 1997 to $42.0 billion in the fiscal year ended September 30, 2002, a compound annual growth rate of 6.3%. 18 ACQUISITION HISTORY The Company was formed to acquire substantially all of the assets of (i) nine business units previously purchased by Lockheed Martin as part of its acquisition of Loral in April 1996 (the "Loral Acquired Businesses") which include eight business units of Loral ("Specialized Communications products") and one business unit purchased by Loral as part of its acquisition of the Defense Systems business of Unisys Corporation in May 1995 ("Communications System --West"), and (ii) one business unit purchased by Lockheed Martin as part of its acquisition of the aerospace business of General Electric Company in April 1993 ("Communication Systems -- East"). Collectively, the Loral Acquired Businesses and Communications Systems -- East comprise the "Predecessor Company" or "Businesses". RESULTS OF OPERATIONS The following information should be read in conjunction with Consolidated (Combined) Financial Statements and the notes thereto. The Company's financial statements reflect operations since the effective date of the L-3 Acquisition, April 1, 1997; and the Predecessor Company's results of operations for the three months ended March 31, 1997 and the year ended December 31, 1996 which include the results of operations of the Loral Acquired Businesses beginning on April 1, 1996, the effective date of that acquisition by Lockheed Martin. Therefore, the results of operations for the year ended December 31, 1996 reflect the results of operations of the Loral Acquired Businesses for the nine months from April 1, 1996 to December 31, 1996. Accordingly, changes between periods for the year ended December 31, 1997 to the year ended December 31, 1996 of the Predecessor Company are significantly affected by the timing of the L-3 Acquisition and Loral Acquired Businesses acquisitions. See Note 4 to the Consolidated (Combined) Financial Statements. The results of operations for the year ended December 31, 1995 and the period from January 1 to March 31, 1996 represent the results of the Predecessor Company, which only comprise the results of operations of Communications Systems -- East. Operating income of the Company and the Predecessor Company are not directly comparable between periods as a result of the effects of valuation of assets and liabilities recorded in accordance with Accounting Principles Board Opinion No. 16 ("APB 16") by the Company and the Predecessor Company, in the purchase accounting for the L-3 Acquisition and Loral Acquired Businesses acquisitions. Interest expense and income taxes expense for the periods are not comparable and the impact of interest expense and income tax expense on the Company is discussed below. As indicated in Note 6 to the Consolidated (Combined) Financial Statements, effective April 1, 1997 the Company has accounted for the sale of its Hycor business in accordance with FASB Emerging Issues Task Force Issue No. 87-11 "Allocation of Purchase Price to Assets to Be Sold". Accordingly, the results of operations of the Hycor business are not included in the results of operations of the Company for the nine months ended December 31, 1997. Hycor is a business unit of the Loral Acquired Businesses, and, accordingly, Hycor is only included in the results of operations of the Predecessor Company beginning on April 1, 1996, the effective date of the Loral Acquired Businesses acquisition by Lockheed Martin. On January 29, 1998, the Company sold the Hycor business, excluding land and buildings, for $3.5 million in cash subject to adjustment based on final closing net assets. The results of operations presented below exclude the results of operations of the 1998 Acquisitions for the year ended December 31, 1997. The results of operations of the Predecessor Company for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, include certain costs and expenses allocated by Lockheed Martin for corporate office expenses based primarily on the allocation methodology prescribed by government regulations pertaining to government contractors. Interest expense was allocated based on Lockheed Martin's actual weighted average consolidated interest rate applied to the portion of the beginning of the year invested equity deemed to be financed by consolidated debt based on Lockheed Martin's debt to equity ratio on such date. The provision (benefit) for income taxes was allocated to the Predecessor Company as if it were a separate taxpayer, calculated by applying statutory rates to reported pre-tax income after considering items that do not enter into the determination of taxable income and tax 19 credits related to the Predecessor Company. Also, pension and post-employment benefit costs were allocated based on employee headcount. Accordingly, the results of operations and financial position hereinafter of the Predecessor Company may not be the same as would have occurred had the Predecessor Company been an independent entity. The following table sets forth selected statement of operations data for the Company and the Predecessor Company for the periods indicated.
COMPANY PREDECESSOR COMPANY -------------- ------------------------------------------------------------------------------- YEAR NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, ------------------ 1997 1996 1997 1996 1996 1995 --------------- -------------- -------------- ------------- ---------- -------- ($ in millions) SALES.............................. $546.5 $501.9 $158.9 $41.2 $543.1 $166.8 COSTS AND EXPENSES ................ 490.6 459.9 151.0 39.5 499.4 162.1 OPERATING INCOME .................. 55.9 42.0 7.9 1.7 43.7 4.7 NET INTEREST EXPENSE .............. 28.5 22.2 8.4 2.0 24.2 4.5 INCOME (LOSS) BEFORE INCOME TAXES 27.4 19.8 (0.5) (0.3) 19.5 .2 INCOME TAX PROVISION (BENEFIT) ... 10.7 7.6 (0.2) 0.2 7.8 1.2 NET INCOME (LOSS).................. 16.7 12.2 (0.3) (0.5) 11.7 (1.0)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Sales for the nine months ended December 31, 1997 as compared to the corresponding period in 1996 increased by $44.6 million, of which $30.5 million is attributable to the Loral Acquired Businesses and $14.1 million to Communication Systems -- East. The increase in sales is attributable to increased volume in sales of microwave components, CHBDL, UAV programs, F-14 display system contract, power supplies and P3-C Repair Depot. Operating income for the nine months ended December 31, 1997 as compared to the corresponding period in 1996 increased by $13.9 million, of which $5.8 million is attributable to the Loral Acquired Businesses and $8.1 million to Communication Systems -- East. The increase in operating income for the nine months ended December 31, 1997 is attributable to increased sales, improved operating performance on sales of aviation recorders, passive microwave components and display systems, the GEMnet product-line and P3-C Repair Depot sales, partially offset by $3.3 million of cost of sales related to ongoing certification efforts for the Company's Explosive Detection System ("EDS") contract and lower sales volume on the U-2 Program. Sales and operating income for the three months ended March 31, 1997 increased by $117.7 million and $6.2 million, respectively, as compared to the corresponding period in 1996. The increases are attributable to the acquisition of the Loral Acquired Businesses, offset by losses incurred on three programs by Communication Systems -- East. Sales and operating income of the Hycor business included in the Predecessor Company's results of operations for the three months ended March 31, 1997 and the year ended December 31, 1996 were $1.8 million and nil, and $7.5 million and $0.3 million, respectively. Net interest expense for the nine months ended December 31, 1997 was $28.5 million representing interest expense on the Company's outstanding borrowings (see Note 8 to Consolidated (Combined) Financial Statements), and amortization of debt issuance costs, less interest income of $1.4 million and interest expense of $0.6 million allocated to the Hycor business net assets held for sale. Interest expense for the three months ended March 31, 1997 and the prior period was $8.4 million and $24.2 million, respectively, and was allocated to the Predecessor Company by applying Lockheed Martin's weighted average consolidated interest rate to the portion of the Predecessor Company's invested equity account deemed to be financed by Lockheed Martin's consolidated debt. The increase in interest expense reflects higher interest rates on the third party debt, as compared to the interest rate utilized to calculate interest expense by the Predecessor Company. The income tax provision for the nine months ended December 31, 1997 reflects the Company's effective income tax rate of 39%. For the three months ended March 31, 1997 and in the prior period, income taxes were allocated to the Predecessor Company by Lockheed Martin and the effective income tax rate was significantly impacted by amortization of costs in excess of net assets acquired, which were not deductible for income tax purposes. See Note 11 to Consolidated (Combined) Financial Statements. 20 SUPPLEMENTAL ANALYSIS OF ANNUAL RESULTS OF OPERATIONS OF THE COMPANY AND THE PREDECESSOR COMPANY As noted above, the Company's financial statements reflect operations since the effective date of the L-3 Acquisition, April 1, 1997, and the results of operations for the year ended December 31, 1996 represent the results of operations of the Predecessor Company, and include the results of operations of the Loral Acquired Businesses beginning on April 1, 1996, the effective date of that acquisition. Accordingly, changes between periods for the year ended December 31, 1997 to the year ended December 31, 1996 of the Predecessor Company are significantly affected by the timing of these acquisitions. To enable investors to better assess the trends in the results of operations and to facilitate comparisons, the following presentation of results of operations for the year ended December 31, 1997 were obtained by aggregating, without adjustment, the historical results of operations of the Predecessor Company for the period from January 1, 1997 through March 31, 1997 with the historical results of operations of the Company for the nine months period from April 1, 1997 through December 31, 1997 (the "1997 period"), and the results of operations for the year ended December 31, 1996 were obtained by aggregating, without adjustments, the historical results of operations of the Predecessor Company for the year ended December 31, 1996 with the historical results of operations of the Loral Acquired Businesses for the period from January 1, 1996 through March 31, 1996 (the "1996 period"). All the historical results were derived from the audited financial statements for respective periods included herein. The following table sets forth historical selected statement of operations data for the Company, Predecessor Company and the Loral Acquired Businesses for the periods indicated and the related calendar year results of operation data derived therefrom.
PREDECESSOR PREDECESSOR LORAL ACQUIRED COMPANY COMPANY COMPANY BUSINESSES -------------- -------------- -------------- --------------- NINE MONTHS THREE MONTHS YEAR THREE MONTHS ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, 1997 DECEMBER 31, MARCH 31, 1996 1997 1997 PERIOD 1996 1996 PERIOD -------------- -------------- -------- -------------- ---------------- ---------- ($ IN MILLIONS) Sales.............. $546.5 $158.9 $705.4 $543.1 $132.2 $675.3 Costs and expenses.......... 490.6 151.0 641.6 499.4 124.4 623.8 -------------- -------------- -------- -------------- -------------- -------- Operating income .. $ 55.9 $ 7.9 $ 63.8 $ 43.7 $ 7.8 $ 51.5 ============== ============== ======== ============== ============== ======== EBITDA ............ $ 78.1 $ 15.7 $ 93.8 $ 71.8 $ 12.8 $ 84.6 ============== ============== ======== ============== ============== ========
Sales for the 1997 period increased to $705.4 million from $675.3 million for the 1996 period. Operating income increased to $63.8 million in the 1997 period from $51.5 million in the 1996 period. Operating income is not directly comparable between the periods as a result of the effects of valuation of assets and liabilities in accordance with Accounting Principles Opinion No. 16. The sales increase in the 1997 period was primarily attributable to sales of the Loral Acquired Businesses which increased by $18.1 million to $531.4 million in the 1997 period as compared to $513.3 million in the 1996 period. This sales increase was primarily attributable to increased sales volume on E2-C antenna program, the E2-C and F-14 display systems and passive microwave components, additional production and shipments on CHBDL and UAV programs, and partially offset by lower sales volume on the U-2 Program. Additionally, sales of Communication Systems --East increased by $12.0 million to $174.0 million in the current period from $162.0 million in the 1996 period, and were primarily attributable to increased sales of power supplies, the GEMnet product line and the P3-C Repair Depot. Operating income increased by 23.9% to $63.8 million in the 1997 period from $51.5 million in the 1996 period. Operating income as a percentage of sales increased to 9.0% in the 1997 period as compared to 7.6% in the 1996 period. The increase in operating income was largely attributable to cost reductions, increased sales volume of the Loral Acquired Businesses and operating improvements at Communications Systems -- East. Operating income for the 1997 period also reflected fourth quarter cost of sales of $3.3 million related to on-going certification efforts for the Company's EDS contract. Excluding these EDS costs, operating income would have been $67.1 million for the 1997 period and operating income as a percentage of sales would have been 9.5%. 21 EBITDA is defined as operating income plus depreciation expense and amortization expense (excluding the amortization of debt issuance costs). EBITDA is not a substitute for operating income, net income or cash 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 management believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. EBITDA for the 1997 period increased by $9.2 million to $93.8 million from $84.6 million from the 1996 period. EBITDA margin, defined as EBITDA as a percentage of sales, increased to 13.3% for the 1997 period from 12.5% for the 1996 period. The increases in EBITDA and EBITDA margin were attributable to the items affecting the trends in operating income between the 1997 period and 1996 period discussed above. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 The results of operations of the Loral Acquired Businesses are reflected in the results of operations of the Predecessor Company beginning on April 1, 1996, the effective date of that acquisition by Lockheed Martin. During 1996, sales increased to $543.1 million from $166.8 million in 1995. Operating income increased to $43.7 million compared with $4.7 million in 1995. Net income increased to $11.7 million as compared to a net loss of $1.0 million in 1995. The Loral Acquired Businesses contributed $13.6 million to net income for the year ended December 31, 1996. The sales increase in 1996 was attributable to the sales of the Loral Acquired Businesses which contributed $381.1 million of the increase. Sales of Communication Systems -East decreased in 1996 by $4.8 million as compared to 1995 primarily due to lower volume on Aegis power supplies and SIGINT system production, partially offset by Local Management Device/Key Processor ("LMD/KP") production startup. The increase in 1996 operating income was largely attributable to the Loral Acquired Businesses, which contributed $36.9 million of the increase. Communication Systems -East operating income in 1996 increased $2.2 million primarily due to improved operating performance on the Shipboard Telephone Communications ("STC-2") program partially offset by increased costs on the Space Station contract. As a percentage of sales, operating income increased to 8.0% from 2.8%. This increase is attributable to the improvement in Communication Systems -- East noted above, higher contract margins and operating improvements in the Loral Acquired Businesses. Allocated interest expense increased to $24.2 million in 1996 from $4.5 million in 1995 due primarily to the acquisition of the Loral Acquired Businesses, which was assumed to be fully financed by debt, coupled with a higher debt-to-equity ratio used in the allocation for Communication Systems - -- East. See Note 9 to Consolidated (Combined) Financial Statements. The effective income tax rate declined to 40% in 1996 as compared to 681% in 1995. The 1995 effective rate was significantly impacted by non-deductible amortization of costs in excess of net assets acquired. As a percentage of income subject to tax, such amortization declined significantly in 1996. LIQUIDITY AND CAPITAL RESOURCES THE L-3 ACQUISITION Effective April 1, 1997, the Company purchased the Businesses from Lockheed Martin for $503.8 million, after a purchase price adjustment of $21.2 million and acquisition costs of $8.0 million. On November 5, 1997 the L-3 Acquisition Agreement was amended to finalize the purchase price adjustment which amounted to $21.2 million of which $15.9 million was received on April 30, 1997 and $5.3 million was received on November 7, 1997, plus interest thereon. The amendment also included the assumption by the Company of Lockheed Martin's rights and obligations under a contract for the U.S. Army's Command and Control Vehicle ("C(2)V") Mission Module Systems ("MMS"), for which the Company received a cash payment of $12.2 million from Lockheed Martin. 22 FINANCING The L-3 Acquisition was funded by a combination of debt and equity. The equity of $125.0 million was provided by Holdings. In connection with the L-3 Acquisition, the Company entered into a $275.0 million credit facility consisting of $175.0 million of term loans (the "Term Loan Facilities") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"), (collectively the "Senior Credit Facilities"). The initial debt balance of $400.0 million consisted of $175.0 million of borrowings under the Term Loan Facilities and $225 million of 10 3/8% Senior Subordinated Notes ("the 1997 Notes") due May 1, 2007. The required principal payments under the Term Loans Facilities are: $5.0 million in 1998, $11.0 million in 1999, $19.0 million in 2000, $25.0 million in 2001, $33.2 million in 2002, $20.0 million in 2003, and $25.2 million in 2004, $24.9 million 2005, and $8.7 million in 2006. Interest payments on the Term Loan Facilities vary in accordance with the type of borrowings and are made at a minimum every three months. In February 1998, the Senior Credit Facilities were amended to, among other things, increase the amount available under the revolving credit facility to $200.0 million, waive certain excess cash flow prepayments, as defined, otherwise required, and permit the incurrence of up to an additional $150.0 million of subordinated debt. Other than upon a change of control or the occurrence of certain asset sales, L-3 Communications will not be required to repurchase the 1997 Notes until maturity on May 1, 2007. L-3 Communications is required to make semi- annual interest payments with respect to the 1997 Notes. The Company has a substantial amount of indebtedness. Based upon the current level of operations, management believes that the Company's cash flow from operations, together with available borrowings under the Revolving Credit Facility, will be adequate to meet its anticipated requirements for working capital, capital expenditures, research and development expenditures, program and other discretionary investments, interest payments and scheduled principal payments for the foreseeable future including at least the next three years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company's ability to make scheduled principal payments, to pay interest on or to refinance its indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. There can be no assurance that sufficient funds will be available to enable the Company to service its indebtedness, including the 1997 Notes or make necessary capital expenditures and program and discretionary investments. On November 5, 1997, L-3 Communications completed its exchange offer relating to the 1997 Notes and the holders of the 1997 Notes received registered securities. The 1997 Notes are redeemable at the option of L-3 Communications, in whole or in part, at any time on or after May 1, 2002, at various redemption prices plus accrued and unpaid interest to the applicable redemption date. In addition, prior to May 1, 2000, L-3 Communications may redeem up to 35% of the aggregate principal amount of the 1997 Notes at a redemption price of 109.375% of the principal amount thereof, plus accrued and unpaid interest to the redemption date with the net cash proceeds of one or more equity offerings by Holdings that are contributed to L-3 Communications as common equity capital. See "Risk Factors -- Substantial Leverage". The Senior Credit Facilities and the 1997 Notes contain financial covenants, which remain in effect so long as any amount is owed thereunder by L-3 Communications. The financial covenants under the Senior Credit Facilities require that (i) L-3 Communications' debt ratio, as defined, be less than or equal to 5.50 for the quarter ended December 31, 1997, and that the maximum allowable debt ratio, as defined, thereafter be further reduced to less than or equal to 3.1 for the quarters ending after June 30, 2002, and (ii) L-3 Communications' interest coverage ratio, as defined, be at least 1.85 for the quarter ended December 31, 1997, and thereafter increasing the interest coverage ratio, as defined, to at least 3.10 for any fiscal quarters ending after June 30, 2002. At December 31, 1997, L-3 Communications was and has been in compliance with these covenants at all times. On February 27, 1998, the Company filed a registration statement with the Securities and Exchange Commission ("SEC") for the sale of $150.0 million aggregate principal amount of Senior Subordinated 23 Notes due 2008 (the "Notes Offering"), and concurrently with the Notes Offering, Holdings filed a registration statement with the SEC for the sale of common stock for a proposed maximum aggregate offering price of $100.0 million (the "Common Stock Offering"). To mitigate risks associated with changing interest rates on certain of its debt, the Company entered into the interest rate cap and floor contracts (the "interest rate agreements"). The Company manages exposure to counterparty credit risk by entering into the interest rate agreements only with major financial institutions that are expected to perform fully under the terms of such agreements. Cash payments to (from) the Company and the counterparties are made at the end of the quarter to the extent due under the terms of the interest rate agreements. Such payments are recorded as adjustments to interest expense. The initial costs of the interest rate agreements are capitalized as debt issue costs and amortized into interest expense. See Note 8 to the Consolidated (Combined) Financial Statements. CASH FLOWS The following table sets forth selected cash flow statement data for the Company and the Predecessor Company for the periods indicated:
PREDECESSOR PREDECESSOR COMPANY COMPANY COMPANY -------------- -------------- ------------------ NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------ 1997 1997 1996 1995 -------------- -------------- --------- ------- ($ IN MILLIONS) Net cash from (used in) operating activities .. $ 73.9 $(16.3) $ 30.7 $ 9.3 Net cash used in investing activities .. (457.8) (4.3) (298.0) (5.5) Net cash from financing activities............. 461.4 20.6 267.3 (3.8)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Cash provided by operating activities of the Company for the nine months ended December 31, 1997 was $73.9 million. Cash provided by operations benefited from improved operating results, effective management of contracts in process and increases in accrued employment costs. Contracts in process declined by $18.2 million to $167.2 million from April 1, 1997 to December 31, 1997, and was primarily attributable to collections of and reductions in the levels of commercial and affiliate receivables. Net cash used in operating activities of the Predecessor Company was $16.3 million for the quarter ended March 31, 1997, resulting primarily from the increase in contracts in process and decrease in current liabilities. Cash flows used by the Loral Acquired Businesses was $10.2 million. Cash used for operating activities by Communication Systems -- East amounted to $6.1 million. Cash provided by operating activities of the Predecessor Company was $30.7 million in 1996 and $9.3 million in 1995. The increase of $21.4 million in 1996 was due primarily to the impact of the Loral Acquired Businesses which were acquired by Lockheed Martin effective April 1, 1996. Earnings after adjustment for non-cash items provided $36.7 million, offset by changes in other operating assets and liabilities. Without the Loral Acquired Businesses, cash provided by operating activities for Communication Systems--East increased to $13.7 million in 1996, 46% over 1995. The Company's current ratio at December 31, 1997 remained constant at 2.0: 1 as compared to the Predecessor Company's current ratio at December 31, 1996. NET CASH USED IN INVESTING ACTIVITIES: Cash used in investing activities for the nine months ended December 31, 1997 consisted primarily of $466.3 million paid by the Company for the L-3 Acquisition (See Note 1 to Consolidated (Combined) Financial Statements); offset by proceeds from the sale of the Company's Sarasota, Florida property of approximately $9.5 million and cash received in connection with the assumption of obligations under the C(2)V MMS contract from Lockheed Martin of $12.2 million. 24 During the year ended December 31, 1996, $287.8 million was paid by the Predecessor Company for the acquisition of the Loral Acquired Businesses. See Note 4 to the Consolidated (Combined) Financial Statements. In addition, for the nine months ended December 31, 1997 and the three months ended March 31, 1997, $11.9 million and $4.3 million, respectively, was used for capital expenditures, and $5.1 million and nil, respectively, for purchase of investments. The Company typically makes capital expenditures related primarily to improvement of manufacturing facilities and equipment. The Company expects that its capital expenditures for 1998 will be approximately $27.0 million. All transactions between the Businesses and Lockheed Martin have been accounted for as settled in cash at the time such transactions were recorded by the Businesses. Accordingly, in 1996, cash flows reflect the purchase of the Loral Acquired Businesses. NET CASH PROVIDED BY FINANCING ACTIVITIES: Cash from financing activities of the Company was $461.4 million for the nine months ended December 31, 1997, and was due to the debt incurred and proceeds from the issuance of common stock which were issued to finance the L-3 Acquisition. See "--Financing" above. Net cash from financing activities also reflects the payment of debt issue costs of $15.6 million and $3.0 million of scheduled debt payments of the Term Loan Facilities. Prior to the L-3 Acquisition, the Businesses participated in the Lockheed Martin cash management system, under which all cash was received and all payments were made by Lockheed Martin. For purposes of the statements of cash flows, all transactions with Lockheed Martin were deemed to have been settled in cash at the time they were recorded by the Predecessor Company. Net cash from (used in) financing activities of the Predecessor Company for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, were approximately $20.6 million, $267.3 million and ($3.8) million, respectively, and represent advances from (repayments to) Lockheed Martin, the Predecessor Company's parent company. 1998 ACQUISITIONS On March 30, 1998, the Company purchased the assets of Ocean Systems for $67.5 million of cash. On March 4, 1998, the Company purchased the assets of ILEX for $51.9 million of cash, subject to adjustment based on closing net assets, and additional consideration based on post-acquisition performance of ILEX. On February 5, 1998, the Company purchased the assets of STS for $27.0 million in cash, subject to adjustment based upon closing net assets. The Company financed the 1998 Acquisitions using its cash on hand and available borrowings under its Revolving Credit Facility. The Company considers and executes strategic acquisitions on an ongoing basis and may be evaluating acquisitions or engaged in acquisition negotiations at any given time. As of the date hereof, the Company has completed, has reached agreement on or is in discussions regarding certain acquisitions, in addition to the 1998 Acquisitions, that are either individually or in the aggregate not material to the financial condition of results of operations of the Company. BACKLOG The Company's funded backlog at December 31, 1997 totaled $516.9 million, as compared with the Predecessor Company's funded backlog at December 31, 1996 of $542.5 million. Funded orders, on a pro forma basis, for the Company for 1997 were $711.5 million. The Predecessor Company's funded orders for 1996 were $619.5 million. It is expected that 86.0% of the backlog at December 31, 1997 will be recorded as sales during 1998. However, there can be no assurance that the Company's backlog will become revenues in any particular period, if at all. See "Risk Factors -- Backlog". Approximately 81% of the total backlog at December 31, 1997 was directly or indirectly for defense contracts for end use by the Government. Approximately $434.0 million of total backlog was directly or indirectly for U.S. and foreign government defense contracts, and approximately $19.5 million of total backlog was directly or indirectly for U.S. and foreign government non-defense contracts. Foreign customers account for approximately $34.6 million of the total backlog. 25 RESEARCH AND DEVELOPMENT Research and development, including bid and proposal, costs ("R&D costs") sponsored by the Company was $28.9 million for the nine months ended December 31, 1997. R&D costs sponsored by the Predecessor Company were $12.0 million, $36.5 million and $9.8 million for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, respectively. The Loral Acquired Businesses sponsored R&D costs of $5.6 million for the three months ended March 31, 1996 and $21.4 million for the year ended December 31, 1995. Accordingly, the Company, Predecessor Company and the Loral Acquired Businesses, in the aggregate, sponsored R&D costs of $40.9 million, $42.1 million and $31.2 million, respectively, for the years ended December 31, 1997, 1996 and 1995. Customer-funded research and development was $117.1 million in 1997, as compared with $153.5 million for 1996. The decrease in customer-funded research and development in 1997 is due primarily to research and development programs existing in 1996 which moved into the production phase during 1997. CONTINGENCIES See Note 13 to the Consolidated (Combined) Financial Statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set general purpose financial statements. SFAS No. 131 establishes accounting standards for the way that public business enterprises report information about operating segments and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 revises employers' disclosures about pension and other postretirement benefits plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87 "Employers' Accounting for Pensions", SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" were issued. SFAS 132 suggests combined formats for presentation of pension and other postretirement benefits disclosures. The Company is currently evaluating the impact, if any, of SFAS No. 130, SFAS No. 131 and SFAS No. 132. 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. OTHER The Company has assessed its financial and operational systems and is developing plans to modify and/or replace those systems impacted by the year 2000 issue. A program is currently underway to address all affected systems with a completion date prior to the year 2000. The Company currently estimates that the total cost of this program will not in the aggregate be material to the Company. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. L-3 COMMUNICATIONS CORPORATION (AND THE PREDECESSOR COMPANY) Consolidated (Combined) Financial Statements as of December 31, 1997 and 1996 and for the nine months ended December 31, 1997, the three months ended March 31, 1997 and the years ended December 31, 1997 and 1996. 27 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of L-3 Communications Corporation: We have audited the accompanying (i) consolidated balance sheet of L-3 Communications Corporation and subsidiaries (the "Company") as of December 31, 1997, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the nine months then ended, (ii) the combined statements of operations and cash flows of the Predecessor Company, as defined in Note 1 to the financial statements, for the three months ended March 31, 1997 and (iii) combined balance sheet of the Predecessor Company, as of December 31, 1996 and the related combined statements of operations, changes in invested equity and cash flows for the year then ended. 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 did not audit the 1996 financial statements of the Lockheed Martin Communications Systems Division, which statements reflect total assets and sales constituting 35 percent and 30 percent of the related combined totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Communications Systems Division for 1996, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above (i) present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries as of December 31, 1997 and their consolidated results of operations and cash flows for the nine months then ended, and (ii) based on our audit and the report of other auditors for 1996, present fairly in all material respects, the combined financial position of the Predecessor Company as of December 31, 1996 and their combined results of operations, and cash flows for the year then ended and the three months ended March 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. 1301 Avenue of the Americas New York, New York 10019 February 2, 1998 28 REPORT OF INDEPENDENT AUDITORS Board of Directors Lockheed Martin Corporation We have audited the combined balance sheet of Lockheed Martin Communications Systems Division, as defined in Note 1 to the financial statements, as of December 31, 1996, and the related combined statements of operations, changes in shareholders' equity and invested equity, and cash flows for the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Division's and Lockheed Martin Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Lockheed Martin Communications Systems Division at December 31, 1996 (not presented separately herein), and the combined results of its operations and its cash flows for the year ended December 31, 1996 (not presented separately herein), and the results of its operations and its cash flows for the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Washington, D.C. March 7, 1997 29 L-3 COMMUNICATIONS CORPORATION CONSOLIDATED (COMBINED) BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THE COMPANY PREDECESSOR COMPANY ----------------- ------------------- DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ------------------- ASSETS Current assets: Cash and cash equivalents ...................................... $ 77,474 -- Contracts in process ........................................... 167,202 $198,073 Net assets held for sale ....................................... 6,653 -- Deferred income taxes .......................................... 13,298 -- Other current assets ........................................... 2,750 3,661 ----------------- ------------------- Total current assets ......................................... 267,377 201,734 ----------------- ------------------- Property, plant and equipment ................................... 95,034 116,566 Less, accumulated depreciation and amortization ................ 12,025 24,983 ----------------- ------------------- 83,009 91,583 ----------------- ------------------- Intangibles, primarily cost in excess of net assets acquired, net of amortization ............................................ 297,503 282,674 Deferred income taxes ........................................... 24,217 -- Other assets .................................................... 31,298 17,307 ----------------- ------------------- Total assets ................................................. $703,404 $593,298 ================= =================== LIABILITIES AND SHAREHOLDERS' (INVESTED) EQUITY Current liabilities: Current portion of long-term debt .............................. $ 5,000 -- Accounts payable, trade ........................................ 33,052 $ 35,069 Accrued employment costs ....................................... 31,162 27,313 Customer advances and amounts in excess of costs incurred ..... 34,458 14,299 Accrued interest ............................................... 4,419 -- Other current liabilities ...................................... 27,476 26,207 ----------------- ------------------- Total current liabilities .................................... 135,567 102,888 ----------------- ------------------- Pension and postretirement benefits ............................. 38,113 -- Other liabilities ............................................... 5,009 16,801 Long-term debt .................................................. 392,000 -- Commitments and contingencies ................................... Shareholders' Equity Common Stock, $.01 par value; 100 shares authorized and outstanding.................................................... -- -- Additional paid-in capital ..................................... 125,000 -- Retained earnings .............................................. 16,715 -- Deemed distribution ............................................ (9,000) -- ----------------- ------------------- Total Shareholders' and Invested Equity ......................... 132,715 473,609 ----------------- ------------------- Total Liabilities and Shareholders' Equity ................... $703,404 $593,298 ================= ===================
See notes to consolidated (combined) financial statements. F-30 L-3 COMMUNICATIONS CORPORATION CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPANY PREDECESSOR COMPANY ------------------ ------------------------------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ---------------------- DECEMBER 31, MARCH 31, 1997 1996 1995 ------------------ -------------- ----------- --------- SALES ............................. $546,525 $158,873 $543,081 $166,781 COSTS AND EXPENSES ................ 490,669 150,937 499,390 162,132 ----------------- -------------- ---------- ---------- OPERATING INCOME .................. 55,856 7,936 43,691 4,649 INTEREST INCOME ................... 1,430 -- -- -- INTEREST EXPENSE .................. 29,884 8,441 24,197 4,475 ----------------- -------------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 27,402 (505) 19,494 174 INCOME TAX EXPENSE (BENEFIT) ..... 10,687 (247) 7,798 1,186 ----------------- -------------- ---------- ---------- NET INCOME (LOSS) ................. $ 16,715 $ (258) $ 11,696 $ (1,012) ================= ============== ========== ==========
See notes to consolidated (combined) financial statements. F-31 L-3 COMMUNICATIONS CORPORATION CONSOLIDATED (COMBINED) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND INVESTED EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1997, THREE MONTHS ENDED MARCH 31, 1997 AND YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR COMPANY COMPANY COMBINED CONSOLIDATED ------------- ----------------------------------------------------------------------- ADDITIONAL INVESTED COMMON STOCK PAID-IN RETAINED EQUITY EQUITY ---------------------- CAPITAL EARNINGS ADJUSTMENT TOTAL SHARES ISSUED PAR VALUE ------------- -------- ----------- ---------- --------- ----------- ------- Balance January 1, 1995 .. $199,506 Repayments to Lockheed Martin.................. (3,831) Net loss................. (1,012) ------------- Balance December 31, 1995..................... 194,663 Advances from Lockheed Martin.................. 267,250 Net income............... 11,696 ------------- Balance December 31, 1996..................... 473,609 Advances from Lockheed Martin.................. 20,579 Net loss................. (258) ------------- Balance March 31, 1997 ... $493,930 -- -- -- -- -- -- ============= ======== =========== ============ ========== ============ ========== Shares Issued............ 100 $-- $125,000 $125,000 Deemed distribution ..... $(9,000) (9,000) Net Income............... $16,715 16,715 -------- ----------- ------------ ---------- ------------ ---------- Balance December 31, 1997..................... 100 $-- $125,000 $16,715 $(9,000) $132,715 ======== =========== ============ ========== ============ ==========
F-32 L-3 COMMUNICATIONS CORPORATION CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
COMPANY PREDECESSOR COMPANY ------------------ ------------------------------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ---------------------- DECEMBER 31, MARCH 31, 1997 1996 1995 ------------------ -------------- ----------- --------- OPERATING ACTIVITIES: NET INCOME (LOSS) ........................... $ 16,715 $ (258) $ 11,696 $(1,012) DEPRECIATION AND AMORTIZATION ............... 22,190 7,786 28,139 11,578 AMORTIZATION OF DEFERRED DEBT ISSUE COSTS .. 1,517 DEFERRED INCOME TAXES ....................... 9,991 -- -- -- CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF AMOUNTS ACQUIRED..................... CONTRACTS IN PROCESS ....................... 18,161 (17,475) 23,543 (3,267) OTHER CURRENT ASSETS ....................... (275) (481) 3,049 788 OTHER ASSETS ............................... 2,141 (761) (8,346) 1,245 ACCOUNTS PAYABLE ........................... (6,146) (207) 4,104 (648) ACCRUED EMPLOYMENT COSTS ................... 6,363 (625) 2,282 (611) CUSTOMER ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ............................ 545 (1,891) (11,586) (2,041) ACCRUED INTEREST ........................... 4,419 -- -- -- OTHER CURRENT LIABILITIES .................. (7,132) (1,867) 3,180 4,004 PENSION AND POSTRETIREMENT BENEFITS ....... 4,284 -- -- -- OTHER LIABILITIES .......................... 1,087 (500) (25,327) (699) ----------------- -------------- ----------- ---------- NET CASH FROM (USED IN) OPERATING ACTIVITIES 73,860 (16,279) 30,734 9,337 ----------------- -------------- ----------- ---------- INVESTING ACTIVITIES: ACQUISITION OF BUSINESS ..................... (466,317) -- (287,803) -- PROCEEDS FROM ASSUMPTION OF CONTRACT OBLIGATION ................................. 12,176 -- -- -- NET CASH FROM ASSETS HELD FOR SALE .......... 3,179 -- -- -- PROCEEDS FROM SALE OF PROPERTY .............. 9,458 -- -- -- PURCHASES OF INVESTMENTS .................... (5,113) -- -- -- CAPITAL EXPENDITURES ........................ (11,934) (4,300) (13,528) (5,532) DISPOSITION OF PROPERTY, PLANT AND EQUIPMENT 771 -- 3,347 26 ----------------- -------------- ----------- ---------- NET CASH USED IN INVESTING ACTIVITIES ...... (457,780) (4,300) (297,984) (5,506) ----------------- -------------- ----------- ---------- FINANCING ACTIVITIES: BORROWINGS UNDER SENIOR CREDIT FACILITY .... 175,000 -- -- -- PROCEEDS FROM SALE OF 10 3/8% SUBORDINATED NOTES ...................................... 225,000 -- -- -- PROCEEDS FROM ISSUANCE OF COMMON STOCK ..... 80,000 -- -- -- DEBT ISSUANCE COSTS ......................... (15,606) -- -- -- PAYMENT OF DEBT ............................. (3,000) -- -- -- ADVANCES FROM (REPAYMENTS TO) LOCKHEED MARTIN ..................................... -- 20,579 267,250 (3,831) ----------------- -------------- ----------- ---------- NET CASH FROM (USED IN) FINANCING ACTIVITIES.................................. 461,394 20,579 267,250 (3,831) ----------------- -------------- ----------- ---------- NET CHANGE IN CASH .......................... 77,474 -- -- -- CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD...................................... -- -- -- -- ----------------- -------------- ----------- ---------- CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 77,474 -- -- -- ================= ============== =========== ==========
See notes to consolidated (combined) financial statements. F-33 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (Dollars in thousands) 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS The accompanying consolidated financial statements include the assets, liabilities and results of operations of L-3 Communications Corporation, Inc., ("L-3" or the "Company"), a wholly owned subsidiary of L-3 Communications Holdings, Inc. ("Holdings") following the change in ownership (see Note 2) effective as of April 1, 1997 and for the period from April 1, 1997 to December 31, 1997. Prior to April 1, 1997, the statements comprise substantially all of the assets and liabilities and results of operations of (i) nine business units previously purchased by Lockheed Martin Corporation ("Lockheed Martin") as part of its acquisition of Loral Corporation ("Loral") in April 1996 (the "Loral Acquired Businesses"), and (ii) one business unit, Communications Systems -- East purchased by Lockheed Martin as part of its acquisition of the aerospace business of GE in April 1993 (collectively, the "Businesses" or the "Predecessor Company"). The combined financial statements of the Predecessor Company reflect the Businesses' assets, liabilities and results of operations included in Lockheed Martin's historical financial statements. Intercompany accounts between Lockheed Martin and the Businesses have been included in Invested Equity. The assets and operations of the semiconductor product line and certain other facilities which are not material have been excluded from the combined financial statements. Significant intercompany and inter-business transactions and balances have been eliminated. The Company is a supplier of sophisticated secure communication systems and specialized communication products including secure, high data rate communication systems, microwave components, avionics, recorders, telemetry and space products. The Company's customers include the Department of Defense (the "DoD"), selected U.S. government intelligence agencies, major aerospace/defense prime contractors and commercial customers. The Company operates primarily in one industry segment, electronic components and systems. Substantially all the Company's products are sold to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or subcontractors thereof. All domestic government contracts and subcontracts or subcontractors thereof. All domestic government contracts and subcontracts of the Businesses are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. Government. Multi-year U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contracts generally include comparable provisions relating to termination for the convenience of the government. 2. CHANGE IN OWNERSHIP TRANSACTION Holdings and L-3 were formed by Mr. Frank C. Lanza, the former President and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the former Senior Vice President and Controller of Loral (collectively, the "Equity Executives"), Lehman Brothers Capital Partners III, L.P. and its affiliates (the "Lehman Partnership") and Lockheed Martin to acquire the Businesses. The Company was capitalized with an equity contribution from Holdings of $125,000. On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, L-3, and Lockheed Martin entered into a Transaction Agreement (the "L-3 Acquisition Agreement") whereby Holdings would acquire the Businesses from Lockheed Martin (the "L-3 Acquisition"). Also included in the acquisition is a semiconductor product line of another business and certain leasehold improvements in New York City which were not material. Pursuant to the L-3 Acquisition Agreement, L-3 acquired the Businesses from Lockheed Martin for $525,000, comprising $458,779 of cash, after a $21,221 reduction related to a purchase price adjustment, and $45,000 of common equity, representing a 34.9% interest in Holdings retained by Lockheed Martin, plus acquisition costs of $8,000. The Company and Lockheed Martin finalized the purchase price adjustment pursuant to an amendment to the L-3 Acquisition Agreement dated November 5, 1997, which also included the F-34 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued) (Dollars in thousands) assumption by the Company of Lockheed Martin's rights and obligations under a contract for the production of mission communication systems for track vehicles, for which the Company received cash of $12,176. In connection with the L-3 Acquisition Agreement, Holdings and the Company anticipated entering into a transition services agreement with Lockheed Martin pursuant to which Lockheed Martin would provide to L-3 and its subsidiaries (and L-3 would provide to Lockheed Martin) certain corporate services of a type previously provided at costs consistent with past practices until December 31, 1997 (or, in the case of Communication Systems - -- East (formerly known as Communication Systems -- Camden), for a period of up to 18 months after the Closing). Lockheed Martin is providing L-3 the services contemplated by the proposed transaction services agreement in the absence of any executed agreement. The parties also entered into supply agreements which reflect previously existing inter-company work transfer agreements or similar support arrangements upon prices and other terms consistent with previously existing arrangements. Holdings, the Company and Lockheed Martin have entered into certain subleases of real property and cross-licenses of intellectual property. Pursuant to the L-3 Acquisition Agreement the Company also assumed certain obligations relating to environmental liabilities and benefit plans. In accordance with Accounting Principles Board Opinion No. 16, the acquisition of the Businesses by Holdings and L-3 has been accounted for as a purchase business combination effective as of April 1, 1997. The purchase cost (including the fees and expenses related thereto) was allocated to the tangible and intangible assets and liabilities of the Company based upon their respective fair values. The assets and liabilities recorded in connection with the purchase price allocation were $664,800 and $164,400, respectively. The excess of the purchase price over the fair value of net assets acquired of $303,200 was recorded as goodwill, and is being amortized on a straight-line basis over a period of 40 years. As a result of the 34.9% ownership interest retained by Lockheed Martin, the provisions of Emerging Issues Task Force Issue Number 88-16 were applied in connection with the purchase price allocation, which resulted in the recognition of a deemed distribution of $9,000. In connection with the determination of the fair value of assets acquired and pursuant to the provisions of Accounting Principles Board Opinion No. 16, the Company has valued acquired contracts in process at contract price, less the estimated cost to complete and an allowance for the Company's normal profit on its effort to complete such contracts. Had the L-3 Acquisition occurred on January 1, 1996, the unaudited pro forma sales and net income for the years ended December 31, 1997 and 1996 would have been $703,600 and $16,300, and $663,200 and $9,700, respectively. The pro forma results, which are based on various assumptions, are not necessarily indicative of what would have occurred had the acquisition been consummated on January 1, 1996. The 1997 and 1996 pro forma sales and net income have been adjusted to (a) include the operations of the Loral Acquired Businesses from January 1, 1996 (Note 3) and (b) exclude the operations of the Hycor business net assets held for sale from January 1, 1996 (Note 6). 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. STATEMENTS OF CASH FLOWS: Changes in operating assets and liabilities are net of the impact of acquisitions and final purchase price allocations. The Predecessor Company participated in Lockheed Martin's cash management system, under which all cash was received and payments were made by Lockheed Martin. All transactions between the Predecessor Company and Lockheed Martin have been accounted for as settled in cash at the time the transactions were recorded by the Predecessor Company. F-35 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued) (Dollars in thousands) REVENUE RECOGNITION: Sales on production-type contracts are recorded as units are shipped; profits applicable to such shipments are recorded pro rata, based upon estimated total profit at completion of the contract. Sales and profits on cost reimbursable contracts are recognized as costs are incurred. Sales and estimated profits under other long-term contracts are recognized under the percentage of completion method of accounting using the cost-to-cost method. Amounts representing contract change orders or claims are included in sales only when they can be reliably estimated and their realization is probable. Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period, on a cumulative catch-up basis, in which the facts, requiring the revision, become known. CONTRACTS IN PROCESS: Costs accumulated on contracts in process include direct costs, as well as manufacturing overhead, and for government contracts, general and administrative costs, independent research and development costs and bid and proposal costs. In accordance with industry practice, 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. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is provided primarily on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. COST IN EXCESS OF NET ASSETS ACQUIRED: The excess of the cost of the L-3 Acquisition over the fair value of the net assets acquired is being amortized using a straight-line method over a 40 year period. Accumulated amortization of the Company amounted to $5,741 at December 31, 1997. The carrying amount of cost in excess of net assets acquired is evaluated on a recurring basis. Current and future profitability as well as current and future undiscounted cash flows, excluding financing costs, of the acquired businesses are primary indicators of recoverability. For the nine months ended December 31, 1997, there was no reduction to the carrying amount of the cost in excess of net assets acquired resulting from these evaluations. PREDECESSOR COMPANY INTANGIBLES: Intangibles, primarily the excess of the cost of Businesses over the fair value of the net assets acquired, was amortized using a straight-line method primarily over a 40-year period. Other intangibles were amortized over their estimated useful lives which range from 11 to 15 years. Amortization expense of the Businesses was $2,655 for the three months ended March 31, 1997; $10,115 and $6,086 for the years ended December 31, 1996 and 1995, respectively. Accumulated amortization was $26,524 at December 31, 1996. Intangibles of the Predecessor Company include costs allocated to the Businesses relating to the Request for Funding Authorization ("RFA"), consisting of over 20 restructuring projects to reduce operating costs, initiated by General Electric ("GE") Aerospace in 1990 and to the REC Advance Agreement ("RAA"), a restructuring plan initiated after Lockheed Martin's acquisition of GE Aerospace. The RAA was initiated to close two regional electronic manufacturing centers. Restructure costs are reimbursable from the U.S. Government if savings can be demonstrated to exceed costs. The total cost of restructuring under the RFA and the RAA represented approximately 15% of the estimated savings to the U.S. Government and, therefore, a deferred asset has been recorded by Lockheed Martin. The deferred asset is being allocated to all the former GE Aerospace sites, including the Communications Systems Division, on a basis that includes manufacturing labor, overhead, and direct material less non-hardware subcontracts. At December 31, 1997 and 1996, approximately $2,313 and $4,400, respectively, of unamortized RFA and RAA costs are deferred on the Company's and the Predecessor Company's consolidated (combined) balance sheets in other current assets and other assets. The carrying values of the Predecessor Company intangibles were reviewed if the facts and circumstances indicated potential impairment of their carrying value. If this review indicated that F-36 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued) (Dollars in thousands) intangible assets were not recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Businesses carrying values related to the intangible asset were reduced by the estimated shortfall of cash flows. INCOME TAXES: The Company provides for income taxes using the liability method prescribed by the Financial Accounting Standards Board ("FASB") Statement 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 financial effect of changes in tax laws or rates is accounted for in the period of enactment. PREDECESSOR COMPANY INCOME TAXES: The Predecessor Company was included in the consolidated Federal income tax return and certain combined and separate state and local income tax returns of Lockheed Martin. However, for purposes of these financial statements, the provision for income taxes has been allocated to the Predecessor Company based upon reported combined income before income taxes. Income taxes, current and deferred, are considered to have been paid or charged to Lockheed Martin and are recorded through the invested equity account with Lockheed Martin. The principal components of the deferred taxes are contract accounting methods, property, plant and equipment, goodwill amortization and timing of accruals. RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the Company and the Predecessor Company include research and development, 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 the Company's 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 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" ("SFAS 123"). DERIVATIVE FINANCIAL INSTRUMENTS: In the normal course of financing operations, the Company enters into interest rate cap and floor transactions for interest rate protection purposes, and not for speculative or trading purposes. Cash payments to and from the Company to and from the counterparties are recorded as a component of interest expense. The initial cost of these arrangements are deferred and amortized as interest expense. 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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to contract estimates of sales and costs, allocations from Lockheed Martin, recoverability of recorded amounts of fixed assets and cost in excess of net assets acquired, litigation and environmental obligations. Actual results could differ from these estimates. EARNINGS PER SHARE: Earnings per share data is not presented since the Company and the Predecessor Company are wholly owned subsidiaries. F-37 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) ACCOUNTING PRONOUNCEMENTS: In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in full set general purpose financial statements. SFAS No. 131 establishes accounting standards for the way that public business enterprises report selected information about operating segments and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other post-retirement benefits plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87 "Employers' Accounting for Pensions", SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" were issued. SFAS No. 132 suggests combined formats for presentation of pension and other post-retirement benefits disclosures. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 and SFAS No. 131 and SFAS No. 132 are required to be adopted by 1998. The Company is currently evaluating the impact, if any, of SFAS No. 130, SFAS No. 131 and SFAS 132. Effective January 1, 1996, the Businesses adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of" ("SFAS 121"). SFAS 121 establishes the accounting standards for the impairment of long-lived assets, certain intangible assets and cost in excess of net assets acquired to be held and used for long-lived assets and certain intangible assets to be disposed of. The impact of adopting SFAS 121 was not material. Effective in December 1997 the Company adopted the provisions of SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). RECLASSIFICATIONS: Certain reclassifications have been made to conform prior-year amounts to the current-year presentation. 4. PREDECESSOR COMPANY ACQUISITION Effective April 1, 1996, Lockheed Martin acquired substantially all the assets and liabilities of the defense businesses of Loral, including the Wideband Systems Division and the Products Group which are included in the Businesses. The acquisition of the Wideband Systems Division and Products Group businesses (the "Loral Acquired Businesses") has been accounted for as a purchase by Lockheed Martin Communications Systems -- Camden Division ("Division"). The acquisition has been reflected in the financial statements based on the purchase price allocated to those acquired businesses by Lockheed Martin. The assets and liabilities recorded in connection with the purchase price allocation were $401,000 and $113,200, respectively. As such, the accompanying condensed combined financial statements for periods prior to April 1, 1997 reflect the results of operations of the Division and the Loral Acquired Businesses from the effective date of acquisition including the effects of an allocated portion of cost in excess of net assets acquired resulting from the acquisition. F-38 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued) (Dollars in thousands) 5. CONTRACTS IN PROCESS Billings and accumulated costs and profits on long-term contracts, principally with the U.S. Government, comprise the following:
PREDECESSOR COMPANY COMPANY ---------- ------------- DECEMBER 31, ------------------------- 1997 1996 ---------- ------------- Billed contract receivables..................................... $ 39,029 $ 45,212 Unbilled contract receivables .................................. 33,136 84,814 Other billed receivables, principally commercial and affiliates 31,253 41,154 Inventoried costs .............................................. 82,954 72,880 ---------- ------------- 186,372 244,060 Less, unliquidated progress payments (19,170) (45,987) ---------- ------------- Net contracts in process........................................ $167,202 $198,073 ========== =============
The U.S. Government has title to or a secured interest in, inventory to which progress payments are applied. Unbilled contract receivables represent accumulated costs and profits earned but not yet billed to customers. The Company believes that substantially all such amounts will be billed and collected within one year. The following data has been used in the determination of costs and expenses:
COMPANY PREDECESSOR COMPANY -------------- -------------------------------- NINE THREE MONTHS MONTHS FOR THE YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ------------------ 1997 1997 1996 1995 -------------- ----------- ----- ------ Selling, general and administrative ("SG&A") costs included in inventoried costs...................... $15,379 $14,536 $14,700 $1,156 Selling, general and administrative costs incurred . 88,527 28,449 82,226 6,525 Independent research and development, including bid and proposal costs, included in SG&A incurred ..... $28,893 $12,024 $36,500 $9,800
6. NET ASSETS HELD FOR SALE The Company has accounted for the allocation of purchase price and the net assets of its Hycor business in accordance with the FASB's Emerging Issues Task Force Issue 87-11 "Allocation of Purchase Price to Assets to be Sold" ("EITF 87-11"). Accordingly, the net assets related to the Hycor business as of April 1, 1997 are included in the accompanying consolidated balance sheet as "Net assets held for sale". The fair value assigned to such net assets is based upon management's estimate of the proceeds from the sale of the Hycor business less the estimated income from operations for such business during the holding period of April 1, 1997 through January 29, 1998 (the "holding period"), plus interest expense on debt allocated to such net assets during the holding period. On January 29, 1998, the Company sold the Hycor business, excluding land and buildings for $3.5 million in cash subject to adjustment based on final closing net assets. In accordance with EITF 87-11, loss from the operations of the Hycor business of $108 and interest expense of $552 on the debt allocated to the Hycor net assets have been excluded from the Company's consolidated statements of operations for the nine months ended December 31, 1997. Also included in net assets held for sale at December 31, 1997 is a Company property located in Atlanta, Georgia. F-39 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) 7. PROPERTY, PLANT AND EQUIPMENT
PREDECESSOR COMPANY COMPANY ---------- ------------- DECEMBER 31, ------------------------- 1997 1996 ---------- ------------- Land.......................................... $ 6,670 $ 9,200 Buildings and improvements ................... 19,487 27,000 Machinery, equipment, furniture and fixtures 58,978 73,137 Leasehold improvements ....................... 9,899 7,229 ---------- ------------- $95,034 $116,566 ========== =============
Depreciation and amortization expense attributable to property, plant and equipment was $13,320 for the nine months ended December 31, 1997; $4,529 for the three months ended March 31, 1997, and $14,924 and $5,492 for the years ended December 31, 1996 and 1995, respectively. 8. DEBT Long-term debt consists of:
DECEMBER 31, 1997 ----------------- Term loans............................. $172,000 10 3/8 Senior Subordinated Notes due 2007 ................................. 225,000 ----------------- $397,000 Less current portion of term loans ... 5,000 ----------------- Total long-term debt.................. $392,000 =================
In connection with the L-3 Acquisition, the Company entered into $275,000 of Senior Credit Facilities consisting of $175,000 of term loans (the "Term Loan Facilities"), and a $100,000 revolving credit facility (the "Revolving Credit Facility") which has been provided by a syndicate of banks and financial institutions and bear interest, at the option of the Company, at a rate related to (i) the higher of federal funds rate plus 0.50% per annum or the reference rate published by Bank of America NT&SA or (ii) LIBOR, at December 31, 1997, such interest rates, based on various maturities, ranged from 7.625% to 8.625%. Interest payments vary in accordance with the type of borrowing and are made at a minimum every three months. The Revolving Credit Facility expires in 2003 and is available for ongoing working capital and letter of credit needs. The Term Loans mature in installments until the final maturity date in 2006. Approximately $93,428 of the Revolving Credit Facility is available at December 31, 1997 reflecting letters of credit of $6,572 drawn against the revolving credit facility of $100,000. In February 1998, the Senior Credit Facilities were amended to, among other things, increase the Revolving Credit Facility to $200,000, waive certain excess cash flow prepayments, as defined, otherwise required and permit the incurrence of up to an additional $150,000 of subordinated debt. The Company pays a commitment fee of 0.375% per annum on the unused portion of the Revolving Credit Facility. In April 1997, the Company issued $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. On November 5, 1997, the Company completed its exchange offer relating to the 1997 Notes and the holders of the 1997 Notes received registered securities. The 1997 Notes are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 2002, at various redemption prices plus accrued and unpaid interest to the applicable redemption date. In addition, prior to May 1, 2000, the Company may redeem up to 35% of the aggregate principal amount of 1997 Notes at a redemption price of 109.375% of the principal amount thereof, plus accrued and unpaid interest to the F-40 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) redemption date with the net cash proceeds of one or more equity offerings by Holdings that are contributed to the Company as common equity capital. The Senior Credit Facilities and the 1997 Notes agreement contain financial and restrictive covenants that limit, among other things, the ability of the Company to borrow additional funds, dispose of assets, or pay cash dividends. At December 31, 1997, none of the Company's retained earnings were available to pay dividends. The Senior Credit Facilities contain financial covenants, which remain in effect so long as any amount is owed by the Company thereunder. These financial covenants require that (i) the Company's debt ratio, as defined, be less than or equal to 5.50 for the quarter ended December 31, 1997, and that the maximum allowable debt ratio, as defined, thereafter be further reduced to less than or equal to 3.1 for the quarters ending after June 30, 2002, and (ii) the Company's interest coverage ratio, as defined, be at least 1.85 for the quarter ended December 31, 1997, and thereafter increasing the interest coverage ratio, as defined, to at least 3.10 for any fiscal quarters ended after June 30, 2002. At December 31, 1997, the Company was in compliance with these covenants. In connection with the Senior Credit Facilities, the Company has granted the lenders a first priority lien on substantially all of the Company's assets including the stock of L-3 Communications Corporation. The aggregate principal payments for debt, excluding borrowings under the Revolving Credit Facilities, for the five years ending December 31, 1998 through 2002 are: $5,000, $11,000, $19,000, $25,000 and $33,200, respectively. The costs related to the issuance of debt have been deferred and are being amortized as interest expense over the term of the related debt using a method that approximates the effective interest method. 9. PREDECESSOR COMPANY'S INTEREST EXPENSE Interest expense has been allocated to the Predecessor Company by applying Lockheed Martin's weighted average consolidated interest rate to the portion of the beginning of the period invested equity account deemed to be financed by consolidated debt, which has been determined based on Lockheed Martin's debt to equity ratio on such date, except that the acquisition of the Loral Acquired Businesses has been assumed to be fully financed by debt. Management of the Businesses believes that this allocation methodology is reasonable. Interest expense of the Predecessor Company was calculated using the following balances and interest rates:
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED ------------------------ MARCH 31, 1997 1996 1995 --------------- ------------ ---------- Invested Equity $473,609 $482,466 $199,506 Interest Rate .. 7.10% 7.20% 7.40%
10. FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, billed contract receivables, other billed receivables (principally commercial and affiliates), trade accounts payable, customer advances, debt instruments, and interest rate cap and interest rate floor contracts. The book values of cash and cash equivalents, billed contract receivables, other billed receivables (principally commercial and affiliates), trade accounts payable and customer advances are considered to be representative of their respective fair values at December 31, 1997 due to the short-term maturities or expected settlement dates of these instruments. The Company's debt instruments consist of term loans and 1997 Notes (Note 8). The carrying values of the term loans approximate fair value because they are variable-rate loans which bear interest at current market rates. F-41 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The 1997 Notes are registered, unlisted public debt which is traded in the over-the-counter market. The fair value of such debt at December 31, 1997 was estimated to be approximately $243,000, based on trading activity on December 31, 1997. To mitigate risks associated with changing interest rates on certain of its debt, the Company entered into the interest rate agreements. The fair values of the interest rate caps and interest rate floors (collectively, the "interest rate agreements") were estimated by discounting expected cash flows using quoted market interest rates. 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 for the nine months ended December 31, 1997. Information with respect to the interest rate agreements is as follows:
DECEMBER 31, 1997 -------------------------- NOTIONAL UNREALIZED AMOUNT GAINS (LOSSES) ---------- -------------- Interest rate caps . $100,000 $(1,008) ---------- -------------- Interest rate floors.............. $ 50,000 $ (263) ---------- --------------
At December 31, 1996, the Predecessor Company's financial instruments consisted primarily of billed contract receivables, other billed receivables (principally commercial and affiliates), trade accounts payable and customer advances. The book value of billed contract receivables, other billed receivables (principally commercial and affiliates), trade accounts payable and customer advances approximated their respective fair values at December 31, 1996, due to the short-term maturities or expected settlement dates of those instruments. 11. INCOME TAXES THE COMPANY Pretax income of the Company for the nine months ended December 31, 1997 was $27,402 and was primarily domestic. The components of the Company's provision for income taxes for the nine months ended December 31, 1997 are:
Income taxes currently payable, primarily federal $ 696 Deferred income taxes: Federal .......................................... 8,635 State and local .................................. 1,356 -------- Subtotal ......................................... $ 9,991 -------- Total provision for income taxes .................. $10,687 ========
The effective income tax rate of the Company for the nine months ended December 31, 1997 differs from the statutory federal income tax rate for the following reasons:
Statutory federal income tax rate .............................. 35.0% State and local income taxes, net of federal income tax benefit 3.2 Non-deductible goodwill amortization and other expenses ....... 3.7 Research and development and other tax credits ................. (2.9) ------- Effective income tax rate ...................................... 39.0 % =======
F-42 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The significant components of the Company's net deferred tax assets at December 31, 1997 are:
Deferred tax assets: Other postretirement benefits ....................... $ 8,649 Inventoried costs ................................... 8,711 Compensation and benefits ........................... 528 Pension costs ....................................... 4,177 Property, plant and equipment ....................... 8,098 Income recognition on long-term contracts .......... 3,691 Other ............................................... 1,861 Net operating loss and other credit carryforwards .. 2,969 --------- Total deferred tax assets........................... 38,684 Deferred tax liabilities: Cost in excess of net assets acquired ............... (1,099) Other, net .......................................... (70) --------- Total deferred tax liabilities...................... (1,169) --------- Net deferred tax assets............................... $37,515 ========= The net deferred tax assets are classified as follows: Current deferred tax assets ......................... $13,298 Long-term deferred tax assets........................ 24,217 --------- $37,515 =========
At December 31, 1997, the Company had $2,969 of tax credit carryforwards primarily related to U.S. federal net operating losses and research and experimentation tax credits, which expire, if unused, in 2012. 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. PREDECESSOR COMPANY The (benefit) provision for income taxes for the Predecessor Company was calculated by applying statutory tax rates to the reported income (loss) before income taxes after considering items that do not enter into the determination of taxable income and tax credits reflected in the consolidated provision of Lockheed Martin, which are related to the Businesses. Substantially all the income of the Businesses are from domestic operations. For the three months ended March 31, 1997, it is estimated that the benefit for deferred taxes represents $1,315. For the years ended December 31, 1996 and 1995, it is estimated that the (benefit) provision for deferred taxes represents ($2,143) and $3,994, respectively. F-43 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The effective income tax rate of the Predecessor Company differs from the statutory Federal income tax rate for the following reasons:
FOR THE THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, 1997 1996 1995 -------------- ---------- --------- Statutory federal income tax rate ..................... (35.0)% 35.0% 34.0% Amortization of cost in excess of net assets acquired (8.1) 2 529 Research and development and other tax credits ....... (11.3) (2) -- State and local income taxes, net of federal income tax benefit and state and local income tax credits .. 4.8 6 101 Foreign sales corporation tax benefits ................ (8.4) (1) -- Other, net ............................................ 9.1 -- 17.0 -------------- ------- ------- Effective income tax rate ............................. (48.9)% 40.0% 681% ============== ======= =======
12. STOCK OPTIONS THE COMPANY Holdings sponsors an option plan for key employees, pursuant to which options to purchase up to 3,255,815 shares of common stock have been authorized for grant. On April 30, 1997, Holdings adopted the 1997 Option Plan for key employees and granted to the Equity Executives nonqualified options to purchase, at $6.47 per share, 2,285,714 shares of Class A common stock of Holdings. In each case, half of the options are "Time Options" and half are "Performance Options" (collectively, the "Options"). The Time Options become exercisable with respect to 20% of the shares subject to the Time Options on each of the first five anniversaries if employment continues through and including such date. The Performance Options become exercisable nine years after the grant date, but may become exercisable earlier with respect to up to 20% of the shares subject to the Performance Options on each of the first five anniversaries, to the extent certain defined targets are achieved. The Options, which have a ten year term, become fully exercisable under certain circumstances, including a change in control. On July 1, 1997 and November 11, 1997, Holdings granted nonqualified options to certain officers and other employees of the Company to purchase at $6.47 per share 689,500 shares of Class A common stock of Holdings (collectively, the "1997 Options"). Generally, the 1997 Options vest over a three-year vesting period and expire ten years from the date of grant. The exercise price for Holdings' stock options granted to employees in 1997 equaled the fair value of Holdings' common stock at the date of grant. Accordingly, in accordance with APB 25, no compensation expense was recognized by the Company. Pro forma information regarding net earnings as required by SFAS 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. Because Holdings is a nonpublic entity the fair value for the options was estimated at the date of grant using the minimum value method prescribed in SFAS 123, which does not consider the expected volatility of Holdings's stock price, with the following weighted-average assumptions for 1997: risk-free interest rate of 6.3%; dividend yield of 0%; and weighted-average expected option life of 5.49 years. F-44 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) For purposes of pro forma disclosures, the compensation cost of the options based on their estimated fair values is amortized to expense over vesting periods of the options. The Company's net income for the nine months ended December 31, 1997 would have decreased to the pro forma amounts indicated below:
Net income: As reported . $16,715 ========= Pro forma..... $16,161 =========
A summary of the stock option activity for the nine months ended December 31, 1997 is as follows:
SHARES WEIGHTED AVERAGE (000'S) EXERCISE PRICE -------- ---------------- Options granted ........................ 2,975 $6.47 Options exercised ...................... -- -- Options cancelled ...................... 4 $6.47 Options outstanding, December 31, 1997 2,971 $6.47 Options exercisable, December 31, 1997 -- --
The weighted-average grant-date fair value of options granted during the nine months ended December 31, 1997 was $1.82 per option. The weighted average remaining contract life of the Company's outstanding stock options was 9.37 years at December 31, 1997. PREDECESSOR COMPANY During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, certain employees of the Predecessor Company participated in Lockheed Martin's stock option plans. All stock options granted had 10 year terms and vested over a two year service period. Exercise prices of options awarded in both years were equal to the market price of the stock on the date of grant. Pro forma information regarding net earnings (loss) as required by SFAS No. 123 has been determined as if the Predecessor Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, respectively: risk-free interest rates of 5.58%, 5.58% and 6.64%; dividend yield of 1.70%; volatility factors related to the expected market price of the Lockheed Martin's common stock of .186, .186 and .216; weighted-average expected option life of five years. The weighted-average fair values of options granted during 1997, 1996 and 1995 were $17.24, $17.24 and $16.09, respectively. For the purposes of pro forma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. The Predecessor Company's pro forma net loss for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995 were ($386), $11,531, and $(1,040), respectively. F-45 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) 13. COMMITMENTS AND CONTINGENCIES THE COMPANY The Company and Predecessor Company leases certain facilities and equipment under agreements expiring at various dates through 2011. At December 31, 1997, the Company's future minimum payments for noncancellable operating leases with initial or remaining terms in excess of one year are as follows:
OPERATING LEASES ------------------------------------ REAL ESTATE EQUIPMENT TOTAL ------------- ----------- -------- 1998.......... $ 8,599 $295 $ 8,894 1999 ......... 7,734 244 7,978 2000 ......... 10,030 232 10,262 2001 ......... 8,926 29 8,955 2002 ......... 2,795 22 2,817 Thereafter .. 14,393 -- 14,393 ------------- ----------- -------- $52,477 $822 $53,299 ============= =========== ========
Real estate lease commitments have been reduced by minimum sublease rentals of $22,106 due in the future under noncancellable subleases. Leases covering major items of real estate and equipment contain renewal and or purchase options which may be exercised by the Company and Predecessor Company. Rent expense, net of sublease income from other Lockheed Martin entities, was $7,330 for the Company for the nine months ended December 31, 1997; $2,553 for the Predecessor Company for the three months ended March 31, 1997 and $8,495 and $4,772 for the Predecessor Company for the years ended December 31, 1996 and 1995, respectively. The Company is and the Predecessor Company has been 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 and the Predecessor Company by a federal grand jury could result in the Company and the Predecessor Company being suspended for a period of time from eligibility for awards of new government contracts. A conviction could result in debarment from contracting with the federal government for a specified term. The decline in the U.S. defense budget since the mid-1980s has resulted in program delays, cancellations and scope reduction for defense contracts in general. These events may or may not have an effect on the Company's programs; however, in the event that U.S. Government expenditures for products of the type manufactured by the Company are reduced, and not offset by greater commercial sales or other new programs or products, or acquisitions, there may be a reduction in the volume of contracts or subcontracts awarded to the Company. Pursuant to the L-3 Acquisition Agreement, Holdings and the Company have agreed to assume certain on-site and off-site environmental liabilities related to events or activities occurring prior to the consummation of the L-3 Acquisition. Lockheed Martin has agreed to retain all environmental liabilities for all facilities not used by the Businesses as of April, 1997 and to indemnify fully Holdings for such prior site environmental liabilities. Lockheed Martin has also agreed, for the first eight years following April 1997 to pay 50% of all costs incurred by Holdings above those reserved for on the Company's balance sheet at March 31, 1997 relating to certain Company-assumed environmental liabilities and, for the seven F-46 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) years thereafter, to pay 40% of certain reasonable operation and maintenance costs relating to any environmental remediation projects undertaken in the first eight years. 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 and the Predecessor Company have been periodically subject to litigation, claims or assessments and various contingent liabilities (including environmental matters) incidental to its business. With respect to those investigative actions, items of litigation, claims or assessments of which they are aware, management of the Company is of the opinion that the probability is remote that, after taking into account certain provisions that have been made with respect to these matters, the ultimate resolution of any such investigative actions, items of litigation, claims or assessments will have a material adverse effect on the financial position or results of operations of the Company and the Predecessor Company. 14. PENSIONS AND OTHER EMPLOYEE BENEFITS THE COMPANY PENSIONS: Holdings and the Company maintain a number of pension plans, both contributory and noncontributory, covering certain employees. Eligibility for participation in these plans varies and benefits are generally based on members' compensation and 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. Pension expense for the nine months ended December 31, 1997 includes the following components:
Service cost ................. $ 5,109 Interest cost ................ 8,883 Actual return on plan assets (11,285) Net deferral ................. 1,581 ---------- Total pension cost ........... $ 4,288 ==========
F-47 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The following presents the funded status and amounts recognized in the balance sheet for the Company's pension plans:
DECEMBER 31, 1997 -------------------------------- ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS --------------- --------------- Actuarial present value of benefit obligations: Vested benefits ................................................ $13,742 $152,133 --------------- --------------- Accumulated benefits ........................................... $13,825 $155,474 Effect of projected future salary increases .................... 3,337 25,795 --------------- --------------- Projected benefits.............................................. $17,162 $181,269 =============== =============== Plan assets at fair value........................................ $18,172 $155,278 --------------- --------------- Plan assets in excess of (less than) projected benefit obligation...................................................... 1,010 (25,991) Unrecognized net (gain) loss .................................... (559) 5,683 --------------- --------------- Prepaid (accrued) pension cost................................... $ 451 $(20,308) =============== ===============
The following assumptions were used in accounting for pension plans for the Company:
APRIL 1, 1997 DECEMBER 31, 1997 --------------- ----------------- Discount rate .................... 7.50% 7.25% Rate of increase in compensation 5.00% 5.00% Rate of return on plan assets ... 9.00% 9.00%
POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE: In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees and dependents at certain locations. Participants are eligible for these benefits when they retire from active service and meet the 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. Post-retirement health care and life insurance costs for the nine months ended December 31, 1997 include the following components:
Service cost .............................................. $ 466 Interest cost ............................................. 840 ------- Total post-retirement health care and life insurance costs $1,306 =======
F-48 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The following table presents the amounts recognized in the balance sheet for the Company at December 31, 1997:
Accumulated post-retirement benefit obligation: Retirees.................................................... $ 4,702 Fully eligible plan participants ........................... 3,188 Other active plan participants ............................. 10,990 --------- Total accumulated post-retirement benefit obligation ........ $18,880 Unrecognized net loss ....................................... 624 --------- Accrued post-retirement health care and life insurance costs $18,256 =========
Actuarial assumptions used in determining the December 31, 1997 used in determining the accumulated post-retirement benefit obligation include a discount rate of 7.25%, an average rate of compensation increase of 5.0% and an assumed health care cost trend rate of 6.5% in 1997 decreasing gradually to rate of 4.5% by the year 2001. The discount rate used at April 1, 1997 was 7.50%. The other assumptions did not change from April 1, 1997. Increasing the assumed health care cost trend rate by 1% would change the accumulated post-retirement benefits obligation at December 31, 1997 by approximately $2,218 and the aggregate service and interest cost components for the nine months ended December 31, 1997 by approximately $81 and $113, respectively. EMPLOYEE SAVINGS PLAN: 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 contribution vary among the plans. Under these plans, the Company's matching contributions, in cash, for the nine months ended December 31, 1997 was $3,742. THE PREDECESSOR COMPANY Certain of the Businesses for the Predecessor Company participated in various Lockheed Martin-sponsored pension plans covering certain employees. Eligibility for participation in these plans varies, and benefits are generally based on members' compensation and years of service. Lockheed Martin's funding policy was generally to contribute in accordance with cost accounting standards that affect government contractors, subject to the Internal Revenue Code and regulations. Since the aforementioned pension arrangements are part of certain Lockheed Martin defined benefit plans, no separate actuarial data is available for the portion allocable to the Businesses. Therefore, no liabilities or assets are reflected in the accompanying combined financial statements of the Predecessor Company as of December 31, 1996. The Businesses have been allocated pension costs based upon participant employee headcount. Net pension expense included in the accompanying combined financial statements of the Predecessor Company was $1,848 for the three months ended March 31, 1997, and $7,027 and $4,134, for the years ended December 31, 1996 and 1995, respectively. In addition to participating in Lockheed Martin-sponsored pension plans, certain of the Businesses of the Predecessor Company provided varying levels of health care and life insurance benefits for retired employees and dependents. Participants were eligible for these benefits when they retired from active service and met the pension plan eligibility requirements. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions. Since the aforementioned postretirement benefits are part of certain Lockheed Martin postretirement arrangements, no separate actuarial data is available for the portion allocable to the Businesses. Accordingly, no liability is reflected in the accompanying combined financial statements as of combined December 31, 1996 and 1995. The Businesses have been allocated F-49 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) postretirement benefits cost based on participant employee headcount. Postretirement benefit costs included in the accompanying combined financial statements was $616 for the three months ended March 31, 1997 and $2,787 and $2,124 for the years ended December 31, 1996 and 1995, respectively. Under various employee savings plans sponsored by Lockheed Martin, the Predecessor Company matched contributions of participating employees up to a designated level. Under these plans the matching contributions for the three months ended March 31, 1997 and for the years ended December 31, 1996 and 1995 were $1,241, $3,940 and $1,478, respectively. 15. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosures to the consolidated statement of cash flows are as follows:
COMPANY PREDECESSOR COMPANY ----------------- ------------------------------ YEAR ENDED NINE MONTHS THREE MONTHS DECEMBER 31, ENDED ENDED ------------ DECEMBER 31, 1997 MARCH 31, 1997 1996 1995 ------------------ -------------- ------ ------ INTEREST PAID ..... $21,245 -- -- -- ================= ============== ====== ====== INCOME TAXES PAID $ 109 -- -- -- ================= ============== ====== ======
The Company issued $45,000 of Holdings Class A Common Stock to Lockheed Martin in a non-cash transaction as partial consideration paid to Lockheed Martin for the L-3 Acquisition. 16. SALES TO PRINCIPAL CUSTOMERS The Company and the Predecessor Company operate primarily in one industry segment, government electronic systems. Sales to principal customers are as follows:
COMPANY PREDECESSOR COMPANY -------------- ------------------------------------------- THREE NINE MONTHS YEAR YEAR MONTHS ENDED ENDED ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1997 1997 1996 1995 -------------- ----------- -------------- -------------- U.S. Government Agencies ... $434,020 $128,505 $425,033 $161,617 Foreign (principally foreign governments) ............... 12,090 13,612 33,475 4,945 Other (principally U.S. commercial) ................ 100,415 16,756 84,573 219 -------------- ----------- -------------- -------------- $546,525 $158,873 $543,081 $166,781 ============== =========== ============== ==============
17. OTHER TRANSACTIONS WITH LOCKHEED MARTIN The Company and the Predecessor Company sell products to Lockheed Martin and its affiliates, net sales for which were $60,402 for the nine months ended December 31, 1997; $21,171 for the three months ended March 31, 1997 and $70,658 and $25,874 for the years ended December 31, 1996 and 1995, respectively. Included in Contracts in Process are receivables from Lockheed Martin and its affiliates of $8,846 and $10,924 at December 31, 1997 and 1996, respectively. 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 certain assets, liabilities and expenses related to F-50 L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) these services have been allocated to the Businesses, the combined financial position, results of operations and cash flows presented in the accompanying combined financial statements would not be the same had the Businesses been independent entities. The amount of allocated corporate expenses to the Predecessor Company and reflected in these combined financial statements was estimated based primarily on an allocation methodology prescribed by government regulations pertaining to government contractors. Allocated costs to the Businesses were $5,208 for the three months ended March 31, 1997, and $10,057 and $2,964 for the years ended December 31, 1996 and 1995, respectively. 18. SUBSEQUENT EVENTS In February 1998, the Company purchased substantially all the assets and liabilities of the Satellite Transmission Systems division of California Microwave, Inc. The purchase price of $27,000 is subject to adjustment based on closing net assets. The Company used cash on hand to fund the purchase price. On December 22, 1997, the Company signed a definitive agreement to purchase substantially all the assets and liabilities of the Ocean Systems division of AlliedSignal Inc. The purchase price of $67,500, subject to adjustment based on closing net working capital, will be financed through cash on hand and/or borrowings available under the Senior Credit Facilities. In February 1998, the Company entered into a definitive agreement to purchase the assets of ILEX Systems ("ILEX") for $51,900 in cash and additional consideration based on post-acquisition performance of ILEX. The acquisitions of ILEX and Ocean Systems are expected to close during the first quarter of 1998. The company plans to finance the purchase prices using its cash on hand and available borrowings under its revolving credit facility. In February 1998, the Company expects to file a registration statement with the Securities and Exchange Commission ("SEC") for the sale of $150,000 aggregate principal amount of Senior Subordinated Notes due 2008 (the "Notes Offering"), and concurrently with the Notes Offering, Holdings expects to file a registration statement with the SEC for the sale of common stock for a proposed maximum aggregate offering of $100,000. F-51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 52 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The following table provides information concerning the directors and executive officers. All directors hold office until the next annual meeting of the stockholders. All officers serve at the discretion of the Board of Directors.
NAME AGE POSITION - ----------------------- ----- ----------------------------------------------- Frank C. Lanza ......... 66 Chairman, Chief Executive Officer and Director Robert V. LaPenta ...... 52 President, Chief Financial Officer and Director Michael T. Strianese .. 42 Vice President--Finance and Controller Christopher C. Cambria 39 Vice President--General Counsel and Secretary Robert F. Mehmel ....... 35 Vice President--Planning and Assistant Secretary Lawrence H. Schwartz .. 60 Vice President--Business Development Jimmie V. Adams ........ 61 Vice President--Washington D.C. Operations Robert RisCassi ........ 62 Vice President--Washington D.C. Operations David J. Brand ......... 36 Director Alberto M. Finali ...... 43 Director Eliot M. Fried ......... 65 Director Robert B. Millard ...... 47 Director Alan H. Washkowitz .... 57 Director Thomas A. Corcoran .... 53 Director Frank H. Menaker, Jr. . 57 Director John E. Montague ....... 44 Director
Frank C. Lanza, Chairman and CEO. Mr. Lanza was Executive Vice President of Lockheed Martin and a member of Lockheed Martin's Executive Council and Board of Directors. Mr. Lanza was formerly President and COO of Lockheed Martin's C(3)I and Systems Integration Sector, which comprised many of the businesses acquired by Lockheed Martin from Loral in 1996. At the time of the Loral acquisition, Mr. Lanza was President and COO of Loral, a position he held since 1981. He joined Loral in 1972 as President of its largest division, Electronic Systems. His earlier experience was with Dalmo Victor and Philco Western Development Laboratory. Robert V. LaPenta, President and Chief Financial Officer. Mr. LaPenta was a Vice President of Lockheed Martin and was Vice President and Chief Financial Officer of Lockheed's C(3)I and Systems Integration Sector. Prior to Lockheed Martin's acquisition of Loral, he was Loral's Senior Vice President and Controller since 1981. He joined Loral in 1972 and was named Vice President and Controller of its largest division in 1974. He became Corporate Controller in 1978 and was named Vice President in 1979. Michael T. Strianese, Vice President--Finance and Controller. Mr. Strianese was Vice President and Controller of Lockheed Martin's C(3)I and Systems Integration Sector. From 1991 to the 1996 acquisition of Loral, he was Director of Special Projects at Loral. Prior to joining Loral, he spent 11 years with Ernst & Young. Mr. Strianese is a Certified Public Accountant. Christopher C. Cambria, Vice President--General Counsel and Secretary. Mr. Cambria joined Holdings in June 1997. From 1994 until joining Holdings, Mr. Cambria was an associate with Fried, Frank, Harris, Shriver & Jacobson. From 1986 until 1993, he was an associate with Cravath, Swaine & Moore. Robert F. Mehmel, Vice President--Planning and Assistant Secretary. Mr. Mehmel was the Director of Financial Planning and Capital Review for Lockheed Martin's C(3)I and Systems Integration Sector. From 1984 to 1996, Mr. Mehmel held several accounting and financial analysis positions at Loral Electronic Systems and Loral. At the time of Lockheed Martin's acquisition of Loral, he was Corporate Manager of Business Analysis. 53 Lawrence H. Schwartz, Vice President--Business Development. Between 1976 and 1987, Mr. Schwartz was Vice President of Engineering, Senior Vice President of Business Development, Senior Vice President of the Rapport Program and Senior Vice President of Development Programs at Loral Electronic Systems. In 1987, Mr. Schwartz assumed the position of Corporate Vice President of Technology for Loral Corporation. He then held that position for the C(3)I and System Integration Sector of Lockheed Martin. Jimmie V. Adams, Vice President--Washington, D.C. Operations. General Jimmie V. Adams (U.S.A.F.-ret.) was Vice President of Lockheed Martin's Washington Operations for the C(3)I and Systems Integration Sector. He held the same position at Loral and was an officer of Loral, prior to its acquisition by Lockheed Martin. Before joining Loral in 1993, he was Commander in Chief, Pacific Air Forces, Hickam Air Force Base, Hawaii, capping a 35-year career with the U.S. Air Force. He was also Deputy Chief of Staff for plans and operation for U.S. Air Force headquarters and Vice Commander of Headquarters Tactical Air Command and Vice Commander in Chief of the U.S. Air Forces Atlantic at Langley Air Force Base. He is a command pilot with more than 141 combat missions. Robert RisCassi, Vice President--Washington, D.C. Operations. General Robert W. RisCassi (U.S. Army-ret.) was Vice President of Land Systems for Lockheed Martin's C(3)I and Systems Integration Sector. He held the same position for Loral, prior to its acquisition by Lockheed Martin. He joined Loral in 1993 after retiring as U.S. Army Commander in Chief, United Nations Command/Korea. His 35-year military career included posts as Army Vice Chief of Staff; Director, Joint Staff, Joint Chiefs of Staff; Deputy Chief of Staff for Operations and Plans; and Commander of the Combined Arms Center. David J. Brand, Director. Mr. Brand is a Managing Director of Lehman Brothers and a principal in the Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology Mergers and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and has been responsible for merger and corporate finance advisory services for many of Lehman Brothers' technology and defense industry clients. Mr. Brand is currently a director of K&F Industries, Inc. Mr. Brand holds an M.B.A. from Stanford University's Graduate School of Business and a B.S. in Mechanical Engineering from Boston University. Alberto M. Finali, Director. Mr. Finali is a Managing Director of Lehman Brothers and principal of the Merchant Banking Group, based in New York. Prior to joining the Merchant Banking Group, Mr. Finali spent four years in Lehman Brothers' London office as a senior member of the M&A Group. Mr. Finali joined Lehman Brothers in 1987 as a member of the M&A Group in New York and became a Managing Director in 1997. Prior to joining Lehman Brothers, Mr. Finali worked in the Pipelines and Production Technology Group of Bechtel, Inc. in San Francisco. Mr. Finali holds an M.E. and an M.B.A. from the University of California at Berkeley, and a Laurea Degree in Civil Engineering from the Polytechnic School in Milan, Italy. Eliot M. Fried, Director. Mr. Fried is a Managing Director of Lehman Brothers. Mr. Fried joined Shearson, Hayden Stone, a predecessor firm, in 1976 and became a Managing Director in 1982. Mr. Fried has extensive experience in portfolio management and equity research. Mr. Fried is currently a director of Bridgeport Machines, Inc., Energy Ventures, Inc., SunSource L.P., Vernitron Corporation and Walter Industries, Inc. Mr. Fried holds an M.B.A. from Columbia University and a B.A. from Hobart College. Robert B. Millard, Director. Mr. Millard is a Managing Director of Lehman Brothers, Head of Lehman Brothers' Principal Trading & Investments Group and principal of the Merchant Banking Group. Mr. Millard joined Kuhn Loeb & Co. in 1976 and became a Managing Director of Lehman Brothers in 1983. Mr. Millard is currently a director of GulfMark International, Inc. and Energy Ventures, Inc. Mr. Millard holds an M.B.A. from Harvard University and a B.S. from the Massachusetts Institute of Technology. Alan H. Washkowitz, Director. Mr. Washkowitz is a Managing Director of Lehman Brothers and head of the Merchant Banking Group, and is responsible for the oversight of Lehman Brothers Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman Brothers in 1978 when Kuhn Loeb & 54 Co. was acquired by Lehman Brothers. Mr. Washkowitz is currently a director of Illinois Central Corporation, K&F Industries, Inc. and McBride plc. Mr. Washkowitz holds an M.B.A. from Harvard University, a J.D. from Columbia University and an A.B. from Brooklyn College. Thomas A. Corcoran, Director. Mr. Corcoran has been the President and Chief Operating Officer of the Electronic Systems Sector of Lockheed Martin Corporation since March 1995. From 1993 to 1995, Mr. Corcoran was President of the Electronics Group of Martin Marietta Corporation. Prior to that he worked for General Electric for 26 years and from 1983 to 1993 he held various management positions with GE Aerospace; he was a company officer from 1990 to 1993. Mr. Corcoran is a member of the Board of Trustees of Worcester Polytechnic Institute, the Board of Trustees of Stevens Institute of Technology, the Board of Governors of the Electronic Industries Association, a Director of the U.S. Navy Submarine League and a Director of REMEC Corporation. Frank H. Menaker, Jr., Director. Mr. Menaker has served as Senior Vice President and General Counsel of Lockheed Martin since July 1996. He served as Vice President and General Counsel of Lockheed Martin from March 1995 to July 1996, as Vice President of Martin Marietta Corporation from 1982 until 1995 and as General Counsel of Martin Marietta Corporation from 1981 until 1995. He is a director of Martin Marietta Materials, Inc., a member of the American Bar Association and has been admitted to practice before the United States Supreme Court. Mr. Menaker is a graduate of Wilkes University and the Washington College of Law at American University. John E. Montague, Director. Mr. Montague has been Vice President, Financial Strategies at Lockheed Martin responsible for mergers, acquisitions and divestiture activities and shareholder value strategies since March 1995. Previously, he was Vice President, Corporate Development and Investor Relations at Martin Marietta Corporation from 1991 to 1995. From 1988 to 1991, he was Director of Corporate Development at Martin Marietta Corporation, which he joined in 1977 as a member of the engineering staff. Mr. Montague is a director of Rational Software Corporation. Mr. Montague received his B.S. from the Georgia Institute of Technology and an M.S. in engineering from the University of Colorado. The Board of Directors intends to appoint two additional directors who are not affiliated with the Company promptly following the Common Stock Offering. The additional directors have not yet been identified. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has two standing committees: an Audit Committee and a Compensation Committee. Currently, the Audit Committee consists of Messrs. Brand, Fried and Menaker. The Company intends to appoint to the Audit Committee only persons who qualify as an "independent" director for purposes of the rules and regulations of the NYSE. The Audit Committee will select and engage, on behalf of the Company, the independent public accountants to audit the Company's annual financial statements, and will review and approve the planned scope of the annual audit. Currently, Messrs. Millard and Montague serve as members of the Compensation Committee. The Compensation Committee establishes remuneration levels for certain officers of the Company, performs such functions as provided under the Company's employee benefit programs and executive compensation programs and administers the 1997 Stock Option Plan, hereinafter defined. COMPENSATION OF DIRECTORS The current directors of the Company do not receive compensation for their services as directors. Any non-affiliated directors will receive directors' fees and reimbursements for their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the board of directors or committees thereof. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation provides that to the fullest extent permitted by the Delaware General Corporation Law (the "DGCL"), a director of the Company shall not be liable to the 55 Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Under the DGCL, liability of a director may not be limited (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases and (iv) for any transaction from which the director derives an improper personal benefit. The effect of the provisions of the Company's Certificate of Incorporation is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior), except in the situations described in clauses (i) through (iv) above. This provision does not limit or eliminate the rights of the Company or any stockholder to seek nonmonetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, the Company's Bylaws provide that the Company shall indemnify its directors, officers, employees and agents against losses incurred by any such person by reason of the fact that such person was acting in such capacity. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION Summary Compensation Table. The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company (the "Named Executive Officers") during the nine months ended December 31, 1997: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------------------------- ANNUAL SECURITIES COMPENSATION RESTRICTED UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION ----------------------- STOCK AWARDS STOCK OPTIONS COMPENSATION(2) SALARY BONUS(1) - -------------------------------------- ---------- ------------ -------------- ------------- --------------- Frank C. Lanza (Chairman and Chief Executive Officer).................... $542,654 -- 1,142,857 -- Robert V. LaPenta (President and Chief Financial Officer).................... 356,538 -- 1,142,857 -- Lawrence H. Schwartz (Vice President) . 145,327 $80,000 17,000 -- Jimmie V. Adams (Vice President) ...... 157,854 70,000 15,000 $ 61 Robert RisCassi (Vice President) ...... 125,704 60,000 15,000 611
- ------------ (1) Represents Company match under savings plan. 56 Stock Options Granted in 1997. The following table sets forth information concerning individual grants of stock options to purchase Holdings' Common Stock made in 1997 to each of the Named Executive Officers. OPTION GRANTS
INDIVIDUAL GRANTS ------------------------------------------------------------------------ NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT-DATE NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE VALUE(1) - -------------------------------------- -------------- --------------- ---------- -------------- ------------ Frank C. Lanza (Chairman and Chief Executive Officer).................... 1,142,857(2) 38.2% $6.47 April 30, 2007 $2,326,731 Robert V. LaPenta (President and Chief Financial Officer) ................... 1,142,857(2) 38.2% $6.47 April 30, 2007 $2,326,731 Lawrence H. Schwartz (Vice President) 17,000 0.6% $6.47 July 1, 2007 $ 17,571 Jimmie V. Adams (Vice President) ...... 15,000 0.5% $6.47 July 1, 2007 $ 15,504 Robert RisCassi (Vice President) ...... 15,000 0.5% $6.47 July 1, 2007 $ 15,504
- ------------ (1) The grant-date valuation of the options was calculated using the minimum value method described in SFAS No. 123. The minimum value is computed as the current price of stock at the grant date reduced to exclude the present value of any expected dividends during the option's expected life minus the present value of the exercise price, and does not consider the expected volatility of the price of the stock underlying the option. The material assumptions underlying the computations are: an average discount rate 6.3%; a dividend yield of 0% and a weighted average expected option life of 5.49 years, with the option lives ranging from 2 years to 10 years. (2) Half of the options granted consists of Time Options and half consists of Performance Options. See "--Employment Agreements" for descriptions of the terms of these options. Aggregate Option Exercises. None of the Named Executive Officers exercised options in 1997. PENSION PLAN The following table shows the estimated annual pension benefits payable under the L-3 Communications Corporation Pension Plan and Supplemental Employee Retirement Plan to a covered participant upon retirement at normal retirement age, based on the career average compensation (salary and bonus) and years of credited service with the Company.
CAREER AVERAGE COMPENSATION YEARS OF CREDITED SERVICE - --------------------------- ---------------------------------------------------- 15 20 25 30 35 --------- --------- --------- --------- --------- $125,000.................... $ 18,981 $ 24,937 $ 29,833 $ 33,856 $ 37,164 150,000.................... 23,172 30,408 36,355 41,243 45,260 175,000.................... 27,364 35,879 42,877 48,629 53,357 200,000.................... 31,556 41,349 49,399 56,015 61,454 225,000.................... 35,747 46,820 55,921 63,402 69,550 250,000.................... 39,939 52,291 62,444 70,788 77,647 300,000.................... 48,322 63,233 75,488 85,561 93,840 400,000.................... 65,089 85,116 101,577 115,106 126,226 450,000.................... 73,472 96,057 114,621 129,879 142,420 500,000.................... 81,855 106,999 127,665 144,651 158,613 750,000.................... 123,772 161,707 192,887 218,515 239,579
As of December 31, 1997, the current annual compensation and current years of credited service (including for Messrs. LaPenta, Adams and RisCassi, years of credited service as an employee of Loral and Lockheed Martin) for each of the following persons were: Mr. Lanza, $750,000 and one year; Mr. LaPenta, $500,000 and 26 years; Mr. Adams, $216,011 and 5 years; Mr. RisCassi, $172,016 and 4 years; and Mr. Schwartz, $229,000 and one year. Compensation covered under the pension plans includes amounts reported as salary and bonus in the Summary Compensation Table. 57 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Robert Millard, Steven Berger and John Montague served on the Compensation Committee of Holdings' Board of Directors during 1997. Mr. Berger resigned from Holdings' Board of Directors and the Compensation Committee in January 1998. No member of the Compensation Committee served as an officer of Holdings or L-3 Communications. 1997 STOCK OPTION PLAN In April 1997, Holdings adopted the 1997 Option Plan for Key Employees of Holdings (the "1997 Stock Option Plan") which authorizes the Compensation Committee to grant options to key employees of Holdings and its subsidiaries to acquire up to 3,255,815 shares of Holdings' Common Stock. The Compensation Committee of the Board of Directors of Holdings, in its sole discretion, determines the terms of option agreements, including without limitation the treatment of option grants in the event of a change of control. On April 30, 1997, Holdings granted each of Messrs. Lanza and LaPenta options to purchase 1,142,857 shares of Holdings' Common Stock. See "--Employment Agreements" for a description of the terms of these grants. On July 1, 1997 and November 11, 1997, the Compensation Committee authorized grants of options to employees of Holdings and its subsidiaries, other than Messrs. Lanza and LaPenta, to acquire an aggregate of 689,500 shares of Holdings' Common Stock at an exercise price of $6.47 per share (the "Employee Options"). Each Employee Option was granted pursuant to an individual agreement that provides (i) 20% of shares underlying the option will become exercisable on the first anniversary of the grant date, 50% will become exercisable on the second anniversary of the grant date and 30% will become exercisable on the third anniversary of the grant date; provided that, in the event of an initial public offering of Holdings' Common Stock, 15% of the shares underlying the option (which would otherwise become exercisable on the second anniversary of the grant date) will become exercisable on the earlier to occur of (A) the completion of the initial public offering of the Holdings' Common Stock and (B) the first anniversary of the grant date; (ii) all shares underlying the option will become exercisable upon certain events constituting a change of control; and (iii) the option will expire upon the earliest to occur of (A) the tenth anniversary of the grant date, (B) one year after termination of employment due to the optionee's death or permanent disability, (C) immediately upon termination of the optionee's employment for cause and (D) three months after termination of optionee's employment for any other reason. EMPLOYMENT AGREEMENTS Holdings entered into an employment agreement (the "Employment Agreements") with each of Mr. Lanza, Chairman and Chief Executive Officer of Holdings and L-3 Communications, who will receive a base salary of $750,000 per annum and appropriate executive level benefits, and Mr. LaPenta, President and Chief Financial Officer of Holdings and and L-3 Communications, who will receive a base salary of $500,000 per annum and appropriate executive level benefits. The Employment Agreements provide for an initial term of five years, which will automatically renew for one-year periods thereafter, unless a party thereto gives notice of its intent to terminate at least 90 days prior to the expiration of the term. Upon a termination without cause (as defined) or resignation for good reason (as defined), Holdings will be obligated, through the end of the term, to (i) continue to pay the base salary and (ii) continue to provide life insurance and medical and hospitalization benefits comparable to those provided to other senior executives; provided, however, that any such coverage shall terminate to the extent that Mr. Lanza or Mr. LaPenta, as the case may be, is offered or obtains comparable benefits coverage from any other employer. The Employment Agreements provide for confidentiality during employment and at all times thereafter. There is also a noncompetition and non-solicitation covenant which is effective during the employment term and for one year thereafter; provided, however, that if the employment terminates following the expiration of the initial term, the noncompetition covenant will only be effective during the period, if any, that Holdings pays the severance described above. Holdings has granted each of Messrs. Lanza and LaPenta (collectively, the "Equity Executives") nonqualified options to purchase, at $6.47 per share of Common Stock, 1,142,857 shares of Holdings' 58 initial fully-diluted common stock. In each case, half of the options will be "Time Options" and half will be "Performance Options" (collectively, the "Options"). The Time Options will become exercisable with respect to 20% of the shares subject to the Time Options on March 2, 1998 and each of the second through fifth anniversaries of the closing of the L-3 Acquisition (the "Closing") if employment continues through and including such date. The Performance Options will become exercisable nine years after the Closing, but will become exercisable earlier with respect to up to 20% of the shares subject to the Performance Options on March 2, 1998 and each of the second through fifth anniversaries of the Closing, to the extent certain EBITDA targets are achieved. The Options will become fully exercisable under certain circumstances, including a change in control. The Option term is ten years from the Closing; except that (i) if the Equity Executive is fired for cause or resigns without good reason, the Options expire upon termination of employment; (ii) if the Equity Executive is fired without cause, resigns for good reason, dies, becomes disabled or retires, the Options expire one year after termination of employment. Unexercisable Options will terminate upon termination of employment, unless acceleration is expressly provided for. Upon a change of control, Holdings may terminate the Options, so long as the Equity Executives are cashed out or permitted to exercise their Options prior to such change of control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. All outstanding capital stock of L-3 Communications is owned by Holdings. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Under the L-3 Acquisition Agreement, Lockheed Martin has agreed to indemnify L-3, subject to certain limitations, for Lockheed Martin's breach of representations and warranties and L-3 has assumed certain obligations relating to environmental matters and benefits plans. These obligations include certain on-site and off-site environmental liabilities related to events or activities of the Businesses occurring prior to the L-3 Acquisition. Lockheed Martin has agreed to indemnify Holdings, subject to certain limitations, for its breach of (i) non-environmental representations and warranties up to $50 million (subject to a $5 million threshold) and (ii) for the first eight years following April 1997, to pay 50% of all costs incurred by the Company above those reserved for on the Company's balance sheet at April 1997 relating to certain Company-assumed environmental liabilities and, for the seven years thereafter, 40% of certain reasonable operation and maintenance costs relating to any environmental remediation projects undertaken in the first eight years (subject to a $6 million threshold). Lockheed Martin provides to certain divisions of the Company certain management information systems services at Lockheed Martin's fully-burdened cost but without profit. Holdings, L-3 Communications and Lockheed Martin have entered into certain subleases of real property and cross-licenses of intellectual property. In addition, Holdings and Lockheed Martin have entered into a Limited Noncompetition Agreement (the "Noncompetition Agreement") which, for up to three years from April 1997, in certain circumstances, precludes Lockheed Martin from engaging in the sale of any products that compete with the products of the Company that are set forth in the Noncompetition Agreement for specifically identified application of the products. Under the Noncompetition Agreement, Lockheed Martin is prohibited, with certain exceptions, from acquiring any business engaged in the sale of the specified products referred to in the preceding sentence, although Lockheed Martin may acquire such a business under circumstances where the exceptions do not apply provided that it offers to sell such business to L-3 within 90 days of its acquisition. The Noncompetition Agreement does not, among other exceptions, (i) apply to businesses operated and managed by Lockheed Martin on behalf of the Government, (ii) prohibit Lockheed Martin from engaging in any existing businesses and planned businesses as of the closing of the L-3 Acquisition or businesses that are reasonably related to existing or planned businesses or (iii) apply to selling competing products where such products are part of a larger system sold by Lockheed Martin. In the ordinary course of business L-3 sells products to Lockheed Martin and its affiliates. Pro forma and aggregated sales to Lockheed Martin were $81.6 million, $70.7 million and $25.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. See Note 19 to the Consolidated (Combined) Financial Statements. 59 Sales of products to Lockheed Martin, excluding those under existing intercompany work transfer agreements, are made on terms no less favorable than those which would be available from non-affiliated third party customers. A significant portion of L-3's sales to Lockheed Martin are either based on competitive bidding or catalog prices. STOCKHOLDERS AGREEMENT Holdings, Lockheed Martin, the Lehman Partnership and Messrs. Lanza and LaPenta entered into a stockholders agreement (the "Stockholders Agreement") which, except the terms relating to (i) the registration rights, (ii) provision of services by Lehman Brothers Inc. and (iii) the standstill agreement by Lockheed Martin, terminates upon the consummation of the Common Stock Offering. Prior to the consummation of the Common Stock Offering, the Lehman Partnership is entitled to designate a majority of the members of the Board of Directors provided that it holds at least 35% of the capital stock of Holdings and remains the single largest shareholder. Pursuant to the Stockholders Agreement, certain of the existing stockholders have the right, from time to time on or after the 180-day period following the completion of the initial public offering and subject to certain conditions, to require the Company to register under the Securities Act shares of Common Stock held by them. Lockheed Martin, the Lehman Partnership and each of the Senior Management has three, four and one demand registration rights, respectively. In addition, the Stockholders Agreement also provides certain existing stockholders with certain piggyback registration rights. The Stockholders Agreement provides, among other things, that the Company will pay expenses in connection with (i) up to two demand registrations requested by Lockheed Martin, up to three demand registrations requested by the Lehman Partnership and the two demand registrations requested by the Senior Management and (ii) any registration in which the existing stockholders participate through piggyback registration rights granted under such agreement. The Stockholders Agreement also provides that Lehman Brothers Inc. has the exclusive right to provide investment banking services to Holdings for the five-year period after the closing of the L-3 Acquisition (except that the exclusivity period is three years as to cash acquisitions undertaken by L-3). In the event that Lehman Brothers Inc. agrees to provide any investment banking services to L-3, it will be paid fees that are mutually agreed upon based on similar transactions and practices in the investment banking industry. Under the Stockholders Agreement Lockheed Martin is subject to a standstill arrangement which generally prohibits any increase in its share ownership percentage over 34.9%. 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) FINANCIAL STATEMENTS The financial statements and notes to the Consolidated (Combined) Financial Statements are referred to in Item 8. (B) ADDITIONAL FINANCIAL INFORMATION None (C) REPORTS FILED ON FORM 8-K None (D) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
EXHIBIT NO. DESCRIPTION OF EXHIBIT - --------------- ----------------------------------------------------------------------------------------- *3.1 Certificate of Incorporation. *3.2 By-Laws of L-3 Communications Corporation. the form of Note. *10.1 Credit Agreement, dated as of April 30, 1997 among L-3 Communications Corporation and lenders named therein. *10.2 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The Bank of New York, as Trustee. *10.3 Stockholders' Agreement between L-3 Communications Corporation and the stockholders parties thereto. *10.4 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. *10.5 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3 Communications Holdings, Inc. *10.51 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3 Communications Holdings, Inc. *10.6 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3 Communications Corporation and KSL, Division of Bonneville International. *10.61 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, L-3 Communications Corporation and Unisys Corporation. *10.62 Sublease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3 Communications Corporation and Unisys Corporation. *10.7 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin Corporation and L-3 Communications Corporation. 10.8 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications Corporation and California Microwave, Inc. 10.81 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3 Communications Corporation. 10.82 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc., AlliedSignal Technologies, Inc., AlliedSignal Deutschland GMBH and L-3 Communications Corporation. 10.9 Form of Stock Option Agreement for Employee Options. 10.10 L-3 Communications Corporation Pension Plan. 12. Computation of Ratio of Earnings to Fixed Charges. 61 EXHIBIT NO. DESCRIPTION OF EXHIBIT - --------------- ----------------------------------------------------------------------------------------- 24 Powers of Attorney. 99.1 Unaudited Pro Forma Condensed Consolidated Financial Information. 99.2 Satellite Transmission Systems Division of California Microwave, Inc. Unaudited Condensed Financial Statements, Six months ended December 31, 1996 and 1997. 99.3 Satellite Transmission Systems Division of California Microwave, Inc. Financial Statements of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995. 99.4 ILEX Systems, Inc. and Subsidiary Consolidated Financial Statements, December 31, 1997. 99.5 AlliedSignal Ocean Systems Combined Financial Statements as of December 31, 1997 and for the year ended December 31, 1997.
- ------------ * Incorporated by reference from the Company's Registration Statement on Form S-4 (File no. 333-31649). 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 1998. 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 below by the following persons on behalf of the registrant on March 31, 1998 and in the capacities indicated.
SIGNATURE TITLE - ---------------------------- ---------------------------------------------------------- /s/ Frank C. Lanza Chairman, Chief Executive Officer and Director ---------------------------- (Principal Executive Officer) Frank C. Lanza /s/ Robert V. LaPenta President, Chief Financial Officer (Principal Financial ---------------------------- Officer) and Director Robert V. LaPenta /s/ Michael T. Strianese Vice President--Finance and Controller (Principal ---------------------------- Accounting Officer Michael T. Strianese * Director ---------------------------- David J. Brand * Director ---------------------------- Thomas A. Corcoran * Director ---------------------------- Alberto M. Finali * Director ---------------------------- Eliot M. Fried * Director ---------------------------- Frank H. Menaker, Jr. * Director ---------------------------- Robert B. Millard * Director ---------------------------- John E. Montague * Director ---------------------------- Alan H. Washkowitz By:/s/ Michael T. Strianese ---------------------------- Attorney-in-Fact
63 POWER OF ATTORNEY We, the undersigned directors and officers of L-3 Communications Corporation, do hereby constitute and appoint Michael T. Strianese, Christopher C. Cambria and David J. Brand, or any of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and on our behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said Corporation to comply with the Securities Exchange Act of 1934 and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report, including specifically, but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed on the 30th day of March, 1998 by the following persons in the capacities indicated:
SIGNATURE TITLE - ---------------------------- ---------------------------------------------------------- /s/ Frank C. Lanza Chairman, Chief Executive Officer and Director ---------------------------- (Principal Executive Officer) Frank C. Lanza /s/ Robert V. LaPenta President, Chief Financial Officer (Principal Financial ---------------------------- Officer) and Director Robert V. LaPenta /s/ Michael T. Strianese Vice President--Finance and Controller (Principal ---------------------------- Accounting Officer Michael T. Strianese /s/ David J. Brand Director ---------------------------- David J. Brand /s/ Thomas A. Corcoran Director ---------------------------- Thomas A. Corcoran /s/ Albert M. Finali Director ---------------------------- Alberto M. Finali /s/ Eliot M. Fried Director ---------------------------- Eliot M. Fried /s/ Frank H. Menaker, Jr. Director ---------------------------- Frank H. Menaker, Jr. /s/ Robert B. Millard Director ---------------------------- Robert B. Millard /s/ John E. Montague Director ---------------------------- John E. Montague /s/ Alan H. Washkowitz Director ---------------------------- Alan H. Washkowitz
64 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE - --------------- ---------------------------------------------------------------------------------- -------- *3.1 Certificate of Incorporation. *3.2 By-Laws of L-3 Communications Corporation. *10.1 Credit Agreement, dated as of April 30, 1997 among L-3 Communications Corporation and lenders named therein. *10.2 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The Bank of New York, as Trustee. *10.3 Stockholders' Agreement between L-3 Communications Corporation and the stockholders parties thereto. *10.4 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. *10.5 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3 Communications Holdings, Inc. *10.51 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3 Communications Holdings, Inc. *10.6 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3 Communications Corporation and KSL, Division of Bonneville International. *10.61 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, L-3 Communications Corporation and Unisys Corporation. *10.62 Sublease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3 Communications Corporation and Unisys Corporation. *10.7 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin Corporation and L-3 Communications Corporation. 10.8 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications Corporation and California Microwave, Inc. 10.81 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3 Communications Corporation. 10.82 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc., AlliedSignal Technologies, Inc., AlliedSignal Deutschland GMBH and L-3 Communications Corporation. 10.9 Form of Stock Option Agreement for Employee Options. 10.10 L-3 Communications Corporation Pension Plan. 12. Computation of Ratio of Earnings to Fixed Charges. 24 Powers of Attorney (included in signature page). 99.1 Unaudited Pro Forma Condensed Consolidated Financial Information. 99.2 Satellite Transmission Systems Division of California Microwave, Inc. Unaudited Condensed Financial Statements, Six months ended December 31, 1996 and 1997. 99.3 Satellite Transmission Systems Division of California Microwave, Inc. Financial Statements as of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995. 99.4 ILEX Systems, Inc. and Subsidiary Consolidated Financial Statements, December 31, 1997. 99.5 AlliedSignal Ocean Systems Combined Financial Statements as of December 31, 1997 and for the year ended December 31, 1997.
- ------------ * Incorporated by reference from the Company's Registration Statement on Form S-4 (File no. 333-31649). EX-10.8 2 ASSET PURCHASE AGREEMENT Exhibit 10.8 ASSET PURCHASE AGREEMENT ________________________________________________________________________________ Between L-3 COMMUNICATIONS CORPORATION and CALIFORNIA MICROWAVE, INC. ________________________________________________________________________________ Dated as of December 19, 1997 TABLE OF CONTENTS
Page ARTICLE I SALE AND PURCHASE OF THE ASSETS . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 Books and Records; Intellectual Property . . . . . . . . . . . . . . 4 ARTICLE II THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Place and Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Allocation of Purchase Price . . . . . . . . . . . . . . . . . . . . 5 2.4 Assumption of Liabilities . . . . . . . . . . . . . . . . . . . . . . 5 2.5 Excluded Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 6 2.6 Consent of Third Parties . . . . . . . . . . . . . . . . . . . . . . 8 2.7 Adjustment of Purchase Price . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . 11 3.1 Authorization, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Corporate Status . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 No Conflicts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 12 3.5 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . 12 3.6 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.7 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.9 Compliance with Laws; Governmental Approvals and Consents; Governmental Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.10 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.11 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.12 Territorial Restrictions . . . . . . . . . . . . . . . . . . . . . . 18 3.13 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.14 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.15 Product Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . 18 3.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.18 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 20 3.20 Employees, Labor Matters, etc. . . . . . . . . . . . . . . . . . . . 20 3.21 Employee Benefit Plans and Related Matter . . . . . . . . . . . . . . 21
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Page ---- 3.22 Brokers, Finders, etc. . . . . . . . . . . . . . . . . . . . . . . . 21 3.23 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . 22 3.24 Order Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.25 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.26 Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . 23 4.1 Corporate Status; Authorization, etc. . . . . . . . . . . . . . . . . 23 4.2 No Conflicts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.3 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.4 Brokers, Finders, etc. . . . . . . . . . . . . . . . . . . . . . . . 24 4.5 Adequate Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE V COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.1 Covenants of Seller . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.2 Covenants of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE VI CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.1 Conditions to Obligations of Each Party . . . . . . . . . . . . . . . 31 6.2 Conditions to Obligations of Buyer . . . . . . . . . . . . . . . . . 32 6.3 Conditions to Obligations of Seller . . . . . . . . . . . . . . . . . 35 ARTICLE VII EMPLOYEES AND EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . 35 7.1 Employment of Seller's Employees . . . . . . . . . . . . . . . . . . 35 7.2 Welfare and Fringe Benefit Plans . . . . . . . . . . . . . . . . . . 36 ARTICLE VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE IX INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 9.1 By Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 9.2 By Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 9.3 Adjustments to Indemnification Payments. . . . . . . . . . . . . . . 39
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Page ---- 9.4 Indemnification Procedures. . . . . . . . . . . . . . . . . . . . . . 39 9.5 Expiration of Representations and Warranties, etc. . . . . . . . . 40 9.6 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE X DEFINITIONS, MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 41 10.1 Definition of Certain Terms . . . . . . . . . . . . . . . . . . . . . 41 10.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.5 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 10.6 Arbitration Procedure. . . . . . . . . . . . . . . . . . . . . . . . 51 10.7 Attorneys Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10.8 Liability for Transfer Taxes . . . . . . . . . . . . . . . . . . . . 53
-iii- EXHIBITS EXHIBIT A Form of Cross-License Agreement EXHIBIT B Form of Technology License Agreement EXHIBIT C Form of Trademark License Agreement EXHIBIT D Form of Supply Agreement SCHEDULES SCHEDULE 1.2 Excluded Assets SCHEDULE 2.4(a) Retention Incentive Agreements SCHEDULE 3.2(b) Qualification to Do Business; Good Standing SCHEDULE 3.3 Conflicts SCHEDULE 3.4 September Balance Sheet SCHEDULE 3.5 Undisclosed Liabilities SCHEDULE 3.6(a) Contested Taxes SCHEDULE 3.7 Absence of Changes SCHEDULE 3.8 Litigation SCHEDULE 3.9(a) Compliance with Laws SCHEDULE 3.9(b) Governmental Approvals and other Consents SCHEDULE 3.9(c) Government Contracts SCHEDULE 3.10 Asset Exceptions SCHEDULE 3.11(a) Contracts SCHEDULE 3.11(c) Defaults and Consents under Contracts SCHEDULE 3.13 Inventory Exceptions SCHEDULE 3.15 Product Warranties SCHEDULE 3.16(a) Owned Intellectual Property SCHEDULE 3.16(b) Intellectual Property Licensing Arrangements SCHEDULE 3.16(c) Infringement by Third Parties SCHEDULE 3.16(d) Claims by Third Parties SCHEDULE 3.17 Insurance SCHEDULE 3.18(a) Owned Real Property SCHEDULE 3.18(b) Leases SCHEDULE 3.19(a) Environmental Matters SCHEDULE 3.21(a) Employee Benefit Plans SCHEDULE 3.23 Suppliers and Customers SCHEDULE 3.24 Backlog SCHEDULE 4.2 Governmental Approvals and other Consents SCHEDULE 5.2(e) Letters of Credit; Performance and Surety Bonds SCHEDULE 5.2(f) Severance Agreements SCHEDULE 6.2(c) Consents -iv- ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT dated as of December 19, 1997, between L-3 Communications Corporation, a Delaware corporation (the "Buyer"), and California Microwave, Inc., a Delaware corporation (the "Seller"). R E C I T A L S: A. Seller is in the business of designing, integrating and installing satellite communications systems (with a principal focus on the telephony, video broadcasting, multimedia, trunk and VSAT hub niches) in the United States and certain other countries through an unincorporated division (the "STS Division"). B. Buyer wishes to purchase or acquire from Seller, and Seller wishes to sell, assign and transfer to Buyer, substantially all of the assets of the STS Division, and Buyer has agreed to assume certain of the liabilities of such Division, all for the purchase price and upon the terms and subject to the conditions hereinafter set forth. C. Capitalized terms used herein without separate definition have the meanings given to such terms in Section 10.1. NOW THEREFORE, in consideration of the mutual covenants, representations and warranties made herein, and of the mutual benefits to be derived hereby, the parties hereto agree as follows: ARTICLE I SALE AND PURCHASE OF THE ASSETS 1.1 Assets. Subject to and upon the terms and conditions set forth in this Agreement, at the Closing, Seller shall sell, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase and acquire from Seller, all right, title and interest of Seller in and to the properties, assets and rights of every nature, kind and description, tangible and intangible (including goodwill), whether real, personal or mixed, whether accrued, contingent or otherwise and whether now existing or hereinafter acquired (other than the Excluded Assets) that primarily relate to and are used in the Business as the same may exist on the Closing Date (collectively, the "Assets"), including, without limitation, -1- (a) the Owned Real Property described on Schedule 3.18(a) and the property leased at 125 Kennedy Drive, Hauppauge, New York, described on Schedule 3.18(b) (the "Kennedy Facility"); (b) all machinery, equipment, furniture, furnishings, vehicles, tools, dies, molds and other tangible personal property; (c) all inventories of raw materials, work in process, finished products, goods, spare parts, replacement and component parts, and office and other supplies (whether on hand, in-transit or on order) (collectively, the "Inventories"); (d) all rights in Intellectual Property owned by Seller and used primarily in the Business; (e) the GMACS and Universal System Controller; (f) all rights under all Contracts; (g) all credits, prepaid expenses, deferred charges, advance payments, security deposits and prepaid items; (h) all notes and accounts receivable held by Seller (including intercompany and interdivisional accounts receivable) and all notes, bonds and other evidences of indebtedness of and rights to receive payments from any Person (in all cases, whether or not billed) and the benefit of security therefor; (i) all Books and Records; (j) to the extent their transfer is permitted by law, all Governmental Approvals, including all applications therefor; (k) all rights to causes of action, lawsuits, claims and demands of any nature available to or being pursued by Seller with respect to the Assets or the Assumed Liabilities (subject to Section 1.2(e)); (l) all guarantees, warranties, indemnities and similar rights in favor of Seller with respect to the Assets; (m) all computer hardware and software used exclusively in the Business, including all rights under licenses and other instruments or agreements relating thereto; -2- (n) all assets reflected on the Final Closing Statement of Net Assets; (o) the Names and Logos "Satellite Transmission Systems" alone or in any combination of words, or any combination, variation or derivation of any such name or mark; and (p) the cash and the cash equivalents in the non-U.S. bank accounts as provided in Section 2.7(b). Subject to the terms and conditions hereof, at the Closing, the Assets shall be transferred or otherwise conveyed to Buyer free and clear of all Liens excepting only those Liens listed in the first and fourth paragraphs of Schedule 3.10 and Permitted Liens. 1.2 Excluded Assets. Seller shall retain and not transfer, and Buyer shall not purchase or acquire, the following assets (collectively, the "Excluded Assets"): (a) the assets listed on Schedule 1.2; (b) the name and mark "California Microwave" and any name or mark derived from or including the foregoing; (c) all cash and cash equivalents and similar type investments, such as certificates of deposit, treasury bills and other marketable securities other than non-U.S. bank accounts as provided in Section 2.7(b); (d) all Books and Records relating to or used in the business of Seller and not primarily relating to or used in the Business; (e) all insurance policies and all rights to causes of action, lawsuits, claims and demands, rights of recovery and set-off, and proceeds, under or with respect to insurance policies except to the extent provided for in Section 5.1(e); (f) all rights to causes of action, lawsuits, claims and demands of any nature available to or being pursued by Seller with respect to the Excluded Assets or the Excluded Liabilities; (g) all Intellectual Property not used primarily in the Business; -3- (h) all right, title and interest of the Seller in and to prepaid Taxes of the Business (except to the extent reflected on the Final Closing Statement of Net Assets), and any claims for any refund, rebate or abatement with respect to Taxes of the Business (except to the extent reflected on the Final Closing Statement of Net Assets) for any period or portion thereof through the Closing Date and any interest payable with respect thereto; and (i) the lease of the warehouse located at 65 Commerce Drive, Hauppauge, New York. 1.3 Books and Records; Intellectual Property. (a) From and after the Closing and until the sixth anniversary thereof, (i) Seller agrees to grant to Buyer, upon reasonable notice and during normal business hours, reasonable access to any Books and Records that pertain to the operations of the Business but that are not Books and Records that primarily relate to the Business, and (ii) Buyer agrees to grant to Seller, upon reasonable notice and during normal business hours, reasonable access to any Books and Records included in the Assets that pertain to the operation of the Business on or prior to the Closing Date, for any reasonable business purpose of Seller. (b) At the Closing, Seller shall grant to Buyer a fully-paid, nonexclusive license to use intellectual property of Seller used in the operation of the Business but not constituting Intellectual Property that primarily relates to the Business. Such license shall be substantially in the form of the Cross-License Agreement between Buyer and Seller attached as Exhibit A hereto (the "Cross- License Agreement"). (c) At the Closing, Buyer shall grant to Seller a fully-paid, non-exclusive license to use the GMACS, Universal System Controller and the patent pending referenced in Schedule 3.16(a). Such license shall be substantially in the form of the Technology License Agreement between Buyer and Seller attached as Exhibit B hereto (the "Technology License Agreement"). (d) At the Closing, Buyer shall grant to Seller a fully-paid, non-exclusive license to use the trademarks, service marks, tradenames and service names associated with the GMACS and the Universal System Controller. Such agreement shall be substantially in the form of the Trademark License Agreement between Buyer and Seller attached as Exhibit C hereto (the "Trademark License Agreement"). -4- ARTICLE II THE CLOSING 2.1 Place and Date. The closing of the sale and purchase of the Assets (the "Closing") and the assumption of the Assumed Liabilities shall take place at 10:00 A.M. local time on the 26th day of January, 1998 at the offices of Whitman Breed Abbott & Morgan LLP, 200 Park Avenue, New York, NY 10166, or such other time and place upon which the parties may agree. The day on which the Closing actually occurs is herein sometimes referred to as the "Closing Date." 2.2 Purchase Price. On the terms and subject to the conditions set forth in this Agreement, Buyer agrees to pay to Seller at the Closing an aggregate of U.S. $27 million, subject to adjustment as provided for in Section 2.7 (the "Purchase Price"), and to assume the Assumed Liabilities as provided in Section 2.4. The Purchase Price shall be paid by the wire transfer of immediately available funds to such bank account or accounts as are specified by Seller in written instructions given to Buyer at least three days prior to the Closing. 2.3 Allocation of Purchase Price. The parties agree to allocate the aggregate of the Purchase Price and the Assumed Liabilities (collectively, the "Aggregate Purchase Price") among the Assets, including solely for this purpose the agreements contained in Section 5.1(f), in accordance with Section 1060 of the Code as mutually agreed to by the parties within 180 days following the Closing. All such mutually agreed to allocations shall be (a) at the election and expense of Buyer, based upon appraisal(s) prepared by independent firm(s) selected by Buyer and approved by Seller (such approval not to be unreasonably withheld or delayed), and (b) used by each party in preparing any filings required pursuant to Section 1060 of the Code or any similar provisions of state or local law and all relevant income and franchise tax returns, subject to adjustment to reflect the adjustment to the Purchase Price provided for in Section 2.7. Neither Buyer nor Seller will take any position before any taxing authority or in any judicial proceeding that is inconsistent with such mutually agreed to allocations without the prior consent of the other party. The parties shall in good faith exercise reasonable efforts to support such reported allocations in any audit proceedings initiated by any taxing authority. 2.4 Assumption of Liabilities. Subject to the terms and conditions set forth herein, at the Closing, Buyer shall assume and agree to pay, honor and discharge when due only the following liabilities and obligations relating to the Assets or the Business: (a) all payment obligations of Seller under all retention incentive agreements as set forth in Schedule -5- 2.4(a), but only to the extent that such payment obligations relate to the failure of Buyer to hire employees of the STS Division or the involuntary termination by Buyer without cause of the employment of any Transferred Employee after the Closing; (b) all product warranty obligations of the Business; (c) all liabilities and obligations of Seller to be performed from and after the Closing Date under or relating to Contracts and Governmental Approvals included in the Assets; (d) all liabilities and obligations of Seller relating to or arising out of the operation of the Business and reflected on the June Balance Sheet and/or the September Balance Sheet or disclosed in the notes thereto other than those relating to income taxes; and (e) to the extent reflected on the Final Closing Statement of Net Assets, all trade and other accounts payable and other liabilities (other than those relating to income taxes) arising out of or in respect of the ordinary course of business of the Business (including intercompany and interdivisional trade accounts payable) consistent with past practice since September 30, 1997 (collectively, the "Assumed Liabilities"). 2.5 Excluded Liabilities. Other than for the Assumed Liabilities, Buyer shall not be responsible for any other debts, claims, commitments, liabilities or obligations of Seller or the Business (collectively, the "Excluded Liabilities"), including without limitation any and all liabilities, obligations or commitments of Seller (except those that constitute Assumed Liabilities) relating to and arising out of any of the following: (a) any liability, obligation or commitment that, in accordance with GAAP, was required to have been shown as a liability in the Financial Statements or in the notes thereto and was not so shown, unless reflected on the Final Closing Statement of Net Assets; (b) except as expressly assumed by Buyer pursuant to Article VII hereof or as accrued or otherwise reflected on the Final Closing Statement of Net Assets, (i) the sponsorship, administration, contribution obligation of any entity under any Employee Benefit Plan or termination of any Employee Benefit Plan on or prior to the Closing Date, or (ii) the termination of employment of any employee of the Business by Seller; (c) any cause of action or judicial or administrative action, suit, proceeding or investigation, pending or threatened on the Closing Date, relating to periods prior to the Closing Date, that is not disclosed on Schedule 3.8 hereto; (d) any failure or alleged failure to comply with, or any violation or alleged violation of, (i) any law, rule, regulation, statute, ordinance, permit, judgment, injunction, order, decree, license or other Governmental Approval applicable to the Business or the Assets or (ii) any -6- Contract, in each case which failure or violation occurred or was alleged to have occurred prior to the Closing Date; (e) any infringement or alleged infringement of the rights of any other person or entity arising out of the use of any Intellectual Property in connection with the Business prior to the Closing Date; (f) any rights of any other Person relating to the Intellectual Property pursuant to any license, sublicense or agreement required to be disclosed and not so disclosed; (g) any obligations against Seller with respect to any notes, bonds, accounts receivable or other evidences of indebtedness of or rights to receive payment from any Person that have been transferred to a third person by Seller; (h) any liability for any Taxes imposed on Seller arising from the operation of the Business on or before the Closing Date; (i) the Excluded Assets; (j) all Environmental Liabilities and Costs arising from, relating to, in respect of, or incurred in connection with (i) any real property, business entities or assets, whether domestic or foreign, formerly owned, occupied or operated by or in connection with the Business and not owned, occupied or operated by or in connection with the Business as of the Closing Date, (ii) the transportation or disposal of any Hazardous Substances to or at any offsite facility or location by or in connection with the Business occurring prior to the Closing Date and (iii) conditions existing or events occurring on or prior to the Closing Date on any real property owned, occupied or operated by or in connection with the Business as of the Closing Date; (k) all obligations of Seller under all retention agreements, severance agreements (subject to the provisions of Section 5.2(f)), change of control agreements and similar arrangements not listed on Schedule 2.4(a); (l) all obligations of Seller under all retention incentive agreements listed on Schedule 2.4(a) (including any payments due thereunder upon and by reason of the sale of the STS Division), other than those payment obligations of Seller referred to in Section 2.4(a); (m) any claim, litigation, action or proceeding, whether or not now pending or threatened, relating to the Business or the Assets to the -7- extent based on or arising out of or based upon product liability with respect to products shipped or sold prior to the Closing; or (n) all intercompany obligations and liabilities owed by the Business to Seller other than intercompany or interdivisional trade accounts payable reflected on the Final Closing Statement of Net Assets. 2.6 Consent of Third Parties. Notwithstanding anything to the contrary in this Agreement, this Agreement shall not constitute an agreement to assign or transfer any Governmental Approval, instrument, contract, lease, permit or other agreement or arrangement or any claim, right or benefit arising thereunder or resulting therefrom if an assignment or transfer or an attempt to make such an assignment or transfer without the consent of a third party would constitute a breach or violation thereof or affect adversely the rights of Buyer or Seller thereunder; and any transfer or assignment to Buyer by Seller of any interest under any such Governmental Approval, instrument, contract, lease, permit or other agreement or arrangement that requires the consent of a third party shall be made subject to such consent or approval being obtained. In the event any such consent or approval is not obtained on or prior to the Closing Date, Seller shall (i) continue to use all reasonable efforts to obtain any such approval or consent after the Closing Date until such time as such consent or approval has been obtained without any third party cost to Buyer, (ii) hold such Governmental Approval, instrument, contract, lease, permit or other agreement or arrangement on behalf of Buyer, (iii) cooperate with Buyer in any lawful arrangement to provide that Buyer shall receive the benefits under any such Governmental Approval, instrument, contract, lease or permit or other agreement or arrangement, including performance by Seller, as agent, and (iv) enforce and perform for the account of Buyer any rights of Seller arising from such Government Approval, instrument, contract, lease, permit or other agreement or arrangement, provided that Buyer shall undertake to pay or satisfy the corresponding liabilities for the enjoyment of such benefit to the extent Buyer would have been responsible therefor if such consent or approval had been obtained. Nothing in this Section 2.6 shall be deemed a waiver by Buyer of its right to receive an effective assignment of all of the Assets. 2.7 Adjustment of Purchase Price. (a) Calculation of Adjustment. The Purchase Price shall be (i) increased by the amount that the Closing Date Net Assets (as hereinafter defined), are greater than $25,099,080 (which amount is the book value of the net assets as shown on the adjusted September Balance Sheet (the "Target Net Assets"); or (ii) decreased by the amount that the Closing Date Net Assets are less than the Target Net Assets. The term "Closing Date Net Assets" as used herein shall mean the book value of the Assets set forth on the Final Closing -8- Statement of Net Assets (as hereinafter defined) in excess of the amount of the Assumed Liabilities set forth on the Final Closing Statement of Net Assets, determined in accordance with the procedures set forth below. The amount of any decrease or increase to the Purchase Price pursuant to this Section 2.7(a) plus interest from and including the Closing Date to but excluding the date of payment at the Prime Rate (as hereinafter defined) shall be paid by Seller or Buyer, as the case may be, by wire transfer in immediately available funds within five (5) business days after the Final Closing Statement of Net Assets is agreed to by Seller and Buyer or is determined by the Neutral Auditor (as hereinafter defined). For purposes of this Agreement, "Prime Rate" means the prime rate of interest in effect on the Closing Date as stated in the "Money Rates" section of the Wall Street Journal. (b) Preparation of Closing Statement of Net Assets. As soon as practicable, and in any event within sixty (60) days after the Closing Date, Seller shall cause Ernst & Young LLP ("E&Y") to prepare an audited statement of net assets for the Business consisting of the Assets and the Assumed Liabilities, as of the close of business on the Closing Date determined on a pro forma basis as if the parties hereto had not consummated the transactions contemplated by this Agreement (the "Closing Statement of Net Assets"), to be prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a basis consistent with the September 30, 1997 Financial Statements (including the September Balance Sheet) through full application of the policies and procedures used in preparing the September 30, 1997 Financial Statements (including the September Balance Sheet) and taking into account the type of adjustments included in the September Balance Sheet set forth in Schedule 3.4, and with changes in contract estimates at completion ("EAC's") and estimates to complete ("ETC's") determined on a basis consistent with the method used for the determination of the September 30, 1997 Financial Statements (including the September Balance Sheet); provided that, for purposes of the Closing Statement of Net Assets, the cash and cash equivalents held in non-US bank accounts for the benefit of the STS Division shall be transferred to Buyer and shall be reflected as assets of the STS Division and shall be included in the calculation of any Purchase Price adjustment required by this Section. The Closing Statement of Net Assets shall be accompanied by the report of E&Y thereon and by a certificate of Seller's Chief Financial Officer, each of which shall state that the Closing Statement of Net Assets presents fairly, in all material respects, the Assets and Assumed Liabilities presented on such statement as provided for in this Agreement at the Closing Date in conformity with GAAP consistently applied with the September 30, 1997 Financial Statements, except that it does not contain all the notes required by GAAP. Buyer shall provide Seller, E&Y and the Neutral Auditor such access to the Books and Records as may reasonably be required for the preparation and/or review of the Closing -9- Statement of Net Assets. All fees and expenses of E&Y relating to the preparation of the Closing Statement of Net Assets shall be borne equally by Seller and Buyer. (c) Review of Closing Statement of Net Assets. After receipt of the Closing Statement of Net Assets, Buyer shall have thirty (30) days to review it. Buyer and its authorized representatives shall have full access to all Books and Records and appropriate employees of the Seller and its accountants to the extent required to complete their review of the Closing Statement of Net Assets including work papers used in preparation thereof. Unless the Buyer delivers written notice to Seller on or prior to the 30th day after receipt of the Closing Statement of Net Assets specifying in reasonable detail all disputed items and the basis therefor, the parties shall be deemed to have accepted and agreed to the Closing Statement of Net Assets. If Buyer so notifies the Seller of an objection to the Closing Statement of Net Assets, the parties shall, within thirty (30) days following the date of such notice (the "Resolution Period") attempt to resolve their differences and any resolution by them as to any disputed amount shall be final, binding, conclusive and nonappealable for all purposes under this Agreement. (d) Resolution. If at the conclusion of the Resolution Period the parties have not reached an agreement on the objections, then all amounts remaining in dispute may, at the election of either party, be submitted to Price Waterhouse or another large international accounting firm not otherwise engaged by either party (the "Neutral Auditor"). Each party agrees to execute, if requested by the Neutral Auditor, a reasonable engagement letter. All fees and expenses relating to the work, if any, to be performed by the Neutral Auditor shall be borne equally by Seller and Buyer, unless the Neutral Auditor finds one party acted in bad faith in which case that party pays all. Except as provided in the preceding sentence, all other costs and expenses incurred by the parties in connection with resolving any dispute hereunder before the Neutral Auditor shall be borne by the party incurring such cost and expense. The Neutral Auditor shall act as an arbitrator to determine, based solely on the presentations by Seller and Buyer, and not by independent review, only those issues still in dispute. The Neutral Auditor's determination shall be made within thirty (30) days of its engagement (which engagement shall be made no later than five (5) business days after the election by either party to submit the objections to the Neutral Auditor) or as soon thereafter as possible, shall be set forth in a written statement delivered to Seller and Buyer and shall be final, binding, conclusive and nonappealable for all purposes hereunder. The term "Final Closing Statement of Net Assets," as hereinafter used, shall mean the definitive Closing Statement of Net Assets agreed to by Seller and Buyer in accordance with Section 2.7(c) or the definitive Closing Statement of Net Assets resulting -10- from the determination made by the Neutral Auditor in accordance with this Section 2.7(d) (in addition to those items theretofore agreed to by Seller and Buyer). ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: 3.1 Authorization, etc. Seller has the corporate power and authority to execute and deliver this Agreement, to perform fully its obligations thereunder, and to consummate the transactions contemplated hereby. The execution and delivery by Seller of this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by all requisite corporate action of Seller. Seller has duly executed and delivered this Agreement. This Agreement is a legal, valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditor's rights generally and by general equitable principles. 3.2 Corporate Status. (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to carry on the Business and to own or lease and to operate the properties of the Business as and in the places where the Business is conducted and such properties are owned, leased or operated. (b) Seller is duly qualified or licensed to do business and is in good standing in each of the jurisdictions in which the operation of the Business or the character of the properties owned, leased or operated by it in connection with the Business makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a Material Adverse Effect. Such jurisdictions are listed on Schedule 3.2(b). (c) Seller has delivered to Buyer complete and correct copies of its certificate of incorporation and by-laws in each case, as amended and in effect on the date hereof and on the Closing Date. Seller is not in violation of any of the provisions of its certificate of incorporation or by-laws or other organizational documents. -11- 3.3 No Conflicts, etc. The execution, delivery and performance by Seller of this Agreement and the consummation of the transactions contemplated hereby, do not and will not conflict with or result in a violation of or a default under (with or without the giving of notice or the lapse of time or both), or result in the acceleration of or give rise to any party the right to terminate, modify or cancel under, or result in the loss of any rights, privileges, options or alternatives under, or result in the creation of any Lien on any assets of Seller (including the Assets) under (i) any Applicable Law applicable to Seller or any of the Assets, (ii) the certificate of incorporation or by-laws of Seller or (iii) except as set forth in Schedule 3.3, any Contract or other agreement or instrument to which Seller is a party or by which Seller or the Assets is bound. Except as specified in Schedule 3.3 and as may be required under the HSR Act, no Governmental Approval or other Consent is required to be obtained or made by Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 3.4 Financial Statements. Seller has delivered to Buyer (a) the audited balance sheet (the "June Balance Sheet") and the related statements of operations and cash flows of the Business as at and for the fiscal year ended June 30, 1997 and (b) the unaudited balance sheet and the unaudited adjusted balance sheet, a copy of which is attached hereto as Schedule 3.4 (the "September Balance Sheet") and the related statement of income of the Business as at and for the three-month period ended September 30, 1997 (collectively, the "Financial Statements"). The September 30, 1997 Financial Statements have been prepared on a basis consistent with the June 30, 1997 Financial Statements. The Financial Statements are in accordance with the books and records of the STS Division, have been prepared in accordance with GAAP and fairly present the financial condition and results of operations of the Business as at and for the periods specified, except that the September 30, 1997 Financial Statements do not contain notes required by GAAP. 3.5 Absence of Undisclosed Liabilities. Seller has no debts, claims, liabilities or obligations of any nature, whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due, asserted or unasserted, arising out of or relating to the Business, except (a) as set forth in Schedule 3.5, (b) as and to the extent disclosed or reserved against in the September Balance Sheet, and (c) liabilities and obligations that were incurred after September 30, 1997 in the ordinary course of business consistent with prior practice. 3.6 Taxes. Seller has (or by the Closing will have) duly and timely filed all Tax Returns relating to the Business with respect to Taxes required to be filed on or before the Closing Date. Except for Taxes set forth -12- on Schedule 3.6(a), which are being contested in good faith and by appropriate proceedings, the following Taxes have (or by the Closing Date will have) been duly and timely paid: (i) all Taxes shown to be due on the Tax Returns, (ii) all deficiencies and assessments of Taxes of which notice has (or by the Closing Date will have) been received by Seller that are or may become payable by Buyer or chargeable as a lien upon the Business, and (iii) all other Taxes in respect of periods prior to the Closing. 3.7 Absence of Changes. Except as set forth in Schedule 3.7 (which Schedule includes, as Schedule 3.7(a), certain STS Division summary financial data showing the actual results of the STS Division for the quarter ended September 30, 1997 and the STS Division's forecasted results, by quarter, for the fiscal year ending June 30, 1998) and for the results shown and changes forecast in Schedule 3.7(a), since September 30, 1997, Seller has not in connection with or relating to the Business or the Assets: (a) suffered any material adverse change in the financial condition, results of operation or Assets of the Business, other than changes in the STS Division's intercompany account with CMI corporate, which changes represent (i) the results of operations of the STS Division, (ii) the cash advanced to the STS Division by CMI corporate or repaid by the STS Division to CMI corporate, and (iii) certain allocations between CMI corporate and the STS Division, which allocations were made in the ordinary course of business consistent in type and amount with past practice; (b) incurred, assumed, guaranteed or discharged any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, or any indebtedness for borrowed money, except current liabilities for trade or business obligations incurred in connection with the purchase of goods or services in the ordinary course of business consistent with prior practice; (c) mortgaged, pledged or subjected to Lien, any property, business or assets, tangible or intangible; (d) sold, transferred, leased to others or otherwise disposed of any of the Assets, except for inventory sold in the ordinary course of business, or cancelled or compromised any debt or claim, or waived or released any right of substantial value; (e) received any notice of termination of any material contract, lease or other agreement; -13- (f) suffered any damage, destruction or loss (whether or not covered by insurance), in any case or in the aggregate, in excess of $150,000; (g) transferred or granted any rights under, or entered into any settlement regarding the breach or infringement of, any Intellectual Property, or modified any existing rights with respect thereto; (h) made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or paid or agreed or orally promised to pay, conditionally or otherwise, any bonus, incentive, retention or other compensation, retirement, welfare, fringe or severance benefit or vacation pay, to or in respect of any employee, distributor or agent of the Business, other than increases in the ordinary course of business consistent with past practice in the compensation payable to those employees of the Business earning less than $50,000 per annum each; (i) encountered any labor union organizing activity, had any actual or threatened employee strikes, work stoppages, slowdowns or lockouts, or had any material change in its relations with its employees, distributors, agents, customers or suppliers; (j) entered into any transaction, contract or commitment other than in the ordinary course of business or paid or agreed to pay any legal, accounting, brokerage, finder's fee, Taxes or other expenses in connection with, or incurred any severance pay obligations by reason of, this Agreement or the transactions contemplated hereby; (k) made any grant of credit to any customer or distributor on terms or in amounts materially more favorable than had been extended to that customer or distributor in the past; or (l) taken any action or omitted to take any action that would result in the occurrence of any of the foregoing. Seller makes no representation or warranty as to the realization of any results forecast in Schedule 3.7(a). 3.8 Litigation. Except as set forth on Schedule 3.8, there is no action, claim, demand, suit, proceeding, arbitration, grievance, citation, summons, subpoena, inquiry or investigation, civil, criminal, regulatory or otherwise, in law or in equity, pending or, to the knowledge of Seller, threatened against or relating to Seller in connection with the Assets or the Business seeking unspecified damages, damages in excess of $50,000 or any -14- injunctive or other equitable relief or against or relating to the transactions contemplated by this Agreement. 3.9 Compliance with Laws; Governmental Approvals and Consents; Governmental Contracts. (a) Except as disclosed in Schedule 3.9(a), Seller has complied in all respects with all Applicable Laws applicable to the Business or the Assets, except for any non-compliance that has not had or would not result in, individually or in the aggregate, a Material Adverse Effect. (b) Schedule 3.9(b) sets forth all Governmental Approvals and other Consents necessary for, or otherwise material to, the conduct of the Business as conducted by Seller. Except as set forth in Schedule 3.9(b), all such Governmental Approvals and Consents have been duly obtained and are in full force and effect, and Seller is in compliance in all material respects with each of such Governmental Approvals and Consents held by it with respect to the Assets and the Business. (c) Schedule 3.9(c) sets forth all Contracts with any Governmental Authority. 3.10 Assets. (a) Except for those Liens listed on Schedule 3.10, on the date hereof, Seller has good and valid title to all the Assets free and clear of any and all Liens other than Permitted Liens. Except for those Liens listed as Items 1 and 4 on Schedule 3.10, on the Closing Date, Seller will have good and valid title to all the Assets free and clear of any and all Liens other than Permitted Liens. The Assets include all material assets required for the continued conduct of the Business by Buyer as now being conducted or material to the financial condition or results of operations of the Business, except for the Excluded Assets. The Assets do not include stock or equity interests in any Person. (b) All material property and assets owned or utilized by the Business are in good operating condition and repair (except for ordinary wear and tear), free from any defects (except such minor defects as do not interfere with the use thereof in the conduct of the normal operations), and are sufficient to carry on the Business as presently conducted. All buildings, plants and other structures utilized by the Business are in good condition and repair (except for ordinary wear and tear). -15- 3.11 Contracts. (a) Schedule 3.11(a) contains a complete and correct list of all agreements, contracts, commitments, orders, licenses, leases, and other instruments and arrangements (whether written or oral) of the types described below to which Seller is a party or by which it or any of its assets is bound in connection with the Business, the Assets or the Assumed Liabilities (the "Contracts"): (i) leases, licenses, permits, franchises, insurance policies, Governmental Approvals and other contracts concerning or relating to the Real Property; (ii) employment, consulting, agency, collective bargaining or other similar contracts, agreements, and other instruments and arrangements relating to or for the benefit of employees, sales representatives, distributors, dealers, agents, or (if material) independent contractors; (iii) loan agreements, indentures, letters of credit, mortgages, security agreements, pledge agreements, deeds of trust, bonds, notes, guarantees, and other agreements and instruments relating to the borrowing of money or obtaining of or extension of credit; (iv) licenses, licensing arrangements and other contracts providing in whole or in part for the use of, or limiting the use of, any Intellectual Property; (v) brokerage or finder's agreements; (vi) joint venture, partnership and similar contracts involving a sharing of profits or expenses (including but not limited to joint research and development and joint marketing contracts); (vii) asset purchase agreements and other acquisition or divestiture agreements, including but not limited to any agreements relating to the sale, lease or disposal of any Assets (other than sales of inventory in the ordinary course of business) or involving continuing indemnity or other obligations; (viii) any contract with respect to which the aggregate amount that could reasonably be expected to be paid or received thereunder in the future exceeds $100,000 per annum; -16- (ix) sales agency, manufacturer's representative, marketing or distributorship agreements; (x) contracts, agreements or arrangements with respect to the representation of the Business in foreign countries; (xi) purchase commitments for inventory items or supplies that, together with amounts on hand, constitute in excess of six months normal usage; (xii) any agreement, understanding, contract or commitment (written or oral) with (x) any employee, agent, consultant, distributor, dealer or franchisee other than those involving in the aggregate consideration or other expenditure of less than $100,000, or (y) any Affiliate; (xiii) any collective bargaining agreements with any unions, guilds, shop committees or other collective bargaining groups; (xiv) any guarantee of the payment or performance of any Person agreement to indemnify any Person, or act as a surety, or other agreement to be contingently or secondarily liable for the obligations of any Person other than (x) the endorsement of checks in the ordinary course of business and (y) guarantees or agreements which in the aggregate do not exceed $100,000; (xv) any outstanding bid or proposal or any outstanding customer option relating to Contracts in the Backlog in excess of $100,000; and (xvi) any other contracts, agreements or commitments that are material to the Business. (b) Seller has furnished Buyer with access to all written Contracts, together with all amendments thereto, set forth in Schedule 3.11(a). Seller has furnished Buyer with a complete and accurate summary of all oral contracts listed on Schedule 3.11(a). (c) There does not exist under any Contract any event of default or event or condition that, after notice or lapse of time or both, would constitute a violation, breach or event of default thereunder on the part of Seller or, to the knowledge of Seller, any other party thereto except as set forth in Schedule 3.11(c) and except for such events or conditions that, individually and in the aggregate, (i) have not had or resulted in a Material Adverse Effect and (ii) have not materially impaired the ability of Seller to -17- perform its obligations under the Agreement. Except as set forth in Schedule 3.11(c), each Contract is a legal, valid, binding and enforceable obligation of Seller and, to the knowledge of Seller, the other parties thereto. Except as set forth in Schedule 3.11(c), no consent of any third party is required under any Contract as a result of or in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. 3.12 Territorial Restrictions. Seller is not restricted by any agreement or understanding with any other Person from carrying on the Business anywhere in the world. 3.13 Inventories. Except as set forth on Schedule 3.13 and net of reserves as reflected in the September Balance Sheet or to be reflected in the Final Closing Statement of Net Assets, (a) Inventories are of such quality as to meet the quality control standards of Seller and any applicable governmental quality control standard and are usable in the ordinary course of business in amounts consistent with past practice, and (b) Inventories that are finished goods are saleable in the ordinary course of business. 3.14 Receivables. Seller's receivables (including accounts receivable, loans receivable and advances) which have arisen in connection with the Business and which are reflected in the September Balance Sheet or will be reflected in the Final Closing Statement of Net Assets, and all such receivables which will have arisen since the date of the Financial Statements, have arisen only from bona fide transactions in the ordinary course of business. Seller has no knowledge of any facts or circumstances generally (other than general economic conditions) which would result in any material increase in the uncollectability of such receivables as a class in excess of the reserves therefor set forth on the Financial Statements. To Seller's knowledge, there has not been any material adverse change in the collectability of such receivables since September 30, 1997. 3.15 Product Warranties. Except as set forth in Schedule 3.15 and for warranties under Applicable Law, (a) there are no warranties express or implied, written or oral, with respect to the products of the Business and (b) except as reflected in the Financial Statements or as incurred in the ordinary course of business thereafter there are no pending or threatened claims with respect to any such warranty. Seller is not aware of any facts that indicate that the reserves for product warranties reflected in the September Balance Sheet are materially understated. Schedule 3.15 sets forth a list of all pending or, to the knowledge of Seller, threatened product warranty claims in excess of $50,000. -18- 3.16 Intellectual Property. Schedule 3.16(a) sets forth a complete and correct list of all material Intellectual Property that is owned by Seller and used in connection with the Business (the "Owned Intellectual Property"). Schedule 3.16(b) sets forth a complete and correct list of all material written or oral licenses and arrangements, (i) pursuant to which the use by any Person of Intellectual Property is permitted by Seller and (ii) pursuant to which the use by Seller of Owned Intellectual Property is permitted by any Person (collectively, the "Intellectual Property Licenses"). The Owned Intellectual Property and the Intellectual Property Licenses (including the GMACS and Universal System Controller) constitute all Intellectual Property necessary to operate the Business consistent with past practice. On the date hereof and at the Closing, all Intellectual Property Licenses are or will be in full force and effect in accordance with their terms, and are free and clear of any Liens (other than Permitted Liens). To the knowledge of Seller, the conduct of the Business does not infringe the rights of any third party in respect of any Intellectual Property, except as set forth on Schedule 3.16(c). To the knowledge of Seller, none of the Intellectual Property is being infringed by third parties. Except as set forth on Schedule 3.16(d), there is no claim or demand of any Person pertaining to, or any proceeding which is pending or, to the knowledge of Seller, threatened, that challenges the rights of Seller in respect of any Intellectual Property, or claims that any default exists under any Intellectual Property License. 3.17 Insurance. Schedule 3.17 contains a list of all insurance policies maintained by Seller for the benefit of or in connection with the Assets or the Business and no notice of cancellation, termination, or reduction of coverage, and no notice of intention to cancel, terminate or reduce coverage, has been received. Seller has given Buyer access to complete and correct copies of all such policies together with all riders and amendments thereto. Such policies are in full force and effect, and all premiums due thereon have been paid. 3.18 Real Property. (a) Owned Real Property. Schedule 3.18(a) contains a complete and correct list of all Owned Real Property setting forth the address and owner of each parcel of Owned Real Property and generally describing all improvements thereon including, without limitation, the properties reflected as being so owned on the Financial Statements and not disposed of after the date of the Financial Statements in the ordinary course of Business. Seller has, or on the Closing Date will have, good and marketable fee simple title to the Owned Real Property indicated on Schedule 3.18(a) as being owned by it, free and clear of all Liens other than Permitted Liens. There are no outstanding options or rights of first refusal to purchase the Owned Real Property, or any -19- portion thereof or interest therein. Notwithstanding the foregoing provisions, for the purposes of this Section 3.18, Section 3.10, and the last sentence of Section 1.1, Permitted Liens shall not include, with the exception of the mortgage liens and easements of record described on Schedule 3.18(c), any mortgage lien encumbering the Owned Real Property or the Kennedy Facility or any easement of record. (b) Leases. Schedule 3.18(b) contains a complete and correct list of all Leases setting forth the address, landlord and tenant for each Lease. Seller has delivered to Buyer correct and complete copies of the Leases. Each Lease is legal, valid, binding and enforceable, and in full force and effect, except as may be limited by bankruptcy, insolvency, reorganization and similar Applicable Laws affecting creditors generally and by the availability of equitable remedies. Seller is not in default, violation or breach in any respect under any Lease, and no event or condition has occurred and is continuing that constitutes or, with notice or the passage of time or both, would constitute a default, violation or breach in any respect under any Lease. No renewal or extension options have been granted to tenants. Schedule 3.18(c) sets forth all easements, covenants, mortgages and restrictions of record encumbering the Owned Real Property and the Leased Real Property subject to the lease from the Suffolk County Industrial Development Agency. 3.19 Environmental Matters. (a) Compliance with Environmental Law. To the knowledge of Seller, Seller is and has been in compliance in all material respects with all applicable Environmental Laws pertaining to any of the properties and assets of the Business and the use by Seller thereof. Except as disclosed on Schedule 3.19(a) hereto, Seller has obtained all material permits, licenses and other authorizations that are required under Environmental Law necessary to operate the Business and the same are listed on Schedule 3.19(a) hereto. No violation by Seller is being alleged of any applicable Environmental Law relating to any of the Assets. (b) Other Environmental Matters. To the knowledge of Seller, Seller has not caused or taken any action that resulted in, and Seller is not subject to, any material liability or obligation on the part of Seller, relating to (x) the environmental conditions on, under, or about the Real Property or other properties or assets owned, leased, operated or used by Seller in the Business including without limitation, the air, soil and groundwater conditions at such properties or (y) the use, management, handling, transport, treatment, generation, storage, disposal or Release of any Hazardous Materials by Seller. -20- 3.20 Employees, Labor Matters, etc. Seller is not a party to or bound by any collective bargaining agreement and there are no labor unions or other organizations representing, purporting to represent or attempting to represent any employees employed in the operation of the Business. Since August 31, 1994, there has not occurred or, to the knowledge of Seller, been threatened any material strike, slowdown, picketing, work stoppage, concerted refusal to work overtime or other similar labor activity with respect to any employees employed in the operation of the Business. There are no labor disputes currently subject to any grievance procedure, arbitration or litigation and there is no representation petition pending or, to the knowledge of Seller, threatened with respect to any employee employed in the operation of the Business. 3.21 Employee Benefit Plans and Related Matters. (a) Schedule 3.21(a) lists each pension, retirement, profit-sharing, deferred compensation, bonus or other incentive plan, or other employee benefit program, arrangement, agreement or understanding, or medical, vision, dental or other health plan, or life insurance or disability plan, or any other employee benefit plan, including, without limitation, any "employee benefit plan" as defined in Section 3(3) of ERISA, to which Seller contributes or is a party or is bound and under which it may have liability and under which employees or former employees of the Business (or their beneficiaries) are eligible to participate or derive a benefit ("Employee Benefit Plans"). Seller has delivered to Buyer true, correct and complete copies of all Employee Benefit Plans. The Assets are not subject to any Lien in favor of, or enforceable by, the Pension Benefit Guaranty Corporation. (b) Compliance; Liability. (i) No liability has been or is expected to be incurred by Seller under or pursuant to Title I or IV of ERISA or the penalty, excise tax or joint and several liability provisions of the Code or ERISA relating to employee benefit plans and, to the knowledge of the Seller, no event, transaction or condition has occurred or exists that could result in any such liability to the Business or, following the Closing, Buyer or any such Employee Benefit Plan. (ii) No Employee Benefit Plan is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, a "multiple employer plan" within the meaning of Section 413(c) of the Code, or a defined benefit plan within the meaning of Section B(35) of ERISA. -21- 3.22 Brokers, Finders, etc. With the exception of fees and expenses payable to J.P. Morgan & Co. Incorporated and certain employees of Seller and its Affiliates which shall be paid by Seller, all negotiations relating to this Agreement, and the transactions contemplated hereby, have been carried on without the participation of any Person acting on behalf of Seller or its Affiliates in such manner as to give rise to any valid claim against Buyer for any brokerage or finder's commission, fee or similar compensation, or for any bonus payable to any officer, director, employee, agent or sales representative of or consultant to Seller or its Affiliates upon consummation of the transactions contemplated hereby or thereby. 3.23 Suppliers and Customers. Schedule 3.23 attached hereto sets forth the twenty (20) largest suppliers and all sole source suppliers and the twenty (20) largest customers of the Business for the period July 1, 1996 through the date hereof. During the period July 1, 1996 through the date hereof, (a) none of the 20 largest customers referred to in the next preceding sentence has cancelled in whole or in part its agreement or commitment with Seller or the Business to purchase products or services (or threatened in writing to do any of the foregoing). During the period July 1, 1996 through the date hereof, none of the sole source suppliers referred to in the first sentence of this Section has cancelled in whole or in part its agreement or commitment to supply services or supplies to Seller or the Business (or threatened in writing to do any of the foregoing). To Seller's knowledge, the relationship of Seller with each of its suppliers and each of its customers is a good commercial working relationship. Seller does not have knowledge that any such supplier or customer intends to cancel or otherwise substantially modify its relationship with Seller or the Business or limit its services, supplies or materials to Seller or the Business, or its usage or purchase of the services and products of the Business either as a result of the transactions contemplated hereby or otherwise. 3.24 Order Backlog. A true and complete list of (a) all firm product and service purchase orders and contracts for the sale of goods or the delivery of services by Seller in connection with the Business to Persons other than Governmental Authorities, and (b) all firm funded product and service purchase orders and contracts for the sale of goods or the delivery of services by Seller in connection with the Business to Governmental Authorities (collectively, the "Backlog") pending as of the latest practical date prior to the date of this Agreement is set forth in Schedule 3.24 attached hereto. 3.25 Disclosure. No representation or warranty of Seller in this Agreement and the Schedules or certificates attached hereto or delivered by Seller in accordance with the terms hereof contains any untrue statement of a material fact or omits any statement of a material fact necessary in order to -22- make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. 3.26 Mortgages. If any parcel of Owned Real Property is encumbered by one or more existing mortgages (each, an "Existing Mortgage"), no written notice has been received from the mortgagee(s) asserting that a default or breach exists thereunder or under any note or other obligation secured thereby which remains uncured. Seller knows of no default, or event which with notice or the passage of time will constitute a default, under the Existing Mortgage(s) or under any note or other obligation secured thereby which has occurred and is continuing. Seller has delivered to Buyer complete copies of the documents constituting the Existing Mortgage(s) and the note(s) secured thereby. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 4.1 Corporate Status; Authorization, etc. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with full corporate power and authority to execute and deliver the Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Buyer of this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by all requisite corporate action of Buyer. Buyer has duly executed and delivered this Agreement. This Agreement is a valid and legally binding obligation of Buyer, enforceable against Buyer in accordance with its terms. 4.2 No Conflicts, etc. The execution, delivery and performance by Buyer of the Agreement, and the consummation of the transactions contemplated hereby, do not and shall not conflict with or result in a violation of or under (with or without the giving of notice or the lapse of time, or both) (i) the certificate of incorporation or by-laws or other organizational documents of Buyer, (ii) any Applicable Law applicable to Buyer or any of its properties or assets or (iii) any contract, agreement or other instrument applicable to Buyer or any of its properties or assets, except, in the case of clause (iii), as set forth in Schedule 4.2 and for violations and defaults that, individually and in the aggregate, have not and shall not materially impair the ability of Buyer to perform its obligations under the Agreement. Except as specified in Schedule 4.2 and except as required under the HSR Act, no Governmental Approval or other Consent is required to be obtained or made by Buyer in -23- connection with the execution and delivery of the Agreement or the consummation of the transactions contemplated hereby. 4.3 Litigation. There is no action, claim, suit or proceeding pending, or to Buyer's knowledge threatened, by or against or affecting Buyer in connection with or relating to the transactions contemplated by this Agreement or of any action taken or to be taken in connection herewith or the consummation of the transactions contemplated hereby. 4.4 Brokers, Finders, etc. All negotiations relating to this Agreement and the transactions contemplated hereby have been carried on without the participation of any Person acting on behalf of Buyer in such manner as to give rise to any valid claim against Seller for any brokerage or finder's commission, fee or similar compensation. 4.5 Adequate Funds. Buyer has all funds necessary to enable it to perform this Agreement in accordance with its terms. ARTICLE V COVENANTS 5.1 Covenants of Seller. (a) Public Announcements. Except as required by Applicable Law (in which case the nature of the announcement shall be described to Buyer prior to dissemination to the public), Seller shall not make any public announcement in respect of this Agreement or the transactions contemplated hereby without the prior written consent of Buyer. (b) Conduct of Business. From the date hereof to the Closing Date, except as permitted or required by this Agreement or as otherwise consented to by Buyer in writing, Seller shall: (i) carry on the Business in the ordinary course, in substantially the same manner as heretofore conducted, and use all reasonable best efforts to maintain the Business in good operating condition and repair, and preserve its relationships with customers, suppliers and others having business dealings with the Business; (ii) not grant (or commit to grant) any increase in the compensation (including incentive or bonus compensation) of any employee employed in the operation of the Business other than increases in the ordinary course of business consistent with past practice in the -24- compensation payable to those employees of the Business earning less than $50,000 per annum each; or institute, adopt or amend (or commit to institute, adopt or amend) any compensation or benefit plan, policy, program or arrangement or collective bargaining agreement applicable to any such employee. (iii) not sell, assign, voluntarily encumber, grant a Lien on or license with respect to, or dispose of, any of the Assets having a fair market value of at least $50,000 individually or $100,000 in the aggregate, or incur any liabilities or obligations (including, without limitation, liabilities with respect to capital leases or guarantees thereof) in excess of $100,000 individually or in the aggregate, except for sales and dispositions made or liabilities incurred, including the creation of purchase money security interests, in the ordinary course of business consistent with past practice; (iv) take any action inconsistent with, the representations and warranties of Seller hereunder or that would cause any of the representations and warranties of Seller hereunder to become untrue in any material respect; and (v) not make, give or grant any bid or proposal, or any customer option relating to contracts in the Backlog, involving an amount in excess of $250,000 (or amend, supplement or terminate any existing bid or proposal, or any existing customer option relating to contracts in the Backlog, involving an amount in excess of $250,000), in each case without the prior approval of Buyer (which approval shall not be unreasonably withheld or delayed). (c) Access and Information. (i) Prior to and after the Closing, Seller shall (and shall cause its accountants, counsel, consultants, employees and agents to) give Buyer and its respective accountants, counsel, consultants, employees and agents, reasonable access during normal business hours to, and furnish them with all documents, records, work papers and information with respect to, all properties, assets, books, contracts, commitments, reports and records relating to the Business, as Buyer shall from time to time reasonably request. In addition, Seller shall permit Buyer, and its accountants, counsel, consultants, employees and agents, reasonable access to such personnel of Seller during normal business hours as may be necessary to Buyer in its review of the properties, assets and business affairs of the Business and the above-mentioned documents, records and information. Buyer and Buyer's agents shall have the right, upon giving reasonable advance notice to enter upon and inspect the Real Property, including physical inspection of the surface and sub-surface land and all improvements and the major components thereof, including heating, plumbing, air conditioning, -25- electrical equipment and wiring and roof. Buyer shall indemnify and hold Seller harmless from and against any and all costs and liabilities resulting from the negligence or willful misconduct of any third party engaged by Buyer to perform such inspections, and Buyer shall return the Real Property to substantially the same condition as before such inspections. Inspections shall be conducted during times reasonably convenient to Seller and the Business. (ii) Buyer shall remain bound by the terms of its existing Confidentiality Agreement with Seller, dated August 6, 1997 (the "Confidentiality Agreement"), except that from and after the Closing: (A) the terms "Evaluation Material" and "Notes" as defined and used in the Confidentiality Agreement, shall no longer include information concerning the Business and properties of the STS Division; (B) clause (d) of the second paragraph of the Confidentiality Agreement shall cease to have any further force and effect insofar as the provisions thereof relate to the STS Division or the Business; and (C) the seventh and eighth paragraphs of the Confidentiality Agreement shall cease to have any further force and effect insofar as the provisions thereof relate to the STS Division or the Business. (d) Further Actions. (i) Seller agrees to use commercially reasonable efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated hereby by the Closing Date. (ii) Seller, as promptly as practicable, shall file or supply, or cause to be filed or supplied, all applications, notifications and information required to be filed or supplied by Seller pursuant to Applicable Law in connection with the Agreement, the sale and transfer of the Assets pursuant to the Agreement and the consummation of the other transactions contemplated hereby, including but not limited to filings pursuant to the HSR Act. (iii) Seller, as promptly as practicable, shall use all reasonable efforts to obtain, or cause to be obtained, all Consents (including, without limitation, all Governmental Approvals and any Consents required under any Contract) necessary to be obtained by it in order to consummate the sale and transfer of the Assets pursuant to the Agreement and the consummation of the other transactions contemplated hereby. (iv) Seller shall coordinate and cooperate with Buyer in exchanging such information and supplying such assistance as may be reasonably requested by Buyer in connection with the filings and other actions contemplated by Section 5.2. -26- (e) Further Assurances. Following the Closing, Seller shall from time to time, execute and deliver such additional instruments, documents, conveyances or assurances and take such other actions as shall be necessary, or otherwise reasonably requested by Buyer, to confirm and assure the rights and obligations provided for in this Agreement and render effective the consummation of the transactions contemplated hereby. Seller until the Closing shall maintain in force in respect of the Business the existing insurance covering the Business, subject to normal variations required by ordinary operations of the Business. Seller shall cooperate with Buyer in order to afford Buyer the benefit of all insurance policies covering the Business for periods prior to the Closing to the extent that the claims thereunder relate to any of the Assets or the Assumed Liabilities. (f) Noncompete. Seller will not and will cause its Subsidiaries and operating units and Affiliates not to (collectively, the "Restricted Parties and individually, a "Restricted Party"), for a period of three years following the Closing (the "Non- Competition Period"), manufacture, sell or provide products or services which are competitive to the Primary Activities, except that this provision shall not preclude (i) EFData Corp. from manufacturing, selling or providing products which it currently manufactures, sells or provides; (ii) EFData Corp. from providing services under those contracts where the EFData Corp. manufactured product content (consisting of products of the type currently manufactured by EFData Corp.) exceeds 50% of the contract value; (iii) the GCS unit of CMI from providing products and services to U.S. Government entities which it currently provides to such U.S. Government customers; or (iv) the bona fide sale, whether by a merger or otherwise, of all or substantially all of the properties and assets of Seller (in one transaction or a series of related transactions) to a Person that is not an Affiliate of Seller that manufactures or sells products or services competitive to the Primary Activities or restrict the activities of any such acquiring Person after such sale (other than any such sale in which the stockholders of Seller immediately before the transaction or series of related transactions possess immediately thereafter 50% or more of the voting power of Seller or the acquiring Person or any parent entity of either). "Primary Activities" shall mean the manufacture and global sale of portable L- Band satellite communications terminals for use in the Inmarsat-B system, the manufacture and global sale of single-channel digital video exciters and receivers, using MPEG-2 or equivalent digital compression algorithms, for satellite-based applications, the manufacture and global sale of X-Band frequency converters for satellite applications, and the bidding and executing of satellite communications projects and/or contracts with commercial customers or foreign governmental authorities in which the primary added-value is system design, integration, installation and/or program management. -27- Seller will not use or permit the use of any of the intellectual property licensed to it pursuant to the Technology License Agreement or the Trademark License Agreement in a manner that would cause a violation of this Section 5.1(f). During the Non-Competition Period, Seller will not, and will cause its Affiliates not to, (i) directly or indirectly, induce or solicit, or aid or assist any Person to induce or solicit, any employees, salespersons, agents, consultants, distributors, representatives, advisors, customers or suppliers of the Business to terminate, curtail or otherwise limit their employment by or business relationship with the Business, or (ii) license, assign or otherwise grant any interest in the Name or Logo "California Microwave" (alone or in any combination of words, or any combination, variation or derivation of such Name or Logo), for use by any Person in connection with the manufacturing, marketing, sale or provision of any products or services which are competitive to the Primary Activities. (g) No Solicitation. From the date hereof to the Closing Date, Seller shall cause its employees, directors, agents and Affiliates to immediately suspend any existing negotiations or discussions relating to any sale, joint venture or other transfer of actual or beneficial ownership of the STS Division, its operations or any of its assets associated therewith (other than inventory in the ordinary course of business) (collectively a "Transaction") and Seller shall not, and shall cause its employees, directors, agents and Affiliates to not, (a) solicit any proposals or offers relating to a Transaction, or (b) negotiate or discuss with any third party concerning any proposal or offer for a Transaction. (h) Post-Closing Confidentiality. From and after the Closing, Seller will, and will cause its Affiliates to, hold in strict confidence, and will not use to the detriment of Buyer or any of its Affiliates, all information with respect to the Business. Notwithstanding the foregoing, Seller may disclose such information (i) if compelled to disclose the same by judicial or administrative process or by other requirements of law, (ii) if the same hereafter is in the public domain through no fault of Seller, or (iii) if the same is later acquired by Seller from another source and Seller is not aware that such source is under an obligation to another Person to keep such information confidential. (i) Mail; Payments. Seller authorizes and empowers Buyer from and after the Closing Date to receive and open all mail and other communications received by Buyer and to act with respect to such communications in such manner as Buyer may elect if such communications relate to the Business other than the Excluded Assets or Excluded Liabilities, -28- or, if such communications do not relate to the Business or relate to the Excluded Assets or Excluded Liabilities, to forward the same promptly to Seller. Seller and Buyer shall promptly deliver to the other any cash, checks or other instruments of payment to which the other is entitled and shall hold the same in trust for the other until such delivery. (j) Performance of Contracts. With respect to each Contract, Governmental Approval, Lease and Intellectual Property License, Seller shall duly perform and comply with all agreements and conditions required thereby to be performed or complied with by it prior to or on the Closing Date. 5.2 Covenants of Buyer. (a) Public Announcements. Except as required by Applicable Law (in which case the nature of the announcement shall be described to the Seller prior to dissemination to the public), Buyer shall not, and shall not permit its Affiliates to, make any public announcement in respect of this Agreement or the transactions contemplated hereby without the prior written consent of Seller. (b) Further Actions. (i) Buyer agrees to use commercially reasonable efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated hereby by the Closing Date. (ii) Buyer shall, as promptly as practicable, file or supply, or cause to be filed or supplied, all applications, notifications and information required to be filed or supplied by Buyer pursuant to Applicable Law in connection with this Agreement, Buyer's acquisition of the Assets pursuant to this Agreement and the consummation of the other transactions contemplated thereby, including but not limited to filings pursuant to the HSR Act. (iii) Buyer shall coordinate and cooperate with Seller in exchanging such information and supplying such reasonable assistance as may be reasonably requested by Seller in connection with the filings and other actions contemplated by Section 5.1. (c) Further Assurances. Following the Closing, Buyer shall, from time to time, execute and deliver such additional instruments, documents, conveyances or assurances and take such other actions as shall be necessary, or otherwise reasonably requested by Seller, to confirm and assure -29- the rights and obligations provided for in this Agreement and render effective the consummation of the transactions contemplated hereby. (d) Use of Business Names by Buyer. (i) Buyer acknowledges that Seller has the absolute and exclusive proprietary right to all names, marks, trade names, trademarks, service names and service marks (collectively, "Names") incorporating "California Microwave" or any similar Name and to all corporate symbols or logos (collectively, "Logos") incorporating California Microwave or any similar Name. All rights of Seller and its respective affiliates to which and the goodwill represented thereby and pertaining thereto are being retained by Seller. Buyer agrees that it will not, and will cause the Business not to, use the Name California Microwave or any similar Name or any Logo incorporating such Name or any similar Name in any manner, including in connection with the sale of any products or services or otherwise in the conduct of its business, except as expressly permitted by clause (ii) of this Section 5.2(d). (ii) For a period of six months from the Closing Date (the "Window Period"), Seller shall and hereby irrevocably grants, effective as of the Closing Date, on a fully-paid, royalty-free basis, the Buyer the right to use the California Microwave Logo and the California Microwave Name in connection with the operation of the Business as currently conducted including, during the Window Period, to (A) use any molds or castings included in the equipment or machinery included in the Assets despite the appearance thereon and on the products manufactured therewith of the Name California Microwave or the California Microwave Logo, (B) market and sell all such products produced by the Business and (C) use any other assets on hand included in the Assets, including, without limitation, any catalogs, invoices, packaging material or stationery, bearing the California Microwave Name or California Microwave Logo. Immediately upon the expiration of the Window Period, Buyer shall cease to use in any manner the Name California Microwave or the California Microwave Logo incorporating such Name and remove or obliterate such Name or the California Microwave Logo from any molds, castings, products or other assets and clearly and prominently mark the new name of the Business thereon. At all times following the Closing, Buyer shall indicate that neither Buyer nor the Business are affiliated with Seller or any of its affiliates. (e) Substitute Letters of Credit and Bonds. Buyer shall use commercially reasonable efforts to furnish as of the Closing or as soon as practicable thereafter, its own letters of credit or performance or surety bonds in substitution for the letters of credit and bonds referred to in Schedule 5.2(e) -30- attached hereto and agrees to reimburse Seller for any out-of-pocket bank fees or charges incurred by Seller by reason of any of the same remaining outstanding from and after 30 days after the Closing Date. (f) Reimbursement of Certain Severance Obligations. Schedule 5.2(f) lists three severance agreements heretofore entered into between Seller and each of Messrs. Maloney, Strean and Pinto (each an "Executive"), respectively (each a "Severance Agreement"). If (i) an Executive becomes employed by Buyer as of the Closing Date as a Transferred Employee, (ii) there shall occur thereafter a termination by such Executive of his employment with Buyer for Good Reason (as defined below) within one year after the Closing Date, and (iii) as a result of the termination of employment of the type described in clause (ii) above, Seller shall be obligated to make any cash payment to such Executive pursuant to the provisions of the Severance Agreement with such Executive, then Buyer shall reimburse Seller for any such cash payment it so makes to such Executive, such reimbursement to occur promptly upon receipt by Buyer of evidence of the making of such payment; provided, however, that the reimbursement obligation of Buyer to Seller under this Section 5.2(f) with respect to any Executive shall not in any event exceed the amount that would have been payable to such Executive under his retention incentive agreement that is listed on Schedule 2.4(a) in the event of an involuntary termination by Buyer without cause of the employment of such Executive after the Closing; provided further, however, Buyer shall have no reimbursement obligation to Seller under this Section 5.2(f) if Buyer otherwise is obligated to make a payment to the Executive under his retention incentive agreement pursuant to Section 2.4(a). As used herein, "Good Reason" means the occurrence of any of the following: (x) the assignment to the Executive in question of duties inconsistent with, or a substantial alteration in the nature or status of, such Executive's responsibilities with respect to the Business at the STS Division immediately before the Closing; (y) a reduction in the Employee's base salary or in the benefits that Buyer is required to provide such Executive pursuant to Section 7.2; or (z) such Executive's relocation to a work site requiring an increase in one-way commute from such Executive's residence of more than 35 miles. ARTICLE VI CONDITIONS PRECEDENT 6.1 Conditions to Obligations of Each Party. The obligations of the parties to consummate the transactions contemplated hereby shall be subject to the fulfillment on or prior to the Closing Date of the following conditions: -31- (a) HSR Act Notification. In respect of the notifications of Buyer and Seller pursuant to the HSR Act, the applicable waiting period and any extensions thereof shall have expired or been terminated without the receipt of any objection from any Governmental Authority. (b) No Injunction, etc. Consummation of the transactions contemplated hereby shall not have been restrained, enjoined or otherwise prohibited by any Applicable Law, including any order, injunction, decree or judgment of any court or other Governmental Authority. No court or other Governmental Authority shall have determined that any Applicable Law makes illegal the consummation of the transactions contemplated hereby, and no proceeding with respect to the application of any such Applicable Law to such effect shall be pending. (c) Supply and License Agreements. Buyer and Seller shall have entered into the Cross-License Agreement (substantially in the form of Exhibit A), the Technology License Agreement (substantially in the form of Exhibit B), the Trademark License Agreement (substantially in the form of Exhibit C) and the Supply Agreement (substantially in the form of Exhibit D). 6.2 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the transactions contemplated hereby shall be subject to the fulfillment (or waiver by Buyer) on or prior to the Closing Date of the following additional conditions: (a) Representations, Performance. Each of the representations and warranties of Seller contained in this Agreement that is qualified as to materiality shall be true and correct and each such representation and warranty that is not so qualified shall be true and correct in all material respects in each case on the date hereof and at and as of the Closing Date as though made on and as of the Closing Date. Seller shall have duly performed and complied in all material respects with all agreements and conditions required by the Agreement to be performed or complied with by it prior to or on the Closing Date. Seller shall have delivered to Buyer a certificate, dated the Closing Date and signed by its duly authorized officer, to the foregoing effect. (b) No Material Adverse Change. Since the date hereof, (i) there shall not have occurred any material adverse change in the financial condition, results of operations or Assets of the Business, except for the results shown and changes forecast in Schedule 3.7(a), and other than changes in the STS Division's intercompany account with CMI corporate, which changes represent (x) the results of operations of the STS Division, (y) the cash advanced to the STS Division by CMI corporate or repaid by the STS Division -32- to CMI corporate, and (z) certain allocations between CMI corporate and the STS Division, which allocations shall have been made in the ordinary course of business consistent in type and amount with past practice, and (ii) there shall not have occurred, in the aggregate, any change in the ETC's and EAC's of the Business' Contracts such as to cause a material adverse change in its financial quarterly contribution. (c) Consents. Seller shall have obtained and shall have delivered to Buyer copies of (i) all Governmental Approvals required to be obtained by Seller in connection with the execution and delivery of the Agreement and the consummation of the transactions contemplated hereby or thereby and (ii) all Consents (including, without limitation, all Consents required under any Contract) necessary to be obtained in order to consummate the sale and transfer of the Assets pursuant to this Agreement and the consummation of the other transactions contemplated hereby and listed on Schedule 6.2(c). Buyer shall have obtained the Consents listed on Schedule 4.2. (d) Corporate Proceedings. All corporate and other proceedings of Seller in connection with this Agreement and the transactions contemplated hereby, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to Buyer and its counsel, and Buyer and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. (e) Transfer Documents. Seller shall have delivered to Buyer at the Closing all documents, certificates and agreements necessary to transfer to Buyer title to the Assets, free and clear of any and all Liens thereon, other than Permitted Liens, including without limitation: (i) a bill of sale, assignment and general conveyance, in form and substance reasonably satisfactory to Buyer, dated the Closing Date, with respect to the Assets (other than any Asset to be transferred pursuant to any of the instruments referred to in any other clause of this Section 6.2); (ii) assignments of all Contracts, Intellectual Property and any other agreements and instruments constituting Assets, dated the Closing Date, assigning to Buyer all of Seller's right, title and interest therein and thereto; (iii) a bargain and sale deed with covenants against grantor's acts, dated as of the Closing Date, with respect to each parcel of Owned Real Property; -33- (iv) an assignment of lease, dated as of the Closing Date, with respect to each Lease; (v) certificates of title to all motor vehicles included in the Assets to be transferred to Buyer hereunder, duly endorsed for transfer to Buyer as of the Closing Date; and (vi) an assignment of lease, assignment of sale agreement, and consent by the Suffolk County Industrial Development Agency and other necessary parties to assignment of lease and sale agreement, and any other documents, consents or approvals necessary to convey all of Seller's interest in the property leased from the Suffolk County Industrial Development Agency. (f) Title Policies. Buyer shall have received from a nationally recognized title insurance company at its expense (the "Title Company") a title insurance policy issued to Buyer in form and substance reasonably satisfactory to it with respect to the Owned Real Property, insuring Buyer and issued as of the Closing Date by the Title Company, showing Buyer to have a fee simple title to the Owned Real Property, subject only to Permitted Liens and the mortgage liens and easements of record described on Schedule 3.18(c). In conjunction with the receipt of the foregoing title policy, Seller shall deliver to Buyer a Certificate of Occupancy for each of the Owned Real Property and the Kennedy Facility issued by the municipal authority having the jurisdiction allowing the property to be used as a commercial or industrial building in the manner presently used. (g) FIRPTA Certificate. Buyer shall have received a certificate of Seller, dated the Closing Date and sworn to under penalty of perjury, setting forth the name, address and federal tax identification number of Seller and stating that Seller is not a "foreign person" within the meaning of Section 1445 of the Code, such certificate to be in the form set forth in the Treasury Regulations thereunder. (h) Environmental Reports. Buyer at its own expense shall have received from an environmental consulting firm of its choice, an environmental site assessment report and analytical report covering the Real Property (including analyses of samples, soil and groundwater taken from all areas of the Real Property as may be deemed appropriate by such consulting firm), which reports shall be in form, scope and substance satisfactory to Buyer in all respects. In addition, Buyer shall be reasonably satisfied with the results of its due diligence investigation of environmental matters in respect of the Real Property. -34- 6.3 Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions contemplated hereby shall be subject to the fulfillment (or waiver by Seller), on or prior to the Closing Date, of the following additional conditions: (a) Representations, Performance, etc. Each of the representations and warranties of Buyer contained in this Agreement that is qualified as to materiality shall be true and correct and each such representation and warranty that is not so qualified shall be true and correct in all material respects in each case on the date hereof and at and as of the Closing Date as though made on and as of the Closing Date. Buyer shall have duly performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date. Buyer shall have delivered to Seller a certificate, dated the Closing Date and signed by its duly authorized officer, to the foregoing effect. (b) Assumption Agreement. Seller shall have received from Buyer an Assumption Agreement, in substance and form satisfactory to Seller, under which Buyer shall have assumed the Assumed Liabilities. (c) Corporate Proceedings. All corporate proceedings of Buyer in connection with this Agreement and the transactions contemplated hereby, and all documents and instruments incident thereto, shall be reasonably satisfactory in substance and form to Seller, and its counsel, and Seller and its counsel shall have received all such documents and instruments, or copies thereof, certified if requested, as may be reasonably requested. (d) Consents and Approvals. Seller shall have obtained all Governmental Approvals necessary to consummate the transactions contemplated hereby. ARTICLE VII EMPLOYEES AND EMPLOYEE BENEFIT PLANS 7.1 Employment of Seller's Employees. Buyer intends to offer employment, effective as of the Closing Date, to all employees who are employed by Seller in the STS Division primarily in the operation of the Business at then current wage or salary levels. Those employees who accept such offers of employment and become employees of Buyer shall be referred to herein as the "Transferred Employees". Effective as of the Closing Date, Buyer shall assume the liability of Seller in respect of the Transferred Employees for accrued but unpaid salaries, wages, vacation and sick pay and 1998 cash -35- incentive compensation, but only to the extent such liability is accrued or otherwise reflected on the Final Closing Statement of Net Assets. Buyer shall not have any liability with respect to any employee of Seller or Employee Benefit Plan or any claim thereof or related thereto except to the extent expressly provided in this Article VII with respect to Transferred Employees and except as provided in Section 2.4(a). 7.2 Welfare and Fringe Benefit Plans. Following the Closing Date and through December 31, 1998, Buyer shall provide Transferred Employees with life insurance, medical coverage, and other employee welfare benefit plans, programs, policies or arrangements, other than stock-based plans relating to equity securities (or their equivalent, such as phantom stock plans or SARs) or (except as provided in the next sentence) any incentive bonus programs based on the achievement of financial targets, on a basis comparable in the aggregate to those provided Transferred Employees prior to the Closing Date. Buyer will provide or establish a cash incentive bonus program(s) based on the achievement of financial targets to those Transferred Employees who currently are eligible for cash incentive bonus program(s) of Seller based on the achievement of financial targets, which cash incentive program(s) of Buyer shall be comparable in the aggregate to such cash incentive bonus program(s) of Seller. ARTICLE VIII TERMINATION 8.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by the written agreement of Buyer and Seller; (b) by either Seller or Buyer by written notice to the other party if the transactions contemplated hereby shall not have been consummated pursuant hereto by 5:00 p.m. California time on February 15, 1998, unless such date shall be extended by the mutual written consent of Seller and Buyer; (c) by Buyer by written notice to Seller if (i) the representations and warranties of Seller shall not have been true and correct in all material respects as of the date when made or (ii) if any of the conditions set forth in Section 6.1 or 6.2 shall not have been, or if it becomes apparent that any of such conditions will not be, fulfilled by 5:00 p.m. California time on February 15, 1998, unless such failure shall be due to the failure of Buyer to -36- perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by it prior to the Closing; or (d) by Seller by written notice to Buyer if (i) the representations and warranties of Buyer shall not have been true and correct in all material respects as of the date when made or (ii) if any of the conditions set forth in Section 6.1 or 6.3 shall not have been, or if it becomes apparent that any of such conditions will not be, fulfilled by 5:00 p.m. California time on February 15, 1998, unless such failure shall be due to the failure of Seller to perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by it prior to the Closing. 8.2 Effect of Termination. In the event of the termination of this Agreement pursuant to the provisions of Section 8.1, this Agreement shall become void and have no effect, without any liability to any Person in respect hereof or of the transactions contemplated hereby on the part of any party hereto, or any of its directors, officers, employees, agents, consultants, representatives, advisers, stockholders or Affiliates, except as specified in Section 10.2 and except for any liability resulting from such party's breach of this Agreement. ARTICLE IX INDEMNIFICATION 9.1 By Seller. Subject to the terms and conditions of this Article IX, Seller covenants and agrees to defend, indemnify and hold harmless Buyer, its officers, directors, employees, agents, advisers, representatives and Affiliates (collectively, the "Buyer Indemnitees") from and against, and pay or reimburse Buyer Indemnitees for, any and all claims, liabilities, obligations, losses, fines, costs, proceedings, deficiencies or damages (whether absolute, accrued, conditional or otherwise and whether or not resulting from third party claims), including out-of-pocket expenses and reasonable attorneys' fees incurred in the investigation or defense of any of the same or in asserting any of their respective rights hereunder (collectively, "Losses"), resulting from or arising out of: (i) Any misrepresentation or breach of any warranty of Seller contained in this Agreement; provided that any claim for indemnification by Buyer under this clause (i) may be made no later than 18 months from and after the Closing Date, excepting only that any claim for misrepresentation or breach of warranty under Sections 3.6, 3.10(a), 3.18(a), 3.19 and 3.21 may be made no later than a date thirty days from and after the expiration of the period of the applicable statute of limitations; -37- (ii) any failure of Seller to perform any covenant or agreement made or contained in this Agreement or fulfill any obligation in respect thereof; (iii) any Excluded Liabilities; (iv) any and all Benefit Liabilities in respect of Employees except, with respect to Transferred Employees, to the extent assumed by Buyer pursuant to Article VII; and (v) any product liability claim with respect to products manufactured by Seller and sold prior to the Closing. Seller shall not be required to indemnify Buyer Indemnitees with respect to any claim for indemnification resulting from or arising out of matters described in clauses (i) and (v) above pursuant to this Section unless and until the aggregate amount of all claims against Seller exceeds $270,000 and then only to the extent such aggregate amount exceeds $270,000. Claims thereafter may be asserted regardless of amount. Seller's maximum liability to Buyer Indemnitees under clauses (i) and (v) of this Section shall not exceed $13,750,000. 9.2 By Buyer. Subject to the terms and condition of this Article IX, Buyer covenants and agrees to defend, indemnify and hold harmless Seller and its officers, directors, employees, agents, advisers, representatives and Affiliates (collectively, the "Seller Indemnitees") from and against any and all Losses resulting from or arising out of: (i) any misrepresentation or breach of warranty of Buyer contained in this Agreement or in any Schedule of Buyer; provided that any claim for indemnification by Seller under this paragraph (i) may be made no later than 18 months from and after the Closing Date; (ii) any failure of Buyer to perform any covenant or agreement made or contained in the Agreement or fulfill any other obligation in respect thereof; (iii) the Assumed Liabilities; (iv) claims made on or drawings under any of the letters of credit or performance or surety bonds referred to in Schedule 5.2(e) attached hereto; -38- (v) the use by Buyer of any Seller tradenames or trademarks after the Closing Date other than as permitted or contemplated by Section 5.2(d); and (vi) the operation of the Business by Buyer or Buyer's ownership, operation or use of the Assets following the Closing Date except to the extent that such Loss is the result of any action of Seller prior to the Closing. Buyer shall not be required to indemnify Seller Indemnitees with respect to any claim for indemnification resulting from or arising out of matters described in clause (i) above pursuant to this Section unless and until the aggregate amount of all claims against Buyer exceeds $270,000 and then only to the extent such aggregate amount exceeds $270,000. Buyer's maximum liability to Seller Indemnitees under clause (i) of this Section shall not exceed $13,750,000. 9.3 Adjustments to Indemnification Payments. Any payment made by Seller to Buyer Indemnitees, on the one hand, or by Buyer to Seller Indemnitees, on the other hand, pursuant to this Article IX in respect of any claim shall be net of any insurance proceeds realized by and paid to the Indemnified Party in respect of such claim. The Indemnified Party shall use its reasonable efforts to make insurance claims relating to any claim for which it is seeking indemnification pursuant to this Article IX; provided that the Indemnified Party shall not be obligated to make such an insurance claim if the Indemnified Party in its reasonable judgment believes that the cost of pursuing such an insurance claim together with any corresponding increase in insurance premiums or other chargebacks to the Indemnified Party, as the case may be, would exceed the value of the claim for which the Indemnified Party is seeking indemnification. 9.4 Indemnification Procedures. In the case of any claim asserted by a third party against a party entitled to indemnification under this Agreement (the "Indemnified Party"), notice shall be given by the Indemnified Party to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and the Indemnified Party shall permit the Indemnifying Party (at the expense of such Indemnifying Party) to assume the defense of any third party claim or any litigation with a third party resulting therefrom, provided that (i) the counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be reasonably satisfactory to the Indemnified Party, (ii) the Indemnified Party may participate in such defense at such Indemnified Party's expense, and (iii) the omission by any Indemnified Party to give notice as provided herein shall not relieve the -39- Indemnifying Party of its indemnification obligation under this Agreement except and only to the extent that such Indemnifying Party is materially damaged as a result of such failure to give notice. Except with the prior written consent of the Indemnified Party, no Indemnifying Party, in the defense of any such claim or litigation, shall consent to entry of any judgment or enter into any settlement that provides for injunctive or other nonmonetary relief affecting the Indemnified Party or that does not include as an unconditional term thereof the giving by each claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim or litigation. In the event that the Indemnified Party shall in good faith determine that the conduct of the defense of any claim subject to indemnification hereunder or any proposed settlement of any such claim by the Indemnifying Party might be expected to affect adversely the Indemnified Party's Tax liability or the ability of Buyer to conduct its business, or that the Indemnified Party may have available to it one or more defenses or counterclaims that are inconsistent with one or more of those that may be available to the Indemnifying Party in respect of such claim or any litigation relating thereto, the Indemnified Party shall have the right at all times to take over and assume control over the defense, settlement, negotiations or litigation relating to any such claim at the sole cost of the Indemnifying Party, provided that if the Indemnified Party does so take over and assume control, the Indemnified Party shall not settle such claim or litigation without the written consent of the Indemnifying Party, such consent not to be unreasonably withheld. In the event that the Indemnifying Party does not accept the defense of any matter as above provided, the Indemnified Party shall have the full right to defend against any such claim or demand and shall be entitled to settle or agree to pay in full such claim or demand. In any event, the Indemnifying Party and the Indemnified Party shall cooperate in the defense of any claim or litigation subject to this Article IX and the records of each shall be available to the other with respect to such defense. 9.5 Expiration of Representations and Warranties, etc. All representations and warranties contained in this Agreement shall survive the Closing for a period of 18 months; provided that the representations and warranties stated in Sections 3.6, 3.10(a), 3.18(a), 3.19 and 3.21 shall survive the Closing for the applicable statute of limitations. 9.6 Exclusive Remedy. The indemnifications provided for in this Article IX shall be the sole and exclusive post-Closing remedies available to either party against the other party for any claims under or based upon this Agreement. -40- ARTICLE X DEFINITIONS, MISCELLANEOUS 10.1 Definition of Certain Terms. The terms defined in this Section 10.1, whenever used in this Agreement (including in the Schedules), shall have the respective meanings indicated below for all purposes of this Agreement. All references herein to a Section, Article or Schedule are to a Section, Article or Schedule of or to this Agreement, unless otherwise indicated. Affiliate: of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person. "Control" (including the terms "Controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. Aggregate Purchase Price: has the meaning set forth in Section 2.3. Agreement: means this Asset Purchase Agreement (including the Exhibits and the Schedules), as the same from time to time may be amended, supplemented or waived. Applicable Law: all applicable provisions of all (i) constitutions, treaties, statutes, laws (including the common law), rules, regulations, ordinances, codes or orders of any Governmental Authority, (ii) Governmental Approvals and (iii) orders, decisions, injunctions, judgments, awards and decrees of or agreements with any Governmental Authority. Assets: has the meaning set forth in Section 1.1. Assumed Liabilities: has the meaning set forth in Section 2.4. Backlog: has the meaning set forth in Section 3.24. Books and Records: all books and records, including manuals, price lists, mailing lists, lists of customers, production data, sales and promotional materials, purchasing materials, personnel records, manufacturing and quality control records and procedures, research and development files, accounting records, tax records and litigation files (regardless of the media in which stored), in each case relating to or used in the Business. -41- Business: the business currently conducted by Buyer through its STS Division, as described in Recital A at the head of this Agreement. Buyer: has the meaning set forth in the first paragraph of this Agreement. Buyer Indemnitees: has the meaning set forth in Section 9.1. Buyer's Arbitrator: has the meaning set forth in Section 10.6(c). Closing: has the meaning set forth in Section 2.1. Closing Date: has the meaning set forth in Section 2.1. Closing Statement of Net Assets: has the meaning set forth in Section 2.7(b). Code: the Internal Revenue Code of 1986, as amended. Consent: any consent, approval, authorization, waiver, permit, grant, franchise, concession, agreement, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any Person, including but not limited to any Governmental Authority. Cross-License Agreement: has the meaning set forth in Section 1.3(b). Disputes: has the meaning set forth in Section 10.6(a). Disputing Person: has the meaning set forth in Section 10.6(b). $ or dollars: lawful money of the United States. E&Y: has the meaning set forth in Section 2.7(b). EAC's: has the meaning set forth in Section 2.7(b). Employee Benefit Plans: has the meaning set forth in Section 3.21(a). Environmental Laws: all Applicable Laws relating to the protection of the environment, to human health and safety, or to any emission, discharge, generation, processing, storage, holding, abatement, -42- existence, Release, threatened Release, arranging for the disposal or transportation of any Hazardous Substances. Environmental Liabilities and Costs: all Losses imposed by, under or pursuant to Environmental Laws, including all fees, disbursements and expenses of counsel based on, arising out of or otherwise in respect of: (i) the ownership or operation of the Business or Real Property, by Seller, and (ii) the environmental conditions existing on the Closing Date on, under, above, or about any Real Property owned, leased or operated by Seller. ERISA: the Employee Retirement Income Security Act of 1974, as amended. ETC's: has the meaning set forth in Section 2.7(b). Excluded Assets: has the meaning set forth in Section 1.2. Excluded Liabilities: has the meaning set forth in Section 2.5. Executive: has the meaning set forth in Section 5.2(f). Existing Mortgage: has the meaning set forth in Section 3.6. Final Closing Statement of Net Assets: has the meaning set forth in Section 2.7(d). Final Determination: has the meaning set forth in Section 10.6(e). Financial Statements: has the meaning set forth in Section 3.4. GAAP: generally accepted accounting principles as in effect in the United States. Good Reason: has the meaning set forth in Section 5.2(f). Governmental Approval: any Consent of, with or to any Governmental Authority. Governmental Authority: any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any government authority, agency, department, board, commission or instrumentality of the United States, any State of the -43- United States or any political subdivision thereof, and any tribunal or arbitrator(s) of competent jurisdiction, and any self- regulatory organization. Hazardous Substances: any substance that: (i) requires investigation, removal or remediation under any Environmental Law, or is defined, listed or identified as a "hazardous waste" or "hazardous substance" thereunder, or (ii) is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is regulated by any Governmental Authority or Environmental Law. HSR Act: the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "include" and "including" shall be construed as if followed by the phrase "without being limited to". Indemnified Party: has the meaning set forth in Section 9.4. Indemnifying Party: has the meaning set forth in Section 9.4. Intellectual Property: any and all United States and foreign: (a) patents (including design patents, industrial designs and utility models) and patent applications (including docketed patent disclosures awaiting filing, reissues, divisions, continuations-in-part and extensions), patent disclosures awaiting filing determination, inventions and improvements thereto; (b) trademarks, service marks, trade names, trade dress, logos, business and product names, slogans, and registrations and applications for registration thereof but excluding the name "California Microwave;" (c) copyrights (including software) and registrations thereof; (d) inventions, processes, designs, formulae, trade secrets, know-how, industrial models, confidential and technical information, manufacturing, engineering and technical drawings, product specifications and confidential business information; (e) mask work and other semiconductor chip rights and registrations thereof; (f) intellectual property rights similar to any of the foregoing; and (g) copies and tangible embodiments thereof (in whatever form or medium, including electronic media). Intellectual Property Licenses: has the meaning set forth in Section 3.16. Inventories: has the meaning set forth in Section 1.1(c). IRS: the Internal Revenue Service. -44- Kennedy Facility: has the meaning set forth in Section 1.1(a). June Balance Sheet: has the meaning set forth in Section 3.4. Leased Real Property: means all space leased pursuant to the Leases. Leases: means the real property leases, subleases, use agreements, licenses and occupancy agreements pursuant to which Seller is the lessee, sublessee, user, licensee or occupant related to the Business, other than real property leases, subleases, licenses and occupancy agreements included in Excluded Assets. Lien: any mortgage, pledge, hypothecation, right of others, claim, security interest, encumbrance, lease, sublease, license, occupancy agreement, adverse claim or interest, easement, covenant, encroachment, burden, title defect, title retention agreement, voting trust agreement, interest, equity, option, lien, right of first refusal, charge or other restrictions or limitations. Logos: has the meaning set forth in Section 5.2(d). Losses: has the meaning set forth in Section 9.1. Material Adverse Effect: any event, occurrence, fact, condition, change or effect that is materially adverse to the business, operations, results of operations, financial condition, properties, assets or liabilities of the Business. Names: has the meaning set forth in Section 5.2(d). Neutral Auditor: has the meaning set forth in Section 2.7(d). Non-Competition Period: has the meaning set forth in Section 5.1(f). Notice of Arbitration: has the meaning set forth in Section 10.6(b). Owned Intellectual Property: has the meaning set forth in Section 3.16. Owned Real Property: the real property owned by Seller and used primarily in the Business, together with all other structures, facilities, -45- improvements, fixtures, systems, equipment and items of property presently or hereafter located thereon attached or appurtenant thereto and all easements, licenses, rights and appurtenances relating to the foregoing. Permitted Liens: (i) Liens reserved against in the September Balance Sheet, to the extent so reserved, (ii) Liens for Taxes not yet due and payable or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on Seller's books in accordance with GAAP, (iii) contract rights of third parties to Contracts, or (iv) Liens that, individually and in the aggregate, do not and would not materially detract from the value of any of the property or assets of the Business or materially interfere with the use thereof as currently used or contemplated to be used or otherwise. Person: any natural person, firm, partnership, association, corporation, company, limited liability company, trust, business trust, Governmental Authority or other entity. Prime Rate: has the meaning set forth in Section 2.7(a). Purchase Price: has the meaning set forth in Section 2.2. Real Property: the Owned Real Property and the Leased Real Property. Release: any releasing, disposing, discharging, injecting, spilling, leaking, leaching, pumping, dumping, emitting, escaping, emptying, seeping, dispersal, migration, transporting, placing and the like, including without limitation, the moving of any materials through, into or upon, any land, soil, surface water, ground water or air, or otherwise entering into the environment. Resolution Period: has the meaning set forth in Section 2.7(c). Seller: has the meaning set forth in the first paragraph of this Agreement. Seller Indemnitees: has the meaning set forth in Section 9.2. Seller's Arbitrator: has the meaning set forth in Section 10.2(c). September Balance Sheet: has the meaning set forth in Section 3.4. -46- Severance Agreement: has the meaning set forth in Section 5.2(f). STS Division: has the meaning set forth in Recital A at the head of this Agreement. Subsidiaries: each corporation or other Person in which a Person owns or controls, directly or indirectly, capital stock or other equity interests representing at least 50% of the outstanding voting stock or other equity interests. Target Net Assets: has the meaning set forth in Section 2.7(a). Tax: any federal, state, provincial, local or foreign income, alternative, minimum, accumulated earnings, personal holding company, franchise, capital stock, net worth, capital, profits, windfall profits, gross receipts, value added, sales, use, goods and services, excise, customs duties, transfer, conveyance, mortgage, registration, stamp, documentary, recording, premium, severance, environmental (including taxes under Section 59A of the Code), real property, personal property, ad valorem, intangibles, rent, occupancy, license, occupational, employment, unemployment insurance, social security, disability, workers' compensation, payroll, health care, withholding, estimated or other similar tax, duty or other governmental charge or assessment or deficiencies thereof, and including any interest, penalties or additions to tax attributable to the foregoing. Tax Return: any return, report, declaration, form, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. Technology License Agreement: has the meaning set forth in Section 1.3(c). Title Company: has the meaning set forth in Section 6.2(f). Trademark Consent Agreement: has the meaning set forth in Section 1.3(d). Transaction: has the meaning set forth in Section 5.1(g). Transaction Expenses: has the meaning set forth in Section 10.2. Transfer Taxes: has the meaning set forth in Section 10.8. -47- Transferred Employee: has the meaning set forth in Section 7.1. Treasury Regulations: the regulations prescribed pursuant to the Code. Window Period: has the meaning set forth in Section 5.2(d). 10.2 Expenses. Except to the extent otherwise provided hereby, Seller, on the one hand, and Buyer, on the other hand, shall bear their respective expenses, costs and fees (including filing fees (if any) required in connection with the HSR Act and attorneys', auditors' and financing commitment fees) in connection with the transactions contemplated hereby, including the preparation, execution and delivery of this Agreement and compliance herewith (the "Transaction Expenses"), whether or not the transactions contemplated hereby shall be consummated. 10.3 Severability. If any provision of this Agreement, including any phrase, sentence, clause, Section or subsection is inoperative or unenforceable for any reason, such circumstances shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatsoever. 10.4 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by facsimile transmission or telegram. (i) if to Buyer, to L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Facsimile: 212/805-5494 Attention: Christopher C. Cambria, Esq. -48- with a copy to: Whitman Breed Abbott & Morgan LLP 200 Park Avenue New York, NY 10166 Facsimile: 212/351-3131 Attention: James P. Gerkis, Esq. (ii) if to Seller, to California Microwave, Inc. 555 Twin Dolphin Drive Redwood City, California 94065 Attn: George L. Spillane Facsimile: 650/596-6600 with a copy to: Richard W. Canady, Esq. Howard, Rice, Nemerovski, Canady, Falk & Rabkin A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111 Facsimile: 415/399-3041 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by facsimile or telegram, on the next day following the day on which such facsimile or telegram was sent, provided that a copy is also sent by certified or registered mail. 10.5 Miscellaneous. (a) Headings. The headings contained in this Agreement are for purposes of convenience only and shall not affect the meaning or interpretation of this Agreement. -49- (b) Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. (c) Counterparts. This Agreement may be executed (including by facsimile transmission) with counterpart signature pages or in several counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. (d) Governing Law, etc. This Agreement shall be governed in all respects, including as to validity, interpretation and effect, by the internal laws of the State of New York without giving effect to the conflict of laws rules thereof. Buyer and Seller hereby irrevocably submit to the jurisdiction of the courts of the State of New York, and the Federal courts of the United States of America located in the Southern District of New York solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any of such document may not be enforced in or by said courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a New York State or Federal court. Buyer and Seller hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of any such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 10.4, or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. (e) Bulk Sales. Buyer and Seller hereby waive compliance by the other with the provisions of the bulk sales laws of any jurisdiction. (f) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. (g) Assignment. This Agreement shall not be assignable or otherwise transferable by any party hereto without the prior written consent of the other party hereto; provided that from and after the Closing Buyer shall have the right to assign its rights (but not its obligations) hereunder. -50- (h) No Third Party Beneficiaries. Except as provided in Section 8.2 with respect to indemnification of Indemnified Parties hereunder, nothing in this Agreement shall confer any rights upon any person or entity other than the parties hereto and their respective heirs, successors and permitted assigns. (i) Amendment; Waivers, etc. No amendment, modification or discharge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by the party against whom enforcement of the amendment, modification, discharge or waiver is sought. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party granting such waiver in any other respect or at any other time. Neither the waiver by any of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure by any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall be construed as a waiver of any other breach or default of a similar nature, or as a waiver of any of such provisions, rights or privileges hereunder. 10.6 Arbitration Procedure. (a) Buyer and Seller agree that the arbitration procedure set forth below shall be the sole and exclusive method for resolving and remedying any and all disputes regarding claims for money damages based upon, arising out of or in any way connected with this Agreement or the transactions contemplated herein (the "Disputes"). Nothing in this Section 10.6 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below). The parties hereby agree and acknowledge that, except as otherwise provided in this Section 10.6 or in the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by and shall be enforced pursuant to the Uniform Arbitration Act as in effect in the State of New York. (b) In the event that any party asserts that there exists a Dispute, such party shall deliver a written notice to each other party involved therein specifying the nature of the asserted Dispute and requesting a meeting to attempt to resolve the same. If no such resolution is reached within 45 days after such delivery of such notice, the party delivering such notice of Dispute (the "Disputing Person") may, within 75 days after delivery of such notice, commence arbitration hereunder by delivering to each other party involved therein a notice of arbitration (a "Notice of Arbitration") and by filing a copy of such Notice of Arbitration with the New York City office of the American -51- Arbitration Association. Such Notice of Arbitration shall specify the matters as to which arbitration is sought, the nature of any Dispute, the claims of each party to the arbitration and the amount and nature of damages or other relief sought to be recovered as a result of any alleged claim and any other matters required by the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time to be included therein. (c) Buyer and Seller each shall select one arbitrator expert in the subject matter of the Dispute (the arbitrators so selected shall be referred to herein as "Buyer's Arbitrator" and "Seller's Arbitrator," respectively). In the event that either party fails to select an arbitrator as set forth herein within 30 days after the delivery of a Notice of Arbitration, then the matter shall be resolved by the arbitrator selected by the other party. Seller's Arbitrator and Buyer's Arbitrator shall select a third independent, neutral arbitrator expert in the subject matter of the Dispute, and the three arbitrators so selected shall resolve the Dispute according to the procedures set forth in this Section 10.6. If Seller's Arbitrator and Buyer's Arbitrator are unable to agree on a third arbitrator within 20 days after their selection, Seller's Arbitrator and Buyer's Arbitrator shall each prepare a list of three independent arbitrators. Seller's Arbitrator and Buyer's Arbitrator shall each have the opportunity to designate as objectionable and eliminate one arbitrator from the other arbitrator's list within ten days after submission thereof, and the third arbitrator shall then be selected by lot from the arbitrators remaining on the lists submitted by Seller's Arbitrator and Buyer's Arbitrator. (d) The arbitrators selected pursuant to Section 10.6(c) shall determine the allocation of the costs and expenses of arbitration. (e) The arbitration shall be conducted in New York City, under the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time, except as otherwise set forth herein or as modified by the agreement of Buyer and Seller. The arbitrators shall conduct the arbitration such that a final result, determination, finding, judgment and/or award (the "Final Determination") is made or rendered as soon as practicable, but in no event later than 120 days after the delivery of the Notice of Arbitration nor later than ten days following completion of the arbitration. The Final Determination shall be made in writing, shall state the basis for such determination and shall be agreed upon and signed by the sole arbitrator or by at least two of the three arbitrators (as the case may be). The Final Determination shall be final and binding on all parties, and there shall be no appeal from or reexamination of the Final Determination, except for fraud, perjury, evident partiality or misconduct by an arbitrator prejudicing the rights of any party and to correct manifest clerical errors. -52- (f) Buyer and Seller may enforce any Final Determination in any state or federal court having jurisdiction over the Dispute. For the purpose of any action or proceeding instituted with respect to any Final Determination, each party hereto hereby irrevocably submits to the jurisdiction of such courts, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or jurisdiction, the laying of the venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding brought in any court has been brought in an inconvenient form. 10.7 Attorneys Fees. In the event any party hereto initiates any legal action arising out of or in connection with this Agreement, the prevailing party shall be entitled to recover from the other party all reasonable attorneys' fees, expert witness fees and expenses incurred by the prevailing party in connection therewith. 10.8 Liability for Transfer Taxes. Buyer and Seller shall each be responsible for and pay in a timely manner 50% of all sales (including, without limitation, bulk sales), use, value added, documentary, stamp, gross receipts, registration, transfer, conveyance, excise, recording, license and other similar Taxes and fees ("Transfer Taxes"), arising out of or in connection with or attributable to the transactions effected pursuant to this Agreement. Each party hereto shall prepare and timely file all Tax Returns required to be filed in respect of Transfer Taxes (including, without limitation, all notices required to be given with respect to bulk sales taxes) that are the primary responsibility of such party under applicable law; provided, however, that such party's -53- preparation of any such Tax Returns shall be subject to the other party's approval, which approval shall not be withheld or delayed unreasonably. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. L-3 COMMUNICATIONS CORPORATION By:_____________________________________ Name: Robert Mehmel Title: Vice President CALIFORNIA MICROWAVE, INC. By:_____________________________________ Name: George L. Spillane Title: Vice President and Secretary -54- EXHIBIT A CROSS-LICENSE AGREEMENT CROSS-LICENSE AGREEMENT dated as of _________________, 1998 (this "Agreement"), between L-3 Communications Corporation, a Delaware corporation ("L-3"), and California Microwave, Inc., a Delaware corporation ("CMI"). RECITALS WHEREAS, L-3 and CMI have entered into that certain Asset Purchase Agreement dated as of December 19, 1997 (the "Purchase Agreement"), in connection with the sale and purchase of the Assets (as defined below) of the Satellite Transmission System Division of CMI (the "STS Division"), which sale and purchase has closed or is closing effective as of the date hereof (the "Closing Date") simultaneously with the execution and delivery of this Agreement; and WHEREAS, effective as of the Closing Date the parties hereto and their respective Subsidiaries currently own or have licenses to use various intellectual property rights heretofore used primarily (in some circumstances) and not primarily (in other circumstances) in connection with the Business (as defined below) of the STS Division; and WHEREAS, the parties hereto have determined that this Agreement is appropriate in order to effectuate the purposes of the Purchase Agreement as described therein, and in order to promote a clear understanding of their respective intellectual property rights subsequent to the Closing Date; NOW, THEREFORE, in consideration of the mutual agreements, undertakings and covenants herein and therein, the sufficiency and receipt of which hereby are acknowledged, the parties hereby agree as follows: ARTICLE I. DEFINITIONS. Section 1.01 General. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" shall have the meaning set forth in the Purchase Agreement. "Agreement" shall have the meaning specified in the first paragraph hereof. "Assets" shall have the meaning set forth in the Purchase Agreement. "Business" shall have the meaning set forth in the Purchase Agreement. "Closing" shall have the meaning set forth in the Purchase Agreement. "Closing Date" shall have the meaning specified in the recitals to this Agreement. "CMI Intellectual Property" shall have the meaning specified in Section 2.02. "Intellectual Property" shall have the meaning set forth in the Purchase Agreement. Notwithstanding the foregoing and for the purposes of this Agreement only, Intellectual Property shall not include: (a) Intellectual Property relating to the GMACS software or to the Universal System Controller; (b) the U.S. patent application serial number No. 08/815,593 filed March 12, 1997 entitled "Wireless Communications Systems Having Fixed and Dynamically Assigned Links" and any right in or to the invention subject thereof throughout the world; or (c) any trademarks, service marks, trade names, trade dress, logos, business and product names, slogans, registrations and applications for registration in respect of any of the intellectual property referred to in either clause (a) or clause (b) above. "L-3 Intellectual Property" shall have the meaning specified in Section 2.01. "Notice" shall have the meaning specified in Section 10.03. "Purchase Agreement" shall have the meaning specified in the recitals to this Agreement. "STS Division" shall have the meaning specified in the recitals to this Agreement. "Subsidiary", shall have the meaning set forth in the Purchase Agreement. -2- "Term" shall have the meaning specified in Section 8.01. ARTICLE II. OWNERSHIP OF INTELLECTUAL PROPERTY ASSETS. Section 2.01. The parties agree that, as a result of the Closing under the Purchase Agreement, L-3 and its Subsidiaries will acquire and own all right, title and interest, including the right to sue and collect past and future damages, in any Intellectual Property which relates primarily to the Business (the "L-3 Intellectual Property"). Section 2.02. The parties agree that, as a result of the Closing under the Purchase Agreement CMI and its Subsidiaries own all right, title and interest, including the right to sue and collect past and future damages, in any Intellectual Property which is being used as of the Closing Date in the operation of the Business but does not constitute Intellectual Property that relates primarily to the Business (the "CMI Intellectual Property"). Section 2.03. The confirmation of ownership of the Intellectual Property rights provided for under Sections 2.01 and 2.02 is subject to all pre-existing third party rights, obligations and restrictions as of the Closing Date. ARTICLE III. INTELLECTUAL PROPERTY LICENSES. Section 3.01. L-3, on behalf of itself and its Subsidiaries, hereby grants as of the Closing Date to CMI and its Subsidiaries a non-assignable, worldwide, fully paid-up, non-exclusive license for the duration of the Term, including the right to grant sublicenses (but such sublicenses may be granted only to Subsidiaries, contractors for whom Licensee is acting as a subcontractor (who will also have the right to sub-license to end-user customers) and end-user customers of Licensee), under the L-3 Intellectual Property, to manufacture, have manufactured, use, offer to sell, and sell, lease, license or otherwise transfer any and all methods, apparatus, processes, compositions and products, and offer and provide any services, in each case in connection with all fields of activity other than the fields of activity of the Business of L-3. Any sublicense permitted hereunder shall not extend beyond the Term. Section 3.02. CMI, on behalf of itself and its Subsidiaries, hereby grants as of the Closing Date to L-3 and its Subsidiaries a non-assignable, worldwide, fully paid-up, non-exclusive license for the duration of the Term, including the right to grant sublicenses (but such -3- sublicenses may be granted only to Subsidiaries, contractors for whom Licensee is acting as a subcontractor (who will also have the right to sub-license to end-user customers) and end-user customers of Licensee), under the CMI Intellectual Property, to manufacture, have manufactured, use, offer to sell, and sell, lease, license or otherwise transfer any and all methods, apparatus, processes, compositions and products, and offer and provide any services, in each case in connection with all fields of activity other than the fields of activity of the business of CMI. Any sublicense permitted hereunder shall not extend beyond the Term. Section 3.03. The rights granted by the parties under Sections 3.01 and 3.02 are subject to all pre-existing third party rights, obligations and restrictions as of the Closing Date. Section 3.04. Each of the parties hereto understands and agrees that, except as otherwise expressly provided, no party hereto is in this Agreement making any representation or warranty whatsoever, including, without limitation, as to title, value or legal sufficiency. The foregoing provisions of this Section shall not, however, limit, modify or impact in any manner whatsoever any of the representations and warranties of CMI or L-3 in the Purchase Agreement, all of which shall remain unaffected hereby. Section 3.05. The rights granted by the parties under Sections 3.01 and 3.02 are limited to the Intellectual Property owned by the parties as of the Closing Date and do not include any intellectual property rights that are acquired or come into existence thereafter. Section 3.06. Except as may be specifically provided for in this Agreement or the Purchase Agreement, the parties agree that no party shall be obligated to provide any technical assistance, or to transfer any technical information or documentation associated therewith, to any other party. ARTICLE IV. UNDERTAKINGS. Section 4.01. To the extent that the grants of Intellectual Property rights and licenses under Article III herein would violate or be prohibited by any agreement with a third party, and such Intellectual Property actually is used by the grantee party, then the granting party undertakes to use reasonable efforts to obtain the necessary consent(s) from such third party so as to be permitted to make such grants. However, each party hereto understands and agrees that no party hereto is, in this Agreement -4- representing or warranting in any way that the obtaining of any consents or approvals, the execution and delivery of any amendatory agreements and the making of any filings or applications, possibly contemplated by this Agreement will satisfy the provisions of any and all applicable agreements or the requirements of any or all applicable laws or judgments. The foregoing provisions of this Section shall not, however limit, modify or impact in any manner whatsoever any of the representations and warranties of CMI or L-3 in the Purchase Agreement, all of which shall remain unaffected hereby. Section 4.02. To the extent a party or its Subsidiaries shall require technical assistance in connection with technology, technical information or software transferred or licensed from another party, then that technical assistance may be provided (but shall not be required to be provided), if at all, pursuant to a separate agreement entered into by the parties pursuant to terms and conditions agreed to by the parties. ARTICLE V. CONFIDENTIALITY. From and after the Closing Date, each party will, and will cause its Subsidiaries to, hold in strict confidence, and will not use to the detriment of the other party or any of such party's Subsidiaries, all information that is licensed pursuant to this Agreement; provided, however, that either party may disclose any of such information to third parties performing services on behalf of the disclosing party who have a need to know such information in order to perform such services and have agreed in writing to maintain the same confidential. Also, each party may disclose such information to contractors or end user customers of such party who have a need to know such information and have agreed in writing to maintain the confidentiality of the same or, in the case of any such disclosure to the U.S. government, if such party has taken all reasonable steps to maintain the confidentiality of the same. Notwithstanding the foregoing, either party may disclose such information (i) by judicial or administrative process or by other requirements of law, (ii) if the same hereafter is in the public domain through no fault of such party, or (iii) if the same is later acquired by such party from another source and the other party is not aware that such source is under an obligation to another Person to keep such information confidential. ARTICLE VI. INFRINGEMENT. Section 6.01. If L-3 determines that a person or entity is infringing on or unlawfully using CMI Intellectual -5- Property, L-3 shall notify CMI. CMI, in its sole discretion, may take all necessary action, including, without limitation, filing suit and enjoining the alleged infringement, at CMI's sole expense; and CMI, as a result thereof, shall retain all damages and other compensation received as a result of taking such actions against such infringement. L-3 shall not take any action in connection with such infringement or unlawful use (including without limitation any action to settle or compromise any such claim, action or proceeding). Section 6.02. If CMI determines that a person or entity is infringing on or unlawfully using L-3 Intellectual Property, CMI shall notify L-3. L-3, in its sole discretion, may take all necessary action, including, without limitation, filing suit and enjoining the alleged infringement, at L-3's sole expense; and L-3, as a result thereof, shall retain all damages and other compensation received as a result of taking such actions against such infringement. CMI shall not take any action in connection with such infringement or unlawful use (including without limitation any action to settle or compromise any such claim, action or proceeding). ARTICLE VII. INDEMNITY. Section 7.01. L-3 agrees to indemnify and hold CMI, its Affiliates and their respective officers, directors, employees and agents, harmless from and against any damages, liabilities, losses and expenses arising out of any claim by any third party, including, without limitation, reasonable attorneys' fees and amounts paid in settlement of any claim, of any kind or nature whatsoever, which may be sustained or suffered as a result of any use by L-3 of CMI Intellectual Property. Section 7.02. CMI agrees to indemnify and hold L-3, its Affiliates and their respective officers, directors, employees and agents, harmless from and against any damages, liabilities, losses and expenses arising out of any claim by any third party, including, without limitation, reasonable attorneys' fees and amounts paid in settlement of any claim, of any kind or nature whatsoever, which may be sustained or suffered as a result of any use by CMI of L-3 Intellectual Property. ARTICLE VIII. TERM AND TERMINATION. Section 8.01. This Agreement shall commence on the Closing Date and shall continue for a period of one year thereafter unless sooner terminated as provided herein (the "Term"). -6- Section 8.02. This Agreement may be terminated by any party with respect to the other party upon written notice to the other party if the other party fails to perform or otherwise breaches in any material respect an obligation under this Agreement; provided, however, that such party failing to perform or otherwise breaching shall have 30 days from the date notice of intention to terminate is received to cure the failure to perform or breach of an obligation. Section 8.03. This Agreement shall terminate automatically without action by either party if any party shall cease or threaten to cease paying its debts when due in the ordinary course or to carry on its business, become insolvent, propose a compromise or arrangement with its creditors or otherwise take advantage of any law for the relief of debtors, a receiver is appointed for any of the other party's assets or any step or proceeding is taken to have the other party declared bankrupt or be liquidated, dissolved, wound up or reorganized. Section 8.04. Termination under this Section 8 will be effected by notice given by the terminating party to the other party, except with respect to a situation described in Section 8.03 where no notice shall be required. Section 8.05. Any termination of this Agreement shall not affect any of the rights of either party hereto which shall have arisen prior to such termination. Section 8.06. Upon termination or expiration of this Agreement, (a) each party's rights with respect to use of the other party's Intellectual Property in any way shall be as if this Agreement had not been entered into, and (b) each party shall cease using the other party's Intellectual Property immediately in any way. ARTICLE IX. MISCELLANEOUS. Section 9.01. Entire Agreement. This Agreement, together with the Purchase Agreement, constitutes the entire agreement and understanding between and among the parties with respect to the subject matter hereof and shall supersede any prior agreements and understandings among the parties with respect to such subject matter. Section 9.02. Counterparts. This Agreement may be executed with counterpart signature pages or in one or more counterparts, all of which shall be one and the same Agreement, and shall become effective when one or more -7- counterparts have been signed by each of the parties and delivered to all the parties. Section 9.03. Notices. All notices, consents, requests, waivers or other communications required or permitted under this Agreement (each a "Notice") shall be in writing and shall be sufficiently given (a) if hand delivered or sent by telecopy, (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to L-3: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Attention: Christopher C. Cambria, Esq. with a copy to: Whitman Breed Abbott & Morgan LLP 200 Park Avenue New York, NY 10166 Attention: James P. Gerkis, Esq. If to CMI: California Microwave, Inc. 555 Twin Dolphin Drive Redwood City, California 94065 Attn: George L. Spillane with a copy to: Richard W. Canady, Esq. Howard, Rice, Nemerovski, Canady, Falk & Rabkin A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111 or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed given upon receipt. Section 9.04. Waivers. The failure of any party to require strict performance by any other party of any provision in this Agreement will not waive or diminish the other party's right to demand strict performance thereafter of that or any other provision hereof. -8- Section 9.05. Amendments. This Agreement may be amended, supplemented or waived only by a subsequent writing signed by each of the parties. Section 9.06. Assignment. This Agreement may not be assigned by any party without the consent of the other parties. Section 9.07. Successors and Assigns. All terms and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 9.08. Subsidiaries. Each of the parties hereto shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that becomes a Subsidiary of such party on and after the Closing Date. Section 9.09. Third Party Beneficiaries. Except with respect to indemnified parties referred to in Article VII, each party intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. Section 9.10. Specific Performance. Each of the parties hereto acknowledges that there is no adequate remedy at law for failure by such parties to comply with the provisions of this Agreement and that such failure would cause immediate harm that would not be adequately compensable in damages, and therefore agree that in the event of a breach or threatened breach of any provision of this Agreement by either party, the other party, may, in addition to all other remedies, immediately obtain and enforce injunctive relief prohibiting the breach or compelling specific performance without the requirement of posting a bond or other security, in addition to all other remedies available to the parties hereto under this Agreement. Section 9.11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER. Section 9.12. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to -9- which it has been held invalid or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby. -10- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. L-3 COMMUNICATIONS CORPORATION By: -------------------------------- Name: Title: CALIFORNIA MICROWAVE, INC. By: -------------------------------- Name: Title: -11- EXHIBIT B TECHNOLOGY LICENSE AGREEMENT TECHNOLOGY LICENSE AGREEMENT dated as of ___________, 1998 (this "Agreement"), between L-3 Communications Corporation, a Delaware corporation ("Licensor"), and California Microwave, Inc., a Delaware corporation ("Licensee"). RECITALS WHEREAS, Licensor and Licensee have entered into that certain Asset Purchase Agreement dated as of December 19, 1997 (the "Asset Purchase Agreement"), in connection with the sale and purchase of certain assets of the Satellite Transmission System Division of Licensee (the "STS Division"), which sale and purchase has closed or is closing as of the date hereof (the "Closing Date") simultaneously with the execution and delivery of this Agreement; and WHEREAS, Licensor wishes to grant to Licensee a license to the Software, the Patent Application and the USC (each as defined below), on the terms and conditions hereof; and WHEREAS, Licensee wishes to acquire a license from Licensor to the Software, the Patent Application and the USC on the terms and conditions hereof; NOW, THEREFORE, in consideration of the mutual agreements, undertakings and covenants herein and therein, the receipt and sufficiency of which hereby are acknowledged, the parties hereby agree as follows: ARTICLE I. DEFINITIONS Section 1.01. General. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Field of Use" shall mean use in satellite earth stations contracted for by the United States Government. "Patent Application" shall mean U.S. patent application serial number No. 08/815,593 filed March 12, 1997 entitled "Wireless Communications System Having Fixed and Dynamically Assigned Links" and any United States patents issued pursuant to such patent application, including any additions, divisions, reissues, continuations or continuations in part, renewals and extensions thereof. "Person" shall mean any natural person, firm, partnership, association, corporation, company, trust, business trust, governmental authority or other entity. "Software" shall mean the current version of the GMACS software (GMACS 16) and related know-how, including source code, object code and associated documentation as distributed by Licensee to its customers on or prior to the Closing Date, and the current version of any software and related know-how, including source code, object code and associated documentation, incorporated in the USC as distributed by Licensee to its customers on or prior to the Closing Date. "Subsidiary" shall mean each corporation or other Person in which Licensee owns or controls, directly or indirectly, capital stock or other equity interests representing at least 50% of the outstanding voting stock or other equity interests. "USC" shall mean the Universal Systems Controller product as distributed by Licensee to its customers on or prior to the Closing Date, but excluding any and all software incorporated therein. ARTICLE II. LICENSE Section 2.01. Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee a non-exclusive, worldwide, perpetual, fully paid-up, nonterminable right and license under any and all patents, copyrights, trade secrets, know-how, and any and all other intellectual property and proprietary rights (i) to copy, support and use the Software within Licensee and its Subsidiaries only (as well as new versions thereof created pursuant to Article IV) in the Field of Use, as well as any documentation relating thereto, and (ii) except for the Software as incorporated in the USC, to make, have made, use, sell, license, lease or otherwise transfer the USC (as well as improvements thereto made under Article IV) in the Field of Use. In addition to the foregoing, and subject to the terms and conditions of this Agreement, Licensor hereby grants to licensee a non-exclusive, worldwide, perpetual, fully paid-up, nonterminable, right and license within the Field of Use under any and all patents, copyrights, trade secrets, know-how, and any and all other intellectual property and proprietary rights (x) to sublicense third parties to use object code versions of the Software and documentation concerning the use thereof, and (y) to sublicense the source code for the Software for internal use by sublicensee and to the extent necessary to enable Licensee or its sublicensee to fulfill its contractual obligations to the U.S. Government in accordance with ordinary and reasonable U.S. Government contracting practices, subject, inter alia, to the restrictions of Article III hereof. Any sublicensee must impose such terms and conditions as Licensor may reasonably specify for protecting its rights in and to the Software, the USC and the Patent Application and shall not be in conflict with this Agreement. Any such sublicense shall be personal to and non-transferable by, the sublicensee. Section 2.02. Pursuant to the license hereunder, and subject, inter alia, to Article III hereof, Licensee, as well as any third party working for or on behalf thereof or permitted sublicensee, may use the Software on any computers, at any location, by any number of users, and on any number of computers at any time. Section 2.03. Subject to the terms and conditions of this Agreement, (including but not limited to Section 2.05 hereof) Licensor hereby grants to Licensee a non-exclusive, perpetual, fully paid-up, non-terminable right and license under the Patent Application to make, have made, use, sell, license, lease or otherwise transfer products covered thereby. Section 2.04. Licensee shall make no use of the Software or the USC, except as expressly permitted by the licenses granted under this Agreement. Section 2.05. None of the rights and licenses granted hereunder to Licensee shall be used in contravention of or to avoid full compliance with the provisions of Section 5.1(f) of the Asset Purchase Agreement. Section 2.06. Licensor extends no right or license under any of its intellectual property or in or to any of its products, services or assets except to the extent as expressly set forth in (a) this Agreement, (b) the Cross-License Agreement of even date herewith between Licensor and Licensee, and (c) the Trademark License Agreement of even date herewith between Licensor and Licensee. Section 2.07. If Licensee determines that a person or entity is infringing or unlawfully using any intellectual property relating to the Software, the USC or the Patent Application, Licensee shall notify Licensor. Licensor, in its sole discretion, may take all necessary action, including, without limitation, filing suit and enjoining the alleged infringement, at Licensor's sole expense; and Licensor, as a result thereof, shall retain all -3- damages and other compensation received as a result of taking such actions against such infringement. Licensee shall not take any action in connection with such infringement or unlawful use (including without limitation any action to settle or compromise any such claim, action or proceeding). ARTICLE III. NONDISCLOSURE Licensee shall maintain the source code for the Software confidential, and shall not disclose such source code to any third party except (i) for third parties performing services on behalf of Licensee who have a need to know such source code in order to perform such services and have agreed in writing to maintain the same confidential, (ii) for contractors with respect to which Licensee is acting as subcontractor who have a need to know such source code in order to perform services for the U.S. Government and have agreed in writing to maintain the confidentiality of the same, (iii) for the U.S. Government, as may be required by U.S. government procurement regulations so long as Licensee takes all reasonable steps to maintain the confidentiality of the same or (iv) as may be required under software escrow arrangements required by such contractors or the U.S. Government so long as Licensee takes all reasonable steps to maintain the confidentiality of the same. ARTICLE IV. RIGHT TO MODIFY THE SOFTWARE AND USC Subject to the terms and conditions of this Agreement, Licensee shall have the right within the Field of Use, in its sole discretion, either by itself or by a third party, to make improvements to the USC, and to create new versions of the Software. Any such improvements to the USC and any such new versions of the Software made by Licensee after the execution of this Agreement shall be owned exclusively by Licensee, and Licensor shall have no right therein. ARTICLE V. REPRESENTATIONS AND WARRANTIES Neither party makes any representations or warranties under this Agreement, whether express or implied, except for those representations and warranties made in the Asset Purchase Agreement which are incorporated herein by reference in their entirety. ARTICLE VI. GMACS AND USC TRADEMARKS Licensee acknowledges that Licensor is the sole owner of the GMACS and USC trademarks throughout the world and shall make no use thereof or of any trademark, trade name, service mark or other designation confusingly similar -4- thereto anywhere in the world, except as expressly provided in the Trademark License Agreement entered into between Licensor and Licensee concurrently herewith. ARTICLE VII. INDEPENDENT CONTRACTORS The parties hereto are acting as independent contractors in connection with this Agreement and nothing herein shall be deemed to cause this Agreement to create an agency, partnership or joint venture between the parties. ARTICLE VIII. INDEMNIFICATION Licensee acknowledges that the Software, the USC and the invention that is the subject of the Patent Application were designed and developed by its STS Division prior to the Closing Date. Licensee agrees to indemnify and hold Licensor, its Affiliates and their respective officers, directors, employees and agents, harmless from and against any damages, liabilities, losses and expenses, (including, without limitation, reasonable attorneys' fees) and amounts paid in settlement of any claim, of any kind or nature whatsoever, which may be sustained or suffered as a result of any cause of action, claim, demand, suit or proceeding asserted by Licensee or any third party that relates to or arises from any manufacture, use, sale, lease, license or other transfer by Licensee, any Affiliate or sublicensee of Licensee or any transferee from Licensee, such Affiliate or such sublicensee, of the USC, the Software or any product or method relating to the Patent Application (including, without limitation, processing, packaging, distribution, or advertising of any thereof). ARTICLE IX. ENTIRE AGREEMENT This Agreement constitutes the entire agreement and understanding between and among the parties with respect to the subject matter hereof and shall supersede any prior agreements and understandings, whether written or oral, among the parties with respect to such subject matter. ARTICLE X. COUNTERPARTS This Agreement may be executed with counterpart signature pages or in one or more counterparts, all of which shall be one and the same Agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to all the parties. ARTICLE XI. NOTICES All notices, consents, requests, waivers or other communications required or permitted under this Agreement -5- (each a "Notice") shall be in writing and shall be sufficiently given (a) if hand delivered or sent by telecopy, (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to Licensor: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Attention: Christopher C. Cambria, Esq. with a copy to: Whitman Breed Abbott & Morgan LLP 200 Park Avenue New York, NY 10166 Attention: James P. Gerkis, Esq. If to Licensee: California Microwave, Inc. 555 Twin Dolphin Drive Redwood City, California 94065 Attn: George L. Spillane with a copy to: Richard W. Canady, Esq. Howard, Rice, Nemerovski, Canady, Falk & Rabkin A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111 or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed given upon receipt. ARTICLE XII. WAIVERS The failure of any party to require strict performance by any other party of any provision in this Agreement will not waive or diminish the first party's right to demand strict performance thereafter of that or any other provision hereof. ARTICLE XIII. AMENDMENTS -6- This Agreement may be amended, supplemented or waived only by a subsequent writing signed by each of the parties. ARTICLE XIV. HEADINGS Headings used in this Agreement are for reference purposes only and shall not be deemed a part of this Agreement. ARTICLE XV. SUCCESSORS AND ASSIGNS All terms and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and assigns of the parties. ARTICLE XVI. THIRD PARTY BENEFICIARIES Each party intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. ARTICLE XVII. SPECIFIC PERFORMANCE Each of the parties hereto acknowledges that there is no adequate remedy at law for failure by such parties to comply with the provisions of this Agreement and that such failure would cause immediate harm that would not be adequately compensable in damages, and therefore agree that, in the event of a breach or threatened breach of any provision of this Agreement by either party, the other party, may, in addition to all other remedies, immediately obtain and enforce injunctive relief prohibiting the breach or compelling specific performance without the requirement of posting a bond or other security, in addition to all other remedies available to the parties hereto under this Agreement. ARTICLE XVIII. GOVERNING LAW THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER. ARTICLE XIX. SEVERABILITY If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held -7- invalid or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby. ARTICLE XX. ASSIGNMENT Licensee may not assign this Agreement or any of the licenses granted hereby without the prior written consent of Licensor; provided, however, that, in case of any partial assignment of this Agreement relating solely to GMACS or the USC, such consent shall not be unreasonably withheld. Licensor may assign this Agreement to any person in Licensor's sole discretion. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. L-3 COMMUNICATIONS CORPORATION By: -------------------------------- Name: Title: CALIFORNIA MICROWAVE, INC. By: -------------------------------- Name: Title: -8- EXHIBIT C TRADEMARK LICENSE AGREEMENT Trademark License Agreement dated as of _________, 1998 (this "Agreement"), between L-3 Communications Corporation, a Delaware corporation ("Licensor"), and California Microwave, Inc., a Delaware corporation ("Licensee"). RECITALS WHEREAS, Licensee and Licensor have entered into that certain Asset Purchase Agreement dated as of December 19, 1997 (the "Purchase Agreement"), in connection with the sale and purchase of certain assets of the Satellite Transmission System Division of Licensor (the "STS Division"), which sale and purchase has closed or is closing as of the date hereof (the "Closing Date") simultaneously with the execution and delivery of this Agreement; WHEREAS, the STS Division has for many years used the trademark GMACS in connection with the GMACS Product (as defined below); WHEREAS, the STS Division has for many years used the trademark USC in connection with the USC Product (as defined below); WHEREAS, the Government Electronics Division of Licensee has distributed the GMACS Product and the USC Product for use in satellite earth stations contracted for by the United States Government (the "CMI Market"); WHEREAS, Licensee wishes to use the mark GMACS within the CMI Market from and after the Closing Date for a reasonable period of time to permit a transition to a replacement mark which does not include the formative GMACS; and WHEREAS, Licensee wishes to use the mark USC within the CMI Market from and after the Closing Date for a reasonable period of time to permit a transition to a replacement mark which does not include the formative USC; NOW, THEREFORE, in consideration of the mutual agreements, undertakings and covenants herein and therein, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereby agree as follows: ARTICLE I. DEFINITIONS Section 1.01. General. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" shall have the meaning set forth in the Purchase Agreement. "Agreement" shall have the meaning set forth in the first paragraph hereof. "Closing Date" shall have the meaning specified in the recitals to this Agreement. "CMI Market" shall have the meaning set forth in the recitals to this Agreement. "GMACS Product" shall mean the current version of GMACS (GMACS 16) software as distributed by Licensee to its customers on or before the Closing Date. "Notice" shall have the meaning specified in Section 10.03. "Purchase Agreement" shall have the meaning specified in the recitals to this Agreement. "STS Division" shall have the meaning specified in the recitals to this Agreement. "Trademarks" shall mean the GMACS and USC trademarks. "USC Product" shall mean the Universal Systems Controller product as distributed by Licensee to its customers on or before the Closing Date. ARTICLE II. LICENSE Section 2.01. Licensor hereby grants to Licensee, on the terms and conditions set forth herein, a non-exclusive, worldwide, fully-paid-up license (a) to use the trademark GMACS in connection with the promotion and distribution of the GMACS Product, and (b) to use the trademark USC in connection with the promotion and distribution of the USC Product. Section 2.02. Licensee and its Affiliates shall not use, and shall not permit the use of any Trademark outside the CMI Market. -2- Section 2.03. Licensee shall only use the Trademarks in connection with products adhering to Licensor's quality standards, which may be modified by Licensor from time to time in its sole discretion. Licensee shall only use the Trademarks in a manner as approved by Licensor, which may be modified by Licensor from time to time in its sole discretion. Licensee recognizes the high reputation of the GMACS Product and the USC Product and that it is essential to Licensor's interests that Licensor's quality standards be maintained at all times. Section 2.04. Licensee will use the Trademarks strictly in compliance with applicable legal requirements and will use such markings in connection therewith as may be required for such compliance. Section 2.05. Licensor may terminate this Agreement due to a material breach by Licensee. For purposes of this Agreement, "material breach" by Licensee shall include but shall not be limited to (a) any failure to observe Licensor's quality standards, and (b) any use of the Trademarks other than a use approved by Licensor. Section 2.06. (a) Within a reasonable period of time following the Closing Date (and in any event by thirty (30) days thereafter), Licensee will adopt a mark not including the formative GMACS or any word or symbol confusingly similar thereto to replace the GMACS mark. Notwithstanding the foregoing, neither Licensee nor any Affiliate thereof shall use or permit the use of the GMACS mark or of any trademark, service mark or trade name including the formative GMACS or any word or symbol confusingly similar thereto anywhere in the world after the date that is 180 days after the Closing Date. (b) Within a reasonable period of time following the Closing Date, (and in any event by thirty (30) days thereafter), Licensee will adopt a mark not including the formative USC or any word or symbol confusingly similar thereto to replace the USC mark. Notwithstanding the foregoing, neither Licensee nor any Affiliate thereof shall use or permit the use of the USC mark or of any trademark, service mark or trade name including the formative USC or any word or symbol confusingly similar thereto anywhere in the world after the date that is 180 days after the Closing Date. Section 2.07. The parties agree that, subject to the rights of Licensee hereunder, the GMACS and USC trademarks are and shall be owned exclusively by Licensor and Licensee will execute and deliver such instruments of title as Licensor may request to confirm such ownership by Licensor. Any and all use of the Trademarks by Licensee shall inure to the benefit of Licensor. -3- Section 2.08. None of the rights and licenses granted hereunder to Licensee shall be used in contravention of or to avoid full compliance with the provisions of Section 5.1(f) of the Purchase Agreement. Section 2.09. If Licensee determines that a person or entity is infringing or unlawfully using the GMACS mark, the USC mark or any trademark, service mark or trade name confusingly similar thereto, Licensee shall notify Licensor. Licensor, in its sole discretion, may take all necessary action, including, without limitation, filing suit and enjoining the alleged infringement, at Licensor's sole expense; and Licensor, as a result thereof, shall retain all damages and other compensation received as a result of taking such actions against such infringement. Licensee shall not take any action in connection with such infringement or unlawful use (including without limitation any action to settle or compromise any such claim, action or proceeding). Section 2.10. Neither party makes any representations or warranties under this Agreement (it being understood and agreed that any representations and warranties relating to the subject matter of this Agreement are made in the Purchase Agreement). ARTICLE III. INDEMNIFICATION Licensee acknowledges that the GMACS Product and the USC Product were designed and developed by its STS Division prior to the Closing Date. Licensee agrees to indemnify and hold Licensor, and its officers, directors, affiliates, employees and agents, harmless from and against any damages, liabilities, losses and expenses, (including, without limitation, reasonable attorneys' fees) and amounts paid in settlement of any claim, of any kind or nature whatsoever, which may be sustained or suffered as a result of any use by Licensee of the Trademarks (including, without limitation, whether by manufacturing, processing, packaging, distribution, sale or advertising) ARTICLE IV. MISCELLANEOUS Section 4.01. Entire Agreement. This Agreement, together with the Purchase Agreement, constitutes the entire agreement and understanding between and among the parties with respect to the subject matter hereof and shall supersede any prior agreements and understandings among the parties with respect to such subject matter. Section 4.02. Counterparts. This Agreement may be executed with counterpart signature pages or in one or more counterparts, all of which shall be one and the same Agreement, and shall become effective when one or more counterparts have -4- been signed by each of the parties and delivered to all the parties. Section 4.03. Notices. All notices, consents, requests, waivers or other communications required or permitted under this Agreement (each a "Notice") shall be in writing and shall be sufficiently given (a) if hand delivered or sent by telecopy, (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to Licensor: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Attention: Christopher C. Cambria, Esq. with a copy to: Whitman Breed Abbott & Morgan LLP 200 Park Avenue New York, NY 10166 Attention: James P. Gerkis, Esq. If to Licensee: California Microwave, Inc. 555 Twin Dolphin Drive Redwood City, California 94065 Attn: George L. Spillane with a copy to: Richard W. Canady, Esq. Howard, Rice, Nemerovski, Canady, Falk & Rabkin A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111 or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed given upon receipt. Section 4.04. Waivers. The failure of any party to require strict performance by any other party of any provision in this Agreement will not waive or diminish the other party's right to demand strict performance thereafter of that or any other provision hereof. Section 4.05. Amendments. This Agreement may be amended, supplemented or waived only by a subsequent writing signed by each of the parties. -5- Section 4.06. Successors and Assigns. All terms and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 4.07. Subsidiaries. Each of the parties hereto shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that becomes a Subsidiary of such party on and after the Closing Date. Section 4.08. Third Party Beneficiaries. Each party intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. Section 4.09. Specific Performance. Each of the parties hereto acknowledges that there is no adequate remedy at law for failure by such parties to comply with the provisions of this Agreement and that such failure would cause immediate harm that would not be adequately compensable in damages, and therefore agree that in the event of a breach or threatened breach of any provision of this Agreement by either party, the other party, may, in addition to all other remedies, immediately obtain and enforce injunctive relief prohibiting the breach or compelling specific performance without the requirement of posting a bond or other security, in addition to all other remedies available to the parties hereto under this Agreement. Section 4.10. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER. Section 4.11. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby. -6- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. L-3 COMMUNICATIONS CORPORATION By: -------------------------------- Name: Title: CALIFORNIA MICROWAVE, INC. By: -------------------------------- Name: Title: -7- EXHIBIT D STS SUPPLY AGREEMENT THIS STS SUPPLY AGREEMENT (this "Agreement") is dated ____________ __, 1998 and is entered into between California Microwave, Inc., a Delaware corporation ("CMI"), and L-3 Communications Corporation, a Delaware corporation ("L-3"). RECITALS A. CMI and L-3 have entered into an asset purchase agreement dated as of December 19, 1997 (the "Purchase Agreement") with respect to the acquisition by L-3 from CMI of certain assets of the business of designing, integrating and installing satellite communications systems in the United States and certain other countries (such business is the "STS Division"). B. CMI and L-3 each desire to continue at favored customer prices certain supply arrangements currently in effect between the STS Division of CMI, on the one hand, and other subsidiaries and divisions of CMI, on the other hand, after the date of closing (the "Closing Date") of the purchase by L-3 of the assets of CMI contemplated by the Purchase Agreement. NOW THEREFORE, as a condition to the closing of the transactions contemplated by the Purchase Agreement, and in consideration of the mutual covenants, representations and warranties made herein, and of the mutual benefits to be derived hereby, the parties hereto agree as follows: 1. Supply of Products by CMI. Upon the terms and subject to the conditions hereof, for two years from the Closing Date, CMI shall, or shall cause its subsidiaries (including EF Data Corp. ("EF Data")) to, sell to L-3, and L-3 shall purchase from CMI and/or its subsidiaries the following products and subassemblies (the "STS Products") needed in operating the STS Division's business after the Closing Date that CMI or EF Data currently supplies to the STS Division: satellite communications modems, codecs, transceivers, converters, Verticom "brick" converter modules (the "Brick Modules"), the ICU-64 Channel Unit for LYNXX (the "LYNXX"), the PL/5617-1 Modulator card for PROGENY (the "Card") (the Brick Modules, the LYNXX and the Card are the "Source Products") and network products. Without limiting the obligation of L-3 to purchase STS Products under the preceding sentence, the quantities of STS Products to be purchased by L-3 pursuant to this Section shall be at the sole discretion of L-3 and no minimum quantities of STS Products are required to be purchased hereunder, Notwithstanding the preceding two sentences, if CMI provides written notice to L-3 specifying any STS Products subject to this Section that CMI intends to discontinue making or selling, CMI will be relieved of any obligation to sell to L-3 any such product as of one year from the date that CMI so notifies L-3. -1- 2. Provision of Services by L-3. For two years from the Closing Date, CMI shall exclusively engage L-3 to provide the following services (the "Services") to CMI for the benefit of CMI's customers that have requested CMI to arrange for the procurement of satellite communications system engineering and/or satellite communications systems integration services for commercial (ie, non-U.S. government) projects or for foreign governmental authorities projects: system design, integration, installation and/or program management. Without limiting the obligation of CMI to purchase the Services under the preceding sentence, the quantities of Services to be purchased by CMI pursuant to this Section shall be at the sole discretion of CMI and no minimum quantities of Services are required to be purchased hereunder. Notwithstanding the preceding two sentences, if L-3 provides written notice to CMI specifying any Services subject to this Section that L-3 intends to discontinue providing, L-3 will be relieved of any obligation to provide to CMI any such Services as of one year from the date that L-3 so notifies CMI. 3. SIVAM Project. (a) It is the understanding of the parties that in connection with the SIVAM project proposals, as currently proposed or as may otherwise be amended (the "SIVAM Proposals"), L-3 shall have exclusive access to and communication with Raytheon Corporation ("Raytheon"), whether oral or written, exclusive of CMI or any of its subsidiaries (including, without limitation, CMI's Microwave Networks division (the "MN Division"), CMI's Microwave Data Systems division ("Data Systems") and EF Data, with respect to or in connection with the SIVAM Project including, without limitation, any proposal, discussion, marketing, negotiation, pricing, settlement, procurement, arrangement or understanding with respect to the SIVAM Project. (b) From the Closing Date to December 31, 1998 (the "Supply Period"), CMI shall, and shall cause its subsidiaries (including EF Data) to, deliver to L-3 the products specified in the SIVAM Proposals (the "SIVAM Products") in accordance with the quantities, product specifications and time period proposed by such divisions in the SIVAM Proposals, and L-3 shall purchase, during such Supply Period, the SIVAM Products from such divisions or subsidiaries in accordance with the SIVAM Proposals, provided that: (i) CMI accepts the terms and conditions of and performs its duties under, as subcontractor to L-3, the contract or agreement awarded by Raytheon to L-3 for the SIVAM Project, including, without limitation, payments made under a vendor trust arrangement generally required by Raytheon; and (ii) the pricing for each SIVAM Product quoted by CMI (including EF Data, the MN Division and Data Systems) is competitive with, and in no event more than 5% above, any proposal made in good faith by a legitimate party which seeks to sell such SIVAM Product to L-3 and which agrees to perform the duties and obligations as a subcontractor to L-3 under -2- the SIVAM Project with respect to such Product. In the event that L-3 is permitted to purchase a SIVAM Product from a party other than CMI or EF Data pursuant to this clause (ii) because that product has not met the conditions set forth in this clause (ii), L-3 will remain obligated to purchase from CMI all of the other SIVAM Products so long as those products meet the conditions in this clause (ii) and clause (i) above and subject to the other terms and conditions hereof. As used herein, the term "Product" shall mean a STS Product or a SIVAM Product. 4. Prices. (a) Source Products. CMI shall sell (or cause its subsidiaries to sell) each Source Product to L-3 at the unit price (the "Unit Price") listed for such Source Products on Schedule 4(a) attached hereto. The prices set forth in Schedule 4(a) are not subject to increase during the first six months from the Closing Date. Thereafter, CMI, or its subsidiaries, may increase such prices, except that in no event shall (i) the Unit Price of any Source Product be less favorable than the unit price given to other customer for such Source Product in like quantities and (ii) any such increase in price increase the gross margin percentage of CMI or its subsidiaries with respect to such Source Product from its current gross margin percentage thereon. Upon L-3's written request, CMI will provide L-3 with reasonable access during normal business hours to the books and records of CMI and its subsidiaries for the sole purpose of verifying the gross margin percentages with respect to the Source Products. (b) STS Products. CMI shall sell (or cause its subsidiaries to sell) the STS Products, other than the Source Products, at prices no less favorable than the prices given to other customers of such products in like quantities. (c) Services. L-3 shall provide the Services to CMI at prices no less favorable than the prices given to other customers of such Services in like quantities. 5. Additional Terms and Conditions. (a) CMI Terms and Conditions. Any sale of the STS Products by CMI or any of its subsidiaries under this Agreement shall be subject to and governed by the then-current standard terms and conditions (including as to warranty) of CMI (or its subsidiaries), which terms and conditions shall be no less favorable that those given to other customers for the same or similar products. (b) L-3 Terms and Conditions. Any sale of the Services by L-3 under this Agreement shall be subject to and governed by the then-current standard terms and conditions (including as to warranty) of L-3, which terms -3- and conditions shall be no less favorable that those given to other customers for the same or similar services. 6. Specifications. CMI shall, or cause its subsidiaries to, manufacture and deliver the STS Products in accordance with the electrical, mechanical, physical, environmental and other specifications as in effect as of the Closing Date, or if the STS Product is a non-standard product, then according to the specifications agreed to in writing by L-3 and CMI from time to time. In the event an improvement or a technical change in the specifications of the STS Products is made by CMI, CMI shall be required to provide the STS Products which meet such improved or changed specifications; provided, however, that no such improvement or change in specifications shall be made to LYNXX without the prior written consent of L-3. CMI shall, or cause its subsidiaries to, manufacture and deliver the SIVAM Products to L-3 in accordance with the specifications therefor in the SIVAM Proposals. 7. Maintenance of Standards. If CMI fails to maintain the quality, delivery or performance standards currently applicable to the Products, or fails to achieve standards of quality or performance specified by CMI with respect to new variations of the standard Products, then L-3 shall have such remedies as may be provided in the then-current standard terms and conditions of CMI, and, if CMI fails to cure any such deficiency in any Product within 60 days after written notice thereof by L-3, L-3 shall no longer be obligated to purchase such Product pursuant to this Agreement. 8. Ordering. Each order by L-3 for STS Products (a "Purchase Order") will specify the STS Products, the quantity, the appropriate specifications corresponding to such STS Products (if necessary), and the date of delivery, provided that the number of days from the date of the Purchase Order through the date of delivery is at least 60 days. Notwithstanding the foregoing, the parties hereafter may agree in writing to use a blanket purchase agreement with specific agreed call out schedules in lieu of the foregoing ordering mechanism. Orders by L-3 for SIVAM Products shall be made in accordance with the SIVAM Proposals. 9. Delivery. (a) All STS Products will be delivered freight paid F.O.B. (CMI's (or its subsidiary's) plant). (b) L-3 reserves the right to inspect the STS Products and to confirm the quantity of the STS Products within 30 days from the date of delivery. Any claims for discrepant deliveries shall be reported by L-3 to CMI in writing within such 30-day period. If L-3 fails to make such a claim within the time specified, such order will be deemed accepted by L-3. Upon CMI receiving notice from L-3 of such discrepancy, L-3 will have such remedies as may be provided in the then-current standard terms and conditions of CMI. -4- (c) CMI undertakes to keep L-3 promptly and regularly informed of difficulties that CMI expects in meeting L-3's needs for delivery in accordance with lead time(s) stated in any Purchase Order. (d) CMI shall deliver the SIVAM Products in accordance with the SIVAM Proposal. 10. Raw and Packaging Materials. CMI will purchase and supply all raw materials and packaging materials necessary for the manufacture of the STS Products. CMI will be responsible for the sampling and testing of all such raw materials and packaging materials and for ensuring an adequate inventory of such raw materials and packaging materials to supply the STS Products. 11. Terms of Sale. With respect to any Products or Services sold hereunder, the selling party will invoice the other party at the time of delivery or provision. Each invoice will be itemized in reasonable detail. The non-selling party will pay to the selling party the amount of such invoice within 60 days of the date of such invoice. 12. Confidentiality. Each party will preserve the confidentiality of the other party's Confidential Information (defined below), will not use same except in connection with the performance of its obligations hereunder, and will return same upon request by the other party. This Section will survive expiration or earlier termination of this Agreement for a period of three years thereafter. "Confidential Information" means all proprietary information (including but not limited to formulas, compilations, data, know-how, specifications, techniques, inventions, devices, projections, drawings and plans, whether of a technical, operational, financial or other nature) which hereafter is, or in the past has been, disclosed in writing and marked as confidential by either party (the "Disclosing Party") to the other party (the "Receiving Party"), and which is of such a nature that its value would be impaired if disclosed to third parties, but shall not include any such information that: (i) becomes part of the public domain through no fault of the Receiving Party; (ii) at the time of receipt is known to the Receiving Party as shown by its written records; (iii) becomes known to the Receiving Party from another source and the Receiving Party is not aware that such source is under an obligation to another Person to keep such information confidential; or (iv) is required to be disclosed by the Receiving Party as a result of judicial or administrative process or by other requirements of law. 13. Indemnity. (a) With respect to any Products or Services sold hereunder, the selling party agrees to indemnify and hold the other party and its affiliates and their respective officers, directors, employees and agents, harmless from and against any damages, liabilities, losses, expenses, (including, without limitation, reasonable attorneys' fees) and amounts paid in settlement of any claim, of any kind or nature whatsoever, which may be sustained or suffered as a result of the infringement or alleged infringement of the copyrights or -5- U.S. patents of third parties or the breach by CMI of its represention in the fourth sentence of Section 3.16 of the Purchase Agreement, and to defend, at its expense, any actions, claims or suits against purchasing party based upon such infringement or alleged infringement. If the use of any products furnished hereunder is enjoined as a result of such a suit, the selling party at its option, and at no expense to the other party, shall obtain for the other party the right to use said products, substitute an equivalent product reasonably acceptable to selling party and extend this indemnity thereto, or accept the return of products and reimburse the other party the purchase price thereof, less a charge for reasonable wear and tear. This indemnity does not extend to any suit based upon any infringement or alleged infringement of any patent or copyright to the extent due to the combination of any products furnished by the selling party and other elements not supplied by or on behalf of the selling party nor does it extend to any products to the extent such products infringe as a result of the other party's design or formula. (b) The purchasing party agrees to notify the selling party in writing of any suit. At its request and at its expense the selling party shall have the right to control the defense of said suit. Except with the prior written consent of the purchasing party, no selling party, in the defense of any such claim or litigation, shall consent to entry of any judgment or enter into any settlement that provides for injunctive or other nonmonetary relief affecting the purchasing party or that does not include as an unconditional term thereof the giving by each claimant or plaintiff to such purchasing party of a release from all liability with respect to such claim or litigation. In the event that the purchasing party shall in good faith determine that the conduct of the defense of any claim subject to indemnification hereunder or any proposed settlement of any such claim by the selling party might be expected to affect adversely the purchasing party's tax liability or the ability of the purchasing party to conduct its business, or that the purchasing party may have available to it one or more defenses or counterclaims that are inconsistent with one or more of those that may be available to the selling party in respect of such claim or any litigation relating thereto, the purchasing party shall have the right at all times to take over and assume control over the defense, settlement, negotiations or litigation relating to any such claim at the sole cost of the selling party, provided that if the purchasing party does so take over and assume control, the purchasing party shall not settle such claim or litigation without the written consent of the selling party, such consent not to be unreasonably withheld. In the event that the selling party does not accept the defense of any matter as above provided, the purchasing party shall have the full right to defend against any such claim or demand and shall be entitled to settle or agree to pay in full such claim or demand. In any event, the selling party and the purchasing party shall cooperate in the defense of any claim or litigation subject to this Section and the records of each shall be available to the other with respect to such defense. (c) The foregoing Sections 13(a) and (b) state the entire liability of the selling party for patent or copyright infringement. This Section will survive the expiration or earlier termination of this Agreement. -6- 14. Term. This Agreement shall commence on the date first set forth above and shall expire on the second anniversary of the Closing Date unless earlier terminated pursuant to Section 15. 15. Termination. (a) Either party may terminate this Agreement for any material breach of this Agreement by the other party if the party seeking to terminate has specified such breach in writing and such breach has not been cured by the breaching party within thirty (30) days after receipt of the written notice. (b) Termination under this Section will be effected by notice given by the terminating party to the other party. (c) Any termination of this Agreement will not affect any of the rights of either party hereto that arose prior to such termination or any liability resulting from either party's breach of this Agreement. 16. Consequences of Termination. Upon expiration or earlier termination of this Agreement, each party will promptly return to the other all documents, samples and other tangible items containing or representing Confidential Information and all copies thereof, and certify, if requested by the other party, that it has complied with the terms of this sentence. This Section will survive expiration or earlier termination of this Agreement. 17. Sales Convey No Right to Manufacture or Copy. The Products and Services offered for sale hereunder are offered for sale and are sold by each party subject in every case to the condition that such sale does not convey any license, expressly or by implication, to manufacture, duplicate or otherwise copy or reproduce any of the Products or Services, unless expressly provided in such sale. 18. Export Control Compliance. Each party agrees to comply fully with the United States Export Control Administration Regulations, the United States Department of State International Traffic in Arms Regulations and any other United States government regulations applicable to the export or disclosure of Products or Services provided hereunder or Confidential Information hereunder insofar as they may control or limit the sale or use of Products or Services. Each party also agrees to comply fully with the United States Foreign Corrupt Practices Act. 19. Force Majeure. Except for either party's payment obligations to the other party for Products or Services previously delivered or provided hereunder, failure of either party to perform its obligations under this Agreement (including but not limited to failure to make sales or deliveries of Products or Services) shall be excused to the extent that such failure is attributable to any cause beyond the reasonable control of the defaulting party, including, without limitation, acts of God, fires, earthquakes, wars, sabotage, accidents, embargo, riots, labor disputes, actions of any government or -7- governmental agency or failure of same to act where action is required, and the inability of such party to obtain material from its suppliers or to obtain equipment or transportation; and the time during which such party may perform will be extended to coincide with the time performance has been prevented, hindered or delayed as a result of the foregoing. Should either party wish to claim relief from its obligations hereunder by reason of this Section, such party shall give notice to the other party without delay of the occurrence of the event or circumstances in question. 20. Governing Law. This Agreement shall be governed in all respects, including as to validity, interpretation and effect, by the internal laws of the State of New York, without giving effect to the conflict of laws rules thereof. The parties hereby agree that this Agreement shall not be governed by the United Nations Convention on Contracts for the International Sale of Goods. 21. Assignment. The Agreement shall not be assignable or otherwise transferable by either party hereto without the prior written consent of the other party, which consent will not be unreasonably withheld. This Agreement will bind and inure to the benefit of the successors and permitted assigns of the parties hereto. References to a party herein also are deemed to be references to any successor or permitted assign of such party. 22. Notices. All notices, consents, approvals, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by facsimile transmission or telegram. if to L-3, to L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Facsimile: 212/805-5494 Attn: Christopher C. Cambria if to CMI, to California Microwave, Inc. 555 Twin Dolphin Drive Redwood City, California 94065 Facsimile:650/596-6682 Attn: George L. Spillane or, in each case, at such other address as may be specified in writing to the other parties hereto. -8- All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by facsimile or telegram, on the next day following the day on which such facsimile or telegram was sent, provided that a copy is also sent by certified or registered mail. 23. Certain Definitions. All capitalized terms used herein and not defined in this Section shall have the meanings assigned to them herein. When used herein, the following terms shall have the meaning specified below: "include" and "including" shall be construed as if followed by the phrase "without being limited to", "Person" means an individual, a corporation, a joint venture, a partnership, a firm, an association, a limited liability company, a business trust or any other legal entity or any governmental authority or instrumentality. 24. General. (a) It is agreed that each of parties hereto is acting as an independent contractor and nothing contained in this Agreement shall be construed to constitute either as a partner, agent or employee of the other. Neither party is authorized to act for or bind the other except as specifically provided herein. (b) The failure of a party at any time to require performance by the other party of any provision hereof shall in no way affect the right of the party thereafter to enforce same against the other party, nor shall waiver by either party of the breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or as a waiver of the provision itself or as a waiver of a breach of any other provision. (c) If any term or provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, such provisions will be narrowed (or deleted, if necessary) to the minimum extent necessary to make it and the rest of this Agreement enforceable, (d) This Agreement or any provision hereof may not be changed, waived, discharged or terminated orally, but only by a statement in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. (e) This Agreement and the Purchase Agreement constitute the entire agreement between the parties relating to the subject matter hereof and supersede all prior and contemporaneous agreements and understandings of -9- the parties relating thereto. The terms of this Agreement may not be modified except by a writing signed by both of the parties. (f) This Agreement may be executed with counterpart signature pages or in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, (g) The agreements that comprise this Agreement, the Purchase Agreement and any terms and conditions of either party that apply to a sale of products or services hereunder shall have the following order of priority in the event of a conflict between any of them: (i) the Purchase Agreement, (ii) this Agreement and (iii) the terms and conditions of the selling party then in effect with respect to such sale, (h) The headings contained in this Agreement are inserted for reference only and shall not be used to aid in the construction hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. L-3 Communications Corporation By: ---------------------------------- Name: Title: California Microwave, Inc. By: ---------------------------------- Name: Title: -10- SOURCE PRODUCTS PRICE LIST (Schedule 4a) Description STS/PN Quantity Pricing - ----------- ------ -------- ------- ICU 64 Channel Unit 01070-00714 Any $5,500.00 EF Data Modulator, Progeny, XP 01070-A71224-1 Any $5,500.00 EF DATA Not-to-exceed Ku-Band Modulator "Brick" 01070-A68551-1 1-9 (A) VERTICOM 10-24 25-49 50 C-Band U/C 70Mhz "Brick" 01070-A69532-1 1-9 (A) VERTICOM 10-24 25-49 50 (A) To be purchased by L-3 directly from Verticom with EF Data's consent and with EF Data agreeing to arrange with Verticom for L-3 to make such direct purchases. -11- EX-10.81 3 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT BETWEEN FAP TRUST AND L-3 COMMUNICATIONS CORPORATION FEBRUARY 10, 1998 TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS ............................. 1 ARTICLE II PURCHASE AND SALE .......................... 6 II.1 Purchase and Sale ........................................ 6 II.2 Cash Purchase Price ...................................... 6 II.3 Adjustment of Cash Purchase Price ........................ 7 II.4 Post-Closing Payment ..................................... 8 II.5 Dispute Resolution ....................................... 11 II.6 Closing .................................................. 12 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER ............... 13 III.1 Due Organization of Seller ............................... 13 III.2 Requisite Consents; Nonviolation ......................... 13 III.3 Due Organization of the Company .......................... 14 III.4 Acquired Assets .......................................... 14 III.5 Subsidiaries, etc ........................................ 14 III.6 Financial Data ........................................... 14 III.7 No Material Changes ...................................... 14 III.8 Undisclosed Liabilities .................................. 15 III.9 Governmental Authorizations; Compliance with Law ......... 15 III.10 Litigation ............................................... 16 III.11 Employee Benefit Plans ................................... 16 III.12 Intellectual Property .................................... 17 III.13 Real and Personal Property ............................... 18 III.14 Insurance ................................................ 19 III.15 Tax Matters .............................................. 19 III.16 Environmental Matters .................................... 20 III.17 Contracts ................................................ 21 III.18 Inventory ................................................ 22 III.19 Accounts Receivable ...................................... 22 III.20 Condition of Plant and Equipment ......................... 22 III.21 Customers and Suppliers .................................. 22 III.22 Bank Accounts ............................................ 23 III.23 Brokers, Finders, Etc .................................... 23 III.24 Employees ................................................ 23 Page ---- III.25 Government Contracts ..................................... 23 III.26 Government Furnished Equipment ........................... 25 III.27 Organizational Conflicts of Interest ..................... 25 III.28 Affiliate Transactions ................................... 25 III.29 Disclosure in the Seller's Schedule ...................... 25 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER ............... 25 IV.1 Due Incorporation; Requisite Power and Authority ......... 25 IV.2 Requisite Consents; Nonviolation ......................... 26 IV.3 Broker's Fees ............................................ 26 ARTICLE V CERTAIN TRANSACTIONS AND AGREEMENTS PRIOR TO THE CLOSING DATE ...................... 26 V.1 Confidentiality .......................................... 26 V.2 Business Organization .................................... 26 V.3 Cooperation .............................................. 27 V.4 Subsidiary Merger ........................................ 28 V.5 No Seller Distributions .................................. 28 V.6 Further Assurances ....................................... 28 ARTICLE VI COVENANTS REGARDING POST CLOSING ACTIVITIES ............. 29 VI.1 Employee Matters ......................................... 29 VI.2 Seller's Indemnification ................................. 30 VI.3 Contracts Requiring Consent to Assignment ................ 33 VI.4 Company Plans ............................................ 33 VI.5 Research and Experimental Expenses ....................... 33 ARTICLE VII CONDITIONS TO OBLIGATIONS OF BUYER AND SELLER ............ 34 VII.1 Government Approvals; Litigation ......................... 34 VII.2 Permits and Approvals .................................... 34 -ii- Page ---- ARTICLE VIII CONDITIONS TO BUYER'S OBLIGATIONS .................. 34 VIII.1 Representations and Warranties; Performance .............. 34 VIII.2 Escrow Agreement ......................................... 34 VIII.3 Subsidiary Merger ........................................ 35 VIII.4 Material Adverse Change .................................. 35 VIII.5 Proceedings .............................................. 35 VIII.6 Ilex Agreement ........................................... 35 VIII.7 Non-Competition Agreements ............................... 35 ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER ................. 35 IX.1 Representations and Warranties; Performance .............. 35 IX.2 Proceedings .............................................. 35 IX.3 Ilex Agreement ........................................... 36 ARTICLE X FEES AND EXPENSES .......................... 36 X.1 Expenses ................................................. 36 X.2 Fees or Commissions of Brokers ........................... 36 ARTICLE XI TERMINATION ............................. 36 XI.1 Termination of Agreement ................................. 36 XI.2 Effect of Termination .................................... 36 ARTICLE XII MISCELLANEOUS ............................ 37 XII.1 Time of the Essence ...................................... 37 XII.2 Entire Agreement ......................................... 37 XII.3 Press Releases and Public Announcements .................. 37 XII.4 Counterparts ............................................. 37 XII.5 Descriptive Headings ..................................... 37 XII.6 Notices .................................................. 37 XII.7 Arbitration .............................................. 38 XII.8 Choice of Law ............................................ 39 -iii- Page ---- XII.9 Bulk Sale and Other Tax Filings .......................... 39 XII.10 Transfer Taxes; Sales Tax ................................ 39 XII.11 Binding Effect; Benefits ................................. 39 XII.12 Assignability ............................................ 39 XII.13 Waiver and Amendment ..................................... 39 XII.14 Attorneys' Fees .......................................... 40 XII.15 Severability ............................................. 40 XII.16 No Recourse .............................................. 40 EXHIBIT A Seller's Schedule EXHIBIT VIII.2 Form of Assignment of Escrow Agreement EXHIBIT VIII.7 Form of Assignment of Non-Competition Agreements -iv- ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") dated as of February 10, 1998 is entered into by and among L-3 COMMUNICATIONS CORPORATION, a Delaware corporation ("Buyer") and FAP TRUST, a Connecticut trust ("Seller"). RECITALS WHEREAS, the Buyer wishes to purchase from Seller, and Seller wishes to sell to the Buyer, all of the Acquired Assets (as hereinafter defined) subject to the assumption by the Buyer of the Assumed Liabilities (as hereinafter defined), upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows: ARTICLE I DEFINITIONS As used herein: "Acquired Assets" means all of the assets (tangible and intangible) of the Seller, including those of the Acquired Company (as hereinafter defined) (except for those assets listed in the proviso to this definition), including, without limitation, all of its right, title and interest in and to: (a) Leaseholds and subleaseholds of real property to which it is a party, and all, improvements, fixtures, and fittings thereon, and easements, rights-of-way, and other appurtenants thereto (such as appurtenant rights in and to public streets); (b) Tangible personal property (such as machinery, equipment, inventories of raw materials and supplies, manufactured and purchased parts, goods in process and finished goods, furniture, automobiles, trucks, tractors, trailers, tools, jigs, and dies); (c) Intellectual Property, goodwill associated therewith, licenses and sublicenses granted and obtained with respect thereto, and rights thereunder, remedies against infringements thereof, and rights to protection of interests therein under the laws of all jurisdictions; (d) Leases, subleases, and rights thereunder; (e) Agreements, contracts, indentures, mortgages, instruments, security interests, guaranties, other similar arrangements, and rights thereunder; -1- (f) Accounts, notes, and other receivables, except those excluded under clause (iv) of the proviso to this definition; (g) Claims, deposits, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of set off, and rights of recoupment; (h) Franchises, approvals, permits, licenses, orders, registrations, certificates, variances, and similar rights obtained from governments and governmental agencies; (i) Prepaid expenses, except those excluded under clause (v) of the proviso to this definition; (j) Books, records, ledgers, files, documents, correspondence, lists, plats, architectural plans, drawings, and specifications, creative materials, advertising and promotional materials, studies, reports, and other printed or written materials (collectively, the "Books and Records"), except those excluded under clause (i) of the proviso to this definition; and (k) All cash and all bank accounts and brokerage accounts and similar accounts and cash equivalents, including deposits in transit, except as set forth in clause (iii) of the proviso to this definition. PROVIDED, HOWEVER, that notwithstanding the foregoing, the Acquired Assets shall not include: (i) With respect to the Company, the corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, original Tax Returns and other documents relating to the organization, maintenance, and existence of the Company as a corporation; (ii) Any assets or rights which are not assignable pursuant to the terms of the document or instrument creating same or which are only assignable with the consent of a third party who refuses to grant such consent, which shall be transferred as and when such consent is obtained and otherwise as provided in Section VI.3 of this Agreement; (iii) Any cash held on deposit in a tax reserve account established by the Company for the payment of any federal, state, local or foreign income Taxes payable with respect to periods prior to the date three (3) Business Days prior to the Closing Date, so long as notice of the amount of such cash and the account number of such account shall be provided to the Buyer not later than such third Business Day); and -2- (iv) $1,000,000 book value of trade accounts receivable of the Acquired Company (which specific receivables shall be identified and reasonably agreed upon by the parties on or prior to the Closing Date); and (v) Prepaid expenses relating to the expenses incurred in connection with the negotiation and consummation of the transactions contemplated by this Agreement. "Acquired Company" means the direct and indirect assets, liabilities and business as a going concern of the Company transferred to Seller in the dissolution and liquidation of the Company. "Agreement" has the meaning set forth in the preface above. "Assumed Liabilities" means all Liabilities of the Acquired Company (except for those Liabilities expressly excluded in the proviso to this definition), including, but not limited to: (a) All Liabilities of the Company to be performed following the Closing expressly provided for under or incurred pursuant to the terms of the written agreements, contracts, employment agreements, leases, licenses, instruments and other items which are included as Acquired Assets, but only to the extent any required consents to the assignment thereof have been obtained or Buyer has otherwise expressly agreed to assume liability under such agreement; (b) All Liabilities for product warranty claims or any use of or defect in any of the products or services sold by the Company, the Subsidiary or the Acquired Company prior to the Closing Date; (c) Liabilities to employees of Acquired Company arising out of workers' compensation or disability leaves of absence if said employee is entitled to an offer of employment pursuant to this Agreement and any other similar obligations or liabilities; and (d) Liabilities resulting from, arising out of or caused by any breach of contract by the Company, the Subsidiary or the Acquired Company, tort, infringement, violation of law or any environmental liability or contamination, including, without limitation, Liabilities arising out of or relating in any way to any Government Bid, Government Contract or Government Disclosure. PROVIDED, HOWEVER, that notwithstanding the foregoing, the Assumed Liabilities shall not include: (A) Any Liability of the Acquired Company or Seller for income and other Taxes, including, but not limited to, any Taxes arising in connection with the consummation of the transactions contemplated hereby; provided, however, that any Taxes (other than federal, state, local or foreign income Taxes and other -3- than Taxes arising in connection with the consummation of the transactions contemplated hereby) accrued on the Closing Statement of Net Assets shall be Assumed Liabilities; (B) Except as otherwise provided for in this Agreement (including, without limitation, as provided for in Section VI.1 hereof), any Liability of the Company related to the employment or compensation of employees and former employees (including with respect to any Company Plan or any post-retirement benefits plan, if any)); (C) Except as otherwise provided for in this Agreement, any Liability of the Company for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby; or (D) Any Liability of Seller which was not related to the Company, the Subsidiary or the Business or arising under this Agreement. "Business" means the business conducted or proposed or planned to be conducted by the Acquired Company on and as of the Closing Date. "Buyer" has the meaning set forth in the preface above. "Closing" has the meaning set forth in Section II.6 below. "Closing Date" has the meaning set forth in Section II.6 below. "Company" means Ilex Systems, Inc. "Code" means the Internal Revenue Code of 1986, as amended. "Employee" has the meaning set forth in Section VI.1 below. "GAAP" means United States generally accepted accounting principles as in effect as of the date hereof. "Government Bid" means any offer to sell made by the Acquired Company prior to the Closing Date which, if accepted, would result or may result in a "Government Contract". "Government Contract" means any prime contract, subcontract, teaming agreement or arrangement, joint venture, basic ordering agreement, pricing agreement, letter contract, purchase order, delivery order, change order, Government Bid or other arrangement of any kind between the Acquired Company and (i) the U.S. Government, (ii) any prime contractor of the U.S. Government in its capacity as a prime contractor or (iii) any subcontractor with respect to any contract of a type described in clauses (i) or (ii) above. "Government Disclosure" means any certification, representation, warranty or statement by the Acquired Company to the U.S. Government in that capacity, or any agent or -4- instrumentality thereof, which in any way relates to the operation of the Business or any business of the Acquired Company carried on prior to the Closing Date. "Knowledge of Seller" (or any similar expression) shall mean the actual knowledge of (i) W. Jeffrey Kramer, Vice President of First Union National Bank, trustee of Seller, Frederick Forster, Jeffrey Furman or Howard Tieg or (ii) each of Joseph Lopez, John Medea, Joseph Leadley, Scott Feldman, and all of the Vice Presidents and the members of the Board of Directors of the Company and the Subsidiary (provided, however, that for purposes of Section III.27, the individuals referred to in clause (ii) shall be limited to Joseph Lopez, John Medea, Thomas Deet and Robert Marchand), after, only in the case of those individuals referred to in clause (ii) of this definition, a reasonable investigation or inquiry of the subject matter thereof by or on behalf of such individuals. "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Ilex Agreement" means the agreement, dated as of February 9, 1998 by and among Seller, the Company and shareholders of the Company. "Liability" or "Liabilities" means any direct or indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or responsibility, fixed or unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise. "Losses" means all losses, liabilities, obligations, amounts paid in settlement, costs and expenses, including court costs, and reasonable attorneys' fees and expenses, incurred in connection with any action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, injunction, judgment, order, decree, ruling. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, a limited liability company, or a governmental entity (or any department, agency, or political subdivision thereof). "Purchase Price" shall mean the sum of (i) any amounts paid by Buyer under Sections II.2 and II.4 and (ii) the amount of the adjustment, if any, to the Cash Purchase Price (as hereinafter defined) pursuant to Section II.3. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Seller's Schedule" has the meaning set forth in Article III below. "Subsidiary" means Hygienetics Environmental Services, Inc., a California corporation, all of the issued and outstanding shares of capital stock of which are owned by the Company. "Subsidiary Merger" means the merger of the Subsidiary with and into the Company. -5- "Tax" and "Taxes" means all taxes, charges, fees, levies or other assessments imposed by any federal, state, local or foreign taxing authority, whether disputed or not, including without limitation, income, profits, gross receipts, capital, estimated, excise, occupational, custom, duty, ad valorem, value-added, stamp, property, sales, transfer, withholding, real estate, use, employment, payroll, alternative or add-on minimum, environmental (including Taxes under Section 59A of Code) and franchise taxes and such terms shall include any interest, penalties or additions attributable to or imposed on or with respect to such assessments and any expenses incurred in connection with the settlement of any tax liability. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. ARTICLE II PURCHASE AND SALE II.1 Purchase and Sale. (a) General. On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from Seller and Seller agrees to sell, transfer, convey, assign and deliver to the Buyer, all of the Acquired Assets at the Closing for the consideration specified below in Section II.2. (b) Assumption of Liabilities. On and subject to the terms and conditions of this Agreement, the Buyer agrees to assume and become responsible for the Assumed Liabilities at the Closing. II.2 Cash Purchase Price. (a) Subject to adjustment as set forth in Section II.3, at the Closing (as defined in Section II.6), as consideration for the purchase of the Acquired Assets, Buyer agrees to pay in aggregate: (i) Fifty-One Million Nine Hundred Twenty-Three Thousand Dollars ($51,923,000), plus or minus, respectively; (ii) the amount equal to one hundred seven and one-half percent (107.5%) of the amount by which the Estimated Closing Date Net Assets (as defined in Section II.3) as determined in accordance with Section II.3 below exceeds or fails to equal Ten Million Two Hundred Thousand Dollars ($10,200,000). The above consideration, in the aggregate, is hereinafter referred to from time to time as the "Cash Purchase Price." (b) The Cash Purchase Price shall be paid on the Closing Date by wire transfer in immediately available funds to the account designated by the Seller in a written notice delivered -6- to Buyer at least 5 Business Days (as defined in Section II.3) prior to the Closing Date (as defined in Section II.6); (c) (i) If the Company shall be awarded the Software Engineering and Technical Support ("SWEATS") contract at Fort Huachuca upon the terms of the bid proposal submitted by the Company in effect as of November 25, 1997, or awarded the SWEATS contract based on such bid as amended after the date of this Agreement with the prior written consent of Buyer, in addition to the Cash Purchase Price, Buyer shall pay to the Seller as additional consideration for the Acquired Assets in aggregate an amount (the "SWEATS Payment") equal to (i) $3,762,500, if the SWEATS contract is awarded to the Company as a "prime" contractor, or (ii) $1,612,500, if the SWEATS contract is awarded to the Company as a subcontractor. The SWEATS Payment shall be paid by Buyer within 30 days following the later of (x) the Business Day following the expiration of the period to protest the SWEATS contract award and (y) the date of final resolution of any bid protest raised in respect of the award of the SWEATS contract. No payment shall be due from Buyer if any such bid protest is upheld. (d) The parties to this Agreement agree to allocate the Purchase Price in accordance with the rules under Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations promulgated thereunder. The parties recognize that the Purchase Price does not include Buyer's acquisition expenses and that Buyer will allocate such expenses appropriately. The Seller and Buyer agree to act in accordance with such allocations (including any modifications thereto reflecting any post-closing adjustment of the Purchase Price pursuant to Sections II.3 and II.4, as applicable) in any relevant Tax returns or filings, including any forms or reports required to be filed pursuant to Section 1060 of the Code, the Treasury Regulations promulgated thereunder or any provisions of local, state and Commonwealth law ("1060 Forms"), and to cooperate in the preparation of any 1060 Forms and to file such 1060 Forms in the manner required by applicable law. II.3 Adjustment of Cash Purchase Price. (a) Preparation of Estimated Closing Statement of Net Assets. At least five Business Days prior to the Closing Date, the Seller shall cause to be delivered to Buyer a statement of estimated Acquired Assets and Assumed Liabilities (the "Estimated Closing Statement of Net Assets") as of the date three Business Days prior to the Closing Date. The Estimated Closing Statement of Net Assets shall be prepared in the same manner and in accordance with the procedures that the Closing Statement of Net Assets is to be prepared pursuant to Section II.3(c), except that it shall be unaudited. The term "Estimated Closing Date Net Assets" shall mean the book value of the Acquired Assets set forth on the Estimated Closing Statement of Net Assets in excess of the amount of the Assumed Liabilities set forth on the Estimated Closing Statement of Net Assets, determined in accordance with the procedures set forth in Section II.3(c). For the purposes of this Agreement, "Business Day" means any day that is not a Saturday, Sunday or day in which banks in New York, New York or San Francisco, California are authorized or obligated by law or governmental action to close. (b) Calculation of Adjustment. The Cash Purchase Price shall be (i) increased by one hundred seven and one-half percent (107.5%) of the amount that the Closing Date Net Assets (as hereinafter defined) is greater than the Estimated Closing Date Net Assets; or (ii) decreased by -7- one hundred seven and one-half percent (107.5%) of the amount that the Closing Date Net Assets is less than the Estimated Closing Date Net Assets. The term "Closing Date Net Assets" as used herein shall mean the book value of the Acquired Assets set forth on the Final Closing Statement of Net Assets (as hereinafter defined) in excess of the amount of the Assumed Liabilities set forth on the Final Closing Statement of Net Assets, determined in accordance with the procedures set forth in Section II.3(c). The amount of any decrease or increase to the Cash Purchase Price pursuant to this Section II.3(b) plus interest from the Closing Date at the Prime Rate (as hereinafter defined) shall be paid by the Seller or Buyer, as the case may be, by wire transfer in immediately available funds within five (5) Business Days after the Final Closing Statement of Net Assets agreed to on behalf of the Seller and Buyer or is determined by the Neutral Auditor (as hereinafter defined). For purposes of this Agreement, "Prime Rate" means the rate of interest announced from time to time by Bank of America as its prime rate of interest. (c) Preparation of Closing Statement of Net Assets. As soon as practicable, and in any event within thirty (30) days after the Closing Date, the Buyer shall cause to be prepared a statement of net assets for the Business consisting of the Acquired Assets and the Assumed Liabilities, as of the close of business on the date three (3) Business Days prior to the Closing Date determined on a pro forma basis as if the parties to the Ilex Agreement had not consummated the transactions contemplated thereby on such date (the "Closing Statement of Net Assets"). The Closing Statement of Net Assets will be prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a basis consistent with the September Balance Sheet through full application of the policies and procedures used in preparing the September Balance Sheet and with changes in contract estimates at completion ("EAC's") and estimates to complete ("ETC's") determined on a basis consistent with the method used for the determination of the September Balance Sheet, and will, at the option of the Buyer, be audited by an independent public accounting firm selected by Buyer (the "Auditor"). The Closing Statement of the Net Assets shall be accompanied by an Auditor's report based upon the audit of the Audited Closing Statement of Net Assets stating that such statement presents fairly, in all material respects, the Acquired Assets and Assumed Liabilities presented on such statement as provided for in this Agreement at the third Business Day prior to the Closing Date in conformity with GAAP consistently applied with the September Balance Sheet, except as modified by any modification which is mutually agreed upon by the parties hereto. Buyer shall provide the Auditor access to the Books and Records as may reasonably be required for the preparation of the Closing Statement of Net Assets. Buyer shall be responsible for the costs and expenses of the Auditor in preparing the Closing Statement of Net Assets. II.4 Post-Closing Payment. (a) As additional consideration for the Acquired Assets ("Additional Consideration"), Buyer shall make the payments or deliveries to the Seller required pursuant to this Section II.4. With respect to each of fiscal years of the Acquired Company ending December 31, 1998, 1999 and 2000, respectively. Buyer shall pay to the Seller in aggregate for any such fiscal year an amount in cash (subject to Section II.4(c)) equal to the product of (i) $3,000,000 for 1998, $3,300,000 for 1999 and $3,630,000 for 2000 and (ii) a percentage (the "Percentage") calculated by dividing (x) EBIT (as defined below) for the Acquired Company for each in each of fiscal 1998, 1999 and 2000 by (y) $8,800,000 for 1998, $10,300,000 for 1999 and $12,300,000 for 2000, respectively provided that the maximum Percentage for any fiscal year shall be 120%. -8- No Additional Consideration will be due to the Seller under this Section II.4 in respect of any fiscal year if the Percentage for that fiscal year shall be less than 60%. "EBIT" means for any fiscal year operating income of the Acquired Company before interest and income taxes; provided that for purposes of calculating EBIT there shall be eliminated (i) the effect of any purchase accounting adjustments (including any increase in depreciation or amortization of tangible or intangible assets of the Business resulting from a write-up of the Acquired Assets for accounting purposes) in connection with the acquisition of the Company, (ii) all costs and expenses paid in connection with financing and refinancing the purchase of the Company, (iii) all operating income, if any, attributable to the SWEATS contract, (iv) all gains (or losses) from extraordinary items and investments, (v) the cumulative effect of changes in accounting principles and (vi) the effect (whether revenue or expense) as a result of any allocation by Buyer of any Buyer-incurred general and administration expenses or management fees (but only to the extent such allocation of expenses or fees exceeds amounts which would be an expense of the operation of the Acquired Company on a stand-alone basis consistent with the Company's method of operation prior to February 10, 1998). In the event of the disposition or discontinuation of any of the Acquired Company's current businesses or operations or the addition of any business or operation to the Acquired Company, the target EBIT amount referred to above shall be adjusted appropriately (determined in good faith by the Buyer, in consultation with the Seller) to reflect such disposition, discontinuation or addition, for purposes of calculating the Percentage. (b) For each of the 1998, 1999 and 2000 fiscal years, Buyer shall, no later than 45 days following the availability of financial statements for such period, prepare and deliver to Seller a report (the "EBIT Report") reflecting in reasonable detail Buyer's calculation of EBIT for the applicable fiscal year (including any adjustments to Buyer's financial statements made in connection with such calculation), together with a copy of the financial statements from which such calculation is derived. EBIT will be calculated in accordance with GAAP applied on a basis consistent with the Financial Statements (as defined in Section II.6) and with changes to EAC's and ETC's determined on a basis consistent with the methods used in the Financial Statements. (c) Any payment of Additional Consideration with respect to any fiscal year shall be payable to the Seller within 30 days after the date on which the calculation of EBIT for such fiscal year shall have been finally determined pursuant to this Section II.4 and Section II.5; provided that no such payment of Additional Consideration (except portions thereof as to which Early Cash Payment Elections (as defined in Section II.4(e)) have been received by Buyer in accordance with Section II.4(e)) with respect to any fiscal year shall be payable by Buyer pursuant to this Section II.4 prior to the earlier of (i) the date 60 days following the completion of the initial sale to the public pursuant to an effective registration statement (other than a registration statement on Form S-4 or Form S-8 or any similar or successor form) (the "Initial Public Offering") filed under the Securities Act of 1933, as amended (the "Securities Act"), of shares of the Class A Common Stock, par value $.0l per share of L-3 Communications Holdings Inc. ("Holdings") (or such other class of common stock of Holdings issued to the holders of such Class A Common Stock in connection with a reclassification thereof) ("Class A Common Stock") and (ii) September 30, 2001. Seller shall not be permitted to elect to receive shares in lieu of Additional Consideration for any fiscal year in an amount less than $250,000 unless the Seller is electing to receive shares for all of such Additional Consideration for such fiscal year. Each cash payment pursuant to this Section II.4 shall be made by wire transfer of immediately -9- available funds to the account designated by the Seller in a written notice to Buyer given at least 5 Business Days prior to the date of payment. (d) Prior to the date of any payment of Additional Consideration pursuant to Section II.4(b) (other than payments pursuant to Early Cash Payment Elections), Buyer shall offer the Seller the opportunity to elect to receive, in lieu of such payment, any Additional Consideration in the form of shares of Freely Tradable (as defined below) Class A Common Stock. Such offer of such shares shall be made in a transaction meeting the requirements of the Securities Act (and any applicable state securities laws). The number of shares of Class A Common Stock to be delivered if the Seller elects to receive such shares pursuant to such offer shall be determined by dividing (i) the amount of such payment of Additional Consideration by (ii) $20 to the extent such Additional Consideration relates to fiscal 1998, $22 to the extent such Additional Consideration relates to fiscal 1999 and $24.20 to the extent such Additional Consideration relates to fiscal 2000. In the event of any change in the outstanding Class A Common Stock by reason of stock split, stock combination, reclassification or similar event, the number of shares to be delivered pursuant to the preceding sentence shall be adjusted appropriately (e.g., if the outstanding shares of Class A Common Stock are split on a two-for-one basis, the $20, $22 and $24.20 amounts referred to in clause (ii) would be adjusted to be $10, $11 and $12.10, respectively). In the event that the Initial Public Offering is not completed by August 1, 2001, no offer to elect to receive shares of Class A Common Stock shall be made pursuant to this Section II.4(d). If the Seller elects to receive shares pursuant to this Section II.4(d) such shares will be delivered by registered mail to the address designated by the Seller in a written notice to Buyer given at least five (5) Business Days prior to the date of delivery. No fractional shares of Class A Common Stock will be issuable pursuant to this Section II.4. In lieu thereof, any person who would otherwise be entitled to a fractional share pursuant to the provisions hereof shall receive an amount in cash equal to the amount of Additional Consideration which would have been payable in cash with respect to such fraction. For purposes of this Section II.4, "Freely Tradable" shall mean Class A Common Stock which (a) may be sold (without legal restriction) to any member of the public, including a sale by or through a securities exchange and/or broker-dealer, without the necessity of (I) obtaining an opinion of counsel, obtaining permission or authorization of the United States Securities & Exchange Commission or any state securities administrator, (II) providing any advance notice to any such body or (III) taking other action to remove any legend or legend condition applicable to such shares of Class A Common Stock that would delay the sale thereof and (b) is not subject to any material delay in attempting the sale thereof on a public securities exchange due to any attribute of the Class A Common Stock. (e) At any time and from time to time, the Seller shall have the right, by written notice (an "Early Cash Payment Election") to Buyer, to elect to require Buyer to pay to the Seller the cash amount of any Additional Consideration payable to the Seller pursuant to Section II.4(c), with the date of payment being determined pursuant to the first sentence of such Section without regard to the proviso thereto. (f) Upon a Change of Control (as hereinafter defined) that occurs prior to the earlier to occur of the dates referred to in clauses (i) and (ii) of the proviso to the first sentence of Section II.4(c), the Seller shall receive in connection with such Change of Control all Additional Consideration payable to the Seller pursuant to Section II.4(c) but not then paid by reason of the -10- proviso contained in the first sentence of such Section prior to the date of such Change of Control the amount and kind of consideration the Seller would have received in respect of the shares of Class A Common Stock which the Seller would have been entitled to elect to receive pursuant to subsection (d) of this Section II.4 if there had been an Initial Public Offering immediately prior to the date of the Change of Control. Such amount shall be payable at such time as the holders of Class A Common Stock receive consideration in connection with such Change of Control. In the event of a Change of Control, notwithstanding anything to the contrary contained herein, any Additional Consideration which becomes payable pursuant to Section II.4(c) following the date of such Change of Control shall be payable in cash. For purposes of this Section II.4(f), "Change of Control" shall mean (i) an acquisition by any person (other than stockholders of Holdings as of the Closing Date or any of their affiliates) of more than 50% of the combined voting power of the outstanding voting securities entitled to vote generally of Holdings or (ii) the sale of substantially all of the direct or indirect assets of Holdings to any person (other than stockholders of Holdings as of the Closing Date or any of their affiliates). (g) The rights of the Seller under this Section II.4 shall be assignable (in whole or in part) by Seller, subject to the following requirements: (i) any such assignment shall be made prior to the date six months following the Closing Date; (ii) if such assignment is to more than one person or entity, (1) any payment or delivery pursuant to this Section II.4 shall be pro rata, based on the relative percentage of Additional Consideration to which such person or entity is entitled hereunder, (2) the $250,000 limitation contained in Section II.4(c) shall apply to each such person or entity and (3) adequate provision shall be made in connection with such assignment so that one assignee in connection with any disputes concerning the calculation and determination of any amounts payable pursuant to this Section II shall be authorized to resolve any and all disputes with the Buyer on behalf of all assignees; and (iii) notwithstanding any such assignment, the right of offset against Seller referred to in the last sentence of Section VI.2(a) shall continue to apply notwithstanding such assignment (i.e., a claim against the Seller under Section VI.2 may be satisfied by exercising such right of offset against amounts due to an assignee of Seller). II.5 Dispute Resolution. (a) Review of Closing Statement of Net Assets and EBIT Report. After receipt of the Closing Statement of Net Assets or the EBIT Report, Buyer or the Seller, as the case may be, shall have thirty (30) days to review it. Buyer or the Seller, as applicable, and their respective authorized representatives shall have full access to all Books and Records and employees of the Company and, with respect to the Closing Statement of Net Assets, the Auditor to the extent required to complete their review of the Closing Statement of Net Assets or the EBIT Report, as applicable, including Auditor work papers used in preparation or the Closing Statement of Net Assets. Unless the Buyer delivers written notice to the Seller, or the Seller delivers written notice to Buyer, on or prior to, the 30th day after receipt of the Closing Statement of Net Assets or the EBIT Report specifying in reasonable detail all disputed items and the basis therefor, the parties shall be deemed to have accepted and agreed to the Closing Statement of Net Assets or the EBIT Report. The parties shall, within thirty (30) days following the date of such notice (the "Resolution Period"), attempt to resolve their differences and any resolution by them as to any -11- disputed amount shall be final, binding, conclusive and nonappealable for all purposes under this Agreement. (b) Resolution. If at the conclusion of the Resolution Period the parties have not reached an agreement on the objections, then all amounts remaining in dispute may, at the election of either party, be submitted to Price Waterhouse or another large international accounting firm not otherwise engaged by either party (the "Neutral Auditor"). Each party agrees to execute if requested by the Neutral Auditor, a reasonable engagement letter. All fees and expenses relating to the work, if any, to be performed by the Neutral Auditor shall be borne equally by the Seller and Buyer, unless the Neutral Auditor finds one party acted in bad faith in which case that party pays all such fees and expenses. Except as provided in the preceding sentence, all other costs and expenses incurred by the parties in connection with resolving any dispute hereunder before the Neutral Auditor shall be borne by the party incurring such cost and expense. The Neutral Auditor shall act as an arbitrator to determine, based solely on the presentations by the Seller and Buyer, and not by independent review, only those issues still in dispute. The Neutral Auditor's determination shall be made within thirty (30) days of its engagement (which engagement shall be made no later than five (5) business days after an election by either party to submit the objections to the Neutral Auditor) or as soon thereafter as possible, shall be set forth in a written statement delivered to the Seller and Buyer and shall be final, binding, conclusive and nonappealable for all purposes hereunder. The term "Final Closing Statement of Net Assets" shall mean the definitive Closing Statement of Net Assets agreed to in accordance with Section II.5(a) or the definitive Closing Statement of Net Assets resulting from the determination made by the Neutral Auditor in accordance with this Section II.5(b). II.6 Closing. (a) Subject to satisfaction or waiver of the conditions to closing set forth in Articles VII, VIII and IX, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the local close of business, or such other time as the parties may mutually agree (the "Effective Time") on February 26, 1998, at the offices of Pillsbury Madison & Sutro LLP, 235 Montgomery Street, San Francisco, California, or at such other date and place as the parties may mutually agree (the "Closing Date"). (b) At the Closing (i) Seller will execute, acknowledge (if appropriate), and deliver to the Buyer (A) an assignment of lease(s), in reasonable customary form, (B) such other instruments of sale, transfer, conveyance, and assignment as the Buyer and its counsel may reasonably request; and (C) an Assignment of Non-Competition Agreements in the form attached hereto as Exhibit VIII.5 (the "Assignment of Non-Competition Agreements"); (ii) the Buyer will execute, acknowledge (if appropriate), and deliver to Seller such instruments of assumption as Seller and its counsel reasonably may request; (iii) the Buyer will deliver to Seller the consideration specified in sections II.2 and II.3 herein; and (iv) the Buyer and Seller will execute and deliver an Assignment of Escrow Agreement, in the form attached hereto as Exhibit VIII.2 (the "Assignment of Escrow"). -12- ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to the Buyer as follows (except as specified to the contrary in the disclosure schedule prepared by Seller and attached hereto as Exhibit A (the "Seller's Schedule"). The Seller's Schedule is arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Article III): III.1 Due Organization of Seller; Authorization; Title to Acquired Assets. Seller is a trust duly organized and is validly existing and in good standing under the laws of the State of Connecticut. Seller has all requisite trust power and authority to execute, deliver and perform its obligations under this Agreement, the Assignment of Non-Competition Agreements and the Assignment of Escrow Agreement (collectively, the "Transaction Documents"), and consummate all the transactions in the manner contemplated by the Transaction Documents. This Agreement has been and, when delivered, the remainder of the Transaction Documents will have been, duly executed and delivered by Seller and duly authorized and approved by all necessary action on the part of Seller. This Agreement constitutes and, when delivered, the remainder of the Transaction Documents will constitute, the valid and binding obligations of Seller, enforceable against Seller in accordance with its or their terms, subject to bankruptcy and similar laws and equitable principles regarding the enforcement of contracts. As of the Closing Date, following Seller's acquisition of the Company pursuant to the Stock Purchase Agreement, the Company will be dissolved in accordance with applicable law and all of its assets and Liabilities will be distributed to Seller. Seller does not have and will not as of Closing Date have any Liabilities other than the Assumed Liabilities except as set forth in Section III.1 of the Seller's Schedule. At the Closing, the Seller will hold the entire legal, equitable and beneficial title (in the case of assets owned by the Acquired Company) and interest in the assets of the Company and the Subsidiary and will transfer to Buyer good title to the Acquired Assets, free and clear of all liens, claims, encumbrances and restrictions of any kind or nature whatsoever ("Liens"). III.2 Requisite Consents; Nonviolation. The execution, delivery and performance of this Agreement by Seller and, when delivered, the execution, delivery and performance of the remainder of the Transaction Documents by Seller do not on the date hereof and will not on the Closing Date (a) require the consent, approval or authorization of any governmental person or entity or other third party (except such approvals or filings as may be required to comply with applicable state securities and antitrust laws), (b) violate or conflict with the trust agreement under which Seller is organized, (c) constitute a default under, violate or conflict with, result in the acceleration of or give rise to any party the right to terminate, modify or cancel, or result in the loss of any rights, privileges, options or alternatives under or result in the creation of any Liens on any assets of the Company or the Subsidiary under or require the consent of any other party to any material contract, note, lease, mortgage or other agreement or instrument to which the Seller or the Company or the Subsidiary is a party or by which the Seller or the Company or the Subsidiary is bound or to which any Seller, the Company or the Subsidiary or any of their respective properties is subject (except any Liens held by Seller's lender which Liens shall be released at or prior to Closing) or (d) violate or conflict with the charter documents of the Company or the Subsidiary or any material statute, ordinance, rule, regulation, order, judgment or degree of any court or governmental or regulatory agency or authority applicable to the Seller -13- or the Company or the Subsidiary or by which any of their respective properties or assets may be bound. III.3 Due Organization of the Company and the Subsidiary. The Company and the Subsidiary (i) have been duly organized and are validly existing and in good standing as corporations under the laws of the State of California, (ii) except as set forth in Section III.3 of the Seller's Schedule, are duly qualified to do business in and are in good standing under the laws of every jurisdiction where each of them is required to be so qualified, except where the failure to be so qualified would not materially adversely affect their properties, assets, results of operations or financial condition and (iii) have all requisite corporate power and authority to own or lease and to operate their properties and carry on the Business. III.4 Acquired Assets. The Acquired Assets constitute all of the property and assets necessary to conduct the business of the Company and the Subsidiary as currently conducted and as conducted immediately prior to the Subsidiary Merger. III.5 Subsidiaries, etc. The Company does not, directly or indirectly, own or control any equity interest in any corporation, partnership, joint venture or other legal entity other than, prior to the Subsidiary Merger, its ownership of all of the outstanding capital stock of the Subsidiary. III.6 Financial Data. Buyer has been provided with (a) the unaudited consolidated balance sheet of the Company at September 30, 1997 (the "September Balance Sheet"), together with the related unaudited consolidated statements of income and shareholders equity for the nine-month period ended September 30, 1997, and (b) the audited consolidated balance sheets of the Company at December 31, 1996 and 1995, together with the related unaudited consolidated statements of income and shareholder equity and the notes thereto (the "Financial Statements"). The Financial Statement are in accordance with the Company's books and records, have been prepared in accordance with GAAP, consistently applied, and fairly present the financial position of the Company and the Subsidiary as of their respective dates and the results of the Company's and the Subsidiary's operations for the periods then ended. III.7 No Material Changes. Since September 30, 1997, there has not been (a) any material adverse change (or any event specifically relating to the Company that would reasonably be expected to result in such a change) in the business, financial condition or results of operations of the Acquired Company, or any change that could materially delay or impair the ability of Seller to effect the Closing on materially and adversely affect the operation of the business of the Acquired Company after the Closing Date as the Company had been operated immediately prior to Seller's acquisition thereof pursuant to the Stock Purchase Agreement, (b) any damage, destruction or loss (whether or not covered by insurance) individually or in the aggregate in excess of $100,000; (c) any labor dispute or any labor union organizing activity, or any actual or threatened strike, work stoppage, slowdown or lockout, or any material change in its relationship with employees, customers, distributors or suppliers; (d) any sale, lease, transfer or other disposition of any asset of the Company or the Subsidiary having a fair material value in excess of $l00,000 or for proceeds in excess of $100,000; or (e) army discharge or satisfaction of any obligation or liability of the Company or the Subsidiary other than in the ordinary course of business in accordance with the terms of such obligation or liability. -14- Since September 30, 1997, except in connection with the transactions contemplated hereby, neither the Company nor the Subsidiary has engaged in any of the following transactions, (i) issued or committed to issue any shares of common stock (except upon exercise of duly issued stock options which were outstanding as of such date) or other ownership interest of the Company or the Subsidiary, or any obligations, understanding or commitment regarding the issuance of capital stock or any option, right, warrant or other security exercisable or exchangeable for or convertible into capital stock of the Company or the Subsidiary, (ii) redeemed, purchased or otherwise acquired or committed to acquire any shares or other ownership interest of the Company or the Subsidiary, (iii) effected a split or reclassification of any shares of the Company or the Subsidiary or a recapitalization of the Company or the Subsidiary, (iv) made any change in the compensation of, or increased benefits available to, any officer, other employee, sales agent or representative of the Company or the Subsidiary under any bonus or pension plan or other contract or commitment, or paid or agreed or promised to pay, whether conditionally or otherwise, any bonus, incentive, retention or composition, or increased or agreed or promised to increase any retirement, welfare, fringe or severance benefits or vacation pay, to or in respect of any officer, other employee, sales agent or representative of the Company or the Subsidiary, other than, with respect to any employee other than officers, in the ordinary course of business and consistent with past practice, (v) incurred, assumed or guaranteed any obligation or liability, whether absolute, accrued, contingent or otherwise, or any indebtedness for borrowed money, except current liabilities for trade or business obligations incurred in connection with the purchase of goods or services in the ordinary course of the business consistent with past practice, (vi) mortgaged, pledged or subjected to any lien any property or assets, tangible or intangible of the Company or the Subsidiary, (vii) transferred or granted any rights under, or entered into any settlement regarding the breach or infringement of, any Intellectual Property, or modified any existing rights with respect thereto, (viii) received any notice of termination or of default or breach of any material contract, lease or other agreement, (ix) made any capital expenditures, or commitments to make any capital expenditure in excess of $250,000 in the aggregate (x) entered into any transaction, contract or commitment with any affiliate of the Company or (xi) entered into any transaction, contract or commitment other than in the ordinary course of business. III.8 Undisclosed Liabilities. The Acquired Company has no debts, claims, liabilities or obligations (whether absolute, contingent or otherwise) which are material to the Acquired Company, except for (a) those reflected, reserved against or otherwise disclosed in the September Balance Sheet or the notes thereto and not heretofore paid or discharged or (b) those incurred in, or as a result of, the ordinary course of business of the Company and the Subsidiary since the date of the September Balance Sheet to the extent reflected in the Closing Statement of Net Assets. III.9 Governmental Authorizations; Compliance with Law. (a) The Acquired Company has all material governmental licenses, permits, approvals and other governmental authorizations necessary to permit the operation of the business of the Company as presently conducted and is in compliance in all material respects with such governmental licenses, permits, approvals and other governmental authorizations. Section III.9 of the Seller's Schedule sets forth a complete and accurate list of all such governmental licenses, permits, approvals and other governmental authorizations. -15- (b) The Acquired Company is in compliance in all material respects with all laws, statutes, ordinances, rules, regulations, orders, judgements or degrees applicable to it and its business and none of Seller, the Company or the Subsidiary has received any notice that any violation or potential violation or any action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced against the Company or the Subsidiary alleging failure to comply. III.10 Litigation. There is no pending or, to the Knowledge of the Seller, threatened action, suit, arbitration proceeding or investigation in any court or before any governmental commission or agency against the Company or the Subsidiary seeking unspecified damages, damages in excess of $50,000, or injunctive or other equitable relief. There is no order, judgment or decree of any court or governmental authority or agency which specifically applies to the Company or the Subsidiary except as listed in Section III.10 of the Seller's Schedule. III.11 Employee Benefit Plans. (a) Section III.11 of the Seller's Schedule contains a true and complete list of each "employee benefit plan" (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including, without limitation, multi-employer plans within the meaning of ERISA section 3(37)), stock purchase, stock option, severance, employment, change-in- control, fringe benefit, collective bargaining, bonus, incentive, deferred compensation and all other employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA (including any funding mechanism therefor now in effect or required in the future as a result of the transaction contemplated by this Agreement or otherwise), whether formal or informal, oral or written, legally binding or not, under which any employee or former employee of the Company or its Subsidiary has any present or future right to benefits or under which the Company or its Subsidiary has any present or future liability. All such plans, agreements, programs, policies and arrangements shall be collectively referred to as the "Company Plans". (b) With respect to each Company Plan, the Seller has delivered to the Buyer a current, accurate and complete copy (or, to the extent no such copy exists, an accurate summary thereof) and, to the extent applicable; (i) any related trust agreement or other funding instrument; (ii) the most recent determination letter, if applicable; (iii) any summary plan description and other written communications (or a description of any oral communications) by the Company or its Subsidiary to their employees concerning the extent of the benefits provided under a Company Plan; and (iv) for the three most recent years (A) the Form 5500 and attached schedules, (B) audited financial statements, (C) actuarial valuation reports and (D) attorney's response to an auditor's request for information. (c) (i) Each Company Plan has been established and administered in accordance with its terms, and in compliance with the applicable provisions of ERISA, the Code and other applicable laws, rules and regulations; (ii) each Company Plan which is intended to be qualified within the meaning of Code section 401(a) is so qualified and has received a favorable determination letter as to its qualification, and nothing has occurred, whether by action or failure to act, that could reasonably be expected to cause the loss of such qualification; (iii) no event has occurred and no condition exists that would subject the Company or its Subsidiary, either directly -16- or by reason of their affiliation with any member of their "Controlled Group" (defined as any organization which is a member of a controlled group of organizations within the meaning of Code sections 414(b), (c), (m) or (o)), to any tax, fine, lien, penalty or other liability imposed by ERISA, the Code or other applicable laws, rules and regulations; (iv) for each Company Plan with respect to which a Form 5500 has been filed, no material change has occurred with respect to the matters covered by the most recent Form since the date thereof; (v) no "reportable event" (as such term is defined in ERISA section 4043), "prohibited transaction" (as such term is defined in ERISA section 406 and Code section 4975) or "accumulated funding deficiency" (as such term is defined in ERISA section 302 and Code section 412 (whether or not waived)) has occurred with respect to any Company Plan; and (vi) no Company Plan provides retiree welfare benefits and neither the Company nor its Subsidiary have any obligations to provide any retiree welfare benefits. (d) None of the Company Plans is subject to Title IV of ERISA and none of the Company Plans is a multi-employer Plan (within the meaning of Section 400l(a)(3) of ERISA). (e) With respect to any Company Plan, (i) no actions, suits or claims (other than routine claims for benefits in the ordinary course) are pending or threatened, (ii) to the Knowledge of Seller, no facts or circumstances exist that could give rise to any such actions, suits or claims, and (iii) no written or oral communication has been received from the PBGC in respect of any Company Plan subject to Title IV of ERISA concerning the funded status of any such plan or any transfer of assets and liabilities from any such plan in connection with the transactions contemplated herein. (f) No Company Plan exists that could result in the payment to any present or former employee of the Company or its Subsidiary of any money or other property or accelerate or provide any other rights or benefits to any present or former employee of the Company or its Subsidiary as a result of the transaction contemplated by this Agreement, whether or not such payment would constitute a parachute payment within the meaning of Code section 280G. III.12 Intellectual Property. Each of the Company and the Subsidiary owns or has the right to use all Intellectual Property necessary to conduct their businesses substantially as such businesses are currently conducted. All of the material Intellectual Property owned by the Company and the Subsidiary that has been issued or registered by or filed with any Governmental Authority (as defined in Section III.25(b)) and all material license agreements in which the Company or the Subsidiary is the licensee of Intellectual Property or by which the Company or the Subsidiary permits any person to use the Intellectual Property owned by it are listed in Section III.12(a) of the Seller's Schedule. As of the date hereof and at the Closing, all Intellectual Property licenses are and will be in full force and effect in accordance with their terms, and are and will be free and clear of any Liens. Except as set forth in Section III.12(b) of the Seller's Schedule, (i) all of the Intellectual Property owned or used by the Company or the Subsidiary is valid, subsisting and unexpired, has not been abandoned, and is not the subject of any Lien; (ii) no judgment, decree, injunction, rule or order has been rendered by any court, tribunal or other government entity which would limit, cancel or question the validity of, or the Company or the Subsidiary's rights in and to, any Intellectual Property; (iii) the Company has taken adequate steps to protect, maintain and safeguard its Intellectual Property and its rights therein including any Intellectual Property for which improper or unauthorized disclosure would -17- impair its value or validity, and has executed appropriate agreements (including nondisclosure agreements and employee assignments) and made appropriate filings and registrations in connection with the foregoing, (iv) there is no claim or demand pertaining to, or any proceeding which is pending, or to the Knowledge of the Seller, threatened that challenges the rights of the Company or the Subsidiary to or the validity of any of its Intellectual Property or claims that a default exists under license by the Company or the Subsidiary of Intellectual Property and (v) to the Knowledge of Seller, none of the Company's or the Subsidiary's Intellectual Property is being infringed or otherwise impaired by third parties. "Intellectual Property" means all intellectual property, including without limitation all (i) inventions, discoveries, processes, formulae, designs, methods, techniques, procedures, concepts, developments, technology, new and useful improvements thereof and know-how relating thereto, whether or not patented or eligible for patent protection; copyrights and copyrightable works, including computer applications, programs, software, databases and related items; trademarks, service marks, trade names, brand names, corporate names, logos and trade dress, the goodwill of any business symbolized thereby, and all common-law rights relating thereto; trade secrets and other confidential information; (ii) registrations, applications, recordings, and licenses or other similar agreements related to the foregoing; (iii) rights to sue at law or in equity for any infringement or other impairment of the foregoing occurring prior to the Closing Date, including the right to receive all damages and proceeds therefrom; and (iv) rights to obtain reissues, re-examinations, continuations, continuations-in-part, divisions, extensions, renewals or other legal protections pertaining to the foregoing. III.13 Real and Personal Property. (a) Section III.13 of the Seller's Schedule contains a list of all real and personal property owned or leased by the Company and the Subsidiary as of the date hereof having, in the case of leased property, an annual lease obligation in excess of $10,000 or, in the case of owned property, a fair market value in excess of $100,000. The Company has good, valid and marketable title to such owned property. Each lease covering leased real property is a legal, valid and binding agreement enforceable in accordance with its terms and there is not under any of such leases any existing default on the part of the Company or the Subsidiary or, to the Knowledge of Seller, any other party thereto nor any facts that would, with the passage of time or notice, or both, constitute such a default. (b) All material property and assets owned or utilized by the Company and the Subsidiary are in good standing condition and repair (except for ordinary wear and tear), free from any material defects (except such minor defects as do not materially interfere with the use thereof in the conduct of normal operations), have been maintained consistent with standards generally followed in the industry and are sufficient to carry on the business of the Company and the Subsidiary as presently conducted. All buildings, plants and other structures utilized by the Company and the Subsidiary are in good condition and repair (except for ordinary wear and tear). (c) The Company and the Subsidiary enjoy peaceful and quiet possession of the real property owned or leased by the Company and the Subsidiary. Buyer has been provided with a true and complete copy of each lease and all amendments thereto pertaining to any leased real property. The rental set forth in each lease is the actual rental being paid, and there are not separate agreements or understandings with respect to the same. Except as listed in Section III.13(c) of the Seller's Schedule, neither the execution of this Agreement nor the consummation -18- of the transactions contemplated hereby shall cause a default under any lease or require prior written consent of any landlord under any lease. III.14 Insurance. Section 111.14 of the Seller's Schedule lists all material insurance policies in force with respect to the Company, the Subsidiary and their respective employees and directors. Such policies are in full force and effect and all premiums due thereon have been paid or accrued. No notice of cancellations, terminations or reductions of coverage, and no notice of intention to cancel, terminate or reduce coverage, has been received by the Company or the Subsidiary. III.15 Tax Matters. (a) Tax Returns Filed and Taxes Paid. All Tax Returns required to be filed by the Company have been duly filed on a timely basis and all Taxes shown to be payable on the Tax Returns or on subsequent assessments with respect thereto have been paid in full on a timely basis or are being disputed in good faith by the Company. All Tax Returns filed by the Company are true and correct in all material respects. (b) Tax Reserves. The Company's liability for unpaid Taxes for all periods ending before the date of this Agreement has been reserved or accrued for in the Financial Statements (other than reserves or accruals for deferred income Taxes established to reflect differences between book basis and Tax basis of assets and liabilities), applicable to all periods ending on or before the Closing Date in conformity with GAAP. The Company's liability for unpaid Taxes for all periods ending on or before the Closing Date will be reserved for or accrued for in the Closing Statement of Net Assets in conformity with GAAP (other than reserves or accruals for deferred income Taxes established to reflect differences between book basis and Tax basis of assets and liabilities). (c) Tax Returns Furnished. For all periods ending on and after December 31, 1992, Buyer has been provided access to true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by the Company or Seller or on behalf of the Company or Seller relating to Taxes, and (ii) all pro-forma separate federal and state income or franchise tax returns for the Company and Seller. (d) Tax Deficiencies; Audits; Statutes of Limitations. No deficiencies have been asserted with respect to Taxes of the Company. The Company is not a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened against the Company or any of its assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Tax Returns of the Company. Except as set forth in Section III.15 of the Seller's Schedule, the Tax Returns of the Company have not in the past four (4) years been audited by a government or taxing authority, nor is any such audit in process, pending or threatened. There is no material agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes and no power of attorney with respect to any material Taxes of the Company has been executed or filed with any Governmental Authority, and, no power of attorney granted by or with respect to the Company relating to any material Taxes claimed to be due from the Company is currently in force. The Company has not executed or entered into a Closing agreement pursuant to section 7121 of the Code or any -19- predecessor provisions thereof (or similar provision for purposes of state, local or foreign income taxes). (e) Tax Elections and Special Tax Status. The Company is not a party to any safe harbor lease within the meaning of Section 168(f)(8) of the Code, as in effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982. The Company is not a "consenting corporation" under Section 341(f) of the Code. The Company has not entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense to the Company pursuant to Section 280G of the Code or any excise tax to the recipient of such payment pursuant to Section 4999 of the Code. (f) Tax Liens. There are no unpaid Taxes with respect to any period, or a portion thereof, ending on or before the Closing Date which are or could become a lien on the Acquired Assets, except for current Taxes not yet due and payable or reserved for in the Financial Statements. (g) Tax Sharing or Other Agreements. The Company is not a party to or bound by (nor will it become a party to or bound by on or prior to the Closing Date) any Tax indemnity, Tax sharing, Tax allocation or similar agreement (whether or not written). (h) Sales Taxes. The Company (i) has collected all material sales and use Taxes required to be collected, and has remitted, or will remit, such Taxes as required by all applicable statutes and regulations, and (ii) regarding all exempt transactions for all periods open under the applicable statute of limitations as of the Closing Date, has maintained all such records and supporting documents, in all material respects in substantial compliance with all applicable sales and use Tax statutes and regulations. (i) FIRPTA. The Company is not, and for the applicable period specified in section 897(c)(1)(A)(ii) of the Code, has not been, a United States real property holding corporation under section 897 of the Code. (j) Affiliated Group Liability. The Company (and any predecessor) (i) has not been a member of an affiliated group filing a consolidated federal income Tax Return and (ii) has no liability for the Taxes of any person under Treasury Regulation section 1.1502-6(a) (or any analogous or similar provision of state, local or foreign law or regulation), as a transferee or successor, by contract, or otherwise. III.16 Environmental Matters. (a) For purposes of this Agreement, the following definitions shall apply: (i) "Hazardous Materials" shall include any hazardous substance, pollutant, contaminant, flammable explosives, radioactive materials and hazardous, toxic or dangerous wastes and any other chemicals, materials or substances which are identified, defined or regulated pursuant to any Hazardous Materials Laws, or the release, discharge or exposure to which is prohibited, limited or regulated by any federal, state or local government under Hazardous -20- Materials Laws and any petroleum, waste oil and petroleum by-products, asbestos in any form, urea formaldehyde. (ii) "Hazardous Materials Laws" shall mean all applicable laws, statutes, ordinances, rules, regulations, orders, judgements, or decrees relating to the protection of the environment, to human health and safety, or to any emission, discharge, generation, processing, storage, holding, abatement exercise, release, threatened release, arrangement for the disposal or transportation of Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended (42 U.S.C. Section 9601 et seq.); the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.); Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); and any so called "Superfund" law. (iii) "Environmental Report" shall mean any report, study, assessment, audit, or other similar document that addresses any issue of actual or potential noncompliance with, or actual or potential liability under or cost arising out of, any Environmental Law that may in any way affect the Company or the Subsidiary; provided, however, that "Environmental Report" shall not include any such document prepared by Subsidiary in the ordinary course of business for any of its clients. (b) Each of the Company and the Subsidiary is and, to the Knowledge of Seller, has been in compliance in all material respects with applicable Hazardous Materials Laws and has all environmental permits required for the handling, use, storage and disposition of Hazardous Materials under Hazardous Materials Laws that are applicable to its operations as presently conducted. (c) Neither the Company nor the Subsidiary has received any notice from any Governmental Authority that the Company or the Subsidiary is in violation of, or may be subject to liability under, any of the terms or conditions of Hazardous Materials Laws or the Company's or the Subsidiary's material environmental permits for the handling, use, storage or disposition of Hazardous Materials under Hazardous Materials Laws. (d) Buyer has been provided with true and complete copies of all Environmental Reports in the possession or control of Seller, the Company, or the Subsidiary. III.17 Contracts. Section 111.17 of the Seller's Schedule contains a complete list of the material agreements, contracts, commitments, proposals, orders, licenses, leases and other instruments ("Contracts") of the Company and the Subsidiary which (i) is made with any officer, director or stockholder of the Company or the Subsidiary, or with any affiliate or relative of any such officer, director or stockholder, (ii) is a contract of employment, consulting, agency or other similar agreement or arrangement relating to or for the benefit of employees, sales representatives, distributors, dealers, agents, independent contractors or consultants, (iii) is made with any labor union, or other labor organization, (iv) is a loan or other credit agreement, indenture, mortgage, letter of credit, security agreement, pledge agreement, deed of trust, bond, note, guarantee or other agreement or instrument relating to the borrowing of money or extension of credit in excess of $25,000, (v) requires, individually, annual payments of more than $50,000 or aggregate payments over the life of the contract of more than $250,000, (vi) is for a remaining -21- term of more than one year and is not cancelable as to all its provisions upon 90 days or less notice without payment of any material penalty, (vii) provides in whole or in part for the use of, or limiting the use of, Intellectual Property, (viii) is a joint venture, partnership and other similar contract involving a sharing of profits or expenses (including but not limited to joint research and development and joint marketing, contracts), (ix) is an asset purchase agreement or other acquisition or investment agreement, (x) is a contract or arrangement with respect to the representation of the Company or the Subsidiary in foreign countries, (xi) restricts or limits in any manner the operation of the business of the Company or the Subsidiary, or (xii) is material to the business of the Company or the Subsidiary and was entered into outside of the normal course of business. Buyer has been provided with true and complete copies of each Contract so listed. The Company, the Subsidiary and, to the Knowledge of Seller, each of the other parties to the Contracts set forth in Section III.17 of the Seller's Schedule have in all respects performed all material obligations required to be performed by them under such Contracts and, no event has occurred which, after notice or lapse of time or both would constitute a default or an event of default that would give any other party to any such Contract the right to terminate or otherwise fail to perform its obligations under the Contracts. Each Contract is the legal, valid and binding obligation of the Company, the Subsidiary and, to the Knowledge of the Seller, the other parties thereto enforceable in accordance with its terms against the parties thereto. No consent of any third party is required under any Contract as a result of or in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. III.18 Inventory. All inventory of the Company and the Subsidiary consists of a quality and quantity consistent with good business practices net of any reserves reflected in (i) the case of inventory on the date hereof, the September Balance Sheet or (ii) the Closing Statement of Net Assets in the case of inventory on the Closing Date and are salable in the ordinary course consistent with past practice. III.19 Accounts Receivable. The accounts receivable of the Company and the Subsidiary reflected in the September Balance Sheet represent bona fide sales actually made in the ordinary course of business, and have been properly accrued in accordance with GAAP, net of any reserves reflected in the September Balance Sheet. To the Knowledge of Seller there are no facts or circumstances (other than general economic conditions) which would result in any material increase in the uncollectibility of the accounts receivable as a class in excess of the reserves therefor set forth in the September Balance Sheet. III.20 Condition of Plant and Equipment. To the Knowledge of Seller there are no material structural defects in the improvements to the real property owned or leased by the Company or the Subsidiary. To the Knowledge of the Seller, the equipment of the Company and the Subsidiary is in good operating condition and repair, ordinary wear and tear excepted. III.21 Customers and Suppliers. Section III.21 of the Seller's Schedule lists the ten largest customers of the Company and the ten largest suppliers of the Company for the most recent fiscal year. To the Knowledge of the Seller, since January 1, 1997, there has been no -22- material adverse change in the business relationship of the Company with any customer or supplier named on Section III.21 of the Seller's Schedule. III.22 Bank Accounts. Section III.22 of the Seller's Schedule sets forth the names and locations of all banks, trust companies, brokerage firms or other financial institutions at which the Company maintains an account and the name of each person authorized to draw thereon or make withdrawals therefrom. III.23 Brokers, Finders, Etc. All negotiations relating to this Agreement, and the transactions contemplated hereby, have been carried on without the participation of any person or entity acting on behalf of the Seller in such a manner as to give rise to any valid claim against Buyer or the Company for any brokerage or finder's commission, fee or similar compensation, or for any bonus payable to any officer, director, employee, agent or sales representative of or consultant to Seller upon consummation of the transactions contemplated hereby. III.24 Employees. All sums payable to Employees (as defined in Section VI.1(a)) after the Closing Date with respect to pre-Closing pending items, which sums shall include, without limitation, salary, wages, overtime, bonuses, accrued and unused vacation time and any other payments due pursuant to any agreements between the Acquired Company and such Employees or as required by applicable law, shall be accrued as a liability on the Closing Statement of Net Assets. III.25 Government Contracts. (a) With respect to each and every Government Contract or bid to obtain a Government Contract to which the Company is a party and except as set forth in Section III.25 of the Seller's Schedule: (i) the Company has fully complied with all material terms and conditions of such Government Contract or bid for a Government Contract as required as of the date hereof and as of the Closing Date; (ii) the Company has fully complied with all material requirements of statute, rule or regulation pertaining to such Government Contract or bid for a Government Contract; (iii) all representations and certifications executed with respect to such Government Contract were accurate in every material respect as of their effective date and the Company has fully complied with all such representations and certifications in every material respect; and (iv) no termination or default, cure notice or show cause notice has been issued or, to the Knowledge of the executive officers of Seller and the management of the Business, will be issued. (b) To the Knowledge of Seller, except as set forth in Section III.25(b) of the Sellers Schedule, (i) none of the Company's or the Subsidiary's respective employees, consultants or agents is (or during the last three years has been) under administrative, civil or criminal investigation, indictment or information by any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing ("Governmental Authority"), (ii) there is not any pending audit or investigation of the Company, its officers, employees or representatives nor within the last three years has there been any audit or investigation of the Company, officers, employees or representatives -23- resulting in a material adverse finding with respect to any alleged irregularity, misstatement or omission arising under or relating to any Government Contract or bid; and (iii) during the last three years, neither the Company nor the Subsidiary has made a voluntary disclosure to the U.S. Government or any non-U.S. government, with respect to any alleged irregularity, misstatement or omission arising under or relating to a Government Contract or bid. Except as set forth in Section III.25(b) Seller's Schedule, to the Knowledge of Seller neither the Company nor the Subsidiary has had any irregularities, misstatements or omissions arising under or relating to any Government Contract or bid that has led or is expected to lead, either before or after the Closing Date, to any of the consequences set forth in clause (i) or (ii) of the immediately preceding sentence or any other material damage, penalty assessment, recoupment of payment or disallowance of cost. (c) Except as set forth in Section III.25(c) of the Seller's Schedule, there are (i) no outstanding claims against the Company or the Subsidiary, either by the U.S. Government or by any non-U.S. government or by any prime contractor, subcontractor, vendor or other third party, arising under or relating to any Government Contract or bid referred to in Section III.25(a) of the Seller's Schedule and (ii) no disputes between the Company or the Subsidiary and the U.S. Government or any non-U.S. Government under the Contract Disputes Act or any other Federal statute or between the Company or the Subsidiary and any prime contractor, subcontractor or vendor arising under or relating to any such Government Contract or bid. Except as set forth in Section III.25(c) of the Seller's Schedule, to the Knowledge of Seller, there are no facts that could reasonably be expected to result in a claim or a dispute under clause (i) or (ii) of the immediately preceding sentence. (d) Except as set forth in Section III.25(d) of the Seller's Schedule, neither the Company or the Subsidiary nor any of their respective employees, consultants or agents is (or during the last three years has been) suspended or debarred from doing business with the U.S. Government or any non-U.S. government or is (or during such period was) the subject of a finding of non-responsibility or ineligibility for U.S. Government or non-U.S. government contracting. Except as set forth in Section III.25(d) of the Seller's Schedule, the Company and its affiliates conducted their operations in compliance with all requirements of all material laws pertaining to all Government Contracts and bids. (e) Except as set forth in Section III.25(e) of the Seller's Schedule, no statement, representation or warranty made by the Company in any Government Contract, any exhibit thereto or in any certificate, statement, list, schedule or other document submitted or furnished to the U.S. Government or any non-U.S. government in connection with any Government Contract or bid (i) contained on the date so furnished or submitted any untrue statement of a material fact, or failed to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading or (ii) contains on the date hereof any untrue statement of a material fact, or fails to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading, except in the case of both clauses (i) and (ii) any untrue statement or failure to state a material fact that would not result in any material liability to the Company or the Subsidiary as a result of such untrue statement or failure to state a material fact. -24- III.26 Government Furnished Equipment. Section III.26 of the Seller's Schedule incorporates the most recent schedule delivered to the U.S. Government or any non-U.S. Government which identifies by description or inventory number certain equipment and fixtures loaned, bailed or otherwise furnished to or held by the Company or the Subsidiary by or on behalf of the United States or any foreign country. To the Knowledge of Seller, such schedule was accurate and complete on its date and, if dated as of the Closing Date, would contain only those additions and omit only those deletions of equipment and fixtures that have occurred in the ordinary course of business, except for such inaccuracies that could not reasonably be expected to have a material adverse effect on the operations of the Company and the Subsidiary. III.27 Organizational Conflicts of Interest. Except as set forth in Section III.27 of the Seller's Schedule, prior to the close of business on the date three Business Days prior to the Closing Date, to the Knowledge of the Seller each of the Company and the Subsidiary as part of its performance of the "IEW Contract" has, in the past four years, not had access to non-public information nor provided systems engineering, technical direction, consultation, technical evaluation, source selection services of services any type, nor prepared specifications or statements of work, nor engaged in any other conduct that would create in any current Government procurement an Organizational Conflict of Interest, as defined in Federal Acquisition Regulation 9.501, with the Company or, based on the Knowledge of the Seller of the business of L-3 as conducted on the date three Business Days prior to the Closing Date, with L-3 if the Company or the Subsidiary were to become an affiliate or division thereof. III.28 Affiliate Transactions. Except with respect to the Ilex Agreement and the agreements, arrangements, undertakings and transactions contemplated thereby, there are no agreements, arrangements, undertakings or other transactions between the Company or the Subsidiary and the Seller or any affiliate of the Seller. III.29 Disclosure in the Seller's Schedule. The disclosure in any Section of the Seller's Schedule to this Agreement of an exception to any representation and warranty shall constitute disclosure of such exception for all applicable representations and warranties under this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller that the statements related to Buyer contained in this Article IV are correct and complete as of the as of the date hereof and will be correct and complete as of the Closing Date, except as specified to the contrary in the disclosure schedule prepared by Buyer and attached hereto as Exhibit B (the "Buyer's Schedule"). The Buyer's Schedule is arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Article IV. IV.1 Due Incorporation; Requisite Power and Authority. Buyer is a corporation duly organized, validly existing and in good standing as a corporation under the laws of the State of Delaware and has all the requisite power and authority to execute and deliver the Transaction -25- Documents and to perform all transactions in the manner contemplated by the Transaction Documents. This Agreement has been and, when delivered, the remainder of the Transaction Documents will have been duly executed and delivered by Buyer and duly authorized and approved by all necessary corporate action on the part of Buyer. This Agreement constitutes and, when delivered, the remainder of the Transaction Documents will constitute the valid and binding obligations of Buyer, enforceable against Buyer in accordance with its or their terms, subject to bankruptcy and similar laws and equitable principles regarding the enforcement of contracts. IV.2 Requisite Consents; Nonviolation. The execution, delivery and performance of this Agreement by Buyer does not and the execution, delivery and performance of the remainder of the Transaction Documents by Buyer will not (a) violate or conflict with (i) the provisions of the Certificate of Incorporation or Bylaws of Buyer, (ii) any applicable law, rule or regulation, (iii) any resolution of the Board of Directors or the shareholders of Buyer, or (iv) order, writ, injunction or decree by which Buyer is bound; or (b) except as set forth in this Agreement, require the consent, license, permit, approval, authorization or other action by or with respect to, any governmental person or entity (except such approvals, permits or filings as may be required to comply with applicable state securities and antitrust laws). IV.3 Broker's Fees. Buyer has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement. ARTICLE V CERTAIN TRANSACTIONS AND AGREEMENTS PRIOR TO THE CLOSING DATE V.1 Confidentiality. The Company and Seller have provided Buyer information relating to the Company, the Subsidiary and Seller and have permitted Buyer to make an investigation of the Company, the Subsidiary and their business. To facilitate a smooth transition in ownership of the Company, prior to the Closing Date, Buyer, through its officers, employees, counsel, accountants and other authorized representatives, will continue to discuss the Company's business with Seller and the Company's and the Subsidiary's officers, employees, independent accountants, actuaries and other agents during the Company's normal business hours only in a manner that does not interfere with the Company's normal business or contravene any agreement to which the Company is bound. V.2 Business Organization. (a) Seller shall use its reasonable best efforts to cause each of the Company and the Subsidiary, through the Closing Date, (i) to operate its business only in the usual, regular and ordinary manner, on a basis consistent with past practice and to the extent consistent with such operation to preserve substantially intact its business organization, (ii) to keep available the services of the present officers and employees of the Company and the Subsidiary, and (iii) to preserve the present relationships of the Company and the Subsidiary with all entities or persons having significant business dealings with either of them. -26- (b) Except as may be approved in writing by Buyer, (1) from the date hereof to and including the date four Business Days prior to the Closing Date, Seller shall use its reasonable best efforts to cause the Company and its affiliates not to, and (2) from the date three Business Days prior to the Closing Date to and including the Closing Date, Seller shall not and shall cause its affiliates not to (i) transfer, sell, encumber or otherwise convey any asset of the business of the Company and the Subsidiary other than the sale of inventory in the ordinary course, (ii) grant or agree to any bonuses to any employee of the Company or the Subsidiary, any general increase in the rate of salary or compensation of the employees of the Company or the Subsidiary, (iii) commit the Company or the Subsidiary to provide any additional pension, retirement or other employee benefits to any employee of the Company or the Subsidiary, or any increase of existing benefits for such employees, (iv) enter into any contract, agreement or commitment other than in the ordinary course of business which involves aggregate consideration of in excess of $100,000 and which is not cancelable without penalty within 30 days, (v) incur or increase any indebtedness for borrowed money or guarantee the debt of any other person (other than any incurrence or increase in the ordinary course of business and then only if the amount of such incurrence or increase (to the extent not repaid prior to the date three Business Days prior to the Closing Date) is reflected as a liability on the Estimated Closing Statement of Net Assets), (vi) submit any bid or proposal, or modify any existing bid or proposal, in excess of $2,000,000, (vii) make any capital expenditure, or commit to make any capital expenditure, in excess of $100,000 in the aggregate, (viii) take any act on inconsistent with the representations and warranties of Seller hereunder or that would cause any of the representations and warranties of Seller hereunder to become untrue in any material respect, (ix) except for conversion of the Company from its status as a subchapter S Corporation under the Code to a subchapter C Corporation under the Code, make or change any material tax election or settle or compromise any material federal, state, local or foreign income tax liability or file any amended Tax Returns, (x) increase the compensation or fringe benefits of any present or former director, officer or employee of the Company or its Subsidiary (except for the payment of bonuses and increases in salary or wages of employees (other than officers) in the ordinary course of business consistent with past practice), (xi) grant severance or termination pay to any present or former director, officer or employee of the Company or its Subsidiary, in excess of $100,000 in the aggregate, (xii) loan or advance any money or other property to any present or former director, officer or employee of the Company or its Subsidiary (except for travel and other similar advances in the ordinary course of business and consistent with past practice), (xiii) establish, adopt, enter into, amend or terminate any Company Plan or any plan, agreement, program, policy, trust, fund or other arrangement that would be a Company Plan if it were in existence as of the date of this Agreement, (xiv) following the fourth Business Day prior to the Closing Date, make, declare or set a record date with respect to any distribution of assets of the Company or the Subsidiary in respect of the capital stock of the Company (whether by dividend, redemption, share purchase or otherwise) other than a liquidation and dissolution of all of the assets of the Company or (xv) agree, whether or not in writing, to do any of the foregoing. V.3 Cooperation. (a) General. Each of the parties will use all reasonable efforts to take all action and to do all things reasonably necessary, proper or advisable in order to consummate and make effective the transaction contemplated by this Agreement (including satisfaction, but not waiver, of the closing conditions). -27- (b) Filings and Consents. As soon as practicable, Buyer and Seller shall make, or cause to be made, any and all filings which are required under the Hart-Scott-Rodino Act, or any other required filings in any jurisdiction. The parties will furnish to each other such necessary information and assistance as each may reasonably request in connection with their preparation of necessary filings or submissions to any governmental agency, including, without limitation, any filings necessary under the provisions of the Hart-Scott-Rodino Act or any other required filings in any jurisdiction. Buyer shall pay the filing fee(s) associated with all Hart-Scott-Rodino Act filings. Seller shall use its reasonable efforts to obtain at the earliest practicable date all material required third party consents, identified in Section V.3(b) of the Seller's Schedule, of all third parties to leases, licenses, agreements, indentures or other instruments necessary to the consummation of the transactions contemplated hereby, and Buyer shall cooperate with Seller in order to obtain such consents at the earliest practicable date by performing such actions and by providing Seller with such information, including, without limitation, publicly-available financial information relating to Buyer, all as Seller may reasonably request. Anything contained in this Section V.3(b) to the contrary notwithstanding this Agreement shall not constitute an agreement to assign any claim, contract, license, lease, commitment, sales order or purchase order if an attempted assignment of the same without the consent of the other party thereto would constitute a breach thereof or in any way materially and adversely affect the rights of Seller thereunder. (c) Access. Prior to Closing, Seller will use its reasonable best efforts to cause the Company to permit representatives of Buyer to have reasonable access at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Company upon reasonable advance notice, to all premises, properties, personnel, books, records (including Tax records), contracts and documents of or pertaining to the Company. (d) Notice of Developments. Each party will give prompt written notice to the other of any material adverse development causing or constituting a breach of any of its own representations and warranties. V.4 Subsidiary Merger. Prior to the Closing, Seller shall consummate the Subsidiary Merger. V.5 No Seller Distributions. Until such time as the transactions pursuant to this Agreement have been consummated in accordance with the terms hereof, Seller shall not distribute nor transfer any of its assets now owned or hereafter acquired. V.6 Further Assurances. Each of the parties hereto agrees that it will, from time to time after the date of the Agreement, execute and deliver such other certificates, documents and instruments and take such other action as may be reasonably requested by the other party to carry out the actions amid transactions contemplated by this Agreement. -28- ARTICLE VI COVENANTS REGARDING POST CLOSING ACTIVITIES VI.1 Employee Matters. (a) Immediately following the Closing on the Closing Date, Buyer shall offer employment at will in a similar position to each employee of the Business who on the Closing Date is employed by the Acquired Company or on an approved leave of absence (the "Employees") at a rate of base compensation and salary equal to not less than one hundred percent (100%) of their base compensation and salary immediately prior to the Closing Date; provided, however, that nothing herein shall interfere with or otherwise impair any right of Buyer to terminate the employment of any employee at any time. Buyer shall assume the responsibility for all obligations and liabilities arising out of or in any way connected with its employment of the Employees or the termination thereof, including, without limitation, any and all claims for wrongful discharge, discrimination or other violations of law or for payment under any employee benefit plans for claims incurred after the Closing on the Closing Date. Buyer shall also offer to Employees participation in benefit programs in accordance with Buyer's employee benefit plans and other fringe benefits which programs shall be, at a minimum, substantially comparable, in the aggregate, to the Company Plans (excluding for these purposes any Company Plans providing equity awards or equity based awards) and shall be eligible to participate in said employee benefit plans and other fringe benefits of Buyer immediately and on the same basis as such plans and benefits are offered to new employees of Buyer; provided, however, that payment of any deductibles under the Company Plans by such Employees will be credited under Buyer's plans during 1998; provided, further, that Buyer may change, amend or terminate any such Company Plans at any time following the Closing Date. In addition, Buyer agrees that any preexisting condition clause in any of the Acquired Company's health or disability insurance coverage shall not be applicable to the Employees to the extent allowable. (b) Buyer shall assume and be responsible for all sums then due any Employee who accepts Buyer's offer of employment, which sums shall include, without limitation, salary, wages, overtime, bonuses, accrued and unused vacation time and any other payments due pursuant to any agreements between the Acquired Company and such Employee payable after the Closing Date or as required by applicable law. All Employees who accept Buyer's offer of employment shall receive credit for years of service with or as granted by the Acquired Company. (c) Any former employee of the Acquired Company (or their dependents) who becomes eligible for health continuation coverage under the Acquired Company's major medical plan by virtue of his or her failure to accept Buyer's offer of employment being tantamount to a qualifying event, for the entitlement to such coverage, shall have available health continuation coverage satisfying the requirements of Section 4870 B of the Code and Section 601 through 608 of ERISA after the Closing through health benefit plans maintained by Buyer or its affiliates. (d) Buyer covenants and agrees that it will assume and be responsible for any obligations after the Closing Date to Employees who are on workers' compensation or a similar leave of absence from the Acquired Company on the Closing Date to the extent such obligations -29- are (i) pursuant to fully insured Company Plans, or (ii) fully accrued on the Closing Statement of Net Assets. VI.2 Seller's Indemnification. (a) Seller's Indemnification. Subject to the limitation of Section VI.2(c), Seller shall indemnify, defend and hold Buyer and its affiliates (and their respective officers, directors, employees and agents), harmless from any liability, damages, deficiency, loss, cost or expense (including but not limited to reasonable attorney's fees and any expenses of investigation in connection with any claim hereunder) actually incurred or paid by Buyer and its affiliates (or their respective officers, directors, employees and agents), arising out of or resulting from (i) the inaccuracy of any representation or the breach of any warranty made in this Agreement by Seller to Buyer; (ii) any failure of Seller to perform or comply with any of its covenants and agreements set forth in this Agreement; (iii) any Liability of the Seller or any of its affiliates or the Company or any of its affiliates other than Assumed Liabilities; or (iv) any Government Bid, Government Contract or Government Disclosure; provided, however, that Seller shall only indemnify Buyer and its affiliates for the first $10,000,000 of claims related to any Government Bid, Government Contract or Government Disclosure. Notwithstanding anything to the contrary contained herein, the Buyer shall be permitted to offset any amounts which would otherwise become payable to the Seller under Section 11.4 against amounts owing by the Seller under this Section VI.2(iv); provided that such right of offset shall only be exercisable with respect to Additional Consideration if notice of the exercise of such right is delivered to the Seller by the Buyer prior to the date on which the calculation of EBIT with respect to such Additional Consideration shall have been finally determined and agreed to pursuant to Section II.5. (b) Tax Indemnification. Seller shall indemnify and hold harmless the Buyer and its affiliates (and their respective officers, directors, employees and agents) from and against any and all Taxes for or in respect of each of the following (excluding, in all cases, Taxes included within the definition of Assumed Liabilities): (i) any and all Taxes with respect to any taxable period or a portion thereof, of the Company (or any predecessor) ending on or before the close of business on the date three Business Day's prior to the Closing Date; (ii) with respect to any and all Taxes of any member of a consolidated, combined or unitary group of which the Company (or any predecessor) is or was a member on or prior to the close of business on the date three Business Days prior to the Closing Date by reason of the liability of the Company pursuant to Treasury Regulation Section 1.1502-6(a) (or any analogous or similar state, local or foreign law or regulation), as a transferee or successor, by contract, or otherwise; (iii) any Taxes arising out of a breach of the representations and warranties contained in Section III.15; and (iv) any payments required to be made after the Closing Date under any Tax sharing, Tax indemnity, Tax allocation or similar contracts (whether or not written), to -30- which the Company or any predecessor was obligated, or was a party, on or prior to the close of business on the date three Business Days prior to the Closing Date. (c) Notification; Control of Proceedings. Buyer shall promptly give to the Seller written notice if it becomes aware of any liability, loss, damage, claim, cost and expense with respect to which indemnity may be asserted; provided that the failure to give prompt notice will not release the Seller from liability hereunder, except to the extent they are actually prejudiced thereby. If any claim is made by a third person or an action or proceeding commenced for which Buyer shall seek indemnity from Seller, Buyer shall give to the Seller reasonable written notice of the claim and request Seller to defend the same. Seller shall have the right to defend against such liability at their expense, and shall give written notice to Buyer of the commencement of such defense with reasonable promptness after the giving of the written notice of the claim by Buyer. Buyer shall be entitled to participate with Seller in such defense, but shall not be entitled in any way to release, waive, settle, modify or pay such claim without the written consent of the Seller, if Seller have assumed such defense. In the event Seller does not assume the defense of the matter as provided above, or does not notify Buyer of its election to defend such a matter within 30 days, Buyer shall have the full right to defend against such liability in such manner as it may deem appropriate. In the event Seller shall assume the defense, Buyer shall cooperate in the defense of such action, and the records of each shall be available to the other with respect to such defense, provided, however, that the Seller shall not, in the defense of any such action, consent to the entry of any judgment or enter into any settlement where such entry of judgment or settlement does not include a provision releasing the Buyer from all liability with respect to such action or that provides for a remedy other than the payment of money damages, except with the written consent of Buyer, such consent not to be unreasonably withheld or delayed. (d) Limitation on Indemnification. Notwithstanding the provisions of Sections VI.2(a) (except with respect to (A) clauses (ii), (iii) and (iv) of Section VI.2(a) and (B) Taxes as provided under Section VI.2(b)), (i) Seller shall not be liable to Buyer on account of any breach of any warranty or representation by Seller in this Agreement until the aggregate amount of all claims against Seller for which indemnification would have been available hereunder but for the application of the limitation set forth in this clause (i) for all breaches exceeds one percent (1%) of the Cash Purchase Price and then only for the amount by which such aggregate cumulative liability is in excess of one percent (1%) of the Cash Purchase Price; and (ii) in no event shall Seller's obligations to Buyer under Section VI.2(a)(i) exceed, in the aggregate, $5,000,000. (e) Survival. The indemnification obligations of Seller under this Section VI.2 (except with respect to indemnification pursuant to Section VI.2(a)(ii), (iii) and (iv)) shall terminate on June 30, 1999 as to any claim not asserted prior to such date, except that the indemnification obligations of Seller for (x) a breach of Sections III.1, III.2, III.3, III.5 and III.15 and (y) for Taxes under Section VI.2(b) shall not terminate until the expiration of the sixty-day period after the expiration of the applicable statute of limitations as to any claim not asserted prior to such date and that the indemnification obligations of Seller for a breach of Sections III.4, III.11 and III.16 shall terminate three (3) years after the date hereof as to any claim not asserted prior to such date. The indemnification obligations of Seller (I) under Section VI.2(a)(ii) shall terminate ten (10) years after the date hereof and (II) under Section VI.2(a)(iv) shall terminate on June 30, 2000, in each case as to any claim not asserted prior to such date. -31- (f) Indemnification Provisions for Benefit of Seller. (i) In the event Buyer breaches (or in the event any third party alleges facts that, if true, would mean Buyer has breached) any of its representations, warranties, and covenants contained in this Agreement or in any of the Transaction Documents, then the Buyer agrees to indemnify Seller and its affiliates (and their respective officers, directors, employees and agents) from and against the entirety of any Losses (up to but not in excess of the Cash Purchase Price) Seller or its affiliates (and their respective officers, directors, employees and agents) may suffer through and after the date of the claim for indemnification (including any Losses Seller or its affiliates (and their respective officers, directors, employees and agents) may suffer after the end of any applicable survival period) resulting from, arising out of, or caused by the breach (or the alleged breach). (ii) Notwithstanding anything to the contrary herein contained, (i) Buyer will indemnify, defend and hold harmless Seller and its affiliates (and their respective officers, directors, employees and agents) from and against any Losses as a result of claims based on or arising from any Assumed Liabilities or the operation of the Business after the Closing Date and (ii) such indemnification shall not be limited in time or amount or subject to any deductible or cap. (iii) Seller or its affiliates shall with reasonable promptness give to the Buyer written notice if it becomes aware of any Losses with respect to which indemnity may be asserted; provided that the failure to give prompt notice will not release the Buyer from liability thereunder, except to the extent they are actually prejudiced thereby. If any claim is made by a third person or an action or proceeding commenced for which Seller or other indemnified parties shall seek indemnity from Buyer, Seller or its affiliates shall give to Buyer reasonable written notice of the claim and request Buyer to defend the same. Buyer shall have the right to defend against such liability at their expense, and shall give written notice to Seller of the commencement of such defense with reasonable promptness after the giving of the written notice of the claim by Seller or its affiliates. Seller or other indemnified parties shall be entitled to participate with Buyer in such defense, but shall not be entitled in any way to release, waive, settle, modify or pay such claim without the written consent of the Buyer, if Buyer has assumed such defense. In the event Buyer does not assume the defense of the matter as provided above, or does not notify Seller of their election to defend such a matter within 30 days, Seller or other indemnified parties shall have the full right to defend against such liability in such manner as it or they may deem appropriate. In the event Buyer shall assume the defense, Seller or other indemnified parties shall cooperate in the defense of such action, and the records of each shall be available to the other with respect to such defense, provided, however, that the Buyer shall not, in the defense of any such action, consent to the entry of any judgment or enter into any settlement where such entry of judgment or settlement does not include a provision releasing the Seller or other indemnified parties from all liability with respect to such action or that provides for a remedy other than the payment of money damages, except with the written consent of Seller or other indemnified parties. (iv) The indemnification obligations of Buyer under this Section VI.2(f) shall not terminate until the expiration of the applicable statute of limitations; provided, however, -32- that the indemnification obligations of Buyer related to any failure of Seller to perform or comply with any of its covenants and agreements set forth in this Agreement shall terminate ten years from the date hereof as to any claim not asserted prior to such date. VI.3 Contracts Requiring Consent to Assignment. Notwithstanding anything in this Agreement, neither this Agreement nor any document or instrument delivered pursuant hereto shall constitute an assignment of any claim, contract, agreement, license, lease, commitment, sales order or purchase order or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof without the consent of any other Person would constitute a breach thereof or in any way adversely affect the rights to be assigned. Until such consent is obtained, or if an attempted assignment thereunder would be ineffective or would affect the rights of Seller or any affiliate thereunder so that the Buyer would not in fact receive all such rights, Seller and the Buyer will cooperate with each other (and, to the extent required, Seller shall cause its affiliates to cooperate with the Buyer) to provide for the Buyer the benefits of, and to permit the Buyer to assume all liabilities under, any such claim, contract, agreement, license, lease, commitment, sales order or purchase order, including enforcement at the request and expense of the Buyer for the benefit of the Buyer of any and all rights of Seller or any affiliate against a third party thereto arising out of the breach or cancellation thereof by such third party; and any transfer or assignment to the Buyer by Seller or any affiliate of any property or property rights or any contract or agreement which shall require the consent or approval of any third party shall be made subject to such consent or approval being obtained. The parties shall each use their best efforts to obtain any required consent to assignment. VI.4 Company Plans. From and after the Closing, Buyer agrees to assume Seller's obligations under and become the plan sponsor of each of the Company Plans in effect immediately prior to the Closing Date and Buyer shall be entitled to all rights, obligations and duties of Seller under such Company Plans and Seller shall cause any assets, set-aside or otherwise, pertaining to the Company Plans to be transferred to Buyer; such assets shall include, but not be limited to, qualified trusts, VEBAs, and grantor trusts and insurance policies. Notwithstanding anything to the contrary herein contained, the assumption of such obligations is not intended to and shall not be construed to impair the right or ability of Buyer to unilaterally amend or terminate any such benefit plans and other fringe benefits, or any Company Plan in effect immediately prior to the Closing Date, at any time after the Closing Date. VI.5 Research and Experimental Expenses. Seller will use its reasonable best efforts to cause to be furnished to Buyer as soon as reasonably practicable, but in no event more than 180 days after Closing, all information reasonably requested relating to the base period research expenses and any other information to allow Buyer to claim research and experimental credits in accordance with the relevant sections of the Code and treasury regulations promulgated thereunder. -33- ARTICLE VII CONDITIONS TO OBLIGATIONS OF BUYER AND SELLER The obligations of Buyer and Seller to consummate the transactions contemplated by this Agreement on the Closing Date shall be subject to the fulfillment at or prior to the Closing of each of the following conditions, except to the extent such conditions are waived in writing by Buyer and Seller: VII.1 Government Approvals; Litigation. All requisite governmental approvals and authorizations necessary, including, but not limited to, any such approvals or authorizations under the Hart-Scott-Rodino Act, for the consummation of the transactions contemplated hereby shall have been duly issued or granted and all applicable waiting periods shall have expired or otherwise been terminated. No action or proceeding by any governmental authority or any third party challenging the transactions contemplated by this Agreement or any parties' ability or right to participate therein shall be pending or threatened against any party. No unfavorable decree or order shall exist that would prevent or make the consummation of any of the transactions contemplated by this Agreement unlawful or would result in the payment of damages or other consequences materially adverse to the business or assets of Seller, Buyer or the Company. VII.2 Permits and Approvals. Buyer, Seller and the Company shall each have received all consents, waivers, approvals, licenses, or other authorizations required for the performance of this Agreement by the parties hereto. ARTICLE VIII CONDITIONS TO BUYER'S OBLIGATIONS The obligation of Buyer to consummate the transactions contemplated by this Agreement on the Closing Date shall be subject to the fulfillment at or prior to the Closing of each of the following conditions, except to the extent such conditions are waived by Buyer, such waiver to be evidenced by Buyer's consummation of the transaction contemplated hereby: VIII.1 Representations and Warranties; Performance. The representations and warranties of the Seller set forth in this Agreement shall be true in all material respects (except that where any statement in a representation or warranty expressly includes a standard of materiality, such statement shall be true and correct in all respects) as of the Closing Date with the same effect as though made at such time. Seller shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing. Seller shall have delivered to Buyer a certificate, dated the Closing Date, as to the foregoing. VIII.2 Escrow Agreement. The Escrow Agreement to be entered into pursuant to the Stock Purchase Agreement shall have been assigned to Buyer pursuant to an Assignment of Escrow Agreement in substantially the form of Exhibit VIII.2 hereto. -34- VIII.3 Subsidiary Merger. The Subsidiary Merger shall have been consummated. VIII.4 Material Adverse Change. Between the date of this Agreement and the Closing, there shall have been no material adverse change (or any event that would reasonably be expected to result in such change) in the condition (financial or otherwise), results of operation, business, assets or properties of the Company. VIII.5 Proceedings. All proceedings to he taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Buyer and its counsel, and Buyer shall have received copies of such documents and such other evidence as it or its counsel may reasonably request in order to establish the consummation of such transaction and the taking of all proceedings in connection therewith. VIII.6 Ilex Agreement. The Closing (as defined therein) under the Ilex Agreement shall have occurred in accordance with the terms thereof. VIII.7 Non-Competition Agreements. The Non-Competition Agreements entered into pursuant to the Stock Purchase Agreement shall have been assigned to Buyer pursuant to an Assignment of Non-Competition Agreements in substantially the form of Exhibit VIII.6 hereto. ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement on the Closing Date shall be subject to the fulfillment at or prior to the Closing of each of the following conditions, except to the extent such conditions are waived by Seller, such waiver to be evidenced by Seller's consummation of the transaction contemplated hereby. IX.1 Representations and Warranties; Performance. The representations and warranties of Buyer set forth in this Agreement shall be true in all material respects (except that where any statement in a representation or warranty expressly includes a standard of materiality, such statement shall be true and correct in all respects) as of the Closing Date, with the same effect as though made at such time. Buyer shall have paid the Cash Purchase Price and otherwise performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing. IX.2 Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Seller and their counsel, and Seller shall have received copies of such documents and such other evidence as they or their counsel may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. -35- IX.3 Ilex Agreement. The Closing (as defined therein) under the Ilex Agreement shall have occurred. ARTICLE X FEES AND EXPENSES X.1 Expenses. Except as explicitly provided hereunder each party hereto shall bear its own expenses incurred in connection with the negotiation and consummation of the transactions contemplated by this Agreement. X.2 Fees or Commissions of Brokers. Buyer has no obligation to pay any fees or commissions of any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Seller could be liable. ARTICLE XI TERMINATION XI.1 Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated at any time before the Closing Date, as follows, and in no other manner: (a) by mutual consent of Buyer and Seller; (b) by either Buyer or Seller if the Closing shall not have occurred on or before 5:00 p.m., Pacific Time, on March 31, 1998; provided that the right to terminate this Agreement under this Section XI.1 shall not be available to any party whose failure to fulfill any obligations under this Agreement has been the cause of, or results in, the failure of the Closing to have occurred within such period; (c) by either Buyer or Seller, respectively, if there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the other party and such breach of a covenant or agreement has not been cured within ten (10) days after notice of such breach has been given to the other party; or (d) by either Buyer or a majority in interest of Seller if (i) there shall be a final, non-appealable order of a federal or state court in effect preventing consummation of the transaction, or (ii) there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the acquisition by any governmental entity which would make consummation of the transaction illegal. XI.2 Effect of Termination. In the event of a termination of this Agreement by any party pursuant to Section XI.1, this Agreement shall become void and have no effect, and there shall be no obligations or liability on the part of any party or its respective officers, directors or -36- trustees, except as set forth in Sections V.1 and X.1 (except to the extent that termination has occurred pursuant to subsection XI.1(c), above). ARTICLE XII MISCELLANEOUS XII.1 Time of the Essence. Time is of the essence in this Agreement; provided, however, that the parties shall have a reasonable period of time to cure any failure to perform their obligations hereunder, which period shall not be longer than three (3) Business Days for purposes of any obligations under Article II. XII.2 Entire Agreement. Except as set forth in Section V.1 above, this Agreement and the other agreements contemplated hereby contain the entire agreement of the parties hereto, and supersedes any prior written or oral agreements between them concerning the subject matter contained herein. There are no representations, agreements, arrangements or understandings, oral or written, between the parties to this Agreement, relating to the subject matter contained in this Agreement, which are not fully expressed herein or the agreement identified in Section V.1 above. The Schedules and each Exhibit attached to this Agreement or delivered pursuant to this Agreement is incorporated herein by this reference and constitutes a part of this Agreement. XII.3 Press Releases amid Public Announcements. Neither Seller nor Buyer shall issue any press release or make any public announcement concerning the matters set forth in this Agreement (other than as required by applicable disclosure rules or regulations) without the consent of the other party, which consent shall not be unreasonably delayed or withheld. Seller and Buyer will cooperate to jointly prepare and issue any press release which may be issued to announce the entering into this agreement or the closing of the transaction contemplated by this Agreement. XII.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. XII.5 Descriptive Headings. The Article and Section headings in this Agreement are for convenience only and shall not affect the meanings or construction of any provision of this Agreement. XII.6 Notices. Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficiently given on the date delivered personally or by telecopier (if a copy is sent by mail), or five (5) days after posting by registered or certified mail, postage prepaid, addressed as follows: -37- If to Buyer: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Telecopier Number: (212) 805-5494 Attention: Christopher C. Cambria With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Telecopier Number: (212) 455-2502 Attention: William E. Curbow And if to Seller: FAP Acquisition Trust c/o First Union National Bank 10 State House Square Hartford, CT 06103-3698 Telecopier Number: (860) 247-1356 Attention: W. Jeffrey Kramer With copies to: Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, CA 94104 Telecopier Number: (415) 983-1200 Attention: Graham Taylor and Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Telecopier Number: (860) 527-5188 Attention: James G. Scantling or to such other address or addresses as a party shall have previously designated by notice to the sender given in accordance win this Section. XII.7 Arbitration. Any dispute under this Agreement prior to June 30, 2000 (and after such date, but in such case only if and for so long as there are Impounded Funds (as defined in the Escrow Agreement between Seller, the Company and the stockholders of the Company (the -38- "Escrow Agreement")) with respect to such dispute) (the "Initial Arbitration Period") which is not settled by mutual agreement among the parties hereto, shall be finally settled by binding arbitration in New York, New York, conducted by and in accordance with the rules then in effect of the Judicial Arbitration and Mediation Service; provided that after the Initial Arbitration Period or the payment or distribution of all amounts held in escrow pursuant to the Escrow Agreement (or when a Notice of Release (as defined in the Escrow Agreement) has been received with regard to all remaining amounts in such escrow), whichever occurs earlier, any such dispute shall be settled by binding arbitration in San Francisco, California, conducted by and in accordance with the rules then in effect of the Judicial Arbitration and Mediation Service. Each party shall bear its own costs and attorneys' and witness' fees. The prevailing party in any arbitration, as determined by the arbitration panel, shall be entitled to an award against the other party in the amount of the prevailing party's costs and reasonable attorneys' fees. In making any such award, the arbitration panel shall take into consideration the outcome of the proceeding and the reasonableness of the conduct of each such party in connection with the dispute, in light of the facts known to such party at the time such party engaged in such conduct. The arbitrator shall not have authority to award punitive damages hereunder. XII.8 Choice of Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. XII.9 Bulk Sale and Other Tax Filings. The Buyer and Seller agree to waive compliance with applicable state sales Tax, bulk sales notification statutes and regulations and any applicable state tax statutes, in connection with the sale of the Acquired Assets to the Buyer. XII.10 Transfer Taxes; Sales Tax. The parties agree that the Buyer shall pay the sales Tax on the transfer of personal property and each of the Seller or the Buyer, as appropriate, shall be responsible for such other transfer Taxes applicable to the transaction contemplated hereby as are customary in the jurisdiction in which the Tax is payable (other than Taxes computed on the basis of income) and each party so responsible shall indemnify, defend and hold the other harmless with respect to such Taxes. Each Party shall file, or cooperate with the other Party in filing, all necessary documentation and Tax Returns with respect to such Transfer Taxes. XII.11 Binding Effect; Benefits. This Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer on any person other than the parties or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. XII.12 Assignability. Except as explicitly contemplated hereunder, neither this Agreement nor any of the parties' rights hereunder shall be assignable by any party without the prior written consent of the other party and any attempted assignment without such consent shall be void provided, however, that this Agreement may be assigned by Buyer to an affiliate of Buyer which shall have been formed for the purpose of consummating the transactions contemplated hereby. XII.13 Waiver and Amendment. Any term or provision of this Agreement may be waived at any time by the party which is entitled to the benefits thereof. The waiver by any -39- party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. The parties may, by mutual agreement in writing, amend this Agreement in any respect. XII.14 Attorneys' Fees. In the event of any action or proceeding to enforce the terms and conditions of this Agreement, the prevailing party shall be entitled to an award of reasonable attorneys' and experts' fees and costs, in addition to such other relief as may be granted. XII.15 Severability. If and to the extent that any court of competent jurisdiction holds any provisions (or any part thereof) of this Agreement to be illegal, invalid or unenforceable, such holding shall not affect the validity of the remainder of this Agreement. XII.16 No Recourse. It is expressly understood and agreed that this Agreement is executed and delivered on behalf of Seller by First Union National Bank ("First Union"), not in its individual capacity but solely as Trustee under the trust agreement under which Seller is organized, in the exercise of the powers and authority conferred and vested in it as the Trustee thereunder, and each of the representations, warranties, undertakings and agreements herein made on the part of Seller is made and intended not as a personal representations, warranty, undertaking and agreement by First Union but is made and intended for the purpose of binding only the trust estate created by the trust agreement under which Seller is organized (the "Trust Estate"), and all persons having any claim against First Union or Seller by reason of the transactions contemplated by this Agreement shall for payment or satisfaction thereof not seek recourse against First Union except in its capacity as trustee and then only to the extent of the Trust Estate. -40- IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the day and year first above written. L-3 COMMUNICATIONS CORPORATION By: /s/ [ILLEGIBLE] --------------------------------- Name: Title: FAP TRUST By: First Union National Bank, not in its individual capacity but solely as trustee By: --------------------------------- Name: W. Jeffrey Kramer Title: Vice-President IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the day and year first above written. L-3 COMMUNICATIONS CORPORATION By: --------------------------------- Name: Title: FAP TRUST By: First Union National Bank, not in its individual capacity but solely as trustee By: /s/ W. Jeffrey Kramer --------------------------------- Name: W. Jeffrey Kramer Title: Vice-President EXHIBIT VIII-2 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by and between L-3 COMMUNICATIONS CORPORATION, a Delaware corporation ("Assignee"), and FAP TRUST, a Connecticut trust ("Assignor"). WITNESSETH WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller intends to acquire all of the outstanding capital stock of Ilex Systems, Inc. (the "Company"); and WHEREAS, pursuant to the Stock Purchase Agreement, Assignor, the Company, all of the stockholders of the Company (the "Sellers") and The First National Bank of Chicago, a national banking association ("Escrow Agent"), have entered into that certain Escrow Agreement dated as of February __, 1998 (the "Escrow Agreement") for the purpose of establishing a fund to satisfy certain indemnification obligations of the Sellers that may arise under the Stock Purchase Agreement and to facilitate the payment of the cash purchase price adjustment contemplated thereby; and WHEREAS, Assignor and Assignee have entered into an Asset Purchase Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement") pursuant to which Assignee will acquire substantially all of the assets and assume substantially all of the liabilities of the Company; and WHEREAS, in connection with the Asset Purchase Agreement and the transactions contemplated thereby, Assignor desires to assign to Assignee its entire right, title and interest in, under and to the Escrow Agreement, and Assignee desires to take such assignment from Assignor, all upon the terms and conditions set forth below: NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignment of the Escrow Agreement. Assignor hereby assigns to Assignee all of Assignor's right, title and interest in, under and to the Escrow Agreement, and Assignee hereby assumes all of Assignor's duties and obligations under the Escrow Agreement. 2. Assertion of Claims Under the Escrow Agreement. Assignor and Assignee understand that any and all claims which Assignee may have under the Escrow Agreement will in most instances, but not in all, be based on facts and circumstances that constitute both breaches of certain representations, warranties and covenants of Assignor contained in the Asset Purchase Agreement and breaches of similar representations, warranties and covenants of the Company and the Sellers contained in the Stock Purchase Agreement. Accordingly, Assignor and Assignee agree as follows: (i) For purposes of this Section 2, capitalized terms used but not otherwise defined herein shall have the respective meanings given to them in the Escrow Agreement. (ii) Assignor shall promptly provide written notice to Assignee upon its becoming aware of any facts or circumstances that give rise to a breach of representation, warranty or covenant under the Stock Purchase Agreement. Assignee shall promptly provide written notice to Assignor upon its becoming aware of any facts or circumstances that give rise to a breach of representation, warranty or covenant under the Asset Purchase Agreement. (iii) Assignee agrees that it will promptly provide Escrow Agent with a Notice of Claim in all instances where Assignee's claims pursuant to the Asset Purchase Agreement may also be asserted by Assignor pursuant to the Stock Purchase Agreement (a "Matching Claim"). The following procedure shall be followed by Assignor and Assignee in connection with each Matching Claim: (a) Upon submission by Assignee to Escrow Agent of a Notice of Claim with respect to any Matching Claim, Assignee shall direct Escrow Agent in writing to make any disbursements required in respect thereof directly to Assignee; and (b) Upon the determination of the amount, if any, payable to Assignee with respect to such Matching Claim, whether by negotiation or litigation, and disbursement by Escrow Agent to Assignee of such amount out of the Escrow Fund in respect of any Matching Claim, Assignee agrees that such Matching Claim shall be deemed fully paid and satisfied and neither Assignor nor Escrow Agent shall have any further liability to Assignee with respect to such Matching Claim, nor shall Assignee have any right to seek any additional payments out of the Escrow Fund pursuant to the Asset Purchase Agreement with respect to such Matching Claim. (iv) In consideration of the mutual promises contained in this Agreement, Assignee agrees that it will, if known, provide Escrow Agent with a Notice of Claim in respect of any and all claims that may be asserted by Assignor pursuant to the Stock Purchase Agreement but may not be asserted by Assignee pursuant to the Asset Purchase Agreement (an "Assignor Claim"). The following procedure shall be followed by Assignor and Assignee in connection with each Assignor Claim: (a) Upon submission by Assignee to Escrow Agent of a Notice of Claim with respect to any Assignor Claim, Assignee shall direct Escrow Agent in writing to make any disbursements required in respect thereof directly to Assignee; and -2- (b) Upon determination of the amount, if any, payable to Assignee with respect to such Assignor Claim, whether by negotiation or litigation, and disbursement by Escrow Agent to Assignee of such amount out of the Escrow Fund in respect of any Assignor Claim, Assignee shall within two business days thereafter remit to Assignor by certified check or wire transfer to an account designated by Assignor in writing an amount equal to the amounts disbursed to Assignee with respect to such Assignor Claim, and Assignor agrees that its claim shall be deemed fully paid and satisfied upon receipt of such certified check or wire transfer and that neither Assignee nor Escrow Agent shall have any further liability to Assignor with respect to that claim, nor shall Assignor have any right to seek any additional payments out of the Escrow Fund pursuant to the Stock Purchase Agreement with respect to that claim. Assignee shall not in any way be responsible to Assignor with respect to any such claim except for the requirement to deliver to Assignor amounts disbursed to Assignee with respect to such claim from the Escrow Fund. (v) Assignee agrees to pursue any Matching Claim only under the claims procedures set forth in this Agreement and the Escrow Agreement. (vi) Assignee shall promptly deliver to Assignor copies of any and all Award Notices, Notices of Claims, Notices of Releases, Objections and Withdrawal Notices received by it pursuant to Section 5 of the Escrow Agreement. (vii) Assignor and Assignee shall cooperate with each other regarding the submission of any and all Notices of Claims to Escrow Agent in connection with the Escrow Agreement, and each of them agree to take any and all such reasonable actions that either of them deem necessary or appropriate to otherwise effectuate the purpose and intent of this Section 2. 3. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 5. Arbitration. Any dispute under this Agreement which is not settled by mutual agreement among the parties hereto, shall be finally settled by binding arbitration in New York, New York, conducted by and in accordance with the rules then in effect of the Judicial Arbitration and Mediation Service. Each party shall bear its own costs and attorneys' and witness' fees. The prevailing party in any arbitration, as determined by the arbitration panel, shall be entitled to an award against the other party in the amount of the prevailing party's costs and reasonable attorneys' fees. In making any such award, the arbitration panel shall take into consideration the outcome of the proceeding and the reasonableness of the conduct of each such party in connection with the dispute, in light of -3- the facts known to such party at the time such party engaged in such conduct. The arbitrator shall not have authority to award punitive damages hereunder. 6. Entire Agreement. This Agreement and the Asset Purchase Agreement constitute the entire agreement between Assignor and Assignee with respect to the subject matter hereof. This Agreement cancels and supersedes all prior agreements, understandings and negotiations between the parties to this Agreement with respect to the subject matter of this Agreement. This Agreement may only be varied or modified by a written document executed by each of the parties hereto. 7. Assignment. The rights and benefits of the parties under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of such parties. Neither this Agreement nor any rights or benefits hereunder may be assigned or transferred by any party hereto without the prior written consent of all other parties hereto. 8. Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Assignee: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Telecopier Number: (212) 805-5494 Attention: Christopher C. Cambria With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Telecopier Number: (212) 455-2502 Attention: William E. Curbow And if to Assignor: FAP Trust c/o First Union National Bank 10 State House Square Hartford, CT 06103-3698 Telecopier Number: (860) 247-1356 Attention: W. Jeffrey Kramer -4- With copies to: Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, CA 94104 Telecopier Number: (415) 983-1200 Attention: Graham Taylor and Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Telecopier Number: (860) 527-5188 Attention: James G. Scantling Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 9. Further Assurances. Each of the parties to this Agreement shall execute such other documents and instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof. 10. No Recourse. It is expressly understood and agreed that this Agreement is executed and delivered on behalf of Assignor by First Union National Bank ("First Union"), not in its individual capacity but solely as Trustee under the trust agreement under which Assignor is organized, in the exercise of the powers and authority conferred and vested in it as the Trustee thereunder, and each of the representations, warranties, undertakings and agreements herein made on the part of Assignor is made and intended not as a personal representation, warranty, undertaking or agreement by First Union but is made and intended for the purpose of binding only the trust estate created by the trust agreement under which Assignor is organized (the "Trust Estate"), and all persons having any claim against First Union or Assignor by reason of the transactions contemplated by this Agreement shall for payment or satisfaction thereof not seek recourse against First Union except in its capacity as trustee and then only to the extent of the Trust Estate. -5- IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: /s/ Christopher Cambria ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President Consented to by: THE FIRST NATIONAL BANK OF CHICAGO as Escrow Agent under the Escrow Agreement By: ------------------------------- Name: Title: 6 IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: ------------------------------- Name: Title: ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: /s/ W. Jeffrey Kramer ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President Consented to by: THE FIRST NATIONAL BANK OF CHICAGO as Escrow Agent under the Escrow Agreement By: ------------------------------- Name: Title: 6 IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: ------------------------------- Name: Title: ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President Consented to by: THE FIRST NATIONAL BANK OF CHICAGO as Escrow Agent under the Escrow Agreement By: /s/ John R. Prenolville ------------------------------- Name: John R. Prenolville Title: Vice President 6 EXHIBIT VIII-7 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by and between L-3 COMMUNICATIONS CORPORATION a Delaware corporation, ("Assignee") and FAP TRUST, a Connecticut trust ("Assignor"). WITNESSETH WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller intends to acquire all of the outstanding capital stock of Ilex Systems, Inc. (the "Company"); and WHEREAS, pursuant to the Stock Purchase Agreement, Assignor and Joseph Lopez ("Seller") have entered into that certain Confidentiality and Non-Competition Agreement dated as of February __, 1998 (the "Non-Competition Agreement"); and WHEREAS, Assignor and Assignee have entered into an Asset Purchase Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement") pursuant to which Assignee will acquire substantially all of the assets and assume substantially all of the liabilities of the Company; and WHEREAS, in connection with the Asset Purchase Agreement and the transactions contemplated thereby, Assignor desires to assign to Assignee its entire right, title and interest in, under and to the Non-Competition Agreement, and Assignee desires to take such assignment from Assignor, all upon the terms and conditions set forth below: NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignment of the Non-Competition Agreement. Pursuant to and in accordance with terms of Section 8 of the Non-Competition Agreement, Assignor hereby assigns to Assignee all of Assignor's right, title and interest in, under and to the Non-Competition Agreement, and Assignee hereby assumes all of Assignor's duties and obligations under the Non-Competition Agreement. 2. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4. Entire Agreement. This Agreement and the Asset Purchase Agreement constitute the entire agreement between Assignor and Assignee with respect to the subject matter hereof. This Agreement cancels and supersedes all prior agreements, understandings and negotiations between the parties to this Agreement with respect to the subject matter of this Agreement. This Agreement may only be varied or modified by a written document executed by each of the parties hereto. 5. Assignment. The rights and benefits of the parties under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of such parties. Neither this Agreement nor any rights or benefits hereunder may be assigned or transferred by any party hereto without the prior written consent of all other parties hereto. 6. Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Assignee: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Telecopier Number: (212) 805-5494 Attention: Christopher C. Cambria With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Telecopier Number: (212) 455-2502 Attention: William E. Curbow And if to Assignor: FAP Trust c/o First Union National Bank 10 State House Square Hartford, CT 06103-3698 Telecopier Number: (860) 247-1356 Attention: W. Jeffrey Kramer -2- With copies to: Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, CA 94104 Telecopier Number: (415) 983-1200 Attention: Graham Taylor and Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Telecopier Number: (860) 527-5188 Attention: James G. Scantling Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 7. Further Assurances. Each of the parties to this Agreement shall execute such other documents and instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof. 8. No Recourse. It is expressly understood and agreed that this Agreement is executed and delivered on behalf of Assignor by First Union National Bank ("First Union"), not in its individual capacity but solely as Trustee under the trust agreement under which Assignor is organized, in the exercise of the powers and authority conferred and vested in it as the Trustee thereunder, and each of the representations, warranties, undertakings and agreements herein made on the part of Assignor is made and intended not as a personal representation, warranty, undertaking or agreement by First Union but is made and intended for the purpose of binding only the trust estate created by the trust agreement under which Assignor is organized (the "Trust Estate"), and all persons having any claim against First Union or Assignor by reason of the transactions contemplated by this Agreement shall for payment or satisfaction thereof not seek recourse against First Union except in its capacity as trustee and then only to the extent of the Trust Estate. -3- IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: /s/ Christopher Cambria ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President 4 IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: /s/ W. Jeffrey Kramer ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President 5 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by and between L-3 COMMUNICATIONS CORPORATION, a Delaware corporation, ("Assignee") and FAP TRUST, a Connecticut trust ("Assignor"). WITNESSETH WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller intends to acquire all of the outstanding capital stock of Ilex Systems, Inc. (the "Company"); and WHEREAS, pursuant to the Stock Purchase Agreement, Assignor and Donald Potter ("Seller") have entered into that certain Confidentiality and Non-Competition Agreement dated as of February __, 1998 (the "Non-Competition Agreement"); and WHEREAS, Assignor and Assignee have entered into an Asset Purchase Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement") pursuant to which Assignee will acquire substantially all of the assets and assume substantially all of the liabilities of the Company; and WHEREAS, in connection with the Asset Purchase Agreement and the transactions contemplated thereby, Assignor desires to assign to Assignee its entire right, title and interest in, under and to the Non-Competition Agreement, and Assignee desires to take such assignment from Assignor, all upon the terms and conditions set forth below: NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignment of the Non-Competition Agreement. Pursuant to and in accordance with terms of Section 8 of the Non-Competition Agreement, Assignor hereby assigns to Assignee all of Assignor's right, title and interest in, under and to the Non-Competition Agreement, and Assignee hereby assumes all of Assignor's duties and obligations under the Non-Competition Agreement. 2. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4. Entire Agreement. This Agreement and the Asset Purchase Agreement constitute the entire agreement between Assignor and Assignee with respect to the subject matter hereof. This Agreement cancels and supersedes all prior agreements, understandings and negotiations between the parties to this Agreement with respect to the subject matter of this Agreement. This Agreement may only be varied or modified by a written document executed by each of the parties hereto. 5. Assignment. The rights and benefits of the parties under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of such parties. Neither this Agreement nor any rights or benefits hereunder may be assigned or transferred by any party hereto without the prior written consent of all other parties hereto. 6. Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Assignee: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Telecopier Number: (212) 805-5494 Attention: Christopher C. Cambria With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Telecopier Number: (212) 455-2502 Attention: William E. Curbow And if to Assignor: FAP Trust c/o First Union National Bank 10 State House Square Hartford, CT 06103-3698 Telecopier Number: (860) 247-1356 Attention: W. Jeffrey Kramer -2- With copies to: Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, CA 94104 Telecopier Number: (415) 983-1200 Attention: Graham Taylor and Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Telecopier Number: (860) 527-5188 Attention: James G. Scantling Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 7. Further Assurances. Each of the parties to this Agreement shall execute such other documents and instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof. 8. No Recourse. It is expressly understood and agreed that this Agreement is executed and delivered on behalf of Assignor by First Union National Bank ("First Union"), not in its individual capacity but solely as Trustee under the trust agreement under which Assignor is organized, in the exercise of the powers and authority conferred and vested in it as the Trustee thereunder, and each of the representations, warranties, undertakings and agreements herein made on the part of Assignor is made and intended not as a personal representation, warranty, undertaking or agreement by First Union but is made and intended for the purpose of binding only the trust estate created by the trust agreement under which Assignor is organized (the "Trust Estate"), and all persons having any claim against First Union or Assignor by reason of the transactions contemplated by this Agreement shall for payment or satisfaction thereof not seek recourse against First Union except in its capacity as trustee and then only to the extent of the Trust Estate. -3- IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: /s/ Christopher Cambria ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President 4 IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: /s/ W. Jeffrey Kramer ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President 4 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by and between L-3 COMMUNICATIONS CORPORATION, a Delaware corporation, ("Assignee") and FAP TRUST, a Connecticut trust ("Assignor"). WITNESSETH WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller intends to acquire all of the outstanding capital stock of Ilex Systems, Inc. (the "Company"); and WHEREAS, pursuant to the Stock Purchase Agreement, Assignor and Erwin P. Frech, Jr. ("Seller") have entered into that certain Confidentiality and Non-Competition Agreement dated as of February __, 1998 (the "Non-Competition Agreement"); and WHEREAS, Assignor and Assignee have entered into an Asset Purchase Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement") pursuant to which Assignee will acquire substantially all of the assets and assume substantially all of the liabilities of the Company; and WHEREAS, in connection with the Asset Purchase Agreement and the transactions contemplated thereby, Assignor desires to assign to Assignee its entire right, title and interest in, under and to the Non-Competition Agreement, and Assignee desires to take such assignment from Assignor, all upon the terms and conditions set forth below: NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignment of the Non-Competition Agreement. Pursuant to and in accordance with terms of Section 8 of the Non-Competition Agreement, Assignor hereby assigns to Assignee all of Assignor's right, title and interest in, under and to the Non-Competition Agreement, and Assignee hereby assumes all of Assignor's duties and obligations under the Non-Competition Agreement. 2. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4. Entire Agreement. This Agreement and the Asset Purchase Agreement constitute the entire agreement between Assignor and Assignee with respect to the subject matter hereof. This Agreement cancels and supersedes all prior agreements, understandings and negotiations between the parties to this Agreement with respect to the subject matter of this Agreement. This Agreement may only be varied or modified by a written document executed by each of the parties hereto. 5. Assignment. The rights and benefits of the parties under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of such parties. Neither this Agreement nor any rights or benefits hereunder may be assigned or transferred by any party hereto without the prior written consent of all other parties hereto. 6. Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Assignee: L-3 Communications Corporation 600 Third Avenue New York, NY 10016 Telecopier Number: (212) 805-5494 Attention: Christopher C. Cambria With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Telecopier Number: (212) 455-2502 Attention: William E. Curbow And if to Assignor: FAP Trust c/o First Union National Bank 10 State House Square Hartford, CT 06103-3698 Telecopier Number: (860) 247-1356 Attention: W. Jeffrey Kramer -2- With copies to: Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, CA 94104 Telecopier Number: (415) 983-1200 Attention: Graham Taylor and Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Telecopier Number: (860) 527-5188 Attention: James G. Scantling Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 7. Further Assurances. Each of the parties to this Agreement shall execute such other documents and instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof. 8. No Recourse. It is expressly understood and agreed that this Agreement is executed and delivered on behalf of Assignor by First Union National Bank ("First Union"), not in its individual capacity but solely as Trustee under the trust agreement under which Assignor is organized, in the exercise of the powers and authority conferred and vested in it as the Trustee thereunder, and each of the representations, warranties, undertakings and agreements herein made on the part of Assignor is made and intended not as a personal representation, warranty, undertaking or agreement by First Union but is made and intended for the purpose of binding only the trust estate created by the trust agreement under which Assignor is organized (the "Trust Estate"), and all persons having any claim against First Union or Assignor by reason of the transactions contemplated by this Agreement shall for payment or satisfaction thereof not seek recourse against First Union except in its capacity as trustee and then only to the extent of the Trust Estate. -3- IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: /s/ Christopher Cambria ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President 4 IN WITNESS WHEREOF, each of the parties has caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNEE L-3 COMMUNICATIONS CORPORATION By: ------------------------------- Name: Christopher Cambria Title: Vice President ASSIGNOR: FAP TRUST By: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as trustee By: /s/ W. Jeffrey Kramer ------------------------------- Name: W. Jeffrey Kramer Title: Vice-President 4 EX-10.82 4 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT AMONG ALLIEDSIGNAL INC., ALLIEDSIGNAL TECHNOLOGIES, INC., ALLIEDSIGNAL DEUTSCHLAND GMBH AND L-3 COMMUNICATIONS CORPORATION DATED AS OF MARCH 30, 1998 ASSET PURCHASE AGREEMENT
Page ---- ARTICLE 1. PURCHASE AND SALE................................................................................... 1 1.1 Purchase and Sale........................................................................ 1 1.2 Non-Assignable Assets.................................................................... 3 1.3 Excluded Assets.......................................................................... 3 1.4 Transfer of the Assets................................................................... 4 1.5 Sale and Transfer of ELAC Shares......................................................... 4 1.6 License Agreement........................................................................ 5 ARTICLE 2. CLOSING; PURCHASE PRICE............................................................................. 5 2.1 Closing Date and Place................................................................... 5 2.2 Purchase Price........................................................................... 5 2.3 Income Taxes............................................................................. 5 2.4 Cash True-Up............................................................................. 5 2.5 Allocation of Purchase Price............................................................. 6 2.6 Payments................................................................................. 6 2.7 Transfer Taxes........................................................................... 6 ARTICLE 3. ASSUMPTION OF LIABILITIES AND OBLIGATIONS............................................................ 7 3.1 Assumed Liabilities...................................................................... 7 3.2 Excluded Liabilities..................................................................... 7 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLERS........................................................... 8 4.1 Corporate Status......................................................................... 8 4.2 Authorization............................................................................ 8 4.3 Compliance............................................................................... 9 4.4 [Intentionally left blank]............................................................... 9 4.5 Personal Property........................................................................ 9 4.6 Intellectual Property.................................................................... 10 4.7 Contracts and Binding Commitments........................................................ 10 4.8 Title.................................................................................... 11 4.9 Litigation............................................................................... 11 4.10 Environmental Matters.................................................................... 11 4.11 Employee Benefit Plans and Policies...................................................... 12 4.12 Material Changes......................................................................... 13 4.13 [Intentionally left blank]............................................................... 15 4.14 Compliance with Law...................................................................... 15 4.15 Consents................................................................................. 15 4.16 Taxes.................................................................................... 15 4.17 Permits and Licenses..................................................................... 16 4.18 Ownership of ELAC Shares................................................................. 16 4.19 Labor Relations.......................................................................... 16 4.20 Brokerage Fees........................................................................... 17 i Page ---- 4.21 Government Contracts..................................................................... 17 4.22 Government Furnished Equipment........................................................... 19 4.23 Entire Business.......................................................................... 19 4.24 Real Estate.............................................................................. 19 4.25 Insurance................................................................................ 20 4.26 Affiliate Transactions................................................................... 20 4.27 No Additional Representations............................................................ 21 ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER......................................................... 21 5.1 Corporate Status......................................................................... 21 5.2 Authorization............................................................................ 21 5.3 Compliance............................................................................... 21 5.4 Due Diligence............................................................................ 22 5.5 Financing................................................................................ 22 5.6 Investment Representation................................................................ 22 5.7 Conveyances and Restrictions............................................................. 22 5.8 Brokerage Fees........................................................................... 22 ARTICLE 6. EMPLOYEES AND EMPLOYEE BENEFITS..................................................................... 22 6.1 Employment............................................................................... 22 6.2 Compensation and Benefits - U.S. Employees............................................... 23 6.3 Severance and WARN Act................................................................... 24 6.4 Health Care Continuation Liability....................................................... 24 6.5 Pension Plan............................................................................. 24 6.6 Savings Plan............................................................................. 26 6.7 Labor Agreements......................................................................... 27 ARTICLE 7. PRE-CLOSING COVENANTS............................................................................... 27 7.1 [Intentionally left blank]............................................................... 27 7.2 [Intentionally left blank]............................................................... 27 7.3 [Intentionally left blank]............................................................... 27 7.4 [Intentionally left blank]............................................................... 27 7.5 Workers' Compensation.................................................................... 27 7.6 Insurance-Primary Casualty Program....................................................... 27 7.6.1 Claims Responsibility and Procedures........................................ 27 7.7 No Inconsistent Action................................................................... 28 7.8 [Intentionally left blank]............................................................... 28 7.9 Non-Solicitation......................................................................... 28 7.10 Refunds and Remittances.................................................................. 28 7.11 Enforcement of Confidentiality Provisions................................................ 28 7.12 Novation of Government Contracts......................................................... 28 7.13 Further Actions.......................................................................... 28 7.14 Letters of Credit........................................................................ 29 7.15 1985 Capitalization of ELAC.............................................................. 29 7.16 MCDV Subcontract......................................................................... 29 ii Page ----- ARTICLE 8. CONDITIONS TO CLOSING............................................................................... 30 8.1 Conditions to the Obligations of Purchaser............................................... 30 8.2 Conditions to the Obligations of Sellers................................................. 31 ARTICLE 9. TERMINATION AND SURVIVAL............................................................................ 31 9.1 Termination.............................................................................. 31 9.2 Effect of Termination.................................................................... 32 ARTICLE 10. CLOSING DOCUMENTS.................................................................................. 32 10.1 Documents to be Delivered by Sellers..................................................... 32 10.2 Documents to be Delivered by Purchaser................................................... 33 ARTICLE 11. POST CLOSING OBLIGATIONS........................................................................... 34 11.1 Further Assurances....................................................................... 34 11.2 Access to Books and Records.............................................................. 34 11.3 Cooperation in Litigation................................................................ 34 11.4 Proprietary Information.................................................................. 34 11.5 Covenant Not to Compete.................................................................. 35 11.6 Change of Name........................................................................... 35 11.7 Tax Election............................................................................. 35 11.8 Research and Experimental Expenses....................................................... 35 11.9 Pooling Arrangement...................................................................... 35 ARTICLE 12. INDEMNIFICATION.................................................................................... 35 12.1 Indemnification by Sellers............................................................... 35 12.2 Tax Indemnification...................................................................... 36 12.3 Indemnification by Purchaser............................................................. 36 12.4 Indemnification Procedure................................................................ 37 12.5 Survival and Limitations................................................................. 38 12.6 Adjustment for Insurance and Taxes....................................................... 38 12.7 Environmental Liabilities................................................................ 39 12.8 Facility Sale Agreement.................................................................. 39 ARTICLE 13. MISCELLANEOUS...................................................................................... 39 13.1 Expenses................................................................................. 39 13.2 Notices.................................................................................. 39 13.3 Confidentiality.......................................................................... 40 13.4 Counterparts............................................................................. 40 13.5 Entire Agreement/Termination of December Agreement....................................... 40 13.6 Construction............................................................................. 41 13.7 Assignment............................................................................... 41 13.8 Amendment................................................................................ 41 13.9 Applicable Law........................................................................... 41 13.10 No Third Party Rights.................................................................... 41 13.11 Exhibits and Schedules................................................................... 41 iii Page ---- 13.12 Waivers.................................................................................. 41 13.13 Severability............................................................................. 42 13.14 Bulk Sales Law........................................................................... 42 13.15 Knowledge of Sellers..................................................................... 42 13.16 Personal Liability....................................................................... 42 EXHIBIT A -- License Agreement EXHIBIT B -- Transition Services Agreement
iv SCHEDULES 1 Products 1.1(a) Personal Property 1.3(j) Excluded Assets 4.6(a) Intellectual Property 4.6(c) Licensed Intellectual Property 4.6(d) Intellectual Property 4.7 Contracts 4.8 Title and Leases 4.9 Litigation 4.10 Environmental Disclosure 4.11 Benefit Plans and Policies 4.12 Material Changes 4.14 Compliance with Law 4.15 Consents 4.16 ELAC Taxes 4.17 Permits and Licenses 4.19 Labor Relations 4.19(x) Labor Relations 4.21(a) - (e) Government Contracts 4.22 Government Furnished Equipment 4.23 Entire Business 4.24 Real Estate 4.25 Insurance v 4.26 Affiliate Transactions 6.2(a) Retention Agreements 6.5(b) Actuarial Methods and Assumptions vi ASSET PURCHASE AGREEMENT ------------------------ ASSET PURCHASE AGREEMENT (the "Agreement") dated as of March 30, 1998 among AlliedSignal Inc., a Delaware corporation ("AlliedSignal"), AlliedSignal Technologies, Inc., an Arizona corporation and a wholly owned subsidiary of AlliedSignal ("ASTI"), AlliedSignal Deutschland GmbH, a German corporation and a wholly owned subsidiary of AlliedSignal ("AS Deutschland" and, collectively with ASTI and AlliedSignal, the "Sellers"), and L-3 Communications Corporation, a Delaware corporation ("Purchaser"). WITNESSETH: WHEREAS, AlliedSignal is engaged exclusively through AlliedSignal's Ocean Systems business unit ("Ocean Systems") and through AlliedSignal ELAC Nautik GmbH ("ELAC"), a wholly owned subsidiary of AS Deutschland, in the business (the "Business") of developing, manufacturing and selling the products and services (the "Products") listed on Schedule 1 hereto, together with services associated with such Products; all of which Products as produced by the Business during the last 24 months are listed in Schedule 1 hereto; WHEREAS, certain of the intellectual property used by Ocean Systems is owned by ASTI; WHEREAS, AlliedSignal desires to sell and Purchaser desires to purchase the assets of Sellers primarily related to, or used primarily in connection with, the Business as described herein. NOW, THEREFORE, in consideration of the mutual covenants, agreements representations and warranties contained herein, the parties agree as follows: ARTICLE 1. PURCHASE AND SALE 1.1 Purchase and Sale of Assets and Stock. Subject to the terms and conditions of this Agreement and except as otherwise provided herein, at the Closing (as defined in Section 2.1), Sellers shall sell, convey, transfer, assign and deliver to Purchaser, and Purchaser shall purchase and accept from Sellers, all direct or indirect right, title and interest of Sellers in the assets, whether tangible or intangible, real or personal, primarily related to, or used primarily in connection with, the Business prior to the Closing, other than Excluded Assets (as defined in Section 1.3), together with all of AS Deutschland's right, title and interest in the ELAC capital stock described in Section 1.1(o) below (the "Assets"), including, without limitation, the following: (a) all machinery and equipment, fixtures, furniture, office equipment, vehicles, boats, ships, tools and other tangible personal property set forth on Schedule 1.1(a) as of the date indicated thereon (collectively, the "Personal Property"); (b) all accounts receivable and other receivables as of the Closing Date, whether recorded or unrecorded (the "Accounts Receivable"); 1 (c) all inventory and other supplies on hand, in transit or on order as of the Closing Date, wherever located, including raw materials, work-in-process and finished goods (the "Inventory"); (d) subject to the exclusions set forth in Section 1.3(f) and (h), all intellectual property, including without limitation all (i) inventions, discoveries, processes, formulae, designs, methods, techniques, procedures, concepts, developments, technology, new and useful improvements thereof and know-how relating thereto, whether or not patented or eligible for patent protection; copyrights and copyrightable works, including computer applications, programs, software, databases and related items; trademarks, service marks, trade names (including, but not limited to, the "Ocean Systems" trade name), brand names, logos and trade dress, the goodwill of any business symbolized thereby, and all common-law rights relating thereto; trade secrets and other confidential information; (ii) registrations, applications, recordings, and licenses or other similar agreements related to the foregoing; (iii) rights to sue at law or in equity for any infringement or other impairment of the foregoing occurring prior to the Closing Date; and (iv) rights to obtain reissues, re-examinations, continuations, continuations-in-part, divisions, extensions, renewals or other legal protections pertaining to the foregoing (the "Intellectual Property"); (e) all contracts, agreements, arrangements and/or commitments (the "Contracts"); (f) all transferable governmental and other permits, licenses, approvals, certificates of inspection, filings, franchises and other authorizations relating to the Assets including, but not limited to, those listed in Schedules 4.10 and 4.17 hereto (the "Permits and Licenses"); (g) prepaid expenses, except insurance premiums, but only if and to the extent of the benefit conferred by such prepaid expenses to the Business after the Closing Date; (h) all transferable rights of Sellers pursuant to any express or implied warranties, representations or guarantees relating to any Personal Property or made by suppliers furnishing goods or services to Sellers; (i) all lists, files and documents, including, but not limited to, all business records, tangible data, computer software, electronic media and management information systems, disks, files, customer lists, supplier lists, blueprints, specifications, designs, drawings, plans, operation or maintenance manuals, bids, personnel records, policy manuals, invoices, credit reports, sales literature, tax, financial and accounting records and all other books and records (the "Books and Records"). (j) all interests in real estate, whether leased or owned, excluding the land, building and improvements located at Sylmar, California (the "Facility"), (k) all security (including cash) deposited with third parties and all security bonds; 2 (l) all goodwill and going concern value (without any representation as to any value thereof); (m) all claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind against other parties (other than those related to Excluded Assets or Excluded Liabilities); (n) all insurance proceeds arising out of or related to damage, destruction or loss of any property or asset of or used primarily in connection with the Business to the extent of any damage or destruction that remains unrepaired, or to the extent any property or asset remains unreplaced, at the Closing Date; and (o) all the issued and outstanding capital stock and rights in respect of such capital stock of ELAC (the "ELAC Shares"). 1.2 Non-Assignable Assets. Notwithstanding anything to the contrary contained in this Agreement, to the extent the sale, assignment, transfer, conveyance or delivery to Purchaser of any Asset, or any other item to be delivered at Closing, such as a permit, license or consent, is prohibited by any foreign, federal, state or local statutes, laws or regulations applicable to the Assets or the operation of the Business (an "Applicable Law") or would require any governmental or third party authorizations, approvals, consents or waivers which shall not have been obtained prior to the Closing (after Sellers' reasonable best efforts to obtain them), this Agreement shall not constitute a sale, assignment, transfer, conveyance or delivery thereof. Following the Closing, the parties shall use reasonable best efforts and cooperate with each other to obtain promptly such authorizations, approvals, consents or waivers; provided, however, that neither Sellers nor Purchaser shall be required to pay any consideration therefor, other than filing, recordation or similar fees payable to any governmental authority, which fees shall be paid in accordance with Section 2.6. Pending such authorization, approval, consent or waiver, the parties shall cooperate with each other in any commercially reasonable and lawful arrangements designed to provide to Purchaser the benefits of use of such Asset. Once such authorization, approval, consent or waiver is obtained, the Sellers shall promptly assign, transfer, convey and deliver such Asset to Purchaser for no additional consideration. To the extent that any such Asset cannot be transferred or the full benefits of use of any such Asset cannot be provided to Purchaser following the Closing, then Purchaser and Sellers shall enter into such arrangements for no additional consideration from Purchaser (including subleasing or subcontracting if permitted) to provide Purchaser the economic (taking into account tax costs and benefits) and operational equivalent of obtaining such authorization, approval, consent or waiver. 1.3 Excluded Assets. Notwithstanding anything to the contrary contained in this Agreement, the following are not included in the Assets and not intended to be sold, assigned, transferred or conveyed to Purchaser hereunder (the "Excluded Assets"): (a) assets primarily related to, or used primarily in connection with, Sellers' businesses other than the Business, including, but not limited to, the assets primarily related to, or used primarily in connection with, Sellers' avionics repair and overhaul business conducted at the Facility; 3 (b) except as set forth in Section 2.4, cash, cash equivalents and overdrafts; (c) intercompany receivables and intercompany prepaid expenses, other than (i) trade receivables of the Business for goods delivered in the ordinary course of business and (ii) the intercompany note receivable between Ocean Systems and ELAC with respect to cash in the AlliedSignal German cash pool (the "Intercompany Note"); (d) Books and Records which Sellers are required by law to retain; provided, however, that in the event of such legal requirement, Sellers shall retain copies of such Books and Records and deliver the original Books and Records to Purchaser unless Sellers are legally obligated to retain the original records in which case the copies of such Books and Records shall be provided to Purchaser; (e) the basic books and records of account and all supporting vouchers, invoices and other records and materials relating to any or all income taxes of Sellers; other than all such materials relating solely to the Business and located at the Facility or at ELAC's headquarters in Kiel, Germany (the "ELAC Facility"); (f) except as granted pursuant to Section 1.1(d) any right to use any name or logo of Sellers or any Affiliate or any confusingly similar variant or derivative thereof, including but not limited to "Allied-Signal", "AlliedSignal", "Allied", "Allied Chemical," "Signal," "Bendix," "Bendix Oceanics" or "Bendix Oceanics, Inc."; (g) the insurance policies of Sellers, including without limitation those pertaining to the Business and the Facility, and the rights of Sellers thereunder; (h) the Intellectual Property listed in Schedule 4.6 (c) (the "Licensed Property"); (i) assets of employee benefit plans, except as provided in Article 6; (j) the assets listed in Schedule 1.3(j); and (k) the Facility. 1.4 Transfer of the Assets. Sellers shall sell, convey, transfer, assign and deliver the Assets to Purchaser at the Closing by means of deeds, bills of sale, assignments, endorsements, consents, certificates and such other good and sufficient instruments of transfer in form and substance reasonably satisfactory to Purchaser, and all in recordable form, where applicable, as shall be necessary or appropriate to vest in Purchaser all right, title, ownership and interest of Sellers in and to the Assets as provided in this Agreement or in the Schedules hereto. 1.5 Sale and Transfer of ELAC Shares. Sellers shall cause to be delivered to the Purchaser certificates representing the ELAC Shares, duly endorsed, or accompanied by stock powers duly executed, with all necessary stock transfer stamps attached thereto and cancelled, 4 or such other assignments, deeds, share transfer forms, endorsements, notarial deeds of transfer or other instruments or documents, duly stamped where necessary. 1.6 License Agreement. On or prior to the Closing Date, ASTI and Purchaser shall enter into a license agreement in the form attached hereto as Exhibit A, with respect to the intellectual property identified in Schedule 4.6(c). ARTICLE 2. CLOSING; PURCHASE PRICE 2.1 Closing Date and Place. On and subject to the conditions set forth herein, the consummation of the purchase and sale contemplated hereby (the "Closing") will take place at the offices of AlliedSignal in Morristown, NJ at 10:00 a.m., local time, on March 30, 1998, or at such other time and place as shall be agreed upon by the parties hereto. The date upon which the Closing occurs is referred to herein as the "Closing Date". The Closing shall be effective as of 11:59 p.m. on the Closing Date. In addition, subsequent to the Closing, Purchaser and Sellers shall call the notary in Europe in order to perfect the transfer of the ELAC Shares by way of a notarial deed. 2.2 Purchase Price. (a) The purchase price to be paid by Purchaser for the Assets including the ELAC Shares, is Sixty-Seven Million Five Hundred Thousand Dollars ($67,500,000) (the "Purchase Price"). The Purchase Price shall be paid by Purchaser in full at Closing in immediately available funds. (b) The parties acknowledge the existence of a receivable relating to a contract dated December 19, 1997 (the "Turkey Contract") pursuant to which Ocean Systems is to supply to the Turkish Navy four (4) AQS-18A dipping sonar systems, plus spares, ground support equipment and performance testing (the "Turkey Receivable"). In the event that any cash is received by AlliedSignal in respect of the Turkey Receivable, whether before, on or after the Closing Date (each a "Turkey Cash Receipt"), AlliedSignal shall pay to L-3 an amount in cash equal to all Turkey Cash Receipts, on April 1, 1998, or if any Turkey Cash Receipt is received by AlliedSignal after April 1, 1998, on the date of such receipt. 2.3 Income Taxes. As soon as reasonably practicable, the parties shall prepare a calculation of income tax liability or tax benefit based on the income or loss reflected on the books and records of the Business determined on a basis consistent with prior periods (excluding any income or loss attributable to the Turkey Contract) for the period beginning after December 31, 1997 (the "Effective Date") and ending on the close of the Closing Date multiplied by 36.6%. The calculation of book income or loss for such period shall be computed by means of a closing of the books and records of the Business as of the Closing Date, and, to the extent not practical, by apportionment on the basis of elapsed days. Buyer shall pay to Seller any such income tax liability and Seller shall pay to Buyer any such income tax benefit within 60 days thereof. 2.4 Cash True-Up. Within fifteen business days after the Closing Date, AlliedSignal shall prepare and deliver to Purchaser a schedule setting forth, on a daily basis, the cash generated by the Business from 12:01 a.m. on the first day following the Effective 5 Date through and including the Closing Date. Purchaser shall have three business days from receipt to review the schedule and AlliedSignal shall give Purchaser reasonable access to its books and records for the purpose of confirming the calculations of AlliedSignal pursuant to this Section 2.4. Any dispute with respect to the schedule shall be resolved in good faith by the parties. Within three business days after the expiration of such review period (or the resolution of any dispute), Purchaser shall make payment to AlliedSignal if the schedule shows a net cash usage by the Business during such period and AlliedSignal shall make payment to Purchaser if the schedule shows net cash generation during such period in an amount equal to such net cash usage or net cash generation, as the case may be; provided, however, that if AlliedSignal shall pay to Purchaser any amount pursuant to Section 2.2(b) in respect of a Turkey Cash Receipt received on or prior to the Closing Date, and the amount of such Turkey Cash Receipt would have been a cash generation under this Section 2.4 but for this proviso, then the amount of any such Turkey Cash Receipt shall be excluded in calculating net cash generation or a cash usage under this Section 2.4. Any payment to be made pursuant to this Section 2.4 shall be made in immediately available funds by wire transfer to a bank account designated in writing by the party entitled to receive the payment. AlliedSignal shall be responsible for paying any checks outstanding as of the Effective Date. 2.5 Allocation of Purchase Price. The Sellers and the Purchaser agree to allocate the Purchase Price of the Assets including the covenant not to compete, in accordance with the rules under Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations promulgated thereunder. Such allocation shall be mutually agreed between the Sellers and the Purchaser. The Sellers and the Purchaser recognize that the Purchase Price does not include Purchaser's acquisition expenses and that Purchaser will allocate such expenses appropriately. Sellers and the Purchaser agree to act in accordance with the computations and allocations as determined pursuant to this Section 2.5 (including any modifications thereto reflecting any post-Closing adjustments, such adjustments shall be allocated in accordance with the character of each such adjustment, on a basis consistent with the allocation under this Section 2.5) in any relevant Tax Returns or filings, including any forms or reports required to be filed pursuant to Section 1060 of the Code, the Treasury Regulations promulgated thereunder or any provisions of local, state and foreign law ("1060 Forms"), and to cooperate in the preparation of any 1060 Forms and to file such 1060 Forms in the manner required by Applicable Law. 2.6 Payments. All payments required to be made pursuant to this Article 2 and other provisions of this Agreement shall be made in United States dollars in immediately available funds by wire transfer to an account designated by the party to receive payment in writing to the party making payment. 2.7 Transfer Taxes. Purchaser and Sellers shall each bear 50% of all sales, transfer and similar taxes, duties or levies (other than taxes computed on the basis of income) assessed or payable in connection with the transfer of the Assets including the ELAC Shares to Purchaser, including notary fees relating to the transfer of the ELAC Shares; provided that in no event shall Sellers be required to pay more than $500,000 in respect thereof, including any amounts paid by AlliedSignal pursuant to Section 2.4 of the real estate purchase agreement, dated as of December 22, 1997 (the "Facility Sale Agreement"), between AlliedSignal and Purchaser. Purchaser and Sellers agree to cooperate with one another to try 6 to minimize such taxes to the extent practicable without additional costs or liabilities to Purchaser or Sellers. To the extent any exemptions from such taxes are available, Purchaser and Sellers shall cooperate to obtain and prepare all required resale or other exemption certificates with respect to the Assets and the ELAC Shares. ARTICLE 3. ASSUMPTION OF LIABILITIES AND OBLIGATIONS 3.1 Assumed Liabilities. Except for the Excluded Liabilities, Purchaser shall, without any further responsibility or liability of, or recourse to, Sellers, except as set forth herein, absolutely and irrevocably assume and be solely liable and responsible for any and all liabilities and obligations of any kind or nature, whether foreseen or unforeseen, known or unknown, existing or which may arise in the future, fixed or contingent, matured or unmatured, to the extent primarily related to the Business or the Assets prior to, on, or following the Closing Date (the "Assumed Liabilities") including, but not limited to: (a) obligations to fill purchase orders of customers of the Business to the extent such orders are unfilled on the Closing Date; (b) obligations incurred through the Closing Date to purchase or pay for goods and services for the Business to be received on or after the Closing Date; (c) obligations and liabilities under the Contracts; provided that any Contract as to which consent to assignment is required but has not been obtained shall not be deemed an Assumed Liability until Purchaser has obtained the benefits of such Contract; (d) obligations and liabilities under licenses and permits of the Business that are transferred or assigned to Purchaser (but only to the extent so transferred or to the extent Purchaser receives the benefits thereunder pursuant to Section 1.2); and (e) obligations and liabilities specifically assumed or undertaken by Purchaser hereunder. 3.2 Excluded Liabilities. Notwithstanding anything to the contrary contained in this Agreement, the liabilities and obligations of Sellers which are not to be assumed or retained by Purchaser hereunder (the "Excluded Liabilities") include, but are not limited to, the following: (a) obligations and liabilities for all Taxes relating to the Business for all periods prior to the Effective Date; (b) obligations and liabilities arising out of or related to past, present or future actions, suits, claims, disputes, investigations and other proceedings relating to the ownership or operation of the Assets or the Business on or prior to the Effective Date, including, but not limited to, the items referred to in Schedule 4.9; 7 (c) obligations and liabilities related to employees, including former employees, not expressly assumed by Purchaser pursuant to Article 6 hereof; (d) all obligations and liabilities (whether or not the subject of any claim by a third party), fixed or contingent, known or unknown, under any Environmental Laws as have been, are or may in the future be in effect arising out of or relating to (i) the operation of the Business on or prior to the Effective Date or the use or ownership of any real property (including, without limitation, the Facility) used in the Business on or prior to the Effective Date, including without limitation, the disposal or arrangement for the disposal of Materials of Environmental Concern prior to the Effective Date and (ii) the presence of contamination by Materials of Environmental Concern at or emanating from any real property (whether leased or owned) used in the Business prior to the Effective Date ("Environmental Liabilities"); (e) all obligations and liabilities for non-trade accounts payable to Sellers and their Affiliates (other than the Intercompany Note); (f) all obligations, liabilities, expenses or charges to earnings or reserves taken in connection with any restructuring program of AlliedSignal; (g) all debts, obligations or liabilities whatsoever to the extent not primarily related to the Business or the Assets; and (h) all other obligations and liabilities for which Sellers have expressly assumed responsibility pursuant to this Agreement. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLERS Sellers jointly and severally represent and warrant to Purchaser as follows: 4.1 Corporate Status. AlliedSignal is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and has full power and authority and all governmental licenses, authorizations, material consents and approvals required to carry on the Business as now conducted and own all of its properties and assets. ASTI is a corporation duly organized, validly existing and in good standing under the laws of Arizona. AS Deutschland and ELAC are corporations duly organized, validly existing and in good standing under the laws of the Federal Republic of Germany. Each Seller has all requisite corporate and other power and authority to enter into, execute and deliver this Agreement and any other agreements contemplated hereby (the "Other Agreements") and to perform its respective obligations and consummate the transactions contemplated hereunder and thereunder in accordance with the terms of this Agreement. Each Seller is duly qualified to do business in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the Sellers' conduct of the Business. 4.2 Authorization. All corporate and other proceedings required to be taken by or on the part of each of the Sellers to authorize Sellers to enter into and carry out this Agreement have been, or prior to the Closing will be, duly and properly taken. This 8 Agreement has been, and on the Closing Date each of the Other Agreements will be, duly authorized, executed and delivered by each Seller and this Agreement constitutes, and each Other Agreement will upon execution and delivery thereof constitute, a legal and binding obligation of Sellers, valid and enforceable against each Seller in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law governing specific performance, injunctive relief and other equitable remedies. 4.3 Compliance. Except for (i) the expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and under any similar German national or European Union law and (ii) any novations pursuant to Section 7.12 and any consents listed on Schedule 4.15, the execution, delivery and performance of this Agreement and Other Agreements by Sellers and the consummation of the transactions contemplated hereby and thereby (a) will not violate (with or without giving of notice or the lapse of time or both), or require any consent, approval, filing or notice under any provision of any licenses, permits, approvals, consents, certificates of public convenience, orders, franchises and other authorizations of any federal, state, local or foreign governmental authority (collectively, "Licenses"), law, rule or regulation, court or administrative order, writ, judgement or decree applicable to Sellers, the Business or any of the Assets or the Assumed Liabilities other than the facilities clearance requirements of the Defense Investigative Services of the United States Department of Defense ("DIS"), as set forth in the DIS Industrial Security Regulation and the DIS Industrial Security Manual, as each may be amended from time to time and (b) will not (with or without the giving of notice or the lapse of time or both) (I) violate or conflict with, or result in the breach, suspension or termination of any provision of, or constitute a default under, or result in the acceleration of the performance of the obligations of Sellers under, or (II) result in the creation of any lien, mortgage, pledge, security interest, claim, charge or encumbrance or other material restriction of any kind or nature (collectively, "Liens") upon the Business or the Assets pursuant to, as the case may be, the articles of incorporation, by-laws or other organization documents of any Seller or any material agreement, lease, mortgage, note, deed of trust, lease, bond, indenture, license or other document or undertaking, oral or written, to which any Seller is a party or by which any Seller is bound and by which any of the Assets or the Business may be affected. 4.4 [Intentionally left blank] 4.5 Personal Property. In all material respects, the Personal Property and the machinery and equipment, fixtures, furniture, office equipment, vehicles, boats or ships, tools and other tangible personal property of ELAC have been maintained in accordance with standard industry practices, are in reasonable working condition (normal wear and tear excepted) and are sufficient for the conduct of the Business as it is currently being conducted. 9 4.6 Intellectual Property. (a) Schedule 4.6(a) lists all Intellectual Property owned or used by the Business that is issued or registered by or filed with any governmental agency, and all licenses of Intellectual Property used by the Business to or from third parties. (b) The Sellers own or have the right to use all Intellectual Property necessary to conduct the Business substantially as it is currently conducted and consistent with past practice. (c) Schedule 4.6(c) lists all Intellectual Property not included in the Assets, the use of which is necessary for the Business as it is currently conducted. AlliedSignal and ASTI will grant to Purchaser a license to such Intellectual Property pursuant to the license agreement referred to in Section 1.6 of this Agreement. (d) Except as set forth on Schedule 4.6(d): (i) all material Intellectual Property owned or used by the Business is unexpired, has not been abandoned and, to the Knowledge of Sellers, does not infringe or otherwise impair the intellectual property rights of any third party; (ii) no material Intellectual Property owned or used by the Business is the subject of any license, security interest, Lien or other agreement granting rights therein to any third party other than licenses listed on Schedule 4.6(d); (iii) no judgment, decree, injunction, rule or order has been rendered by any governmental entity, no action, suit or proceeding is currently pending and Sellers have not received written notice, and to the Knowledge of Sellers there are no threatened suits, actions or proceedings, which would limit, cancel or question the validity of, or Sellers' rights in and to any material Intellectual Property; and (iv) the Company and its subsidiaries have taken reasonable steps to protect, maintain and safeguard their material Intellectual Property, including any Intellectual Property for which improper or unauthorized disclosure would impair its value or validity, and have executed appropriate nondisclosure and confidentiality agreements and made appropriate filings and registrations in connection with the foregoing. 4.7 Contracts and Binding Commitments. Schedule 4.7 lists the Contracts and the contracts, agreements and/or commitments of ELAC that are material to the operation of the Business taken as a whole (the "Agreements"). Except as set forth on Schedule 4.7, each of the Agreements is a valid and binding agreement of the Seller which is a party thereto or ELAC and is in full force and effect. True and complete copies of all the Agreements have been delivered to Purchaser or otherwise made available for inspection by Purchaser. All the Agreements are in full force and effect. Except as set forth on Schedule 4.7, to the Knowledge of Sellers neither AlliedSignal nor ELAC, as the case may be, is in default in any material respect under any of the Agreements and to the Knowledge of Sellers there has been no material default under any of the Agreements by any other party thereto. AlliedSignal is not obligated to list in Schedule 4.7 any agreement, contract or commitment identified elsewhere in this Agreement or any Schedule hereto, or if such agreements, individually and together with all such other agreements which are not listed on Schedule 4.7 pursuant to this sentence, are not material to the Business taken as a whole and (a) such agreement, contract or commitment, is related to the sale or furnishing of products or services by AlliedSignal or ELAC and has a price of less than $75,000 in the case of AlliedSignal or DM 100,000 in the 10 case of ELAC; (b) such agreement, contract or commitment, if related to the purchase of materials, supplies, equipment, merchandise or services, imposes a payment obligation on AlliedSignal or ELAC of less than $75,000; or (c) the disclosure of such agreement, contract or commitment is proscribed by the terms of such document or by the provisions of a governmental security agreement or regulation; provided that if such agreements, individually or in the aggregate, are material to the Business, a summary of the material terms of such agreement have been delivered to a properly authorized officer or employee of Purchaser in accordance with Applicable Law. 4.8 Title. Except as set forth in Schedule 4.8, each Seller and ELAC holds the entire legal, equitable and beneficial title in and will transfer to Purchaser good (and, in the case of real property, marketable) title to, or a valid and binding leasehold interest in, its property included in the Assets free and clear of all Liens other than (i) Liens for taxes not yet due and payable or being contested in good faith for which adequate reserves are being maintained in accordance with United States generally accepted accounting principles ("GAAP"), and (ii) encumbrances that do not, and are not reasonably expected to, individually or in the aggregate, materially adversely affect the value of the Assets subject thereto or the ability of AlliedSignal, ELAC or Purchaser to conduct the Business as it is now being conducted (collectively, "Permitted Liens"). 4.9 Litigation. Except as disclosed in Schedule 4.9, there is not any action, suit, proceeding, arbitration or litigation, pending or to the Knowledge of Sellers threatened against Sellers or to the Knowledge of Sellers any investigation pending or threatened, relating to the Business, the Assets, the Assumed Liabilities or the transactions contemplated by this Agreement that could reasonably be expected to result in any material judgment against, material liability of, or have a material adverse effect on the Business taken as a whole. Sellers are not in violation of any term of any judgment, writ, decree, injunction or order entered by any court or governmental authority (domestic or foreign) and outstanding against Sellers or with respect to the Business or any of Sellers' assets (including the Assets) or properties, except for such violations which could not, individually or in the aggregate, have a material adverse effect on the Sellers or the Business. An action, suit, proceeding, investigation, arbitration or litigation shall be considered "threatened" for purposes of this Section 4.9 if any of the persons referred to in Section 13.15 shall have received a written notice or communication reasonably indicating to a business person that an action, suit, investigation, or proceeding will be commenced. 4.10 Environmental Matters. (a) Except as set forth on Schedule 4.10 to the Knowledge of Sellers: (i) the Business complies and has complied in all material respects with all applicable Environmental Laws, and possesses and complies and has possessed and complied in all material respects with all Environmental Permits (all of which are identified accordingly on Schedule 4.10 and are transferrable as a routine matter to Purchaser); (ii) there are and have been no Materials of Environmental Concern, or other conditions, at any property owned, operated, or otherwise used by the Business now or in the past, or at any other location, that could give rise to any material liability to the Business under any Environmental Law or result in material costs to the Business arising out of any Environmental Law; (iii) no judicial, administrative, or arbitral proceeding (including any notice of violation or alleged violation) under any Environmental Law is pending or 11 threatened in writing with respect to the Business, nor is the Business the subject of any investigation or the recipient of any request for information in connection with any such proceeding; (iv) there are no past or present conditions, circumstances, practices, plans, or legal requirements that could be expected to prevent the Business from, or materially increase the burden on the Business of, complying in all material respects with applicable Environmental Laws or obtaining, renewing, or complying in all material respects with all Environmental Permits required under such laws. (b) The Sellers have provided or made available to Purchaser true and complete copies of all Environmental Reports in their possession or control. (c) Any costs, estimates, projections or other predictions contained or referred to in Schedule 4.10 are not, and shall not be deemed to be, representations or warranties of Allied Signal. (d) For purposes of this Agreement, the following terms shall have the following meaning: "Environmental Laws" shall mean any and all laws, rules, orders, regulations, statutes, ordinances, guidelines, codes, decrees, or other legally enforceable requirement (including, without limitation, common law) of the United States or any other national government, or any state, local, municipal or other governmental authority, regulating, relating to or imposing liability or standards of conduct concerning protection of the environment or of human health, or employee health and safety as of the Closing Date. "Environmental Permits" shall mean any and all permits, licenses, approvals, registrations, notifications, exemptions and any other authorization required of the Business under any Environmental Law. "Environmental Report" shall mean any report, study, assessment, audit, or other similar document that addresses any issue of actual or potential noncompliance with, or actual or potential liability under or cost arising out of, any Environmental Law that may in any way materially adversely affect the Business. "Materials of Environmental Concern" shall mean any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutants, contaminants, radioactivity, and any other substances or forces of any kind, whether or not any such substance or force is defined as hazardous or toxic under any Environmental Law, that is regulated pursuant to or could give rise to liability under any Environmental Law. 4.11 Employee Benefit Plans and Policies. Schedule 4.11 lists all of the employment, severance, change-of-control, stock purchase, stock option, fringe benefits, incentive, bonus, pension, welfare, shop agreements or other employee benefit plans and policies maintained or contributed to by Sellers or ELAC for the Business or in which employees of the Business or managing directors of ELAC, including employees or managing 12 directors of ELAC on short-term disability, medical, sick or other leave of absence (the "Employees"), are entitled to participate (collectively the "Benefit Plans") and copies of all such written Benefit Plans have been made available to Purchaser. Except as listed on Schedule 4.11, (a) such Benefit Plans that cover U.S. Employees ("U.S. Benefit Plans") comply in all material respects, to the extent applicable, with the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code") and all other applicable laws, rules and regulations; (b) none of the U.S. Benefit Plans subject to Part 3 Subtitle B of Title I of ERISA has incurred any "accumulated funding deficiency" within the meaning of Section 302 of ERISA or Section 412 of the Code; (c) no material liability, other than required premium payments, to the Pension Benefit Guaranty Corporation has been incurred with respect to any of the U.S. Benefit Plans subject to Title IV of ERISA; (d) AlliedSignal has not incurred any material liability for any tax imposed under Section 4975 of the Code or Part 4 Subtitle B of Title I of ERISA with respect to any of the U.S. Benefit Plans; (e) none of the U.S. Benefit Plans is a multiemployer plan within the meaning of Section 3(37)(A) of ERISA. Except as otherwise is provided in this Agreement, all contributions to the U.S. Benefit Plans that were required to be made under such U.S. Benefit Plans as of the date hereof have been paid, accrued or otherwise adequately reserved or disclosed in accordance with GAAP as of such date; and (f) each Benefit Plan covering non-U.S. Employees complies in all material respects with all Applicable Laws, rules and regulations. 4.12 Material Changes. Except as set forth on Schedule 4.12 or as communicated to Steven Schorer or any individual who directly reports to Mr. Schorer or Purchaser, since December 31, 1997, there has been no: (a) Lien created on any Asset or ELAC Asset, except Permitted Liens; (b) capital expenditures or commitment to make any such expenditures with respect to the Assets or the ELAC Assets, except with respect to any such expenditures or commitments incurred prior to the date hereof, to the extent such expenditures and commitments do not exceed, when combined with any expenditures permitted under Section 4.7(d) of the Facility Sale Agreement, $2,100,000 in the aggregate; (c) rights of substantial value knowingly waived with respect to the Assets or the Business; or (d) sale or transfer of any Assets or ELAC Assets other than dispositions of inventory and obsolete or worn out equipment in the ordinary course of business. (e) (i) (x) contract, agreement, proposal or other commitment entered into for the purchase of goods or services which is not terminable by the parties upon 30 days' notice or less without penalty or which involves aggregate consideration in excess of $250,000 or (y) agreement, bid, proposal or other commitment entered into for the sale of goods or services which is not terminable by the parties upon 30 days' notice or less without penalty or which involves aggregate consideration in excess of $5 million or which would result in a loss in excess of $100,000 for any individual contract or $250,000 in the aggregate, (ii) amendment, supplement, waiver or modification of any contract or agreement included in 13 the Assets or the ELAC Assets, other than in the ordinary course of business consistent with past practice and (iii) Affiliate that has been permitted to do, or agree, in writing or otherwise, to do, any of the foregoing; (f) except as required by Applicable Law or to the extent required under existing employee and director benefit plans, agreements or arrangements as in effect on the date of this Agreement, (i) increase in the compensation or fringe benefits of any of the President of Ocean Systems and his direct reports or other employees (including any such increase pursuant to any deferred compensation, severance, bonus, pension, profit-sharing or other plan or commitment), except for increases, in the ordinary course of business consistent with past practice, in salary or wages of employees who are not senior managers of the Business, (ii) grant of any severance or termination pay, (iii) hire, except in the ordinary course of business, of any new employees or consultants or (iv) amendment or termination, or any agreement to amend or terminate, any collective bargaining, bonus, profit sharing, thrift, compensation, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of the President of Ocean Systems and his past or present direct reports or any other past or present employees of the Business (except for changes in AlliedSignal benefit plans generally); (g) (i) transaction with or for the benefit of any other division or business of Seller or any Affiliate of Seller except as is set forth in Schedule 4.26 and (ii) Affiliate has been permitted to do, or agree, in writing or otherwise, to do, any of the foregoing; (h) (i) waiver of any material claims or rights relating to the Business or the Assets or (ii) Affiliate has been permitted to do, or agree, in writing or otherwise, to do, any of the foregoing; (i) acquisition of or agreement to acquire, by merging or consolidating with, or by purchasing a substantial portion of the stock or assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof; (j) except for performance guarantees issued in the ordinary course of business consistent with past practice, incurrence of any indebtedness for borrowed money, or guarantee of any such indebtedness of another person, issuance or sale of any debt securities or warrants or other rights to acquire any debt securities of the Sellers, guarantee of any debt securities of another person, entrance into any "keep well" or other agreement to maintain any financial statement condition of another person or entrance into any arrangement having the economic effect of any of the foregoing, or loans, advances or capital contributions to, or investments in, any other person; or (k) license or agreement entered into with respect to the Intellectual Property. 14 4.13 [Intentionally left blank] 4.14 Compliance with Law. Except as set forth on Schedule 4.14, Sellers and ELAC are not in violation of any Applicable Law which, individually or in the aggregate, would have a material adverse effect on the operation of the Business, and Sellers and ELAC have not received any notice in writing alleging any such defaults or violations or potential defaults or violations. 4.15 Consents. Except as set forth in Schedule 4.15, no action, approval, consent or authorization, including but not limited to any action, approval, consent or authorization by any third party, financial institution, governmental or quasi-governmental agency, commission, board, bureau or instrumentality, is necessary to make this Agreement or any of the Other Agreements or instruments to be executed and delivered pursuant hereto a legal, valid and binding obligation of Sellers or ELAC or to consummate the transactions contemplated hereunder. 4.16 Taxes. All Taxes (as hereinafter defined) with respect to the Business that are due and payable or which relate to tax periods ending on or prior to the Closing Date have been or will be duly and properly computed, reported, fully paid and discharged by Sellers. There are no unpaid Taxes with respect to any period, or a portion thereof, ending on or before the Closing Date which are or could become a Lien on the Assets or the ELAC Assets, except for current Taxes not yet due and payable or reserved for in the Financial Statements. Except as set forth on Schedule 4.16, there has been filed by or on behalf of ELAC all material returns, declarations, statements, reports, schedules, forms and information returns and any amended tax returns relating to any Taxes (the "Tax Returns"). All such material Tax Returns are true, complete and correct in all material respects and all Taxes shown as due on such Tax Returns have been or will be paid in a timely fashion by Sellers prior to Closing or have been accrued for on ELAC's financial statements. Except as set forth on Schedule 4.16, no audit or other proceeding by any Governmental Authority, or similar person is pending, or to the Knowledge of Sellers, is threatened with respect to any material Taxes due from or with respect to ELAC. No material issues relating to Taxes were raised in writing by the relevant taxing authority during any audit or examination. Except as set forth in Schedule 4.16, ELAC is not a party to or bound by (nor will it become a party to or bound by prior to the Closing Date) any tax indemnity, tax sharing, or tax allocation agreement. There is no material agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes and no power of attorney with respect to any material Taxes of ELAC has been executed or filed with any Governmental Authority. ELAC is not, nor has it ever been, a member of a U.S. consolidated, combined unitary tax group. As used herein, the term "Taxes" shall include all federal, state, local and foreign taxes, assessments or other governmental charges (including, without limitation, net income, gross income, excise, franchise, sales and value added taxes, taxes withheld from employees' salaries and other withholding taxes and obligations and all deposits required to be made with respect thereto), levies, assessments, deficiencies, import duties, licenses and registration fees and charges of any nature whatsoever, including any interest, penalties, additions to tax or additional amounts with respect thereto, imposed by any government or taxing authority, provided, however, that the term "Taxes" does not include the taxes, duties and levies referred to at Section 2.6. 15 4.17 Permits and Licenses. Schedule 4.17 attached hereto lists all material governmental or other permits, licenses, approvals, certificates of inspection, filings, franchises and other authorizations, other than those relating to the environment, that are issued to, or held or used by Sellers or ELAC, or for which Sellers or ELAC have applied, in connection with the current operation of the Business, and any limitations thereto. Except as listed in Schedule 4.17, Sellers and ELAC have all material governmental or other permits, licenses, approvals, certificates of inspection, filings, franchises and other authorizations, other than those relating to the environment, that are necessary to own and operate the Assets and the ELAC Assets and to conduct the Business as it is currently being conducted, and Sellers and ELAC have not received notice alleging that any other material governmental or other permits, licenses, approvals, certificates of inspection, filings, franchises and other authorizations, other than those relating to the environment, are required. "Material" for purposes of this Section 4.17 shall include but not be limited to permits, licenses and other authorizations which are required to own or operate the Assets or ELAC Assets owned or operated by Sellers and used for the production of products in the Business. 4.18 Ownership of ELAC Shares. The ELAC Shares constitute all of the issued and outstanding shares of capital stock of ELAC. The ELAC Shares have been duly authorized and validly issued and are fully paid and nonassessable. There are no securities convertible into or exchangeable or exercisable for ELAC Shares or any options, warrants or other rights to acquire ELAC Shares. AS Deutschland is the sole legal and beneficial owner of the ELAC Shares and owns the ELAC Shares free and clear of any Liens, restrictions, options or rights in others, encumbrances or other claims, rights of first offer or first refusal, or voting agreements, and AS Deutschland has full legal right, power and authority to enter into this Agreement and to transfer and deliver good and valid title to the ELAC Shares hereunder. At the Closing, Purchaser shall receive good and valid title to the ELAC Shares free and clear of any Liens other than as created by Purchaser. ELAC does not constitute a material part of the assets of AS Deutschland. 4.19 Labor Relations. Except as set forth on Schedule 4.19, (i) there is no employment agreement, collective bargaining agreement, shop agreement or written personnel policy applicable to Employees of the Business nor are any such agreements or policies presently negotiated; (ii) there is no current labor strike, slowdown or work stoppage or pending lockout, dispute or other labor controversy in effect, or to the Knowledge of Sellers threatened against or otherwise affecting the Business, and the Business has not experienced such labor controversy in the past five years; (iii) there is no unfair labor practice charge or complaint pending or, to the Knowledge of Sellers, threatened against or otherwise affecting the Business; (iv) no representation question exists or has been raised respecting any of the Employees of the Business within the past five years, nor to the Knowledge of Sellers are there any campaigns being conducted to solicit cards from Employees of the Business to authorize representation by any labor organization; (v) no action, suit, complaint, charge, arbitration, grievance, inquiry, proceeding or investigation by or before any court, governmental agency, administrative agency or commission brought by or on behalf of any Employee, prospective employee, former employee, retiree, labor organization or other representative of the Business's Employees is pending or, to the Knowledge of Sellers, threatened against the Business; (vi) the Sellers and ELAC are not party to, or otherwise bound by, any consent decree with, or citation by, any Government agency relating to 16 Employees or employment practices; (vii) the Sellers and ELAC are in compliance in all material respects with all Applicable Laws, agreements, contracts, and policies relating to employment, employment practices, wages, hours, and terms and conditions of employment; (viii) other than to the extent accrued in the financial statements of the Business in accordance with GAAP, the Sellers and ELAC have paid in full to all Employees of the Business all wages, salaries, commissions, bonuses, benefits and other compensation due to such employees or otherwise arising under any policy, practice, agreement, plan, program, statute or other law; (ix) the Sellers and ELAC are not liable for any severance pay or other payments to any Employee, or former employee arising from the termination of employment, nor will the Business have any liability under any benefit or severance policy, practice, agreement, plan, or program which exists or arises, or may be deemed to exist or arise, under any Applicable Law or otherwise, as a result of or in connection with the transactions contemplated hereunder or as a result of the termination by the Business of any persons employed by the Sellers on or prior to the Closing Date except to the extent accrued on the Closing Balance Sheet; (x) except as set forth in Schedule 4.19(x), the Sellers and ELAC have not closed any Business plant or facility, effectuated any layoff of Employees or implemented any early retirement, separation or window program which within the past five years, nor have the Sellers or ELAC planned or announced any such action or program for the future; (xi) the Sellers and ELAC are in compliance with their obligations pursuant to the Worker Adjustment and Retraining Notification Act of 1988, and Sellers and ELAC are in compliance with all other notification and bargaining obligations arising under any collective bargaining agreement, statute or otherwise. 4.20 Brokerage Fees. No person is entitled to any brokerage or finder's fee or other commission from Sellers in respect of this Agreement or the transactions contemplated hereby except Bear, Stearns & Co. Inc. (whose fee shall be paid by Sellers). 4.21 Government Contracts. (a) With respect to each and every Government Contract or bid to obtain a Government Contract to which Sellers or ELAC are a party, and which relates to the Business, and except as set forth in Schedule 4.21(a): (i) Sellers and ELAC have fully complied with all material terms and conditions of such Government Contract or bid for a Government Contract as required as of the date hereof and as of the Closing Date; (ii) Sellers and ELAC have fully complied with all material requirements of statute, rule or regulation pertaining to such Government Contract or bid for a Government Contract; (iii) all representations and certifications executed with respect to such Government Contract were to the Knowledge of Sellers accurate in every material respect as of their effective date and Sellers and ELAC to the Knowledge of Sellers have fully complied with all such representations and certifications in every material respect; and (iv) no termination for default, cure notice or show cause notice has been issued or, to the Knowledge of Sellers will be issued, (v) neither the U.S. Government nor any non-U.S. government nor any prime contractor, subcontractor or other entity person has notified in writing any of the Sellers or ELAC that any of the Sellers or ELAC has breached or violated any Applicable Law, certification, representation, clause provision or requirement pertaining to such Government Contract or bid; (vi) no cost incurred by the Sellers or ELAC pertaining to such Government Contract or bid has been questioned or challenged, is the subject of any investigation or has been disallowed by the U.S. Government or any non-U.S. government; (vii) no money due to the Sellers or ELAC pertaining to such Government Contract or bid has been withheld or set 17 off and the Sellers or ELAC are entitled to all progress payments with respect thereto and (viii) each Government Contract is valid and in full force and effect. As used herein, "Government Contract" means any open contract relating to the Business between any of Sellers or ELAC and (x) the U.S. Government or any non-U.S. government, (y) any prime contractor of the U.S. Government or any non-U.S. government or (z) any subcontractor at any tier with respect to any contract described in clauses (x) and (y) above. (b) To the Knowledge of Sellers, except as set forth in Schedule 4.21(b), with respect to the Business; (i) none of its respective employees, consultants or agents is (or during the last three years has been) under administrative, civil or criminal investigation, indictment or information by any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing ("Governmental Authority"), (ii) there is not any pending audit or investigation by Sellers or ELAC nor within the last three years has there been any audit or investigation by Sellers or ELAC resulting in a material adverse finding with respect to any alleged irregularity, misstatement or omission arising under or relating to any Government Contract or bid; and (iii) during the last three years, the Sellers and ELAC have not made a voluntary disclosure to the U.S. Government or any non-U.S. government, with respect to any alleged irregularity, misstatement or omission arising under or relating to a Government Contract or bid. Except as set forth in Schedule 4.21(b), to the Knowledge of Sellers there are no irregularities, misstatements or omissions arising under or relating to any Government Contract or bid that has led or is expected to lead, either before or after the Closing Date, to any of the consequences set forth in clause (i) or (ii) of the immediately preceding sentence or any other material damage, penalty assessment, recoupment of payment or disallowance of cost. (c) Except as set forth in Schedule 4.21(c), with respect to the Business, there exist (i) no outstanding claims against the Sellers or ELAC, either by the U.S. Government or by any non-U.S. government or by any prime contractor, subcontractor, vendor or other third party, arising under or relating to any Government Contract or bid referred to in Section 4.21(a) and (ii) no disputes between the Sellers or ELAC and the U.S. Government or any non-U.S. government under the Contract Disputes Act or any other Federal statute or between the Sellers or ELAC and any prime contractor, subcontractor or vendor arising under or relating to any such Government Contract or bid. Except as set forth in Schedule 4.21(c), to the Knowledge of Sellers there are no facts that could reasonably be expected to result in a claim or a dispute under clause (i) or (ii) of the immediately preceding sentence. (d) Except as set forth in Schedule 4.21(d), neither the Sellers nor ELAC nor any of their employees, consultants or agents is (or during the last three years has been) suspended or debarred from doing business with the U.S. Government or any non-U.S. government or is (or during such period was) the subject of a finding of nonresponsibility or ineligibility for U.S. Government or non-U.S. government contracting. Except as set forth in Schedule 4.21(d), the Sellers, ELAC and their Affiliates have operated the Business in 18 compliance with all requirements of all material laws pertaining to all Government Contracts and bids. (e) Except as set forth in Schedule 4.21(e), no statement, representation or warranty made by the Sellers or ELAC in any Government Contract, any exhibit thereto or in any certificate, statement, list, schedule or other document submitted or furnished to the U.S. Government or any non-U.S. government in connection with any Government Contract or bid (i) contained on the date so furnished or submitted any untrue statement of a material fact, or failed to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading or (ii) contains on the date hereof any untrue statement of a material fact, or fails to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading, except in the case of both clauses (i) and (ii) any untrue statement or failure to state a material fact that would not result in any material liability to the Business as a result of such untrue statement or failure to state a material fact. 4.22 Government Furnished Equipment. Schedule 4.22 incorporates the most recent schedule delivered to the U.S. Government or any non-U.S. Government which identifies by description or inventory number certain equipment and fixtures loaned, bailed or otherwise furnished to or held by the Business by or on behalf of the United States or any foreign country. To the Knowledge of Sellers, such schedule was accurate and complete on its date and, if dated as of the Closing Date, would contain only those additions and omit only those deletions of equipment and fixtures that have occurred in the ordinary course of business, except for such inaccuracies that could not reasonably be expected to have a material adverse effect on the Business. 4.23 Entire Business. Except for the Excluded Assets, and except as set forth on Schedule 4.23, the Assets, together with the License Agreement, constitute all of the assets, properties and rights necessary to conduct the Business in all material respects as currently conducted. Other than ELAC, Sellers have no subsidiaries primarily engaged in the Business. 4.24 Real Estate. Schedule 4.24 accurately lists all real property of the Business owned or leased, indirectly or directly, by the Sellers or ELAC (other than the Facility, the "Real Property"): (a) The Sellers and ELAC have good and marketable title to all such owned Real Property and good and valid leasehold interest in all such leased Real Property, in each case, free and clear of all Liens except for Permitted Liens; (b) There are no condemnation proceedings or eminent domain proceedings of any kind pending or, to the Knowledge of Sellers no written notice of any threatened action has been received against any Real Property; (c) All of the Real Property is occupied under a valid and current certificate of occupation or similar permit, the sale of the Assets hereunder will not require the issuance or any new or amended certificate of occupancy and to the Knowledge of Sellers the Real 19 Property may be occupied and used by Purchaser or ELAC after the Closing Date in the same manner as used by Sellers or ELAC on or before the Closing Date; (d) All improvements on the Real Property constructed by or on behalf of Sellers or any other person were at the time installed constructed in compliance with all applicable federal, state, local or foreign statutes, laws, ordinances, regulations, rules, codes, orders or requirements (including, but not limited to, any building, zoning or environmental laws or codes) affecting the Real Property; (e) All improvements on the Real Property and the present use and conditions thereof do not violate any applicable deed restrictions or applicable covenants, restrictions, agreements, existing site plan approvals, zoning or subdivision regulations or urban redevelopment plans as modified by any duly issued variances, and no permits, licenses or certificates pertaining to the ownership or operation of all improvements on the Real Property, other than those that are transferable with the Real Property, are required by any governmental agency having jurisdiction over the Real Property. Such improvements on the Real Property are wholly within the lot limits of such Real Property and do not encroach on any adjoining premises and there are no encroachments on any Real Property by any improvements located on any adjoining premises; (f) Sellers and ELAC enjoy peaceful and quiet possession of each parcel of Real Property, and there is not under any lease of any of the leased Real Property (a "Lease") any default by any of Sellers or ELAC thereunder or any condition that with notice or the passage of time or both would constitute such a default, and Sellers and ELAC have not received notice asserting the existence of any such default or condition. To the Knowledge of Sellers there are no defaults under any Lease by the landlord thereunder. Sellers have heretofore furnished the Purchaser a true and complete copy of each Lease and all amendments thereto pertaining to any leased Real Property. Each Lease is valid and binding and in full force and effect; (g) The rental set forth in each Lease is the actual rental being paid, and there are not separate agreements or understandings with respect to the same; and (h) Neither the execution of this Agreement nor the sale of the Assets hereunder shall cause a default under any Lease or require prior written consent of any landlord under any Lease. 4.25 Insurance. Schedule 4.25 lists insurance maintained by Sellers and ELAC with respect to the Assets and the ELAC Assets and with respect to the employees and representatives of the Business and the operations of the Business. The coverage under each such policy and binder is in full force and effect, and no notice of cancellation or nonrenewal with respect to any such policy or binder has been received by any of the Sellers or ELAC. 4.26 Affiliate Transactions. Except as set forth in Schedule 4.26, there are no agreements, arrangements, undertakings or other transactions between the Business and any other division or business of Sellers or any person that directly, or indirectly through one or 20 more intermediaries, controls or is controlled by or is under common control with any of Sellers (including, without limitation, any owner of capital stock of Sellers) (an "Affiliate"). 4.27 No Additional Representations. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS ARTICLE 4 OR ANY OTHER PROVISION OF THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT ALLIEDSIGNAL IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY OR SUITABILITY AS TO ANY OF THE PROPERTIES OR ASSETS OF THE SELLERS. EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS AGREEMENT, THE ASSETS ARE BEING SOLD ON AN "AS IS, WHERE IS" BASIS. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to AlliedSignal as follows: 5.1 Corporate Status. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full power and all governmental licenses, authorizations, consents and approvals required to carry on its business and to own all of its properties and assets. Purchaser has all requisite corporate and other power and authority to enter into, execute and deliver this Agreement and the Other Agreements and to perform its obligations and consummate the transactions contemplated hereunder and thereunder in accordance with the terms of this Agreement. 5.2 Authorization. All corporate and other proceedings required to be taken by or on the part of Purchaser to authorize Purchaser to enter into and carry out this Agreement have been, or prior to the Closing will be, duly and properly taken. This Agreement has been, and on the Closing Date each of the Other Agreements will be, duly executed and delivered by Purchaser and this Agreement constitutes, and each Other Agreement will upon execution and delivery thereof constitute, a legal and binding obligation of Purchaser, valid and enforceable against Purchaser in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law governing specific performance, injunctive relief and other equitable remedies. 5.3 Compliance. The execution, delivery and performance of this Agreement and Other Agreements and the consummation of the transactions contemplated hereby will not result in the breach of any of the terms or conditions of, or constitute a default under, or violate, as the case may be, the articles of incorporation, by-laws or other organization documents of Purchaser or any material agreement, lease, mortgage, note, deed of trust, lease, bond, indenture, license or other document or undertaking, oral or written, to which Purchaser is a party or by which Purchaser is bound or by which any of the Assets may be affected other than the consent required under Purchaser's existing credit facility, which Purchaser believes will be obtained prior to Closing. 21 5.4 Due Diligence. Purchaser has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the transactions contemplated by this Agreement and the Other Agreements. Purchaser confirms that AlliedSignal provided to Purchaser the opportunity to ask questions of the officers and management employees of AlliedSignal and to acquire such additional information about the business and financial condition of the Business as Purchaser requested and all such information has been received. 5.5 Financing. Purchaser has funds of its own, or has binding commitments from responsible banks or other financial institutions to provide funds, which will be sufficient and available to pay the purchase price as set forth in Section 2.1. 5.6 Investment Representation. Purchaser is acquiring the ELAC Shares for investment and not with a view to the public distribution thereof. 5.7 Conveyances and Restrictions. The performance by Purchaser of its obligations hereunder, whether through the purchase of the Assets, the obtaining of financing to fund the acquisition, and/or the obtaining of financing for the operations of the Business after the Closing, will not violate any provision of the Uniform Fraudulent Conveyance Act as enacted by the United States or any state thereof, or any regulations thereunder or any state fraudulent conveyance or similar statute in a state in which the Business or Purchaser is doing business. 5.8 Brokerage Fees. No person is entitled to any brokerage or finder's fee or other commission from Purchaser in respect of this Agreement or the transactions contemplated hereby. ARTICLE 6. EMPLOYEES AND EMPLOYEE BENEFITS 6.1 Employment. (a) Purchaser shall offer employment effective as of the Closing Date to all Employees (except that Employees on Long Term Disability shall be offered employment when such Employees are medically certified to return to work) employed as of the Closing Date. Nothing herein expressed or implied confers upon any Employee who accepts Purchaser's offer of employment (collectively, "Transferred Employees") any rights or remedies of any nature or kind, including, without limitation, any rights of employment with Purchaser for a specified period of time. (b) Notwithstanding Section 6.1(a) above, the employment of Employees employed by ELAC (collectively, the "German Employees") shall continue following the Closing Date and shall remain the liability of ELAC. 22 6.2 Compensation and Benefits - U.S. Employees. (a) Generally. Purchaser shall continue or shall provide, for a period of at least 12 months immediately subsequent to the Closing Date, for all Transferred Employees who are employed in the United States (collectively, "U.S. Transferred Employees") base salary or applicable rate of pay not less than that provided by Sellers immediately prior to the Closing Date, employee benefits and incentive compensation comparable, in the aggregate, to those in effect as of the Closing Date, except that, with respect to those plans providing a benefit in AlliedSignal stock, Purchaser shall have no obligation to provide such benefits or comparable benefits or to take into account such benefits for purposes of this Section. Purchaser shall assume liability for all deferred compensation, supplemental and excess pension and savings benefits, all bonus amounts, normal and enhanced severance benefits, and relocation benefits (whether or not all such employee benefits are vested on the Closing Date) in respect of all U.S. Transferred Employees incurred or earned, but not paid, on or before the Closing Date, or as incurred in connection with the sale of the Business and not paid as of the Closing Date, to the extent accrued on the Closing Balance Sheet. Purchaser shall assume the retention agreements listed on Schedule 6.2(a). (b) Union Employees. Purchaser shall offer employment on or prior to the Closing Date to each U.S. Employee covered by the Collective Bargaining Agreements between AlliedSignal and the United Auto Workers ("UAW") or UAW Local 179, including the Local Agreement between AlliedSignal and UAW Local 179, the Master Agreement between AlliedSignal and the UAW, and all associated agreements that are part of such Master Agreement, including the letters of understanding and agreements covering pensions, insurance and savings plans (collectively, the "Bargaining Agreements") as described in Schedule 4.7 (such covered Employees being referred to, collectively, as "Union Employees"), provided that such Union Employee is actively at work on the Closing Date. Purchaser shall provide each Union Employee with compensation (base rate of pay and incentive compensation, if any) no less than that required by the applicable Bargaining Agreements and any applicable side letters and schedules immediately prior to the Closing Date. A Union Employee who is absent on the Closing Date due to illness, vacation, paid leave, holiday or union office leave or who is otherwise subject to recall with seniority rights shall to the extent required by the applicable Bargaining Agreement and any applicable side letters and schedules be considered actively at work on the Closing Date. The Union Employees who are actively at work on the Closing Date shall hereafter be called "Union Transferred Employees". Sellers shall retain the obligation to provide any Union Employee who does not become a Union Transferred Employee on the Closing Date with benefits under Sellers' Pension Plans for Union Employees, as defined herein, and all other benefits required to be provided by the Bargaining Agreements. (c) Purchaser agrees to credit each U.S. Transferred Employee service credited with Sellers under the Benefit Plans for participation, retirement eligibility and vesting under such employee benefit plans or policies Purchaser maintains or will maintain for or on behalf of the U.S. Transferred Employees. In addition, such service shall be credited for benefit purposes under welfare plans (including severance plans), vacation plans and qualified retirement plans in respect of which assets and liabilities are transferred to 23 Purchaser's Plans. Sellers shall not in any manner be responsible for any liability, claim or obligation due under any such plan maintained by Purchaser. 6.3 Severance and WARN Act. (a) Sellers shall pay and be responsible for all liability, cost or expense for severance, termination indemnity payments, salary continuation, special bonuses and like costs under Sellers' severance pay plans, policies or arrangements, with respect to any of the Employees that arise from or relate to the transactions described in or contemplated by this Agreement, or of any U.S. Transferred Employees that arise under Sellers' severance plans from the subsequent termination of employment by Purchaser after the Closing Date. Purchaser agrees to pay and be responsible for all liability, cost, expense and sanctions resulting from the Purchaser's failure to comply after the Closing Date with the Worker Adjustment and Retraining Notification Act of 1988 ("WARN Act"), and the regulations thereunder or for any action by Purchaser which causes WARN to apply. (b) The Sellers shall not, at any time within the 60-day period prior to the Closing Date, effectuate a "plant closing" or "mass layoff", as those terms are defined in the WARN Act or any State law, affecting in whole or in part any Ocean Systems site of employment, facility, operating unit or employee. (c) The Sellers shall indemnify, defend and hold Purchaser harmless from and against any and all claims, actions, suits, demands, proceedings, losses, expenses, damages, obligations and liabilities (including costs of collection, attorney's fees and other costs of defense) ("Damages") arising out of or otherwise in respect of (i) termination by the Sellers of any employee of the Business on or prior to the Closing Date; (ii) any claim made by any employee of the Business for severance pay arising prior to, or upon the Closing Date; or (iii) any suit or claim of violation brought against the Purchaser under the WARN Act or any State law for any actions taken by the Sellers in connection with, on or prior to the Closing Date with regard to any site of employment, facility, operating unit or employee affected by this Agreement which action by itself causes WARN to apply. 6.4 Health Care Continuation Liability. With respect to Sellers' plans, Seller agrees to pay and be responsible for all liability, cost, expense, taxes and sanctions under Section 4980B of the Internal Revenue Code (the "Code"), interest and penalties imposed upon, incurred by, or assessed against Purchaser or Sellers that arise by reason of or relate to any failure to comply with the health care continuation coverage requirements of Section 4980B of the Code and Sections 601 through 608 of ERISA, as amended, which failure occurs as a result of the transactions described in or contemplated by this Agreement or which failure occurs on or after the Closing Date with respect to any Employee or any qualified beneficiary (as defined in Section 4980B(g)(1)) of such Employee. 6.5 Pension Plan. (a) AlliedSignal shall amend the Salaried Employees Pension Program for AlliedSignal Inc., the AlliedSignal Inc. Pension Plan for Hourly Employees (provisions relating to UAW Local 179) and the AlliedSignal Inc. Retirement Program (collectively, the "Pension Plans") to fully vest all Employees employed by the Business as of the Closing Date participating in the Pension Plan in their accrued benefit as of the Closing Date. Purchaser 24 shall assume the liabilities and obligations as of the Closing Date of Sellers for the accrued benefits of all U.S. Transferred Employees under the Pension Plans. Purchaser shall have established as of the Closing Date, or shall establish as soon as practicable after the Closing Date, a tax-qualified defined benefit pension plan or plans which shall discharge the pension obligations of Purchaser set forth in this Section ("Purchaser's Plan"). As soon as practicable after the Closing Date, AlliedSignal shall cause a transfer of the pension liabilities and obligations being assumed by Purchaser and of the assets, as calculated below, to Purchaser's Plan. (b) The assets to be transferred from the Pension Plans to Purchaser's Plan shall be an amount equal to the "projected benefit obligation," within the meaning of Financial Accounting Standard No. 87, as of the Closing Date attributable to the U.S. Transferred Employees under Sellers' Pension Plans ("PBO") with adjustments described below. Sellers' actuary shall calculate the transfer amount (the "Transfer Amount") by applying the assumptions, methods and methodologies listed on Schedule 6.5(b) and other actuarial assumptions and methodologies used in the ordinary course in the preparation of the actuarial valuation not inconsistent with those listed in Schedule 6.5(b). Notwithstanding any provision herein to the contrary, the transfer amount shall be subject to the applicable requirements of Sections 414(l) and 401(a)(12) of the Code. The amount as so determined shall be adjusted for investment earnings at the short term investment fund rate earned by Sellers' Pension Plans (the "Earnings") for the period between the Closing Date and the actual dates of transfer (see below) and reduced by the amount of any benefit payments to U.S. Transferred Employees and a proportional share of investment and administrative expenses relative to asset values for such period. The amount of assets caused to be transferred pursuant to this Section shall be calculated by Sellers' actuary, and the actuarial calculations shall be subject to review and approval by Purchaser's actuary. In the event that Purchaser's actuary does not agree with the calculation determined by Sellers' actuary, the determination of the amount to be transferred pursuant to this Section shall be made by a third, nationally recognized actuarial firm selected by Sellers' and Purchaser's actuaries (the cost of which shall be borne equally between Sellers and Purchaser), and the determination of such third actuary as to the amount to be transferred shall be binding and conclusive upon all parties hereto. The transfer of assets from Sellers' Pension Plan to Purchaser's Plan shall be made in cash pursuant to Section 6.5(c). The parties shall file any necessary IRS Forms 5310-A with respect to such transfer. (c) All transfers from the Pension Plans to the Purchaser's Plan shall be made in accordance with the provisions of this Section 6.5(c). As soon as is administratively practical, but in no event later than 30 days following the Closing Date, and conditioned upon AlliedSignal having been provided evidence reasonably satisfactory to it that Purchaser has established a trust (or trusts) to hold the assets of the Purchaser's Plan and that Purchaser's Plan is qualified under Section 401(a) of the Code and the trusts holding assets of the Purchaser's Plan are tax exempt under Section 501(a) of the Code ("Initial Transfer Date"), AlliedSignal shall cause its trusts to make an initial transfer of assets in cash equal to 85% of the amount reasonably estimated by AlliedSignal in good faith to be equal to the Transfer Amount (the "Initial Transfer Amount"). In addition, prior to the Initial Transfer Date AlliedSignal shall provide Purchaser with evidence reasonably satisfactory to Purchaser that the Pension Plans remain qualified under Section 401(a) of the Code. As soon as practicable 25 after the final determination of the amounts to be transferred ("True-Up Date"), AlliedSignal shall cause a second transfer to be made in cash of the "True-Up Amount." The True-Up Amount shall be equal to the following amount: (Transfer Amount minus Initial Transfer Amount), minus benefit payments made to U.S. Transferred Employees since the Closing Date from the Pension Plans, adjusted for Earnings on the excess of the Transfer Amount over the Initial Transfer Amount from the Initial Transfer Date to the True-Up Date, If the Initial Transfer Amount exceeds the Transfer Amount, as soon as practicable following such determination Purchaser shall cause a transfer to be made to the respective Pension Plan equal to the excess of the Initial Transfer Amount over the Transfer Amount, adjusted to reflect earnings at the short term investment fund rate earned by Purchaser's Plan from the Initial Transfer Date until the date of transfer. 6.6 Savings Plan. AlliedSignal shall provide that those Employees participating in the AlliedSignal Savings Plan and AlliedSignal Thrift Plan ("Savings Plans") immediately prior to the Closing Date shall fully vest on the Closing Date in their respective Savings Plans accounts (the "Accounts"). As promptly as practicable following the Closing Date, Sellers and Purchaser shall arrange for the transfer of the Accounts and the corresponding liabilities with respect to the U.S. Transferred Employees, from the Savings Plans to one or more tax-qualified plans established or to be established by Purchaser which provides benefits substantially equivalent to the benefits available under the applicable Savings Plans. With respect to the plan or plans receiving assets from the Savings Plans, to the extent permitted by Applicable Law, such plan or plans shall also (a) provide for tax-deferred contributions and (b) meet all requirements for a qualified cash or deferred arrangement under Section 401(k) of the Code. The transfer of assets from the Savings Plans shall be made in cash, marketable securities, promissory notes presenting participant loans, or a combination thereof, as determined by AlliedSignal and consented to by Purchaser. Without limiting the generality of the foregoing, if AlliedSignal should determine to transfer assets held in Accounts which, immediately prior to the Closing Date, provide for holding AlliedSignal common stock in such form, Purchaser agrees to accept transfer of such Accounts in AlliedSignal's common stock, and, to the extent permitted by law for such reasonable period of time as Purchaser may determine, to provide U.S. Transferred Employees with an election to retain AlliedSignal's common stock in their respective plan accounts or to dispose of such stock and have the proceeds reinvested in other investment alternatives offered under each such plan. Prior to the transfer date, Purchaser shall, to the reasonable satisfaction of AlliedSignal's counsel, present AlliedSignal with such evidence and information (which may include or be provided by an opinion of Purchaser's counsel satisfactory to AlliedSignal) as is reasonably necessary to establish that the tax-qualified plan or plans established or to be established by Purchaser to which the transfer or transfers described in this Section are to be made are in full force and effect and meet all the requirements for qualification under Sections 401 and 411(d)(6) of the Code and Sellers shall, to the reasonable satisfaction of Purchaser's counsel, present Purchaser with such evidence and information as is reasonably necessary to establish that the Savings Plan meets the requirements of Section 401(a) of the Code. 26 6.7 Labor Agreements. Purchaser shall assume Sellers' obligations under the Bargaining Agreements and any applicable side letters and schedules according to their terms as in effect of and as of the Closing Date, and shall honor such Bargaining Agreements for the remainder of the effective term thereof following the Closing Date. ARTICLE 7. PRE-CLOSING COVENANTS 7.1 [Intentionally left blank]. 7.2 [Intentionally left blank]. 7.3 [Intentionally left blank]. 7.4 [Intentionally left blank]. 7.5 Workers' Compensation. The Seller shall retain responsibility for all workers' compensation events which relate to incidents occurring on or before the Closing Date. The Purchaser shall have responsibility for all workers' compensation events which relate to incidents occurring after the Closing Date. 7.6 Insurance-Primary Casualty Program. Sellers maintain at present a series of insurance programs pursuant to which various insurance carriers have provided and are providing insurance coverage in respect of the Business relating to automobile liability, general liability, employers liability and non-aircraft products liability (the "Primary Casualty Program") and Sellers and Purchaser understand and agree that Sellers are not transferring to Purchaser pursuant hereto any rights or interests in such Primary Casualty Program, nor, except as otherwise set forth herein, shall Sellers be required to maintain any of such coverages or limit in any manner Sellers' right to change deductible levels or other terms or conditions thereof. As between Purchaser and Sellers, however, it is agreed that the following shall apply to claims with a date of occurrence prior to the Closing Date that are covered by the Primary Casualty Program: 7.6.1 Claims Responsibility and Procedures. Purchaser shall promptly notify in writing Sellers of any claims against the Business, Purchaser, Sellers or any of their Affiliates arising from occurrences which took place prior to the Closing Date relating to the Business or its prior assets, business or operations. To the extent coverage is available under the Primary Casualty Program, Purchaser shall handle such claims through the applicable insurance carrier and to the limited extent required therefor is hereby appointed as Sellers' agent in dealing with any such applicable insurance carriers, such agency, however, being subject to revocation at any time if Purchaser fails to comply with the provisions of this Section 7.6. Purchaser through the applicable insurance carrier may settle any such claim on a basis which in its judgment is reasonable provided, however, that Purchaser agrees not to settle any such claims for an amount in excess of $50,000 without prior consultation with AlliedSignal. Sellers and Purchasers shall cooperate with each other in the defense of any such claims and will keep each other informed of significant developments with respect 27 thereto. Neither Purchaser nor Sellers will knowingly take any action that prejudices the other party in the collection of any applicable insurance proceeds. 7.7 No Inconsistent Action. Subject to Sections 9.1 and 9.2, the parties hereto shall not take any action inconsistent with their obligations under this Agreement or which could materially hinder or delay the consummation of the transactions contemplated by this Agreement. None of the parties hereto shall take or omit to take any action that could result in any of their respective representations and warranties not being true in all material respects on the Closing Date. 7.8 [Intentionally left blank]. 7.9 Non-Solicitation. Sellers agree that until December 22, 1999, they shall not, and they shall cause each of their respective Affiliates not to, without the prior consent of Purchaser, employ or solicit for employment any person currently employed by the Business (other than a person solicited or hired as a result of a general solicitation (such as an advertisement) not specifically directed to employees of the Business). 7.10 Refunds and Remittances. In the event that Sellers or their Affiliates receive any amount that is properly due and owing to Purchaser in accordance with the terms of this Agreement, Sellers shall cause same to be promptly remitted to Purchaser at the address specified in Section 13.2. 7.11 Enforcement of Confidentiality Provisions. Sellers agree to use reasonable best efforts to enforce, at the written request of Purchaser, (i) the confidentiality provisions of any agreements related to the sale of the Business (excluding any employee solicitation provisions) and (ii) all confidentiality agreements, if any, entered into between Sellers or any of their Affiliates and any of their employees, in each case to the extent such provisions pertain to the Business as of the Closing Date. 7.12 Novation of Government Contracts. As soon as reasonably practicable following the Closing, AlliedSignal shall, in accordance with Federal Acquisition Regulations Part 42, Section 42.12, submit in writing to each responsible Contracting Officer (as such term is defined in Federal Acquisition Regulations Part 42, Section 42.102(a)), a request for the U.S. Government to (i) recognize Purchaser in accordance with this Agreement and (ii) enter into a novation agreement (the "Novation Agreement") substantially in the form contemplated by such regulations. AlliedSignal shall thereby reasonably assist Purchaser in obtaining all consents, approvals and waivers required for the purpose of processing, entering into and completing the Novation Agreement with regard to any of the Government Contracts, including responding to any reasonable requests for information by the U.S. Government with regard to such Novation Agreement. 7.13 Further Actions. Subject to the terms and conditions hereof, Sellers and Purchaser agree to use their reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, including without limitation, taking all necessary or advisable action (i) in respect of the works council of ELAC and (ii) 28 to terminate the profit/loss pooling arrangement (the "Pooling Arrangement") between AS Deutschland and ELAC not later than December 31, 1998. 7.14 Letters of Credit. Schedule 7.14 identifies letters of credit and other similar obligations in respect of which AlliedSignal will remain as account party ("Retained L/Cs") and other letters of credit and similar obligations ("Assumed L/Cs") in respect of which Purchaser shall, not later than May 31, 1998, either (a) become account party or (b) issue replacement letters of credit, with Purchaser as account party, and obtain the cancellation of the Assumed L/Cs and release Sellers from any obligations under any related credit agreements. In the event that, after using its reasonable best efforts, Purchaser cannot perform its obligations under Section 7.14(a) or (b) with respect to the Assumed L/Cs, Purchaser shall provide back-up letters of credit with respect to such Assumed L/Cs. Any Assumed L/C in respect of which Purchaser has not issued a replacement or back-up letter of credit as aforesaid by May 31, 1998 may be cancelled by AlliedSignal and Purchaser shall reimburse AlliedSignal forthwith for all amounts drawn by the beneficiary under any such cancelled letter of credit; provided, however, that prior to May 31, 1998, AlliedSignal shall not waive any requirements of or agree to amend any such Retained L/C without the prior written consent of Purchaser. The parties acknowledge that the identity of the account party under any Retained L/C and any Assumed L/C and other similar obligations does not alter the terms of this Agreement, meaning, specifically and without limitation, that the provisions of Section 3.1 (Assumed Liabilities), 3.2 (Excluded Liabilities) and Article 12 (Indemnification) are unaffected by the identity of the account party, and if a demand for payment is made under a Retained L/C or an Assumed L/C, the financial responsibility for the circumstances underlying such demand shall be determined by this Agreement and not by the identity of the account party under the letter of credit in question. 7.15 1985 Capitalization of ELAC. AlliedSignal shall ensure that the 1985 capitalization of ELAC is confirmed by German counsel to have been lawful and proper. The parties shall cooperate in any steps that may be necessary to correct the capitalization, at AlliedSignal's expense. 7.16 MCDV Subcontract. Following the Closing, AlliedSignal and Purchaser shall use their reasonable best efforts to prepare a subcontract (the "MCDV Subcontract") to be entered into between AlliedSignal Canada Inc. ("ASC") and Purchaser relating to the contract between ASC and MacDonald, Dettwiler and Associates Ltd. for the maritime coastal defense vessel, as amended (the "MCDV Contract"). The MCDV Subcontract shall be reasonably acceptable to AlliedSignal and Purchaser and shall transfer to Purchaser in U.S. dollars the full economic benefit of the MCDV Contract (based on the exchange rate for U.S. and Canadian dollars as reported in the Wall Street Journal on the date of any payment). Purchaser shall, and AlliedSignal shall cause ASC to, enter into the MCDV Subcontract promptly following the finalization thereof to the reasonable satisfaction of AlliedSignal and Purchaser. In the event that (i) ASC shall be prohibited from making any payment to Purchaser under the MCDV Subcontract, (ii) any Canadian withholding tax would be applicable to any payment to Purchaser by ASC under the MCDV Subcontract or (iii) ASC would lose Canadian content credit as a result of any payment to Purchaser by ASC under the MCDV Subcontract, AlliedSignal shall, on the date any such payment is due and in lieu of such payment from ASC under the MCDV Subcontract, make a payment to Purchaser in an 29 amount equal to the amount of the payment due under the MCDV Subcontract, without regard to any Canadian withholding tax. Purchaser shall not have any liability under the MCDV Subcontract for any obligation or liability relating to the ownership or operation of the Assets or the Business on or prior to the Closing Date relating to (a) the provision of Canadian content, (b) any penalty or excise tax for failure to meet Canadian content obligations or (c) any obligation for liquidated damages for failure to timely deliver. ARTICLE 8. CONDITIONS TO CLOSING 8.1 Conditions to the Obligations of Purchaser. The obligations of Purchaser to consummate the transactions contemplated by this Agreement are subject to the fulfillment prior to or at the Closing of each of the following conditions, any one or more of which may be waived by Purchaser in its sole discretion: (a) On the Closing Date, there shall be no injunction, restraining order or decree of any nature of any court or governmental agency or body of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated by this Agreement or any such injunction, restraining order or decree or any pending lawsuit, claim or legal action relating to the transactions contemplated by this Agreement which would materially adversely affect such transactions or Purchaser's ownership, use or enjoyment of the Business or any part thereof. (b)(i) All of the representations and warranties of Sellers, including those set forth in Section 8.1(b)(ii) and (iii) below, contained in this Agreement or in any certificate, instrument or other document delivered to Purchaser pursuant hereto shall be complete, true and correct in all respects on and as of the Effective Date, with the same force and effect as though such representations and warranties had been made on and as of the Effective Date, except to the extent that any such representation and warranty is made as of a specified date, in which case, such representation and warranty shall have been true and correct as of such date; (ii) The representations and warranties of Sellers contained in Sections 4.1, 4.2, 4.3, 4.8, 4.10, 4.11, 4.12, 4.15, 4.16, 4.17, 4.18, 4.20, 4.21, 4.22, 4.23, 4.25, 4.26 and 4.27 of this Agreement or in any certificate, instrument or other document delivered to Purchaser pursuant hereto shall be complete, true and correct in all respects on the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except to the extent that any such representation and warranty is made as of a specified date, in which case, such representation and warranty shall have been true and correct as of such date; and (iii) To the Knowledge of Sellers, the representations and warranties contained in Section 4.9 of this Agreement or in any certificate, instrument or other document delivered to Purchaser pursuant hereto shall be complete, true and correct in all respects on the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except to the extent that any such 30 representation and warranty is made as of a specified date, in which case, such representation and warranty shall have been true and correct as of such date. (c) Sellers shall have performed in all material respects all obligations and agreements and complied in all material respects with all covenants contained in this Agreement to be performed and complied with by them prior to or on the Closing Date. (d) Purchaser shall have received a certificate, dated the Closing Date, from an authorized officer of each of the Sellers to the effect that the conditions specified in (b) and (c) above have been fulfilled. (e) The Transition Services Agreement, attached as Exhibit B hereto, shall have been executed and delivered by the parties thereto. 8.2 Conditions to the Obligations of Sellers. The obligations of Sellers under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by Sellers in their sole discretion: (a) On the Closing Date, there shall be no injunction, restraining order or decree of any nature of any court or governmental agency or body of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated by this Agreement. (b) The representations and warranties of Purchaser contained in this Agreement or in any certificates, instruments or other documents delivered to AlliedSignal pursuant hereto shall be complete, true and correct on the Closing Date, with the same force and effect as though such representations and warranties, as updated, had been made on and as of the Closing Date, except to the extent that any such representation and warranty is made as of a specified date, in which case, such representation and warranty shall have been true and correct as of such date. (c) Purchaser shall have performed in all material respects all obligations and agreements and complied in all material respects with all covenants contained in this Agreement to be performed and complied with by the Closing Date. (d) AlliedSignal shall have received a certificate, dated the Closing Date, from an authorized officer of the Purchaser to the effect that the conditions specified in (b) and (c) above have been fulfilled. ARTICLE 9. TERMINATION AND SURVIVAL 9.1 Termination. Notwithstanding anything to the contrary set forth herein, this Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing: (a) by mutual written consent of Purchaser and Sellers; or 31 (b) by Purchaser, on the one hand, or Sellers, on the other hand, upon written notice to the other, if such other party or its Affiliate has breached any representation, warranty or covenant contained in this Agreement in any respect, if the non-breaching party has notified the breaching party of the breach in writing and the breach has continued without cure for a period of thirty (30) days after notice of the breach; or (c) by the Purchaser, on the one hand, or Sellers, on the other hand, if there shall be in effect any law or regulation that prohibits the consummation of the Closing or if the consummation of the Closing would violate any non-appealable final order, decree or judgment of any court or governmental body having jurisdiction over the transactions contemplated hereby; or (d) by either party if the Closing shall not have occurred by April 1, 1998; provided that the terminating party is not in material breach of its obligations under this Agreement. 9.2 Effect of Termination. If this Agreement is terminated pursuant to Section 9.1, this Agreement shall become void and of no further force and effect, and none of the parties hereto (nor their respective Affiliates, directors, shareholders, officers, employees, agents, consultants, attorneys-in-fact or other representatives) shall have any liability in respect of such termination except that the obligations contained in Sections 9.2, 13.1, 13.3 and 13.9 shall survive; provided, however, that if such termination is effected pursuant to Section 9.1(b) or (d) and the failure to consummate the transactions contemplated hereby was the result of any of the conditions to Closing having not been fulfilled by reason of the breach by either Purchaser, on the one hand, or Sellers, on the other hand, of their respective covenants, representations and/or warranties set forth in this Agreement or in any agreement, document or instrument ancillary hereto, the party having so breached shall remain liable to the other party for such breach. ARTICLE 10. CLOSING DOCUMENTS 10.1 Documents to be Delivered by Sellers. At the Closing, Sellers shall deliver to Purchaser the following documents: (i) Copies of resolutions of each of the Sellers certified by a Secretary, Assistant Secretary or other appropriate officer of such entity, authorizing the execution, delivery and performance of this Agreement and the transactions contemplated hereby; (ii) Executed deeds, bills of sale or other appropriate instruments of transfer with respect to all of the Real Property, Personal Property, Inventory, Accounts Receivable and any other Assets not transferred or assigned by any other documents or instruments described in this Section; (iii) Executed and acknowledged Assignments by ASTI sufficient to transfer title to the Intellectual Property; 32 (iv) Executed assignment and assumption agreements with respect to the Contracts; (v) Executed documents of assignment or transfer with respect to each of the permits, licenses and authorizations listed in Schedule 4.17; (vi) One executed assumption of liability agreement by which Purchaser will assume the Assumed Liabilities pursuant to Section 3.1 (the "Assumption of Liability Agreement"); (vii) One executed copy of the License Agreement; (viii) A certificate of an appropriate officer of AlliedSignal relating to the representations, warranties and covenants of AlliedSignal made herein as provided in Section 8.1(b) and (c); (ix) A share transfer agreement in customary form and a certificate in the name of Purchaser representing the ELAC Shares; (x) Any other document reasonably necessary to effectuate the transactions contemplated hereby; (xi) Sellers shall have delivered to Purchaser certificate(s) in form and substance reasonably satisfactory to Purchaser, duly executed and acknowledged, certifying any facts that would exempt the transactions contemplated hereby from withholding pursuant to the provisions of the Foreign Investment Real Property Tax Act (e.g., a certificate of non-foreign status as provided in Treasury Regulation section 1.1445-2(b)(2)(iii)(B)); and (xii) One executed Transition Services Agreement. 10.2 Documents to be Delivered by Purchaser. At the Closing, Purchaser shall pay the Purchase Price to AlliedSignal and shall execute where applicable and deliver to AlliedSignal the following documents: (i) Copies of resolutions of the Purchaser, certified by the Secretary or Assistant Secretary of Purchaser, authorizing the execution, delivery and performance of this Agreement and the transactions contemplated hereby; (ii) Executed assignment and assumption agreement with respect to the Contracts; (iii) One executed Assumption of Liability Agreement; (iv) A certificate of an appropriate officer of Purchaser relating to the representations, warranties and covenants made herein by Purchaser, as provided in Sections 8.2(b) and (c); 33 (v) One executed copy of the License Agreement; (vi) Any other document reasonably necessary to effectuate the transactions contemplated hereby; (vii) One resale certificate regarding inventory; and (viii) One executed copy of the Transition Services Agreement. ARTICLE 11. POST CLOSING OBLIGATIONS 11.1 Further Assurances. From time to time after the Closing, without further consideration, the parties shall cooperate with each other and shall execute and deliver instruments of transfer or assignment, or such other documents to the other party as such other party reasonably may request to evidence or perfect Purchaser's right, title and interest to the Assets, and otherwise carry out the transactions contemplated by this Agreement, including providing that Purchaser will be able to utilize the AlliedSignal sales office in Canada previously used by the Business. Any cash received by the Sellers after the Closing in respect of any Asset shall be immediately remitted by Sellers to Purchaser. 11.2 Access to Books and Records. After the Closing, Purchaser shall permit AlliedSignal to have reasonable access to and the right to make copies of such of Sellers' books, records and files as constitute part of the Assets or the ELAC Assets for any reasonable purpose at any time during regular business hours, such as for use in litigation or financial reporting, tax return preparation, or tax compliance matters. 11.3 Cooperation in Litigation. The parties shall reasonably cooperate with each other at the requesting party's expense in the prosecution or defense of any dispute or litigation or other proceeding arising from their respective operation of the Business, including but not limited to affording reasonable access to and providing information regarding amounts in dispute, information regarding former employees of the Business and documentation created in the running of the Business relating to such dispute or litigation. Purchaser and Sellers shall cooperate fully, as and to the extent reasonably requested by the other party, and at their own cost and expense, in connection with the filing of Tax Returns, the retention of records and the forwarding of any relevant notices or other information received from any Taxing authority and any audit, litigation or other proceeding with respect to Taxes, and shall fully and accurately submit any tax data packages reasonably requested by Sellers within the time periods established by the Sellers Tax department consistent with past practices. 11.4 Proprietary Information. Prior to the Closing Date, the Business was routinely supplied copies of proprietary and confidential information relating to strategic, technical, and/or marketing plans of AlliedSignal and its Affiliates and their various operations unrelated to the Business. Although AlliedSignal has attempted to recover such information from the Business, some may still be present within the Business. Purchaser therefore agrees that it 34 will not use such information for any purpose whatsoever, and shall destroy any remaining copies. 11.5 Covenant Not to Compete. AlliedSignal and each of its Affiliates agrees that for a period of five years after the Closing Date, neither it nor any of its Affiliates will, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, any business whether in corporate, proprietorship or partnership form or otherwise competitive with the Business as currently conducted, except for (i) any business, service or product line acquired by AlliedSignal, directly or indirectly, after the Closing Date to the extent the revenues attributable to the competing business do not account for in excess of 20% of the revenues of the business acquired or (ii) any investment by the Savings Plans or the Pension Plans of AlliedSignal. 11.6 Change of Name. To the extent AS Deutschland has not done so prior to Closing, Purchaser covenants that promptly after Closing it will change the legal name of ELAC and its wholly owned pension fund subsidiary in accordance with German law to eliminate the reference therein to "AlliedSignal." 11.7 Tax Election. The Purchaser may at its option make a section 338 election with respect to the ELAC Shares or in the alternative, the Purchaser may purchase the ELAC Shares through a German acquisition vehicle; provided that, in either case, the Seller consents to the making of such election or purchase which such consent shall not be unreasonably withheld. 11.8 Research and Experimental Expenses. Sellers will furnish to the Purchaser as soon as reasonably practicable, but in no event more than 180 days after Closing, at Seller's cost and expense, all information reasonably requested relating to the base period research expenses and any other information to allow Purchaser to claim research and experimental credits in accordance with the relevant sections of the Code and Treasury Regulations promulgated thereunder. 11.9 Pooling Arrangement. As described in Section 7.13, the Pooling Arrangement is to be terminated not later than December 31, 1998. Notwithstanding the existence of the Pooling Arrangement, any net earnings of ELAC during the period from the Effective Date until the date the Pooling Arrangement is terminated (the "Pooling Period") shall be treated as an Asset, and all losses and the consequences thereof shall be treated as an Assumed Liability, for purposes of this Agreement. ARTICLE 12. INDEMNIFICATION 12.1 Indemnification by Sellers. Sellers shall defend, indemnify and hold harmless Purchaser and Purchaser's directors, shareholders, officers, employees, agents, Affiliates, successors and each of the heirs, executors and successors and assigns of any of the foregoing (collectively, the "Purchaser Indemnified Parties") from and against any and all claims, liabilities, obligations, losses, costs, expenses (including, without limitation, reasonable legal, 35 accounting and similar fees and expenses), fines, damages (individually a "Loss" and collectively "Losses"), arising out of: (a) any breach or violation of any of the covenants or agreements made by Sellers in this Agreement or the Other Agreements; (b) any breach of, or any inaccuracy or misrepresentation in, any of the representation or warranties made by Sellers in this Agreement or in any Schedule, agreement, instrument, certificate or similar document required to be delivered pursuant to the terms hereof; or (c) any of the Excluded Liabilities or Excluded Assets. 12.2 Tax Indemnification. The Sellers shall, jointly and severally, be responsible for, shall pay or cause to be paid, and shall indemnify and hold harmless the Purchaser Indemnified Parties from and against any and all Taxes for or in respect of each of the following: (a) any and all Taxes with respect to any taxable period or a portion thereof, of ELAC (or any predecessor) ending on or before the Closing Date; (b) with respect to any and all Taxes of any member of a consolidated, combined or unitary group of which ELAC (or any predecessor) is or was a member on or prior to the Closing Date by reason of the liability of ELAC pursuant to Treasury Regulation Section 1.1502-6(a) (or any analogous or similar state, local or foreign law or regulation), as a transferee or successor, by contract, or otherwise; (c) any Taxes arising out of a breach of the representations and warranties contained in Section 4.16; and (d) any payments required to be made after the Closing Date under any Tax sharing, Tax indemnity, Tax allocation or similar contracts (whether or not written), including but not limited to the profit/loss pooling arrangement with AS Deutschland set forth on Schedule 4.16, to which ELAC was obligated, or was a party, on or prior to the Closing Date. 12.3 Indemnification by Purchaser. Purchaser shall indemnify and hold harmless AlliedSignal and AlliedSignal's directors, shareholders, officers, employees, agents, consultants, representatives, Affiliates, successors and assigns (the "AlliedSignal Indemnified Parties") from and against any and all Losses arising out of: (a) any breach or violation by Purchaser of any of the covenants or agreements made by Purchaser in this Agreement or the Other Agreements; (b) any breach of, or any inaccuracy in any of the representations or warranties made by Purchaser in this Agreement, or in any Schedule, agreement, certificate, instrument or similar documents required to be delivered pursuant to the terms hereof; or 36 (c) any Assumed Liability. 12.4 Indemnification Procedure. (a) Any party seeking indemnification hereunder (the "Indemnitee") shall notify the party liable for such indemnification (the "Indemnitor") in writing of any event, omission or occurrence which the Indemnitee believes has given or could give rise to Losses which are indemnifiable hereunder (such written notice being hereinafter referred to as a "Notice of Claim"). Any Notice of Claim shall be given promptly after the Indemnitee becomes aware of such event, omission or occurrence; provided, that the failure of any Indemnitee to give notice as provided in this Section 12.4 shall not relieve the Indemnitor of its obligations under this Section 12.4, except to the extent that the Indemnitor is actually prejudiced by such failure to give notice. A Notice of Claim shall specify in reasonable detail the nature and the particulars of the event, omission or occurrence giving rise to a right of indemnification to the extent known by or available to Indemnitee. The Indemnitor shall satisfy its obligations hereunder within thirty (30) days of its receipt of a Notice of Claim. (b) All costs and expenses incurred by the Indemnitor in defending any claim or demand shall be a liability of, and shall be paid by, the Indemnitor. Except as hereinafter provided, in the event that the Indemnitor notifies the Indemnitee within the 30 day period that it desires to defend the Indemnitee against such claim or demand, the Indemnitor shall be deemed to waive its right to contest such Indemnitee's right to indemnification hereunder and shall have the right to defend the Indemnitee by appropriate proceedings and shall have the sole power to direct and control such defense. If any Indemnitee desires to participate in any such defense, it may do so at its sole cost and expense; provided, that such Indemnitee shall have the right to employ separate counsel to represent such Indemnitee in such defense, at the Indemnitor's expense, if (i) in such Indemnitee's reasonable judgement and on the advice of counsel, a conflict of interest between such Indemnitor and such Indemnitee exists with respect to such claim or demand or (ii) the Indemnitor agrees to the retention of such counsel. So long as the Indemnitor is reasonably contesting any such claim or demand in good faith, the Indemnitee shall not pay or settle a claim or demand without the consent of the Indemnitor (unless the Indemnitee waives in writing any right to indemnity therefor). The Indemnitor may settle any claim or demand without the consent of the Indemnitee provided that such settlement includes a full, unconditional and complete release of the Indemnitee, and provided also that no such settlement will, without the prior written consent of the Indemnitee, impose any obligation or restriction on the Indemnitee or any of its assets or businesses. So long as the Indemnitor is defending in good faith any such third party claim, demand, suit, action or proceeding, the Indemnitee shall at all times cooperate in all reasonable ways with, make its relevant files and records available for inspection and copying by, and make its employees available or otherwise render reasonable assistance to, the Indemnitor and shall be reimbursed for its reasonable out-of-pocket expenses related thereto. In the event that the Indemnitor fails to timely defend, contest or otherwise protect against any such third party claim, demand, suit, action or proceeding, the Indemnitee at the Indemnitor's expense shall have the right, but not the obligation, to defend, contest, assert crossclaims or counterclaims, or otherwise protect against, the same and may make any compromise or settlement thereof and be entitled to all amounts paid as a result of such third party claim, demand, suit or action or any compromise or settlement thereof. 37 (c) The Indemnitor, following receipt of any notice from any Indemnitee requesting reimbursement for a Loss (which notice documents in reasonable detail the Loss or portion thereof by the Indemnitee) shall promptly and in any case within thirty days of receipt provide such reimbursement, unless and only to the extent that the Indemnitor disputes in good faith its indemnity obligation with respect to such Loss. (d) Each Indemnitee shall reasonably cooperate in complying with any applicable foreign, federal, state or local laws, rules or regulations or any discovery or testimony necessary to effectively carry out the Indemnitor's obligations hereunder. Such Indemnitee shall be reimbursed for any reasonable out-of-pocket expenses incurred in connection with such compliance. 12.5 Survival and Limitations. Except as otherwise provided herein, the warranties and representations of the parties contained in this Agreement or in any instrument delivered pursuant hereto, as deemed to have been given as of the Effective Date or the Closing Date, as the case may be, pursuant to Section 8.1(b), will survive the Closing Date and will remain in full force and effect thereafter for a period of two years from the Closing Date; provided that the representations and warranties contained in (i) Sections 4.8 and 4.18 shall survive the Closing Date indefinitely and (ii) Sections 4.3, 4.10, 4.11, 4.16 and 4.21 which shall survive the Closing Date until 90 days following the expiration of any statute of limitations (or extensions thereof) applicable to the matters described therein; and provided further that in the event notice of any claim for indemnification is given within the applicable survival period, the representations and warranties that are the subject of such indemnification claim shall survive until such time as such claim is finally resolved. Anything to the contrary contained herein notwithstanding, (a) neither party shall assert any claim against the other for indemnification (not including indemnification for Taxes) hereunder with respect to any inaccuracy or breach of such warranties or representations unless and until the amount of such claim or claims, including any claims deemed made pursuant to Section 12.8, shall exceed $750,000 calculated on a cumulative basis and not a per item basis, and then only in respect to the excess over said $750,000; and (b) neither party shall be entitled to recover from the other more than 50% of the sum of (I) the Purchase Price hereunder and (II) the Purchase Price under the Facility Sale Agreement with respect to all claims for indemnity with respect to any inaccuracy or breach of such warranties or representations. 12.6 Adjustment for Insurance and Taxes. The amount (an "Indemnity Payment") which an Indemnitor is required to pay on behalf of any Indemnitee pursuant to this Article 12 shall be reduced by the amount of any insurance proceeds theretofore or thereafter actually received by or on behalf of the Indemnitee in reduction of the related indemnifiable loss. An Indemnitee which shall have received or on behalf of which there shall be paid an Indemnity Payment and which shall subsequently receive, directly or indirectly, insurance proceeds in respect of the related indemnifiable loss, shall pay to the Indemnitor the amount of such insurance proceeds or, if lesser, the amount of the Indemnity Payment. Where any tax benefit is available to the Indemnitee with respect to an indemnifiable event, the indemnity payment shall be reduced dollar for dollar by the amount of such tax benefit and where any net Tax cost is incurred by the Indemnitee arising from the receipt of indemnity payments hereunder, the indemnity payment shall be increased dollar for dollar by the amount of such Tax cost (grossed up for such increase), provided that such Tax benefit or Tax cost shall be computed 38 at the highest federal, state, local and foreign corporate income tax rate of the jurisdiction in which such Tax benefit or Tax cost so relates. 12.7 Environmental Liabilities. (a) To the fullest extent permitted under (i) the Stock Purchase Agreement pursuant to which AlliedSignal acquired ELAC from Honeywell and (ii) Applicable Law, AlliedSignal agrees to assign its indemnification rights if any in respect of the ELAC facility to Purchaser and to the extent not assignable to enforce such provisions for the benefit of Purchaser and to provide any amounts it receives in connection therewith to Purchaser. (b) Notwithstanding Section 3.2(d), (i) Purchaser shall indemnify the AlliedSignal Indemnified Parties from and against the first $3 million of Losses, in aggregate, in respect of the combined Environmental Liabilities hereunder and under the Facility Sale Agreement and 50% of the next $2 million of such Losses and (ii) AlliedSignal shall indemnify the Purchaser Indemnified Parties from and against any other Losses relating to Environmental Liabilities. 12.8 Facility Sale Agreement. Purchaser agrees to indemnify the Allied Signal Indemnified Parties from and against amounts up to $750,000, calculated on a cumulative basis and not a per item basis, paid by Sellers under Article 11 of the Facility Sale Agreement for claims under the Facility Sale Agreement for indemnification (not including indemnification for Taxes) thereunder with respect to any inaccuracy or breach of the warranties or representations thereunder. If AlliedSignal shall be liable to any party pursuant to the Facility Sale Agreement (a "Facility Sale Liability"), Purchaser shall indemnify AlliedSignal to the extent the amount of such Facility Sale Liability exceeds the amount for which Sellers would have been liable under this Agreement had the Real Estate Assets (as defined in the Facility Sale Agreement) been included in the Assets. Any payments made pursuant to this Section 12.8 shall be deemed "claims" for purposes of the $750,000 threshold set forth in Section 12.5. Sellers shall not be required to pay more than once in respect of any Loss. ARTICLE 13. MISCELLANEOUS 13.1 Expenses. Except as specifically set forth elsewhere herein and except that a party not in breach of this Agreement shall be entitled to recover from a breaching party all expenses and costs incurred by the non-breaching party by reason of such breach (including, without limitation all legal expenses and costs), each of the parties hereto shall pay its own expenses and costs incurred or to be incurred by it in negotiating, closing and carrying out this Agreement, and, in no event, shall any such fees and expenses of the Sellers constitute "Assumed Liabilities" under this Agreement. 13.2 Notices. Any notice or communication given pursuant to this Agreement by a party hereto to the other party shall be in writing and hand delivered, or mailed by registered or certified mail, postage prepaid, return receipt requested (notices so mailed shall be deemed given when mailed), or sent via facsimile, with an original mailed as follows: 39 If to AlliedSignal or Sellers: AlliedSignal Inc. 101 Columbia Road Morristown, New Jersey 07962 Attention: Vice President and Chief Financial Officer Telecopier: 973-455-6039 If to Purchaser: L-3 Communications Corporation 600 Third Avenue New York, New York 10016 Attention: Christopher C. Cambria, Esq. Telecopier: 212-805-5494 with a required copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: David B. Chapnick, Esq. Telecopier: 212-455-2502 13.3 Confidentiality. AlliedSignal and Purchaser have entered into a Confidentiality Agreement dated September 23, 1997 which notwithstanding any provision herein to the contrary shall survive the execution and delivery of this Agreement and the Closing hereunder. 13.4 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.5 Entire Agreement/Termination of December Agreement. Except for the Confidentiality Agreement referred to in Section 13.3, this Agreement and the Other Agreements are the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior communications, representations, agreements and understandings between the parties hereto, whether oral or written, including any prior version of this Agreement executed and delivered by the parties hereto. On December 22, 1997, the parties hereto entered into that certain Purchase Agreement (the "December Agreement") regarding the purchase and sale of the Assets. Since the date of the December Agreement, Purchaser has conducted an audit and other examinations of the Business and has asserted certain claims with respect to the December Agreement, relating, inter alia, to the financial position and business prospects of the Business. The parties have resolved all such claims and, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, have restated their agreement with respect to the purchase and sale of the Business, as set forth in this Agreement. The December Agreement is hereby terminated, is 40 of no further force or effect, and no party shall have any right or obligation, whether as a matter of the law of contract or otherwise, under, arising out of or relating to, the December Agreement or any matter appearing in the December Agreement that does not appear in this Agreement (including, without limitation, the representations and warranties of Sellers that do not appear in this Agreement). The agreement between the parties as to the purchase and sale of the Business is expressed in its entirety in this Agreement. 13.6 Construction. When the context so requires, references herein to the singular number include the plural and vice versa and pronouns in the masculine or neuter gender include the feminine. The headings contained in this Agreement and the tables of contents, exhibits and schedules are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 13.7 Assignment. This Agreement may not be assigned, in whole or in part, by any party hereto without the prior written consent of the other parties hereto, which consent shall not unreasonably be withheld; provided that Purchaser may, without the consent of Sellers, assign its rights and obligations, in whole or in part, to any wholly-owned subsidiary of Purchaser so long as Purchaser remains bound by all the terms of this Agreement. 13.8 Amendment. This Agreement may be amended, supplemented or otherwise modified only by written agreement duly executed by the parties hereto. 13.9 Applicable Law. This Agreement shall be construed in accordance with the laws of the State of New York, disregarding its conflicts of laws principles which may require the application of the laws of another jurisdiction. 13.10 No Third Party Rights. This Agreement is not intended and shall not be construed to create any rights in any parties other than Sellers and Purchaser and no other person shall assert any rights as a third party beneficiary hereunder. 13.11 Exhibits and Schedules. The Exhibits and Schedules attached hereto are incorporated into this Agreement and shall be deemed a part hereof as if set forth herein in full. References herein to "this Agreement" and the words "herein," "hereof" and words of similar import refer to this Agreement (including Exhibits and Schedules) as an entirety. In the event of any conflict between the provisions of this Agreement and any such Exhibit or Schedule, the provisions of this Agreement shall control. 13.12 Waivers. Any waiver of rights hereunder must be set forth in writing. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein, or in any documents delivered or to be delivered pursuant to this Agreement or in connection with the Closing hereunder. A waiver of any breach or failure to enforce any of the terms or conditions of this Agreement shall not 41 in any way affect, limit or waive any party's rights at any time to enforce strict compliance thereafter with every term or condition of this Agreement. 13.13 Severability. If and to the extent that any court of competent jurisdiction holds any provisions (or any part thereof) of this Agreement to be illegal, invalid or unenforceable, such holding shall in no way affect the validity of the remainder of this Agreement. 13.14 Bulk Sales Law. The parties hereto agree to waive compliance with the provisions of the bulk sales law of any jurisdiction. The Sellers agree to indemnify and hold harmless Purchaser from and against any and all liabilities which may be asserted by third parties against Purchaser as a result of such noncompliance. 13.15 Knowledge of Sellers. For purposes of this Agreement, Knowledge of Sellers or any similar expression shall mean the knowledge, after due inquiry, of (i) the executive officers of Sellers; (ii) Robert Johnson; or (iii) Steven Schorer and all individuals who directly report to Mr. Schorer. 13.16 Personal Liability. The directors, officers, stockholders, employees, agents, consultants, representatives and affiliates of each of the parties hereto acting in such capacity shall not in such capacity have any personal liability or obligation arising under this Agreement (including any claims that the other parties may assert). 42 IN WITNESS WHEREOF, Sellers and Purchaser have duly executed and delivered this Agreement as of the day and year first above written. AlliedSignal Inc. By: /s/ Terrance Carlson __________________________ AlliedSignal Technologies, Inc. By: __________________________ AlliedSignal Deutschland GmbH By: __________________________ L-3 Communications Corporation By: /s/ Christopher C. Cambria __________________________ 43 EX-10.10 5 L-3 COMMUNICATIONS CORPORATION PENSION PLAN L-3 COMMUNICATIONS CORPORATION PENSION PLAN Effective April 30, 1997 1457780 July 24, 1997 L-3 COMMUNICATIONS CORPORATION PENSION PLAN Effective April 30, 1997 TABLE OF CONTENTS -----------------
INTRODUCTION........................................................................................... 1 GENERAL DESCRIPTION ................................................................................... 1 ARTICLE I. DEFINITIONS ................................................................................ 2 Accrual Service .............................................................................. 2 Accumulated Contributions .................................................................... 2 Actuarial Equivalent ......................................................................... 2 Affiliate .................................................................................... 2 Alternate Payee .............................................................................. 2 Annuity Starting Date ........................................................................ 3 Basic Benefit ................................................................................ 3 Beneficiary .................................................................................. 3 Board ........................................................................................ 4 Break in Service ............................................................................. 4 Code ......................................................................................... 4 Committee .................................................................................... 4 Company ...................................................................................... 4 Contributing Participant ..................................................................... 4 Contributory Benefit ......................................................................... 4 Deferred Vested Termination Benefit .......................................................... 4 Deferred Vested Termination Date ............................................................. 4 Early Commencement Factor .................................................................... 5 Early Retirement Benefit ..................................................................... 5 Early Retirement Date ........................................................................ 5 Earnings ..................................................................................... 5 Effective Date ............................................................................... 6 Election Period .............................................................................. 6 Eligibility Service .......................................................................... 6 Eligible Spouse .............................................................................. 7 Employee ..................................................................................... 7 Employer ..................................................................................... 7 Employment Date .............................................................................. 7 ERISA ........................................................................................ 7 Forfeitures .................................................................................. 8 Former Participant ........................................................................... 8 Highly Compensated Employee .................................................................. 8 Hour of Service .............................................................................. 8 Late Retirement Benefit ...................................................................... 8 Late Retirement Date ......................................................................... 8 Minimum Basic Benefit ........................................................................ 8 Monthly Accrued Benefit ...................................................................... 8 L-3 Communications Corporation Pension Plan i Normal Retirement Benefit .................................................................... 8 Normal Retirement Date ....................................................................... 8 Participant .................................................................................. 8 Period of Severance .......................................................................... 8 Plan ......................................................................................... 8 Plan Year .................................................................................... 9 Prior Employer ............................................................................... 9 Prior Plan ................................................................................... 9 Proper Application ........................................................................... 9 QDRO ......................................................................................... 9 Qualified Joint and Survivor Annuity ......................................................... 9 Qualified Pre-Retirement Survivor Annuity .................................................... 9 Retirement Date .............................................................................. 9 Service ...................................................................................... 10 Severance From Service Date .................................................................. 10 Social Security Wage Base .................................................................... 10 Trust Agreement .............................................................................. 10 Trust ........................................................................................ 11 Trustee ...................................................................................... 11 Vested Participant ........................................................................... 11 Vested Percentage ............................................................................ 11 Vesting Service .............................................................................. 11 ARTICLE II. ADMINISTRATION....................................................................... 12 2.1 Committee 's Discretionary Power to Interpret and Administer the Plan.................................................................. 12 2.2 Rules of the Committee .............................................................. 13 2.3 Claims Procedure .................................................................... 13 2.4 QDRO Claim .......................................................................... 15 2.5 Indemnification of Committee Members ................................................ 15 2.6 Power to Execute Plan and Other Documents ........................................... 15 2.7 Conclusiveness of Records ........................................................... 15 ARTICLE III. ELIGIBILITY AND HOW TO CALCULATE SERVICE ............................................................................. 16 3.1 When Participation Starts and Ends .................................................. 16 3.2 General Restrictions on Participation ............................................... 17 3.3 How to Calculate Eligibility Service ................................................ 17 3.4 . Rule of Parity o Disregarding Prior Service ......................................... 19 3.5 How to Calculate Accrual Service .................................................... 19 3.6 How to Calculate Vesting Service .................................................... 20 L-3 Communications Corporation Pension Plan ii ARTICLE IV. VESTING AND FORFEITURES.............................................................. 21 4.1 Vesting ............................................................................ 21 4.2 Changes in Vesting Schedule ......................................................... 22 4.3 Forfeitures ......................................................................... 22 4.4 Restoring Forfeitures ............................................................... 22 ARTICLE V. AMOUNT OF RETIREMENT BENEFIT......................................................... 23 5.1 General Rules for Calculating Amount of Plan Benefits................................ 23 5.2 The Different Plan Benefits ......................................................... 23 5.3 Monthly Accrued Benefit ............................................................. 24 5.4 Special Section 401(a)(17) Provision Regarding Plan Benefits......................... 25 5.5 Minimum Basic Benefit for Certain Participants ...................................... 26 5.6 Normal Retirement Benefit ........................................................... 27 5.7 Late Retirement Benefit ............................................................. 27 5.8 Early Retirement Benefit ............................................................ 28 5.9 Deferred Vested Termination Benefit ................................................. 29 5.10 Co-ordination with Prior Plan ....................................................... 29 5.11 Effect of, Deferred Payment ......................................................... 30 5.12 Effect of Reemployment After Receipt of Plan Benefits ............................... 30 ARTICLE VI. PAYMENT OF RETIREMENT AND DEATH BENEFITS............................................. 32 6.1 How to Retire........................................................................ 32 6.2 Timing of Participant's Benefits .................................................... 32 6.3 Normal Form of Benefits ............................................................. 35 6.4 Notice and Election Period .......................................................... 35 6.5 Waiver and Spousal Consent Necessary for Optional Forms of Benefit ............................................................................. 36 6.6 Optional Forms of Benefit ........................................................... 38 6.7 Suspending Plan Payments Upon Reemployment .......................................... 39 6.8 Qualified Pre-Retirement Survivor Annuity ........................................... 39 6.9 Form of Benefit Fixed as of Annuity Starting Date ................................... 41 ARTICLE VII. IN-SERVICE WITHDRAWAL AND RETURN OF CONTRIBUTIONS ....................................................................... 43 7.1 In-Service Withdrawal of Pre-1970 Employee Contributions............................. 43 ARTICLE VIII. THE TRUST, FUNDING AND CONTRIBUTIONS ................................................ 44 8.1 Contributions to the Trust Fund ..................................................... 44 8.2 The Trust ........................................................................... 44 L-3 Communications Corporation Pension Plan iii ARTICLE IX. AMENDMENT AND TERMINATION............................................................ 45 9.1 Power to Amend Plan ................................................................. 45 9.2 Power to Terminate Plan ............................................................. 45 9.3 Allocation of Assets Upon Termination ............................................... 45 9.4 Reversion of Assets Upon Termination ................................................ 45 ARTICLE X. LIMITATION OF BENEFITS............................................................... 47 10.1 Construction ........................................................................ 47 10.2 Definitions ......................................................................... 47 10.3 Limitation on Annual Benefits ....................................................... 48 10.4 Adjustments for Early or Late Payment ............................................... 48 10.5 Conditional Exemption for Pensions Under $10,000 .................................... 49 10.6 Participants with Fewer Than Ten Years of Service ................................... 49 10.7 Participants with Fewer Than Ten Years of Participation ............................. 50 10.8 Benefits Payable under More Than One Defined Benefit Plan . . .....................50 10.9 Participation in Defined Contribution Plan .......................................... 50 10.10 Limitation Year ..................................................................... 53 10.11 Protection of Current Accrued Benefit ............................................... 53 10.12 Rules Regarding 25 Top-Paid Employees ............................................... 53 ARTICLE XI. GENERAL PROVISIONS .................................................................. 55 11.1 No Contract of Employment ........................................................... 55 11.2 Employer Not Liable for Plan Benefits ............................................... 55 11.3 Exclusive Benefit and Return of Employer Contributions .............................. 55 11.4 Tax Withholding ..................................................................... 56 11.5 Incompetency or Minority of Payee ................................................... 56 11.6 Missing Payees ...................................................................... 57 11.7 Alienation and QDROs ................................................................ 57 11.8 Notice to Committee, Elections ...................................................... 58 11.9 Merger or Transfer With Other Plans ................................................. 58 11.10 Fiduciaries ......................................................................... 59 11.11 Plans Shall Comply with Law; and Choice of Law ...................................... 59 11.12 Deemed Distribution of Unvested Amounts ............................................. 59 11.13 Gender and Number ................................................................... 59 11.14 Headings ............................................................................ 59 11.15 Illegality of Particular Provisions ................................................. 60 11.16 Receipt and Release for Payments .................................................... 60 11.17 Action by the ....................................................................... 60 11.18 Mistaken Payments ................................................................... 60 11.19 Participants and Beneficiaries Bound by the Plan .................................... 60 11.20 Direct Rollover Distributions to Other Plans or IRAs ................................ 60 L-3 Communications Corporation Pension Plan iv 11.21 Transfers Among Affiliates .......................................................... 62 ARTICLE XII. TOP-HEAVY PROVISIONS................................................................. 64 12.1 Applicable Plans Included in Determination of "Top Heavy" Status ............................................................................ 64 12.2 "Key Employee" ...................................................................... 64 12.3 "Top Heavy" Test .................................................................... 65 12.4 Determination Dates ................................................................. 65 12.5 Add-Back of Prior Distributions ..................................................... 66 12.6 Former Employees Disregarded after Five Plan Years .................................. 66 12.7 Compliance with Section 416 of the Code ............................................. 66 12.8 Beneficiaries ....................................................................... 66 12.9 Provisions Applicable in "Top Heavy" Plan Years ..................................... 66 EXHIBIT A. ACTUARIAL EQUIVALENT FACTORS......................................................... - 1- EXHIBIT B. CONTRIBUTORY BENEFITS ............................................................... -3- L-3 Communications Corporation Pension Plan
v L-3 COMMUNICATIONS CORPORATION PENSION PLAN ------------------------------------------- INTRODUCTION ------------ On April 30, 1997, Lockheed Martin Corporation ("Lockheed Martin") sold certain of its businesses (the "Business") to L-3 Communications Holdings, Inc. ("Holdings"). In connection with the sale, certain employees in the information display systems operations of the Lockheed Martin currently located in Alpharetta, Georgia, and certain headquarters employees became employees of L-3 Communications Corporation, a wholly owned subsidiary of Holdings. Lockheed Martin agreed to transfer, and Holdings agreed to accept, the assets under the Lockheed Martin Tactical Defense Systems Pension Plan (Corp. & LMSD) (the "Pension Plan") attributable to the Accrued Benefits of the employees and former employees (the "Transferred Individuals") of the transferred operations. The Transferred Individuals shall be entitled to their Accrued Benefit under the Pension Plan (or a predecessor plan) as of April 30, 1997, provided that the assets are transferred, and future benefits, if any, under the terms of this Plan. A Participant under this Plan, including a Transferred Individual, is entitled to benefits under the terms of the Plan in effect, including the terms of the Pension Plan or any other predecessor plan, when the Participant terminates (or terminated) employment with the Employer. The Plan is intended to be qualified under Internal Revenue Code Section 401 and its Trust is intended to be tax-exempt under Code Section 501. GENERAL DESCRIPTION ------------------- Benefits attributable to Employer contributions are integrated with Social Security, under Code Section 401(l). Such benefits are termed the "Basic Benefit" under the Plan. The Plan also provides for a" Minimum Basic Benefit" for certain Participants. The plan does not charge for QPSA coverage, and does provide for a subsidized early retirement benefit. L-3 Communications Corporation Pension Plan ARTICLE I. DEFINITIONS As used in this Plan, the following terms shall have the following meanings, unless a different meaning is required by the context: "Accrual Service" shall have the meaning set forth in Section 3.5. "Accumulated Contributions" means the after-tax, voluntary employee contributions made by a Participant under the Prior Plan prior to April 1, 1970. These contributions, plus the accrued interest described in this paragraph, constitute a Contributing Participant's Contributory Benefit. The accrued interest shall be computed up to April 1, 1970 as provided under the Prior Plan plus interest thereon at the rate of 4% per year for the period from April 1, 1970 through December 31, 1973, at the rate of 5% per year for the period from January 1, 1974 through December 31, 1987, and at the rate of 120% of the Federal mid-term rate (as in effect under Code Section 1274 for the first month of each Plan Year) for the period beginning January 1, 1988 compounded annually from the last day of the calendar year in which such contributions were made to the first day of the month in which occurs the earliest of (a) withdrawal of such contributions by the Participant prior to or termination of employment, (b) the Participant's Annuity Starting Date, (c) the Participant's death, or (d) the date the Participant becomes a Former Participant. "Actuarial Equivalent" means an amount of equal value as determined in accordance with EXHIBIT A hereto. "Affiliate" means the Company and any corporation, trade or business during any period when it is, along with the Company, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in Code Section 414(b), the common control rules of Code Section 414(c), the affiliated service group rules of Code Section 414(m), or the rules of 414(o), subject to the rules of Code Section 415(h). "Alternate Payee" means any spouse, former spouse, child or other dependent of a Participant who is recognized by a "qualified" court domestic relations order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant, as described in Code Section 414(p). The determination of whether a court order is "qualified" shall be made in the sole discretion of the Committee. L-3 Communications Corporation Pension Plan 2 "Annuity Starting Date" shall mean: (a) with respect to any lump sum or installment payment, first day of the month coincident with or next following the date that the Participant is both entitled to and has completed his Proper Application for a Plan distribution, (b) with respect to any one of a series of payments over the life or life expectancy of one or more distributees, the first date for which the benefit is paid, even if this date is not the date of actual payment. (c) The term "Annuity Starting Date" shall be determined with respect to payments made to the Participant, rather than with respect to any survivor benefit payments (excepting only the QPSA). (d) The term "Annuity Starting Date" shall, in all events, be defined by Treasury Regulation Section 1.401(a)-20. "Basic Benefit" for a Participant shall have the meaning set forth in Section 5.3. "Beneficiary" means a Participant's designated beneficiary, under Plan procedures. As required by the context of the Plan, "Beneficiaries" may also include Alternate Payees. (a) The Beneficiary of any married Participant shall normally be his legally married spouse, at the time of death (whether or not she or he is an Eligible Spouse). Married Participants may designate someone other than a spouse as Beneficiary, only if the designation includes the written consent of the Participant's spouse, as set out in Plan Section 6.5. If these requirements are not met, then the designation of a non- spouse Beneficiary is invalid. However, the Committee may not require the spouse's written consent if it is established to the satisfaction of a Plan representative that such consent cannot be obtained because (1) there is no spouse, (2) the spouse cannot be located, or (3) such other circumstances exist as may be prescribed by applicable regulation. Any such written spousal consent or establishment that consent cannot be obtained shall be effective only with respect to that spouse. (b) Beneficiary designations may be changed at any time before the Annuity Starting Date. If no proper Beneficiary is designated or survives, the Participant's Beneficiary shall be, in the following order L-3 Communications Corporation Pension Plan 3 of priority: (1) his spouse, if living at the time of such payment; (2) his children (including adopted children but excluding stepchildren) per stirpes; (3) his estate. (c) If the Committee is in doubt as to the right of any person to receive a Plan benefit, the Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Trustee to pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Trust therefor. "Board" means either the Board of Directors of the Company, or the Executive Committee of the Board of Directors. "Break in Service" is defined in Section 3.3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and all appropriate regulations and administrative guidance. "Committee" means the committee which administers the Plan in accordance with Article II. As context requires, the term "Committee" shall refer to the Committee or its delegates. "Company" means L-3 Communications Corporation, a Delaware corporation, and any successor thereto which adopts this Plan. The Company shall act by resolution of its Board of Directors. "Contributing Participant" means a Participant who made voluntary after-tax contributions to the Prior Plan prior to April 1, 1970 and has not withdrawn such contributions. "Contributory Benefit" is defined in Section 5.3, and shall equal the amounts set out in Exhibit B. "Deferred Vested Termination Benefit" is defined in Section 5.9. "Deferred Vested Termination Date" means: (a) the first day of the month coincident with or next following the date that a Participant terminates active employment. A Vested Terminated Date will always precede any date that might have been the Participant's Retirement Date. L-3 Communications Corporation Pension Plan 4 (b) Generally, a Deferred Vested Termination Date will arise only with respect to a Participant whose Vested Percentage is more than 0%. However, a Contributing Participant who retains a Contributory Benefit may incur a Deferred Vested Termination Date even if he has no Vested Percentage. (c) A Deferred Vested Termination Date will be the date as of which a Participant's Deferred Vested Termination Benefit is calculated, under Article V. (d) A Deferred Vested Termination Date is not a "Retirement Date" per se. Accordingly, if any benefit under any welfare plan is dependent upon "retirement," then such a benefit may not be available to a Participant who terminates employment as of his Deferred Vested Termination Date. "Early Commencement Factor" is defined in Section 5.8. "Early Retirement Benefit" is defined in Section 5.8. "Early Retirement Date" means the first day of the month (a) coincident with or next following the date a Participant retires under the terms of the Plan, (b) on or after his 55th birthday and completion of ten years of Eligibility Service, and (c) prior to his Normal Retirement Date. For purposes of this definition only, Accrual Service includes any period during which the Employee was an active participant of (1) a qualified defined benefit plan sponsored by an Affiliate (provided that such a plan was in effect and sponsored by the Affiliate during the relevant period) or (2) the Prior Plan. "Earnings" for any Plan Year shall mean: (a) the total cash remuneration actually paid by the Employer, including regular earnings; commissions; overtime pay; bonuses; incentive compensation; fringe benefits; elective employee deferrals or contributions made under any qualified retirement plan; and Code Section 125 elective, payroll deduction contributions. (b) Any compensation that is accrued but not paid during the relevant Plan Year shall not be accounted. The following items shall also be excluded: distributions from any employer qualified retirement or welfare plan; the disposition or granting of stock options; imputed income from life insurance; employer contributions made to any welfare plan, or to any qualified retirement plan; any reimbursed L-3 Communications Corporation Pension Plan 5 expenses such as relocation expenses; all severance pay; and lump sum vacation allowances. (c) In addition to other applicable limits set out in this Plan, and notwithstanding any contrary Plan provisions, Earnings accounted under this Plan shall be capped at $150,000 (adjusted for cost of living, as provided by Code Section 401(a)(17)). (1) If a cost of living adjustment is declared under the Code with respect to any calendar year, it shall affect the Earnings accounted for the Plan Year that begins on the January 1st of that same calendar year. (2) Generally, if Earnings paid for any prior Plan Year are taken into account in determining benefit accruals for the current Plan Year, then the Earnings limit for the prior year will be subject to the Code Section 401(a)(17) limit applicable (adjusted for the cost of living) for that prior year. (3) If a Participant is not actively employed for a full Plan Year, then his credited Earnings under Code Section 401(a)(17) shall not be reduced, prorated, or limited because of his incomplete year of service. (4) However, if this Plan should be amended to base its benefit allocation or accrual formula on compensation paid for a period of less than a Plan Year, then Earnings taken into account under this Plan shall be prorated, to correspond to the period of time used in the Plan formula. For example, if the Plan formula is based on compensation paid each quarter, then the 401(a)(17) limit for that Plan Year shall be divided by four, when applying the Plan benefit formula. (d) To the extent that any Participant's Earnings exceeded $150,000 prior to January 1, 1994, Section 5.4 shall apply to his accrued Plan benefit. "Effective Date" of this Plan means April 30, 1997. Unless specified within the Plan, all Plan provisions are effective as of the Effective Date. However, the terms of the Prior Plan, or any earlier restatement of this Plan, shall apply with respect to periods before the Effective Date. L-3 Communications Corporation Pension Plan 6 "Election Period" refers to a period during which certain elections must be made concerning the form of benefit paid under the Plan. It is described in Section 6.4. "Eligibility Service" is defined in Section 3.3. "Eligible Spouse" means: (a) A participant's legally married spouse. Further, with respect to a spouse's eligibility to receive a QPSA benefit, an Eligible Spouse must have been married to the Participant for at least 12 continuous months before the Participant's date of death. (b) Whether or not an individual is an Eligible Spouse shall in all events be determined under Treasury Regulation Section 1.401(a)-20. "Employee" shall mean: (a) any common-law employee in the service of the Employer, (b) Employees shall, as prescribed by the Code, also include employees of Affiliates, for the limited purposes of determining eligibility to participate, and vesting. (c) Leased employees as described by Code Section 414(n), shall be considered Employees for the sole purpose of Code Section 414(n)(3). Notwithstanding, the preceding provisions, the following shall not be an Employee: (d) any person whose terms of employment is subject to a collective bargaining agreement, to which the Company is a party, unless the agreement specifically provides for the person's participation in this Plan, (e) any common-law employee of an Employer or Affiliate who is employed at a site, unit, or subsidiary whose employees, under Employer or Affiliate policy, are not eligible to participate in a qualified defined benefit. "Employer" means the New York Corporate office of the Company and the L-3 Communications Corporation - Display Systems Division currently located in Alpharetta, Georgia. L-3 Communications Corporation Pension Plan 7 "Employment Date" means the first day of employment with an Employer or Prior Employer, as determined by the Employer's procedures, and within its discretion. "ERISA" means the Employee Retirement Income Security Act of 1974, as enacted or as amended from time to time, and all appropriate regulations and administrative guidance. "Forfeitures" are defined in Section 4.3. "Former Participant" (a) Means an individual who has ceased to be a Participant for any of the reasons set out in Section 3.1, and a former participant in the Prior Plan if the Prior Plan transferred to this Plan assets attributable to his accrued benefit under the Prior Plan. (b) A Former Participant is ineligible to accrue further benefits under the Plan, because he is no longer an active Participant. "Highly Compensated Employee" means any Employee or former Employee who is a highly compensated employee as defined in Code Section 414(q). "Hour of Service" means any hour for which an Employee is paid or is entitled to payment, for the performance of duties for the Employer or Prior Employer. "Late Retirement Benefit" is defined in Section 5.7. "Late Retirement Date" means the first day of the month coincident with or next following the date on which a Participant retires, under the terms of the Plan, after his Normal Retirement Date. "Minimum Basic Benefit" is defined in Section 5.5. "Monthly Accrued Benefit" is defined in Section 5.3. "Normal Retirement Benefit" is defined in Section 5.6. "Normal Retirement Date" means the first day of the month coincident with or next following the later of (i) a Participant's 65th birthday, or (ii) the date a Participant completes five years of Eligibility Service. "Participant" means any Employee who is participating in the Plan, under the terms of the Plan, after meeting the eligibility requirements of Article III. L-3 Communications Corporation Pension Plan 8 "Period of Severance" is defined in Section 3.3. "Plan" means the L-3 Communications Corporation Pension Plan, as amended from time to time, which includes EXHIBITS A and B which are attached, as well as the Trust Agreement. "Plan Year" means the calendar year, except that the first Plan Year shall be the period beginning on April 30, 1997 and ending on December 31, 1997. "Prior Employer" means Lockheed Martin Corporation prior to April 30, 1997, and Loral Corporation. "Prior Plan" means the Lockheed Martin Tactical Systems Inc. Pension Plan (Corp. & LMDS), as in effect from time to time prior to the Effective Date, and the predecessors to that plan, which are the Loral Corporation Pension Plan, established effective April 1, 1970, and restated effective January 1, 1976, January 1, 1984, January 1, 1989 and restated, reflecting amendments made through December 20, 1994, effective January 1, 1989. It was preceded by the Retirement Plan for Non-Union Employees of Loral Corporation established effective January 1, 1963. "Proper Application" is defined in Section 6.1. "QDRO" is an abbreviation for "qualified domestic relations order," defined in Section 11.7. "QJSA" or "Qualified Joint and Survivor Annuity" means an annuity for the life of a Participant with a survivor annuity for the life of his Eligible Spouse, if there is an Eligible Spouse as of his Annuity Starting Date. The amount of the survivor annuity shall be 50% of the amount payable during the lifetime of the Participant. The QJSA shall be calculated to be the Actuarial Equivalent of a single life annuity for the life of the Participant, as of his Normal Retirement Date. In all events, a QJSA shall be as defined by Treasury Regulation Section 1.401(a)-20. "QPSA" or "Qualified Pre-Retirement Survivor Annuity" means an annuity for the life of an Eligible Spouse who survives a Participant, under the circumstances and in the amount described in Section 6.8. In all events a QPSA shall be defined by Treasury Regulation Section 1.401(a)-20. "Retirement Date" means a Participant's Normal, Early or Late Retirement Date, whichever is applicable. A Vested Terminated Participant shall not have a Retirement Date, per se. Accordingly, if any benefit under any welfare plan is conditioned upon "retirement," then such a benefit may not be available to a Vested Terminated Participant. L-3 Communications Corporation Pension Plan 9 "Service" (a) Different Meanings. Service under the Plan has different meanings for different purposes. The Plan accounts three different types of Service: Eligibility Service, Accrual Service, and Vesting Service. The definition of "Service" set out in this Article I applies to all of these different types of Service. (b) General Rule. Service shall generally mean the period for which the Employee is paid or is entitled to payment (including any back pay, irrespective of mitigation of damages), subject to the rules and restrictions of Article III, for the performance of duties for the Employer. For the purposes of calculating Eligibility Service and Vesting Service, "Service" shall also include Service performed for an Affiliate or service credited under a Prior Plan. However, with respect to crediting Service during any period during which the Prior Plan was in effect, then the provisions of the Prior Plan shall control. Service shall never be double-credited. (c) Military Service (1) An employee or Participant shall be credited with Service for any period of military service to the extent required by any Federal veteran reemployment laws. (2) Notwithstanding the foregoing, if a Participant who leaves employment with the Employer for the sole purpose of entering the armed forces of the United States returns to active employment with the Employer within the period his re-employment rights are protected by applicable law, his Service shall include the period of such absence and solely for the purpose of the Plan during such period he shall be deemed to have received Earnings from the Employer equal to his basic remuneration rate immediately prior to the commencement of such absence (subject to escalation to the extent required under applicable laws and regulations). "Severance From Service Date" is defined in Section 3.3. "Social Security Wage Base" means, for any Plan Year, the maximum amount of a Participant's annual remuneration which may be treated as wages under Section L-3 Communications Corporation Pension Plan 10 3121(a) of the Federal Insurance Contributions Act for such year, indexed to the extent required by Code Section 401(l). "Trust Agreement" The agreement between the Company and Trustee concerning the assets of this Plan. The Trust Agreement is fully a part of the Plan. "Trust" or Trust Fund" means the fund held by the Trustee into which contributions under the Plan will be paid by the Employer and Employees and out of which benefits under the Plan will be paid as herein provided. "Trustee" means the trustee appointed under the Trust Agreement. "Vested Participant" means a Participant who terminates employment with the Employer on a Deferred Vested Termination Date. "Vested Percentage" is defined in Section 4.1. "Vesting Service" is defined in Section 3.6. L-3 Communications Corporation Pension Plan 11 ARTICLE II. ADMINISTRATION 2.1 Committee's Discretionary Power to Interpret and Administer the Plan (a) Appointment. The Committee shall be appointed from time to time by the Board to serve at its pleasure. Any member of the Committee may resign by delivering his written resignation to the Board. (b) Role under ERISA. The Committee is the "named fiduciary" for operation and administration of the Plan, and the "administrator" under ERISA. The Committee is designated as agent for service of legal process. (c) Committee establishes Plan procedures. The Committee and its delegates shall from time to time establish rules and procedures for the administration and interpretation of the Plan and the transaction of its business. (d) Role of Human Resource and Benefits Personnel. Employees of the Employer who are human resources personnel, or benefits representatives are the Committee's delegates and shall, under the authority of the Committee, perform the routine administration of the Plan, such as distributing and collecting forms and providing information about Plan procedures. They shall also establish Plan rules and procedures. (e) Discretionary Power to Interpret Plan (1) The Committee has complete discretionary and final authority to (i) determine all questions concerning eligibility, elections, contributions, and benefits under the Plan, (ii) construe all terms under the Plan, including any uncertain terms, and (iii) determine all questions concerning Plan administration. All administrative decisions made by the Committee, and all its interpretations of the Plan documents, shall be given full deference by any court of law. (2) Information that concerns an interpretation of the Plan or a discretionary determination, can be properly provided only by the Committee, and not by any delegate (except legal counsel). (3) Should any individual receive oral or written information concerning the Plan, which is contradicted by a subsequent L-3 Communications Corporation Pension Plan 12 determination by the Committee, then the Committee's final determination shall control. 2.2 Rules of the Committee (a) Any act which the Plan authorizes or requires the Committee to do may be done by a majority of its members. The action of such majority, shall constitute the action of the Committee and shall have the same effect for all purposes as if made by all members of the Committee at the time in office. The Committee may act without any writing that records its decisions, and need not document its meetings or teleconferences. The Committee may also act through any authorized representative. (b) The members of the Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Committee to do. (c) The Committee may employ counsel and other agents and may procure such clerical, accounting, actuarial and other services as they may require in carrying out the provisions of the Plan. Legal counsel are authorized as the Committee's delegates. (d) No member of the Committee shall receive any compensation for his services as such. All expenses of administering the Plan, including, but not limited to, fees of accountants, counsel and actuaries shall be paid from the Trust Fund, except to the extent paid by an Company. (e) Each member of the Committee may delegate Committee responsibilities among the Company directors, officers, or employees, and may consult with or hire outside experts. The expenses of such experts shall be paid by the Trust Fund, to the extent that they are not paid by an Company. 2.3 Claims Procedure (a) The Committee shall determine Participants and Beneficiaries' rights to benefits under the Plan. In the event that a Participant or Beneficiary disputes an initial determination made by the Committee, then he may dispute the determination only by filing a written claim for benefits. L-3 Communications Corporation Pension Plan 13 (b) If a claim is wholly or partially denied, the Committee shall provide the claimant with a notice of denial, written in a manner calculated to be understood by the claimant and setting forth: (1) The specific reasons for such denial; (2) Specific references to the pertinent Plan provisions on which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim with an explanation of why such material or information is necessary (if applicable); and (4) Appropriate information as to the steps to be taken if the claimant wishes the Committee to revise its initial denial. The notice of denial shall be given within a reasonable time period but no later than 90 days after the claim is received, unless special circumstances require an extension of time for processing the claim. If such extension is required, written notice shall be furnished to the claimant within 90 days of the date the claim was received stating that an extension of time and the date by which a decision on the claim can be expected, which shall be no more than 180 days from the date the claim was filed. (5) If no written notice of denial is provided by the Committee, then the claim shall be deemed to be denied, and the claimant may appeal the claim as though the claim had been denied. (c) The claimant and/or his representative may appeal the denied claim and may: (1) Request a review by making a written request to the Committee provided that such a request is made within 60 days of the date of the notification of the denied claim; (2) Review pertinent documents. (d) Upon receipt of a request for review, the Committee shall within a reasonable time period but not later than 60 days after receiving the request, provide written notification of its decision to the claimant stating the specific reasons and referencing specific plan provisions on which its decision is based, unless special circumstances require an L-3 Communications Corporation Pension Plan 14 extension for processing the review. If such an extension is required, the Committee shall notify the claimant of the date, no later than 120 days after the original date the request for review was received, on which the Committee will notify the claimant of its decision. (e) In the event of any dispute over benefits under this Plan, all remedies available to the disputing individual under this Article must be exhausted, within the specified deadlines, before legal recourse of any type is sought. 2.4 QDRO Claim Claims relating to or affected by a domestic relations order (as defined by Code Section 414(p)) or draft order shall be determined under the Committee's procedures concerning domestic relations orders. The claims procedure described in the preceding section shall not apply to any such domestic relations order claim. 2.5 Indemnification of Committee Members To the fullest extent permitted by law, the Company agrees to indemnify, to defend, and hold harmless the members of the Committee and its delegates, individually and collectively, against any liability whatsoever for any action taken or omitted by them in good faith in connection with this Plan or their duties hereunder and for any expenses or losses for which they may become liable as a result of any such actions or non-actions unless resultant from their own willful misconduct; and the Company will purchase insurance for the Committee and its delegates to cover any of their potential liabilities with regard to the Plan and Trust. 2.6 Power to Execute Plan and Other Documents Any appointed Vice President of the Company shall have the authority to execute governmental filings or other documents including the plan document relating to the Plan, or the Company may delegate this authority to another officer or employee of the Company. 2.7 Conclusiveness of Records In administering the Plan, the Committee may conclusively rely upon the Employer's payroll and personnel records maintained in the ordinary course of business. L-3 Communications Corporation Pension Plan 15 ARTICLE III. ELIGIBILITY AND HOW TO CALCULATE SERVICE 3.1 When Participation Starts and Ends (a) Participants in Prior Plan. Each Employee who was a Participant in the Prior Plan immediately before the Effective Date shall be a Participant in this Plan on the Effective Date, provided he is an Employee on the Effective Date. (b) General Rule of Participation. Each Employee, other than an Employee described in subsection (a) shall become a Participant on the first day of the month coincident with or next following the later of (1) the completion of one year of Eligibility Service or (2) his 21st birthday. (c) End of participation. A Participant ceases to be a Participant when he terminates his employment (as determined within the sole discretion of the Employer), dies, ceases to be an Employee, incurs a Severance from Service Date, or loses his eligibility to participate under the following Section. Any Participant who ceases to be a Participant becomes a Former Participant. (d) Becoming an Employee through change in status. Should any individual who was a common-law employee of the Employer or an Affiliate but not an Employee under the terms of this Plan, subsequently become an Employee, then he shall be eligible to become a Participant as set out in Subsection 3.1(b). For the purposes of the preceding sentence only, his prior period of employment shall be credited as "Service," under the rules of Articles I and III. (e) Re-entry into the Plan. Similarly, a Former Participant who again becomes an Employee of the Employer shall be eligible to become a Participant, subject to the Rule of Parity provisions of Section 3.4, as of the first day of the month coincident with or next following the date he again becomes an eligible Employee under this Article. However, a Former Participant who is fully vested in his Plan benefit who again becomes an Employee of the Employer shall again become a Participant as of his new Employment Date. (f) Plan benefit of Former Participants. (1) With respect to any individual who becomes a Former Participant because of any provision of this Article, his Monthly Accrued Benefit, under the Plan up to the date he became a L-3 Communications Corporation Pension Plan 16 Former Participant, shall be suspended. This benefit shall not be increased through any further accruals while he continues as a Former Participant. 3.2 General Restrictions on Participation Notwithstanding the provisions of Section 3.1: (a) Individuals may be Participants only during those periods that they are eligible Employees, under this Article and Article I. (b) Further, an eligible Employee will be able to actively participate in this Plan only during those periods during which he is (1) in service with the Employer (rather than with any Affiliate), and (2) the Plan is in effect. (c) Leased employees, as described in Code Section 414(n), are not eligible to be Participants. 3.3 How to Calculate Eligibility Service (a) General Rule. Eligibility Service shall be credited only for the purpose of determining an Employee's eligibility to participate in the Plan, unless another use is specifically expressed in this Plan (such as determining a Participant's Normal Retirement Date.) As used in this Section, "Service" shall mean "Eligibility Service," and shall also reflect the definition set out in Article I, and the Rule of Parity set out in the next Section. (b) Fractional Periods. Subject to the Rule of Parity, stated in the next Section, fractional periods of a year of Service will be credited only if they include completed months. (c) Service. Service begins on the date of hire, or the first day of reemployment with the Employer or an Affiliate. Service includes periods of lay-off, vacation, or an Employer or Affiliate-approved leave of absence, provided that such periods of vacation, lay-off or leave do not exceed 12 consecutive months. (Should such periods of vacation, lay-off or leave occur simultaneously or consecutively, they shall be aggregated in determining the maximum period of 12 months of credited Service.) If a period of vacation, lay-off, and/or leave exceeds 12 continuous months, then the portion that is more than 12 months shall not be credited as Service. L-3 Communications Corporation Pension Plan 17 (d) Severance From Service. Service will not be credited on or after any Severance from Service Date. As of a Severance from Service Date, the Participant becomes a Former Participant. A Severance from Service Date is the date of any quit, retirement, death, or termination of employment, as determined within the sole discretion of the Employer or Affiliate. A Severance from Service Date also occurs if an Employee completes a Break in Service (described in the next paragraph). If an Employee has incurred two possible Severance from Service Dates, then the earlier date shall control. However, notwithstanding the preceding provisions, if an Employee quits, retires, or terminates, and returns to active employment within 12 months of his initial Severance from Service Date (without incurring a Break in Service), then his entire Period of Severance will be credited as Eligibility and Vesting Service, although not as Accrual Service. (e) Break in Service. A Break in Service occurs when a Period of Severance continues for twelve or more consecutive months, during which the individual does not perform an hour of Service. (f) Period of Severance. A Period of Severance is any continuous period, during which the individual has had a separation from active employment with the Employer or any Affiliate, on account of lay-off, Employer or Affiliate-approved leave, vacation, retirement, quit, discharge, any other reason, or any combination of the preceding reasons. A Period of Severance dates from the first date of absence. (g) Quit, Retirement, Death or Termination. If a quit, retirement, death, or termination occurs following an absence for any other reason (such as leave or lay-off), but before a Break in Service has occurred, then a Severance from Service Date will occur as of the quit, retirement, death or termination. However, in this situation, if the former Employee returns to active employment within twelve months of his initial date of absence, so that a Break in Service has not occurred, then his entire Period of Severance shall be credited as Eligibility and Vesting Service. However, a Period of Severance following a quit, retirement or termination, shall not be treated as Accrual Service. (h) Approved Leave. A special rule applies to an Employer or Affiliate- approved leave on account of maternity or paternity, meaning on account of pregnancy, the birth of a child, the placement of a child in connection with an adoption, or the caring for such a child immediately following the birth or placement. Any period of Employer or Affiliate-approved leave on account of maternity or paternity shall be credited as Service, through the first anniversary of the first date of L-3 Communications Corporation Pension Plan 18 such an absence. Any one-year period of such an Employer-approved leave that continues past the first anniversary, that is, the second year of any such leave, shall not be credited as Service, nor shall it count as any Period of Severance. A Break in Service on account of such leave therefore shall not occur until the end of the second year of such a leave. (i) Crediting Service. Subject to the Rule of Parity, no Service that preceded a Break in Service shall be credited until the Employee has completed 12 continuous months of Service, following the Break. 3.4 Rule of Parity - Disregarding Prior Service (a) Definition of Service. As used in this Section, "Service" shall mean Eligibility, Vesting and Accrual Service, and shall also reflect the definition set out in Article I. (b) General Rule. Should an Employee who is not fully vested in all his accrued Plan benefits incur a Break in Service, then the following rules will apply, once he resumes active service and again becomes an Employee. The Service earned before the Break in Service shall be disregarded, only if the number of his consecutive one-year Breaks in Service either equals or exceeds (1) five years or (2) his pre-Break Service, whichever is greater. (c) Lost Service. If a Former Participant or Employee has lost Service under the preceding paragraph, then such an individual will be treated as a newly hired Employee, fully subject to the requirements of this Article. 3.5 How to Calculate Accrual Service (a) Purpose of Accrual Service. Accrual Service shall be accounted only for the following purposes: (1) determining the amount of a Participant's Monthly Accrued Benefit under Section 5.3 (2) determining whether a Participant who is eligible for a Deferred Vested Termination Benefit may receive such a benefit before his Normal Retirement Date under Article VI. L-3 Communications Corporation Pension Plan 19 (b) Definition of Accrual Service. (1) Accrual Service includes only the portion of an individual's Eligibility Service performed while he was a Participant in this Plan or the Prior Plan. (2) Accrual Service shall not include any period during which the individual waived participation in the Prior Plan, prior to January 1, 1982. (3) Accrual Service shall also reflect the definition of "Service" in Article I. 3.6 How to Calculate Vesting Service (a) Purpose of Vesting Service. Vesting Service shall be accounted only for the purpose of determining whether a Participant is vested in his Plan benefit, under Article IV. (b) General Definition of Vesting Service. Except as set out in the next subsection, Vesting Service shall include all Eligibility Service accounted under this Plan. Vesting Service shall also reflect the definition of "Service" in Article I. (c) Exceptions. Notwithstanding the general rule of the preceding paragraph, Vesting Service shall be calculated as follows: (1) In the case of a Participant who was an Employee of Loral & Communication Ltd, his Vesting Service shall be measured from the later of his Employment Date or January 1, 1963. (2) In the case of a Participant who was an Employee of Lermer Packaging Corporation, his Vesting Service shall be measured from the later of his Employment Date or April 1, 1970. (3) In the case of a Participant who is not described in paragraphs (1) or (2), above, his Vesting Service shall be measured from the later of his Employment Date or the date the Plan or Prior Plan was adopted, or such earlier date as shall be determined by the Board on a uniform and non-discriminatory basis. L-3 Communications Corporation Pension Plan 20 ARTICLE IV. VESTING AND FORFEITURES 4.1 Vesting (a) Full vesting at Normal Retirement Date. Upon attainment of his Normal Retirement Date, (while in active Service) a Participant's rights in his Basic Benefit shall be non-forfeitable. (b) Full Vesting in Contributory Benefit. (1) A Contributing Participant's rights in his Contributory Benefit shall be non-forfeitable at all times, provided his employee contributions to the Prior Plan were not withdrawn under Section 7.1. (2) However, if the Contributing Participant's accrued benefit attributable to his employee contributions (as determined in Code Section 411(c)(2)) is less than his Contributory Benefit, then, his Contributory Benefit shall be reduced but not eliminated by any withdrawal under Section 7.1, under Plan procedures. (c) General Vesting Schedule (1) A Participant's nonforfeitable interest in his Basic Benefit is his Vested Percentage. A Participant's Vested Percentage is based on his completed years of Vesting Service, as of his Separation from Service Date. The general vesting schedule is: Completed Years of Vesting Service Vested Percentage --------------- ----------------- Less than 5 0% 5 or more 100% (2) For Employees who terminated employment prior to January 1, 1989, the gradual vesting schedule in effect under the Prior Plan at the date of their termination shall control. 4.2 Changes in Vesting Schedule If the Individual Plan's vesting schedule is amended or if the Plan is determined to be top-heavy, then any Participant with (a) at least one hour of L-3 Communications Corporation Pension Plan 21 Service during the Plan Year for which the change is made and (b) three years of Service with the Employer may within 60 days after receiving written notice of such amendment (or such later date prescribed by regulations under Code Section 411), make a Proper Application to have his Vested Percentage computed under the Plan's prior vesting provisions. 4.3 Forfeitures Forfeitures shall arise if any Participant whose Vested Percentage is not 100% incurs a Severance from Service Date. Such unvested accrued Plan benefits shall then be forfeited, and these Forfeitures shall be applied to reduce future Employer contributions and to pay Plan expenses. Forfeitures shall not be used to increase Plan benefits. 4.4 Restoring Forfeitures If a Participant's nonvested interest in his accrued Plan benefit is forfeited, and the-Participant subsequently resumes employment with the Employer or an Affiliate, then the forfeited amount shall be restored to him to the extent that his pre-Break Service is recognized, under Sections 3.3 and 3.4. L-3 Communications Corporation Pension Plan 22 ARTICLE V. AMOUNT OF RETIREMENT BENEFIT 5.1 General Rules for Calculating Amount of Plan Benefits (a) Only Service with Employer will be accounted for accrued benefit. Notwithstanding any other contrary provision of this Article or the Plan, only Accrual Service performed (1) with the Employer (rather than with any Affiliate), (2) while the Employee is actively participating in the Plan or the Prior Plan, and (3) while the Plan or the Prior Plan is in effect, will be credited for the purpose of determining a Participant's accrued benefit under the Plan. (b) Must be vested. A Participant shall be paid only those accrued Plan benefits in which he is vested. (c) This Article limited by Article X. The provisions of this Article shall be subject to the limitations of Article X. (d) All terms of this Article apply. Any Plan benefit calculation shall be subject to all the terms of this Article, and the Plan. 5.2 The Different Plan Benefits A Participant's Monthly Accrued Benefit shall be paid as one of the following: (a) Normal Retirement Benefit. A Participant will be eligible to receive his Normal Retirement Benefit ff he retires under the Plan as of his Normal Retirement Date. (b) Late Retirement Benefit. A Participant will be eligible to receive his Late Retirement Benefit if he retires under the Plan as of his Late Retirement Date (and continues to accrue Accrual Service after his Normal Retirement Date). (c) Early Retirement Benefit. A Participant will be eligible to receive his Early Retirement Benefit if he retires under the Plan as of his Early Retirement Date. (d) Deferred Vested Termination Benefit. A Participant will be eligible to receive his Deferred Vested Termination Benefit if he terminates employment under the Plan as of his Deferred Vested Termination Date. L-3 Communications Corporation Pension Plan 23 5.3 Monthly Accrued Benefit (a) Formula for Monthly Accrued Benefit. Subject to the provisions of this Article, the amount of a Participant's "Monthly Accrued Benefit" shall equal his Basic Benefit and, if he is a Contributing Participant, his Contributory Benefit. (b) Formula for Basic Benefit. The amount of a Participant's "Basic Benefit" under the Plan shall equal 1/12th of the sum of Subsections (c) and (d). (c) Basic Benefit with respect to Accrual Service after 1988. For each Plan Year (and completed months) of Accrual Service on and after January 1, 1989, the sum of (1) and (2). (1) If such year is prior to the year in which he completes 15 years of Eligibility Service, 1.20% of his Earnings not in excess of the Social Security Wage Base for such year, plus 1.45% of his Earnings for such year in excess of the Social Security Wage Base for such year. (2) If such year is the year in which he completes 15 years of Eligibility Service or any subsequent year, 1.50% of his Earnings for such year not in excess of the Social Security Wage Base for such year, plus 1.75% of his Earnings for such year in excess of the Social Security Wage Base for such year. (d) Basic Benefit with respect to Accrual Service before 1989. For Accrual Service prior to January 1, 1989, the greater of (1) the sum of (A) and (B), multiplied by (C), or (2). (1) (A) 0.8% of (C) or (D), whichever is applicable, not in excess of $16,800. (B) 1.2% of (C) or (D), whichever is applicable, in excess of $16,800. (C) His years (and completed months) of Accrual Service prior to January 1, 1989. (D) For a Participant who has completed at least five years of Accrual Service as of January 1, 1989, his average Earnings for the five Plan Years 1984 through 1988. L-3 Communications Corporation Pension Plan 24 (E) For a Participant who has not completed five years of Accrual Service as of January 1, 1989, his average Earnings for his entire period (years and completed months) of such Accrual Service. (2) The Basic Benefit under the Prior Plan as in effect immediately prior to January 1, 1989 calculated through December 31, 1988. (e) Formula for Contributory Benefit (1) A Contributing Participant's "Contributory Benefit" under the Plan shall equal the amount set forth in Exhibit B hereto, provided his contributions to the Prior Plan were not withdrawn. A Participant's Contributory Benefit is based on the Accumulated Contributions he had made under the Prior Plan. (2) However, if a Participant has withdrawn his Contributory Benefit under Section 7.1 and the amount of a Participant's accrued benefit attributable to his employee contributions (as determined by Code Section 411(c)(2)) is less than his Contributory Benefit, then his Contributory Benefit shall be reduced but not eliminated by the withdrawal, under Plan procedures. (f) Formula for Participants covered by Prior Plan. Notwithstanding the preceding provisions of this Section, for a Participant who was participating in the Prior Plan immediately prior to January 1, 1989, his Basic Benefit shall not be less than (1) his Basic Benefit under the Prior Plan as in effect immediately prior to January 1, 1989, calculated as of December 31, 1988 for any Participant who is a Highly-Compensated Employee, or (2) his Basic Benefit under the Prior Plan as in effect immediately prior to January, 1 1989 calculated as of December 31, 1989 or the date of his separation from service with the Prior Employer, if earlier, for any Participant who is not highly compensated. 5.4 Special Section 401(a)(17) Provision Regarding Plan Benefits (a) Application. This Section shall apply only to those Participants whose current accrued Plan benefit as of or after January 1, 1994 is based on Earnings (1) incurred during at any time prior to January 1, 1994, (2) in excess of $150,000. L-3 Communications Corporation Pension Plan 25 (b) Calculation of accrued Plan benefit. Unless otherwise provided under the Plan, each such Participant's accrued Plan benefit shall be the greater of (1) or (2): (1) the Participant's accrued Plan benefit determined under the Plan, as amended effective on or after January 1, 1994, as applied with respect to his total Accrual Service performed as of such a date, or (2) The sum of: (A) the Participants's accrued Plan benefit as of December 31, 1993, frozen as provided in Code Regulation Section 1.401(a)(4)-13, and (B) the Participant's accrued Plan benefit determined under the Plan, as amended effective on or after January 1, 1994, as applied with respect to his Accrual Service performed on or after January 1, 1994. 5.5 Minimum Basic Benefit for Certain Participants (a) 1978 Rule Participants. Paragraph (b) of this Section shall apply only to an Employee (i) who was a Participant on and immediately prior to January 1, 1978, and (ii) who (x) had reached his Normal Retirement Date prior to January 1, 1978 or (y) remained in the employment of the Employer until his Normal Retirement Date which occurs on or after January 1, 1978 ("1978 Rule Participant"). (b) Formula for 1978 Minimum Benefit. Notwithstanding the provisions of Section 5.2(b) or the applicable provisions of the Prior Plan as in effect immediately prior to January 1, 1978, a 1978 Rule Participant's Minimum Basic Benefit (or for a 1978 Rule Participant who had reached his Normal Retirement Date prior to January 1, 1978, his minimum Plan benefit attributable to Employer contributions) shall equal 1/12th of .75% of his Earnings for the Plan Year preceding his Late Retirement Date (or, if he was compensated for less than ten full months during such year, his Earnings for the last full prior calendar year during which he was compensated, if greater), multiplied by his years (and completed months) of Eligibility Service (not in excess of 20). (c) 1984 Rule Participants. Paragraph (d) of this Section shall apply only to an Employee (i) who is a Participant on and immediately prior to L-3 Communications Corporation Pension Plan 26 January 1, 1984, and (ii) who has not reached his Normal Retirement Date on January 1, 1984 and remains in the employment of the Employer until his Normal Retirement Date ("1984 Rule Participant.") (d) Formula for 1984 Minimum Benefit. Notwithstanding the provisions of Section 5.2(b) or the applicable provisions of the Prior Plan as in effect immediately prior to January 1, 1984, a 1984 Rule Participant's Minimum Basic Benefit shall equal 1/12th of 0.75% of his Earnings for the Plan Year 1983 (or, if he was compensated for less than ten full months during such year, his Earnings for the last full prior calendar year during which he was compensated, if greater), multiplied by his years (and completed months) of Eligibility Service on and after the first day of the month coincident with or next following the later of (i) his 25th birthday or (ii) the first anniversary of his Employment Date, and prior to January 1, 1984. (e) Formula for those who are subject to both 1978 and 1984 Rules. For an Employee who is both a 1978 Rule Participant and a 1984 Rule Participant, his Minimum Basic Benefit shall be the amount determined under paragraph (b) or paragraph (d) of this Section, whichever is greater. 5.6 Normal Retirement Benefit. The amount of a Participant's Normal Retirement Benefit under the Plan shall equal his vested Monthly Accrued Benefit, payable at his Normal Retirement Date. 5.7 Late Retirement Benefit. (a) General rule. A Participant's Late Retirement Benefit under the Plan shall generally equal his Monthly Accrued Benefit payable at his Late Retirement Date. (b) Special rule for those who reached age 65 before 1988. (1) This Subsection applies only to those Participants who reached age 65 before calendar year 1988. (2) The Late Retirement Benefit of such a Participant shall equal the greater of (i) his Monthly Accrued Benefit at his Late Retirement Date, or (ii) his Monthly Accrued Benefit at his Normal Retirement Date multiplied by his Late Commencement Factor as determined in accordance with the following Subsection (c). L-3 Communications Corporation Pension Plan 27 (3) Further, if the Minimum Basic Benefit rules of Section 5.4 are applicable to such a Participant, then clause (ii) of the preceding paragraph shall not apply to his Minimum Basic Benefit (or his minimum Plan benefit). (c) Late Commencement Factors defined (1) For the purpose of this Section, a Participant's "Late Commencement Factor" means for age 70 and under a factor determined in accordance with the schedule below based on his age at his Annuity Starting Date (with interpolations for actual age). Age Late Commencement Factor --- ------------------------ 66 1.10 67 1.20 68 1.30 69 1.40 70 1.50 (2) Over age 70, "Late Commencement Factor" means a factor equal to the Actuarial Equivalent. 5.8 Early Retirement Benefit (a) Timing affects amount of benefit. (1) A Participant's Early Retirement Benefit will be affected by the exact date of his Annuity Starting Date. (2) Generally, the earlier that his Annuity Starting Date precedes his Normal Retirement Date, the lower a Participant's monthly Early Retirement Benefit payment will be. (b) Formula for Early Retirement Benefit. (1) A Participant's Early Retirement Benefit shall equal his Normal Retirement Benefit at his Early Retirement Date multiplied by his Early Commencement Factor, as defined in this Section. (2) The "Early Commencement Factor" is a factor equal to (A) minus (B). (A) and (B) shall mean: L-3 Communications Corporation Pension Plan 28 (A) 1. (B) 1/180 for each of the first 60 months plus 1/360 for each of the next 60 months by which his Annuity Starting Date precedes his Normal Retirement Date. (3) For the purposes of calculating the "Early Commencement Factor," partial months shall be considered to be whole months. 5.9 Deferred Vested Termination Benefit. (a) If a Participant has any vested accrued benefit, and his Annuity Starting Date is on or after his Normal Retirement Date, the amount of his Deferred Vested Termination Benefit under the Plan shall equal his Monthly Accrued Benefit at his Deferred Vested Termination Date. (b) If a Participant's Vested Percentage is 0%, and his Annuity Starting Date is on or after his Normal Retirement Date, the amount of his Deferred Vested Termination Benefit under the Plan shall equal 100% of his Contributory Benefit at his Deferred Vested Termination Date, if any, or, if greater, his accrued benefit attributable to employee contributions (as determined in Code Section 411(c)(2)). (c) If a Participant's Annuity Starting Date is prior to his Normal Retirement Date, the amount of his Deferred Vested Termination Benefit shall equal the amount determined in paragraph (a) or (b) of this Section, whichever is applicable, multiplied by his Early Commencement Factor as determined in the preceding Section. (d) If any benefit under any welfare plan maintained by the Employer or Affiliate is dependent on "retirement" under this Plan, then the receipt of a Deferred Vested Termination Benefit shall not constitute "retirement." 5.10 Co-ordination with Prior Plan. (a) The monthly amount of any Plan benefit being paid to a Former Participant or any joint annuitant or Beneficiary immediately prior to the Effective Date under the Prior Plan shall continue to be paid to such payee on and after the Effective Date in accordance with the applicable provisions of the Prior Plan. (b) The monthly amount of any Plan benefit which had not commenced as of the Effective Date for any terminated, Vested Former Participant L-3 Communications Corporation Pension Plan 29 whose employment with the Employer had terminated prior to the Effective Date, shall be determined under the Prior Plan as in effect on the date of his termination of employment. However, the provisions of Article VI of this Plan shall apply to the payment of such Plan benefits. Further, if the Annuity Starting Date is prior to his Normal Retirement Date, the amount of the payment shall be calculated using the Early Commencement Factor as determined in accordance with this Article of this Plan. 5.11 Effect of Deferred Payment If a Participant or Former Participant who was eligible to retire under this Plan has failed to make a Proper Application for his Plan Benefit, so that his benefit commencement date falls after the date he terminates employment, he shall receive, in a lump sum, an amount equal to all payments that would have been made (but were not made), due to the delay. Similarly, a retroactive, lump sum payment will be made if the amount of the Plan benefit cannot be immediately ascertained by the Committee or its delegates, or if the payee cannot be immediately located. However, there shall be no actuarial adjustment made, under this Section. 5.12 Effect of Reemployment After Receipt of Plan Benefits (a) Reemployment. If a Former Participant who is receiving a Plan benefit becomes re-employed as an Employee of the Employer or an Affiliate, the payment of his Plan benefits shall immediately cease. (b) Suspension of Benefits. Generally, suspension of benefits under this Section shall occur only if the re-employed Employee shall be working a full-time schedule, as determined by the Employer under ERISA. (c) Offset for Error. Should such a suspension permitted under this Section not take place, through administrative error or any other reason, then the amounts which were paid but which were also suspendable may be offset from future Plan benefits. Offsets may also be taken against any survivor benefits, with respect to the Participant. (d) Proper Notice. No suspension of benefits under this Section may take place unless proper notice is sent to the individual during the calendar month of the suspension, under ERISA. (e) Recommendation of Benefits. Plan payments to the individual shall recommence, generally within four months after his period of L-3 Communications Corporation Pension Plan 30 reemployment has ended, provided he has made Proper Application (with 90 days advance notice) for their recommencement. (f) Amount of Benefit. Such an individual's ultimate Plan benefit shall be reduced by the Actuarial Equivalent of Plan benefits he has already received, but in no event shall his monthly benefit be reduced below the amount that he was receiving, before his reemployment and suspension of benefits. L-3 Communications Corporation Pension Plan 31 ARTICLE VI. PAYMENT OF RETIREMENT AND DEATH BENEFITS 6.1 How to Retire (a) General rules. Except as provided in the next Section, no Plan benefit shall be paid unless Proper Application is made to the Committee. (b) Eligibility for Benefits. Each Participant or Beneficiary will be eligible to receive a Plan benefit only when: (1) the Participant is vested in an accrued Plan benefit, under Article IV, (2) the Participant has terminated his employment with the Employer and all Affiliates, under that employer's procedures, and (3) the payee has met all the requirements of this Article, particularly those described in the next paragraph. (c) Making "Proper Application" - required forms. (1) Retirement and death benefits will be paid only after "Proper Application" has been made. For all purposes under this Plan, the term "Proper Application" shall mean making any election, granting any consent, giving any notice or information, and making any communication whatsoever to the Committee or its delegates, in compliance with all Plan procedures, on forms provided by the Committee, and providing all information required by the Committee. A Proper Application will be deemed to have been made only if it is properly completed, as determined by the Committee. (d) Advance notice to Committee necessary. Generally, at least four months advance notice must be made to the Committee, in order to make a Proper Application to elect any particular Annuity Starting Date. 6.2 Timing of Participant's Benefits (a) General rules. Generally, a Participant's Plan benefit will be paid, under this Article, as soon as is feasible (but no less than 30 days) after the Retirement Date or Annuity Starting Date that he has elected, by making a Proper Application. L-3 Communications Corporation Pension Plan 32 (b) Consent to distribution. With respect to this Article, making a Proper Application for a Plan distribution shall be considered as giving written consent to such a distribution. (c) Payments made only on the first of the month. All benefits paid under the Plan will be paid only as of the first day of any relevant month. Any Retirement Date or Annuity Starting Date must therefore fall on the first day of a month. (d) Deferred Vested Termination Benefit rules. (1) Normally, the Annuity Starting Date for any Participant receiving a Deferred Vested Termination Benefit will be his Normal Retirement Date. (2) However, if a Participant who is eligible to receive a Deferred Vested Termination Benefit has also completed ten years of Accrual Service, then the Participant may make Proper Application (with 60 days advance notice) to elect an Annuity Starting Date with respect to his Deferred Vested Termination Benefit that is: (A) before his Normal Retirement Date, and (B) after his 55th birthday. (e) Final monthly payment. The final monthly payment of any Plan annuity payment shall be made with respect to the month within which the death of the Participant or his Beneficiary (whichever is applicable) occurs. (f) Deferred payments. Any failure to make Proper Application (as determined within the sole discretion of the Committee), shall be deemed to be a Proper Application to defer payment, provided that deferred payment is permitted under this Section. (g) Required payment date of small amounts. If the lump sum Actuarial Equivalent of a Participant's vested Plan benefit equals or is less than $5,000 (or any other figure set by the Code), then a lump sum payment of such an amount shall be made as soon as is feasible on or after his death or termination of employment with the Employer and all Affiliates, subject to this Article. Such a payment shall not be deferred; and payment shall be made even if the Participant or Beneficiary fails to make any Proper Application for payment. L-3 Communications Corporation Pension Plan 33 (h) General rules for required payment dates. Unless the Participant elects to defer his benefit payment, Plan benefits will be paid under this Article no later than the 60th day after the close of the plan year in which the latest of the following events occurs: (1) the Participant's Normal Retirement Date (2) the 10th anniversary of the year in which the Participant commenced participation in the plan (3) the Participant terminates service with the Employer. (i) Payments following age 70 1/2. Notwithstanding any contrary provision of this Plan, payments to each Participant must begin no later than the April 1st of the calendar year following the calendar year in which he attains age 70 1/2 or separates from service, unless otherwise required by law. With respect to any required minimum distribution prescribed by Code Section 401(a)(9), there shall be no annual recalculation of life expectancies. (j) Payments on Account of Participant's Death (1) Distribution begun before death. If the distribution of a Participant's benefit has commenced under this Article prior to his death, then the payment of any remaining portion that is payable under this Article shall be paid to the Beneficiary as soon as is practicable. The schedule of such payments shall be at least as rapid as the schedule used at the Participant's death. In this event, there shall be no permitted deferral of payment. (2) Distribution paid after death to non-spouse Beneficiary. If the Participant dies before distribution under this Article has begun, then the payment under this Article to any non-spouse Beneficiary shall be made: (A) As soon as is feasible, but no later than five calendar years following the date of death, if the Beneficiary is not the surviving, legally married spouse of the Participant, and the benefit is to be paid in any form except payments over the life or life expectancy of the Beneficiary. (B) As soon as is feasible, if the benefit is to be paid over the life or life expectancy of a non-spouse Beneficiary, but no later L-3 Communications Corporation Pension Plan 34 than by December 31 of the calendar year immediately following the calendar year in which the Participant died. (3) Distribution paid to Eligible Spouse (A) Distributions to an Eligible Spouse under a QJSA shall be paid as soon as is feasible. (B) Distributions paid to an Eligible Spouse under a QPSA shall be paid as provided in Section 6.8. 6.3 Normal Form of Benefits (a) Normal form for married Participant. The normal form of retirement benefit for any married Participant who has an Eligible Spouse on his Annuity Starting Date shall be a Qualified Joint and Survivor Annuity, or a "QJSA." (b) Normal form for unmarried Participant. The normal form of benefit for any Participant who does not have an Eligible Spouse as of his Annuity Starting Date shall be a single life annuity paid for his life. 6.4 Notice and Election Period (a) Notice concerning benefits. The Committee shall distribute to each Participant at least 90 days before his Annuity Starting Date a written explanation of: (1) the QJSA; (2) how the Participant may waive the QJSA; (3) the effect of the Participant's waiver of the QJSA; (4) the need for the Participant's Eligible Spouse to consent to such a waiver, before the waiver can be effective, and (5) the Participant's and the spouse's right to revoke their waiver or consent (respectively), during the Election Period (which is described in the next paragraph). (b) Election Period. For the purposes of this Article, the Election Period shall be the 90 calendar day period preceding any Participant's L-3 Communications Corporation Pension Plan 35 Annuity Starting Date. The last business day preceding the Annuity Starting Date is the last day of the Election Period. 6.5 Waiver and Spousal Consent Necessary for Optional Forms of Benefit (a) General rules. A married Participant may elect an optional form of benefit, in lieu of the normal form of benefit, only if he and his spouse meet all the requirements of this Section. (b) Waiver. (1) After receiving the notice explaining the normal form of benefit, described in the preceding Section, the married Participant must waive his right to the normal form of benefit, by making a Proper Application concerning his waiver. (2) The waiver shall specify the optional benefit, and, if applicable, the designated nonspouse Beneficiary (or any single or class of contingent Beneficiaries). (c) Spousal consent. (1) After the Participant's receipt of notice explaining the normal form of benefit, described in the preceding Section, the Participant's Eligible Spouse must give written consent to the Participant's waiver of the normal form of benefit, in order for the waiver to be effective. (The Committee's delivery of the explanatory notice to the Participant shall be deemed to also be delivery to the Eligible Spouse.) The Eligible Spouse's written consent shall be made by Proper Application and shall: (A) express the effect of waiving the normal form of benefit; (B) be notarized; (C) consent to the optional form of benefit being selected; (D) consent to a designated Beneficiary other than herself, if applicable, and (E) state whether or not the consent is revocable. However, if the consent form is silent as to this issue, then it shall be considered to be revocable, under the terms of this Section. L-3 Communications Corporation Pension Plan 36 (2) If the Participant has designated a Beneficiary other than his spouse, then such a designation shall not be effective unless the spouse gives written consent to the Beneficiary designation, by making Proper Application. This consent must state that the Beneficiary cannot be changed further without further spousal consent, unless the written consent form explicitly states that no such further consent with respect to another change in designated Beneficiary is necessary. (3) Any waiver of a QJSA or any spousal consent described in this Section shall be binding only upon the individual spouse who gives the consent. It shall not be binding upon any subsequent spouse of the Participant. (d) Deadline for waiver and spousal consent. To be effective, the Participant's waiver of his normal form of benefit and his Eligible Spouse's written consent must be made by Proper Application during the 90 day Election Period. (e) Revocation of waiver and spousal consent. Both the Participant's waiver of the QJSA and his Eligible Spouse's consent to the waiver may be revoked within the Election Period, by making Proper Application. Any such revocation will cause the normal form of benefit to be paid to the Participant, unless another waiver and consent is made by Proper Application, within the Election Period. Notwithstanding the previous provisions of this paragraph, a revocation of the Eligible Spousal consent shall not be permitted if the forms on which the consent were made explicitly disallow such a spousal revocation. 6.6 Optional Forms of Benefit (a) Procedural rules. A Participant may elect an optional form of benefit, rather than the normal form described in Section 6.3, if he meets the requirements of the preceding Section, and makes a Proper Application. (b) Value of optional forms. Each optional form of benefit described in this Section shall equal the Actuarial Equivalent of the normal form of benefit that would be paid with respect to the Participant as of his Normal Retirement Date. L-3 Communications Corporation Pension Plan 37 (c) Optional forms available. The optional forms of benefit offered under the Plan are: (1) Single life annuity. (2) Joint and survivor annuity, with any person designated by the Participant as his joint annuitant (and Beneficiary) and with the survivor annuity equal to a percentage, not less than 50% and not in excess of 100%, designated by the Participant, of the annuity payable for the life of Participant. (3) Single life annuity with a period certain guarantee of 10, 15, or 20 years or, if less, the joint life and last survivor life expectancy of the Participant and his Beneficiary at his Annuity Starting Date. Upon the death of the Participant prior to the expiration of the period certain, monthly payments shall continue to the Beneficiary if the Beneficiary survives the Participant or, if the Beneficiary has predeceased the Participant or if no proper contingent Beneficiary designation is in effect at the Participant's death, the Actuarial Equivalent of the remaining payments shall be paid to the Participant's next Beneficiary in a lump sum. Upon the death of the Participant after expiration of the period certain, no further payments shall be made under this option. Upon the death of the properly designated Beneficiary who survived the Participant prior to expiration of the period certain, the Actuarial Equivalent of the remaining payments shall be paid to the Beneficiary's Beneficiary in a lump sum. (4) For a Participant whose Annuity Starting Date is prior to the earliest date Social Security old-age benefits are payable, a level- income single life annuity taking into account the estimated amount of Social Security old-age benefits payable commencing at such date. (d) Restrictions as to optional forms. (1) Notwithstanding the foregoing, no optional form of payment shall provide only for a survivor benefit to the Participant's Beneficiary after his death. (2) Under any optional form of payment, the present value of the payments to be made to the Participant while living must exceed 50% of the present value of the total payments to be made to the L-3 Communications Corporation Pension Plan 38 Participant and any joint annuitant, Beneficiary or other survivor (other than his Eligible Spouse). (3) Any optional form of payment shall provide for payment (i) over the life of the Participant, (ii) over the lives of the Participant and his Beneficiary, (iii) over a period not exceeding the life expectancy of the Participant, or (iv) over a period not exceeding the life expectancies of the Participant and his Beneficiary. 6.7 Suspending Plan Payments Upon Reemployment. Plan payment under this Article will be suspended, if the Former Participant becomes re-employed; as set out in Section 5.11. 6.8 Qualified Pre-Retirement Survivor Annuity (a) Eligibility for QPSA. A Qualified Pre-Retirement Survivor Annuity, or "QPSA," will be paid only in the event that a Participant dies: (1) with a surviving Eligible Spouse, as of his date of death, and (2) one of the following: (A) while in active employment with the Employer, or (B) after his termination of employment with the Employer, but before his Annuity Starting Date. (b) QPSA is paid to Eligible Spouse. The QPSA shall be paid, under this Section, to the Eligible Spouse of a Participant who meets the requirements of the preceding Subsection. (c) Amount of QPSA. (1) A QPSA shall be paid only with respect to the Participant's vested, accrued Plan benefits. The precise amount of QPSA is determined by referring to the 50% survivor benefit that would have been payable, with respect to the Participant's death, had he elected a 50% QJSA and had he died at the dates described in this Subsection. Different dates apply, according to the Participant's age and service history at the time of his death. (2) If an eligible Participant dies after his Normal Retirement Date, then the QPSA shall equal the 50% QJSA survivor benefit that would have been payable had he retired with a 50% QJSA on the L-3 Communications Corporation Pension Plan 39 day before his actual date of death, so that his QJSA Annuity Starting Date would have been the date before his actual date of death (or the first day of the next month). (3) If a Participant dies (i) with 10 years of Accrual Service, and (ii) before his Normal Retirement Date, but (iii) after his 55th birthday, then the QPSA shall, as in the preceding paragraph, equal the 50% QJSA survivor benefit that would have been payable had he retired with a 50% QJSA on the date before his actual date of death, so that his QJSA Annuity Starting Date would have been the date before his actual date of death (or the first day of the next month). (4) If a Participant dies (i) before his Normal Retirement Date, and (ii) before completing 10 years of Accrual Service, then the amount of the QPSA shall equal the 50% QJSA survivor benefit that would have been payable had he (a) survived, (b) terminated employment as of either his actual termination date, or his actual date of death (whichever came first), (c) elected his Normal Retirement Date as his Annuity Starting Date, and (d) died the next day. (5) If a Participant dies (i) before his 55th birthday, and (ii) after completing 10 years of Accrual Service, then the amount of the QPSA shall equal the 50% QJSA survivor benefit that would have been payable had he (a) survived, (b) terminated employment as of either his actual termination date, or his actual date of death (whichever came first), (c) elected the first day of the month coincident with or next following his 55th birthday as his Annuity Starting Date, and (d) died the next day. (6) With respect to the four preceding paragraphs, in the event that the Participant dies after his active employment has ended, the four preceding paragraphs shall not be construed to credit the Participant with any Accrual Service or accruals that he had not earned, as of his termination of employment. (d) Special rule for amount of QPSA if optional benefit has been elected. If a QPSA is payable with respect to a Participant who had made a Proper Application for an optional form of benefit which would have provided annuity payments to the Participant and his Eligible Spouse, then, notwithstanding any other provisions of this Section, the amount of the QPSA shall equal the Actuarial Equivalent of the survivor benefit under the elected optional form of benefit. L-3 Communications Corporation Pension Plan 40 (e) Form of the QPSA. The QPSA shall be paid in monthly installments, over the life of the surviving Eligible Spouse. (f) QPSA is subsidized. Participants are not charged, under this Plan, for their right to a QPSA. (g) Commencement of QPSA payments. QPSA payments shall generally be made as soon as is feasible following the Eligible Spouse's Proper Application. Eligible Spouses may not defer payment later than the first day of the month coincident with or following: (1) the Participant's 55th birthday - with respect to a Participant who had earned 10 years of Accrual Service and died before age 55 (2) the date of death - with respect to Participant's who had earned 10 years of Accrual Service and died after age 55 (3) The Participant's Normal Retirement Date - with respect to Participant's who died with less than 10 years of Accrual Service. 6.9 Form of Benefit Fixed as of Annuity Starting Date (a) General Rule. The form of any Plan benefit is fixed as of the Annuity Starting Date, and is not subject to change, except with respect to the provision of any survivor benefit under a QJSA or optional form of benefit. (b) QDRO Exception. Should a QDRO become effective after a Participant's Annuity Starting Date, the Plan payments may be divided, as provided for under the QDRO, but the total monthly payment that had been made monthly under Plan (before the QDRO) shall not be changed. L-3 Communications Corporation Pension Plan 41 ARTICLE VII. IN-SERVICE WITHDRAWAL AND RETURN OF CONTRIBUTIONS 7.1 In-Service Withdrawal of Pre-1970 Employee Contributions (a) Withdrawal of Accumulated Contributions Benefit. A Contributing Participant may at any time prior to his Annuity Starting Date, by making Proper Application at least 30 days in advance, withdraw all of his Accumulated Contributions Benefit. (b) No Partial Withdrawal. Such a withdrawal must be made of all of the Participant's Contributory Benefit; no partial withdrawal shall be permitted. (c) Spouse' Consent Required. However, if the amount of a Participant's Contributory Benefit exceeds $5,000, then a married Participant may make such a withdrawal only if his spouse gives her written, notarized consent, under Committee procedures. L-3 Communications Corporation Pension Plan 42 ARTICLE VIII. THE TRUST, FUNDING AND CONTRIBUTIONS 8.1 Contributions to the Trust Fund (a) General Rule. The Employer shall make contributions under this Plan to the Trust Fund at least once each quarter during each Plan Year. Notwithstanding the preceding sentence, the Committee may direct that Contributions be made on a different schedule, as permitted by the Code, without formal Plan amendment. (b) Amount of Contributions. The amount of such contributions shall be the amount recommended by the Plan's enrolled actuary, in compliance with the Code and ERISA, to fund Plan benefits. (c) No Contributions By Employees. Contributions by Employees shall not be permitted. (d) Determination of Necessary Contributions. An enrolled actuary hired by the Committee shall make an annual actuarial valuation to estimate the Employer contributions necessary under this Article. 8.2 The Trust (a) Trust Agreement. Amounts contributed to the Trust shall be managed and invested, according to the Trust Agreement. (b) Funding Policy. The Company shall, to the extent allowed under the Trust, establish a funding policy and method, consistent with the objectives of the Plan the applicable requirements of ERISA and the Code. L-3 Communications Corporation Pension Plan 43 ARTICLE IX. AMENDMENT AND TERMINATION 9.1 Power to Amend Plan (a) General Rule. The Company, by action of the Board, may, subject to this Section, at any time modify or amend, in whole or in part, any or all of the provisions of the Plan. Any such amendment shall be by an instrument in writing executed by the Board, under its by-laws. Upon the execution of any such instrument, the Plan shall be deemed to have been amended in the manner therein set forth. (b) Parties Bound. The Employer, the Trustee and each Employee, Participant, Former Participant, Eligible Spouse, Beneficiary or any person claiming under or through any of the foregoing shall be bound by any such amendment. However, no such amendment shall make it possible for any of the assets of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries, increase the duties or responsibilities of the Trustee without its consent thereto, or adversely affect any benefits accrued by any Participant prior to such amendment, except as provided in Article XI. 9.2 Power to Terminate Plan Although the Company intends to maintain the Plan indefinitely, the Company, by action of the Board, may terminate the Plan. 9.3 Allocation of Assets Upon Termination (a) General rule. In the event of termination of the Plan, the Plan Administrator shall, subject to the approval of the Committee, allocate the assets of the Trust Fund that are available among the applicable Participants, Former Participants, and appropriate Beneficiaries in the manner set forth in Section 4044 of ERISA. (b) Full vesting upon termination or partial termination. Upon termination or partial termination of the Plan as to any Participants hereunder, all rights of such Participants to their accrued Plan benefits theretofore accrued shall become non-forfeitable to the extent then funded. L-3 Communications Corporation Pension Plan 44 9.4 Reversion of Assets Upon Termination Any Trust Fund assets which remain by reason of actuarial error after all liabilities of the Plan to applicable Participants, Former Participants, and other persons have been satisfied and all expenses of terminating the Plan as to any such persons and liquidating the Trust Fund assets have been paid, shall upon direction of the Committee be paid to the Company, provided such payment does not contravene any applicable provisions of law. L-3 Communications Corporation Pension Plan 45 ARTICLE X. LIMITATION OF BENEFITS 10.1 Construction The purpose of this Article is to comply with the provisions of section 415 of the Code, and all terms and provisions of this Article shall be interpreted and construed consistently with said provisions. The provisions of this Article shall apply notwithstanding any contrary provision of the Plan. 10.2 Definitions Solely for the purposes of this Article: Annual Addition. "Annual Addition" means the sum for any Limitation Year of (a) employer contributions to a plan (or portion thereof) subject to section 415(c) of the Code maintained by the Employer or an Affiliate, (b) forfeitures under all such plans (or portions thereof), if any, credited to employee accounts, (c) employee contributions under all such plans (or portions thereof), and (d) amounts described in section 419A(d)(2) of the Code (relating to post-retirement medical benefits of Key Employees (as defined in the Article entitled "Top Heavy Provisions.")) or allocated to a pension plan individual medical account described in section 415(l) of the Code to the extent includable for purposes of section 415(c)(2) of the Code. The employee contributions described in clause (c) shall be determined without regard to (i) any rollover contributions, (ii) any repayments of loans, or (iii) any prior distributions repaid to a plan upon the exercise of buyback rights. Employer and employee contributions taken into account as Annual Additions shall include "excess contributions" as defined in section 401(k)(8)(B) of the Code, "excess aggregate contributions" as defined in section 401(m)(6)(B) of the Code and "excess deferrals" as described in section 402(g) of the Code (to the extent such deferrals are not distributed to the Participant before the April 15th following the end of the taxable year of the Participant in which such deferrals were made), regardless of whether such amounts are distributed or forfeited. The Annual Additions for any year beginning before January 1, 1987 shall be determined under the law as in effect for such year and shall not be recomputed to treat all employee contributions as Annual Additions. Compensation Limit. "Compensation Limit" means 100% of the Participant's average annual Earnings for the three consecutive years in which his Earnings were highest. Dollar Limit. "Dollar Limit" means, subject to the Section of this Article entitled "Protection of Current Accrued Benefit," $90,000 as adjusted from time to time (beginning in 1988) to reflect increases in the cost of living pursuant to applicable regulations. The adjustment required pursuant to the preceding sentence for any L-3 Communications Corporation Pension Plan 46 year shall be the cost of living adjustment which is effective as of the January 1 which occurs in such year. No such adjustment shall be taken into account before the year for which such adjustment first takes effect. Earnings. "Earnings" for any year shall have the meaning set forth in Treas. Reg. ss. 1.415-2(d)(11)(i). 10.3 Limitation on Annual Benefits (a) Unadjusted Limit. If a Participant's Plan benefit is payable as a single life annuity or a QJSA, the annual amount of benefit payable to the Participant shall not exceed the lesser of the Dollar Limit or the Compensation Limit. (b) Optional Payment Forms. If a Participant's Plan benefit is payable in any form other than a single life annuity or a QJSA, the annual amount of benefit payable to the Participant shall not exceed the Actuarial Equivalent of a single life annuity which does not exceed the lesser of the Dollar Limit or the Compensation Limit. In making such actuarial adjustment, (a) the actuarial assumptions used shall be those set forth in the Plan, as appropriate according to the form and date of payment, provided that the interest assumption used shall generally not be less than 5%, and (b) no adjustment shall be made for any ancillary benefit provided under the Plan (if applicable) which is not directly related to retirement benefits, including, without limitation, disability benefits, medical benefits, and pre-retirement death benefits, and any death benefit coverage described in the Plan. (c) Multi-employer Plans. Any benefits provided under any multi-employer plan to which the Employer or any Affiliate is a party shall be taken into account under this Article only to the extent that the benefits provided under such plan exceed the benefits that would have been provided under such plan if the Participant had no service with the Employer or any Affiliate. 10.4 Adjustments for Early or Late Payment (a) Payments Starting Before Social Security Retirement Age But After Age 62. If a Participant's Plan benefit begins before his Social Security Retirement Age but on or after the date he attains age 62, the Dollar Limit shall be reduced: (1) if the Participant's Social Security Retirement Age is 65, by 5/9th of 1% for each month by which the commencement of payment of his Plan benefit precedes the month in which he attains age 65; or (2) if the Participant's Social Security L-3 Communications Corporation Pension Plan 47 Retirement Age is 66 or 67, by 5/9th of 1% for each of the first 36 months and 5/12th of 1% for each additional month by which the commencement of payment of his Plan benefit precedes the month in which he attains his Social Security Retirement Age. (b) Payments Starting Before Age 62. If a Participant's Plan benefit begins before age 62, the Dollar Limit shall be reduced in accordance with applicable regulations (using the actuarial assumptions set forth in the Actuarial Equivalent, this Plan, provided that the interest assumption used shall be not less than 5%), so that it is equivalent to the Dollar Limit as applied to a pension beginning at age 62. (c) Payments Starting After Social Security Retirement Age. If a Participant's Plan benefit begins after his Social Security Retirement Age, the Dollar Limit shall be increased in accordance with applicable regulations (using the actuarial assumptions set forth in the Actuarial Equivalent, provided that the interest assumption shall not exceed 5%) so that it is actuarially equivalent to the Dollar Limit as applied to a pension beginning at his Social Security Retirement Age. 10.5 Conditional Exemption for Pensions Under $10,000 The Compensation Limit shall not be applicable to any Plan benefit with respect to a Participant for any year if (a) the annual amount of employer-provided retirement benefits payable with respect to such Participant under this Plan and all other defined benefit plans of the Employer and all Affiliates does not exceed $10,000 for such year or any prior year, and (b) such Participant never participated in any defined contribution plan maintained by the Employer or an Affiliate. 10.6 Participants with Fewer Than Ten Years of Service If a Participant has fewer than 10 years of Service in the aggregate with the Employer and all Affiliates at the time his Plan benefit starts, the Compensation Limit and the $10,000 limit described in the Section of this Article entitled "Conditional Exemption for Pensions under $10,000" shall be adjusted by multiplying such amounts by a fraction (a) the numerator of which is the Participant's number of years of Service (and fraction thereof) and (b) the denominator of which is 10. In no event shall such fraction be less than 1/10th. 10.7 Participants with Fewer Than Ten Years of Participation If a Participant has been credited with fewer than 10 "Years of Participation," the Dollar Limit shall be adjusted by multiplying such amount by a fraction (a) the numerator of which is the Participant's number of Years of L-3 Communications Corporation Pension Plan 48 Participation in the Plan (and fraction thereof) and (b) the denominator of which is 10. In no event shall such fraction be less than 1/10th. "Years of Participation" means years of Service for which the Participant is credited with future Service benefits excluding any such year of Service credited (a) for a Plan Year prior to the Plan Year in which the individual first became a Participant, (b) for any period of disability during which the Participant was not permanently and totally disabled (within the meaning of section 22(e)(3) of the Code), and (c) for any period prior to the Effective Date. 10.8 Benefits Payable under More Than One Defined Benefit Plan If benefits that are subject to the limitations of section 415 of the Code are payable under any other defined benefit plan maintained by the Employer or an Affiliate, the benefits payable under this Plan, as limited by this Article, shall be subject to further limitation in order that the amount of employer-provided benefits payable under all defined benefit plans maintained by the Employer and all Affiliates shall not, in the aggregate, exceed the benefit limitations described in this Article. If a reduction in the benefits under such defined benefit plans in the aggregate is thus required, such reduction shall be applied in the reverse order in which benefits under,such plans would otherwise accrue except as any such other plan may otherwise expressly provide, provided that benefits under any multi-employer plan shall be reduced last. 10.9 Participation in Defined Contribution Plan (a) Combined Limitation. Subject to the later paragraph of this Subsection, entitled "Adjustment of Defined Contribution Plan Fraction," if a Participant participates (or participated) in one or more defined contribution plans maintained by the Employer or an Affiliate (including any plan so considered as a result of any employee contributions to a defined benefit plan) the sum of his Defined Contribution Plan Fraction and Defined Benefit Plan Fraction as of the close of any year shall in no event exceed 1.0. In order to prevent such sum from exceeding 1.0, benefits under this Plan shall be reduced to the extent necessary for that purpose. Such reduction shall be made prior to any reduction of allocations of Annual Additions under such defined contribution plans which would otherwise be made in order to prevent such sum from exceeding 1.0. (b) Defined Contribution Plan Fraction Determination. For purposes of this Section, a Participant's "Defined Contribution Plan Fraction" shall be determined as follows: L-3 Communications Corporation Pension Plan 49 (1) Numerator. For any year, the numerator shall be the sum of the Annual Additions to the Participant's accounts under all such defined contribution plans maintained by the Employer or an Affiliate in such year and in all prior years. (2) Denominator. For any year, the denominator shall be the sum of the lesser of the following amounts, determined for such year and for each prior year of service with the Employer and all Affiliates as if the Participant were covered by a defined contribution plan maintained by the Employer or Affiliates for all such years, but were not covered by any defined benefit plan for any such year: (A) 125% of the maximum dollar limitation applicable to defined contribution plan allocations for such year (as provided in section 415(c)(1)(A) of the Code determined without regard to section 415(c)(6)), or (B) 35% of the Participant's Earnings for such year. (c) Notwithstanding the foregoing, in computing the denominator of the Defined Contribution Plan Fraction for any year ending after 1982, the Committee may elect to determine the portion of such denominator which relates to 1982 and prior years under the method described in section 415(e)(6) of the Code, in lieu of the method described above. Such election may be made at such time and in such manner as may be provided in applicable Treasury regulations. (d) Defined Benefit Plan Fraction Determination. For purposes of this Section, a Participant's "Defined Benefit Plan Fraction" shall be determined as follows for any year: (1) Numerator. The numerator shall be the total projected annual benefit (as defined in section 415(b)(2) of the Code) of the Participant under all defined benefit plans maintained by the Employer or any Affiliate as of the close of such year, as determined for each such plan for purposes of section 415(e)(2)(A) of the Code, disregarding benefits derived from employee contributions. (2) Denominator. The denominator shall be the lesser of the following amounts: L-3 Communications Corporation Pension Plan 50 (i) 125% of the Dollar Limit, deter mined after giving effect to the Section of this Article entitled "Protection of Current Accrued Benefit", or (ii) 140% of the Compensation Limit. For purposes of computing the denominator of the Defined Benefit Plan Fraction, (A) the Dollar Limit and the Compensation Limit shall be determined as if years of Service for purposes of the Section of this Article entitled "Participants with Fewer than Ten Years of Service" included future years before the Participant will attain age 65, provided that the year in which the Participant will attain age 65 shall not count as a future year unless it can be reasonably anticipated that the Participant will receive a year of Service for such year and (b) the Dollar Limit shall be determined as if all years of Service (determined after application of clause (A) above) were Years of Participation (and fractions thereof) solely for purposes of the Section of this Article entitled "Participants with Fewer than Ten Years of Participation." (e) Adjustment of Defined Contribution Plan Fraction. If the sum of a Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction determined as of December 31, 1986 would have exceeded 1.0 had the provisions of this Article as in effect after December 31, 1986 been used to compute such sum, an amount shall be subtracted from the numerator of the Defined Contribution Plan Fraction (not exceeding such numerator) so that the sum of the Defined Contribution Plan Fraction and Defined Benefit Plan Fraction as of the first day of the Limitation Year beginning in 1987 does not exceed 1.0. Such amount shall be equal to the product of: (1) the sum of the Defined Contribution Plan Fraction plus the Defined Benefit Plan Fraction as of the determination date minus one, times (2) the denominator of the Defined Contribution Plan Fraction as of the determination date. 10.10 Limitation Year All determinations under this Article shall be made by reference to the Limitation Year, which shall be the Plan Year. L-3 Communications Corporation Pension Plan 51 10.11 Protection of Current Accrued Benefit If a Participant's Plan benefit, determined as if the Participant had terminated employment as of the close of 1986 and expressed in the form of a Qualified Joint and Surviving Spouse Annuity or a single life annuity, as of January 1, 1987 exceeds the limitations of this Article, then the Dollar Limit with respect to such Participant shall be equal to his Plan benefit determined as described in this Section. The Dollar Limit as so determined shall include optional benefit forms and early retirement benefits or retirement subsidies that are protected under section 411(d)(6) of the Code, whether or not the Participant has met all the requirements to qualify for such forms or benefits or subsidies, if and to the extent that they remain so protected as of the date on which the limitations of this Article are applied. 10.12 Rules Regarding 25 Top-Paid Employees (a) For purposes of this Section, the following terms shall have the indicated meaning: Benefits. The term "Benefits" means the sum of the Participant's accrued benefit and all other benefits to which he is entitled under the Plan. Restricted Participant. The term "Restricted Participant" means, with respect to a Plan Year, a Highly Compensated Employee who is a Participant and who, if there are more than 25 Highly Compensated Employees, is one of the 25 Highly Compensated Employees with the highest Total Annual Pay. An individual who is a Restricted Participant in a Plan Year shall be a Restricted Participant in a subsequent Plan Year only if he satisfies the conditions of the previous sentence in that subsequent Plan Year. If more than one individual has the same Total Annual Pay, the younger individual shall be deemed to have the higher Total Annual Pay. Total Annual Pay. The term "Total Annual Pay" means, with respect to any Plan Year, (a) in the case of a Highly Compensated Employee who is not currently employed by the Employer or an Affiliate, the greater of his Earnings (as defined in this Article) for the Plan Year he ceased to be employed by the Employer or an Affiliate or his Earnings for the Plan Year immediately preceding such Plan Year and (b) in the case of a Highly Compensated Employee who is currently employed by the Employer or an Affiliate, the greater of his Earnings for the Plan Year in question or for the prior Plan Year. L-3 Communications Corporation Pension Plan 52 (b) Limitation on Distributions. Subject to the further provisions of this Section, a Restricted Participant may not receive his benefits under this Plan in the form of a single sum payment, or other benefit form under which payments during a single year would exceed the annual payments that would be made on behalf of the Participant under a single life annuity that is the Actuarial Equivalent of his Benefits (other than benefits described in paragraph (c)(1) of this Section. (c) Application of Limitation. The limitation of this Section shall not apply to: (1) payment of benefits attributable to transferred balances from defined contribution plans or to employee contributions, (2) any payment, if the value of Plan assets after such payment equals or exceeds 110 percent of the value of the Plan's "current liabilities" (within the meaning of section 412(l)(7) of the Code), or (3) any payment, if the value of the Restricted Participant's benefits is less than one percent of the value of such "current liabilities." (d) Changes in Law. In the event that Congress should provide by statute, or the Internal Revenue Service should provide by regulation or ruling, that the limitations set forth in this section are no longer necessary for the Plan to meet the requirements of section 401(a) of the Code or other applicable provisions of the Code then in effect, such limitations shall become void and shall no longer apply without the necessity of further amendment to the Plan. L-3 Communications Corporation Pension Plan 53 ARTICLE XI. GENERAL PROVISIONS 11.1 No Contract of Employment Nothing contained in the Plan shall be construed as a contract of employment between the Company, the Employer and any Employee, and the Plan shall not afford an Employee a right of continued employment with the Company or the Employer. 11.2 Employer Not Liable for Plan Benefits All benefits payable under the Plan shall be paid or provided for solely from the Trust Fund, and neither the Company nor the Employer assumes any liability or responsibility therefor. 11.3 Exclusive Benefit and Return of Employer Contributions (a) General Rule. Except as provided in this Section, the assets of the Trust Fund shall be used for the exclusive purposes of providing Plan benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan. (b) Tax Deductibility. Contributions are always conditioned upon their deductibility under Code Section 404. (c) Return of Contributions. Contributions may be returned to the Company only: (1) if a contribution is made to the Trust Fund by the Company (or the Employer) by a mistake of fact, then such contribution may be returned to the Company within one year after the payment of the contribution; (2) if any part or all of a contribution is disallowed as a deduction under Section 404 of the Code, then to the extent a contribution is disallowed as a deduction it may be returned to the Company within one year after the disallowance; (3) if the Internal Revenue Service initially determines that the Plan does not meet the requirements of Section 401(a) of the Code, the Plan shall be null and void from the Effective Date and any contributions shall be returned to the Company less expenses paid unless the Company elects to make the changes to the Plan L-3 Communications Corporation Pension Plan 54 necessary to receive a determination from the Internal Revenue Service that the requirements of Section 401(a) are met; (4) if the Plan has been terminated, and the rules set out in Section 9.4 are met, then the excess Plan assets shall revert to the Company. 11.4 Tax Withholding The Committee hereby specifically delegates to the Trustee the responsibility to be liable for income tax withholding, and to withhold the appropriate amount from any payment made from the Trust to any payee under the provisions of applicable law and regulation. 11.5 Incompetency or Minority of Payee (a) General Rule. In the event the Committee determines in its discretion that any Participant or Beneficiary, receiving or entitled to receive benefits under the Plan is incompetent to care for his affairs, and in the absence of the appointment of a legal guardian of the property of the incompetent, benefit payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee or other legal representative) may be made to the spouse, parent, brother or sister or other person, including a hospital or other institution, deemed by the Committee to have incurred or to be liable for expenses on behalf of such incompetent (b) Payment to Adult. In the absence of the appointment of a legal guardian of the property of a minor, any minor's share of benefits payable under the Plan may be paid to such adult or adults as in the discretionary opinion of the Committee have assumed the custody and principal support of such minor. (c) Legal Guardian May Be Required. The Committee, however, in its sole discretion, may require that a legal guardian for the property of any such incompetent or minor be appointed, before authorizing the payment of benefits in such situations. (d) Court Determination. If the Committee is in doubt as to the right of any person to receive a Plan benefit, the Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Trustee to pay such amount into any court of appropriate jurisdiction. L-3 Communications Corporation Pension Plan 55 (e) No Verification or Insurance Required. The Trustee shall not be required to verify or insure that any distributions made to any third parties under this Section are applied for the benefit of such minor or incompetent or incapacitated Beneficiary. 11.6 Missing Payees If all or portion of a Participant's vested Plan benefit becomes payable under the Plan and the Committee after a reasonable search cannot locate the Participant (or his Beneficiary if such Beneficiary is entitled to payment), then, five years after the Participant's benefit first became payable under the Plan, a notice shall be mailed to the last known address of the Participant. If the Participant does not respond within three months, the Committee may elect, upon advice of counsel, to remove all records of the Participant's accrued benefit from the Plan's current records and that benefit shall be used to offset future Employer contributions. If the Participant or his Beneficiary subsequently presents a valid claim for benefits to the Committee, the Committee shall restore and pay the appropriate Plan benefit. 11.7 Alienation and QDROs (a) General Rule. Except as provided in this Section, no accrued Plan benefit whether vested or not, shall be subject to alienation, assignment, pledging, encumbrance, attachment, garnishment; including but not limited to execution, sequestration, or other legal or equitable process, or transferability by operation of law in the event of bankruptcy, insolvency or otherwise. (b) QDRO Exception. The provisions of the preceding paragraph shall not prevent the creation, assignment or recognition of any individual's right to a benefit payable with respect to a Participant pursuant to a Qualified Domestic Relations Order (QDRO). (c) QDRO Definition. "Qualified Domestic Relations Order" or "QDRO" shall mean any judgment, decree or order which (1) meets the basic requirements of Code Section 414(p) and further (2) meets the QDRO requirements set out in the Plan procedures, concerning domestic relations orders, as determined by the final, discretionary authority of the Committee. (d) QDRO Procedures. The Committee shall establish reasonable procedures to determine whether a domestic relations order is a QDRO and to administer distributions under a QDRO. If any domestic relations order is received by the Plan, the Committee shall L-3 Communications Corporation Pension Plan 56 (1) promptly notify the Participant and any Alternate Payee that the order has been received and of the Plan's procedures for determining whether the order is a QDRO and (2) notify the Participant and each Alternate Payee (or their representatives) of the Committee's determination. (e) Definition of Alternate Payee. "Alternate Payee" shall mean any spouse, former spouse, child or other dependent of a Participant recognized by a proper domestic relations order as having a right to receive all, or a portion of, a Participant's benefits under the Plan, as prescribed under Code Section 414(p). (f) Court Order After Death. Should any court order be issued after a Participant's or Alternate Payee's death, it will be considered a QDRO only if it (1) relates to and reflects an earlier order issued before death, and (2) meets the QDRO requirements. (g) Committee Authority. The Committee shall have final, discretionary authority to administer and interpret any QDRO, including any uncertain terms. 11.8 Notice to Committee, Elections Any election made or notice given by a Participant pursuant to the Plan shall be in writing to the Committee or to such representative as may be designated by it for such purpose and shall be deemed to have been made or given on the date received by the Committee or its representative. 11.9 Merger or Transfer With Other Plans The Board shall have the power to fully or partially merge or consolidate this Plan with any other plan. In the event of any merger or consolidation of the Plan (by action of the Board) with, or a transfer of the assets and liabilities of the Plan to, any other plan, each Participant must (if such other plan were terminated immediately after such merger, consolidation or transfer) receive a benefit under such other plan which is equal to or greater than the benefit he would have been entitled to receive under the Plan (if the Plan had been terminated immediately prior to such merger, consolidation or transfer). 11.10 Fiduciaries Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan. L-3 Communications Corporation Pension Plan 57 11.11 Plans Shall Comply with Law; and Choice of Law It is intended that the Plan conform to and meet the applicable requirements of ERISA and the Code. Except to the extent preempted by ERISA, the validity of the Plan or of any of its provisions shall be determined under, and it shall be construed and administered according to, the laws of the State of New York (including its statute of limitations and all substantive and procedural law, and without regard to its conflict of laws provisions). 11.12 Deemed Distribution of Unvested Amounts Notwithstanding any contrary provision of the Plan, in the event that (a) a Participant separates from the Service with the Company, and (b) the Participant has not, as of the date he separates from service, met the Service and other requirements that would enable him to be 100% vested in all his accrued Plan benefits, then, (c) as of the date he separates from Service, he shall be deemed to have received a distribution of his unvested accrued benefits under the Plan. The amount of this deemed distribution shall be zero. Following this deemed distribution, the Participant's remaining accrued Plan benefits shall be only those benefits in which is 100% vested. 11.13 Gender and Number Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 11.14 Headings The headings of Sections and Articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. 11.15 Illegality of Particular Provisions The illegality of any particular provision of this Plan shall not affect the other provisions thereof, but the Plan shall be construed in all respects as if such invalid provision were omitted. L-3 Communications Corporation Pension Plan 58 11.16 Receipt and Release for Payments Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for each Participant, or Beneficiary in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee, the Company, and the Employer, any of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or the Company. 11.17 Action by the Company Whenever the Company under the terms of this Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 11.18 Mistaken Payments No Participant or Beneficiary shall have any right to any payment made (a) in error, (b) in contravention to the terms of the Plan, the Code, or ERISA, or (c) because the Committee or its delegates were not informed of any death. The Committee shall have full rights under the law and ERISA to recover any such mistaken payment, and the right to recover attorney's fees and other costs incurred with respect to such recovery. Recovery shall be made from future Plan payments, or by any other available means. 11.19 Participants and Beneficiaries Bound by the Plan All Employees, Participants, Beneficiaries, as well as their heirs, successors, and assigns shall be bound by the terms of this Plan. 11.20 Direct Rollover Distributions to Other Plans or IRAs (a) General Rule. A Distributee (as defined in this Section) may elect, under Plan procedures, to have all or any portion of his proper Plan distribution transferred in a trust-to-trust transfer from the Trust Fund to another qualified plan, certain "IRAs" and certain other vehicles, subject to the restrictions of this Section. (b) Definition of "Distributee". For the purposes of this Section only, a "Distributee" is a Participant, Former Participant, surviving spouse, or Alternate Payee, who is eligible under the Plan and Plan procedures L-3 Communications Corporation Pension Plan 59 to receive any Plan distribution. Distributees shall not include any other non-spouse Beneficiary. (c) Limits on Distributions Eligible for Direct Rollover. Generally, all or any portion of the accrued, vested Plan benefit payment attributable to the Distributee would be eligible for a trust-to-trust transfer under this Section, provided that the amount is includable in gross income. However, the following distributions are not eligible: (1) periodic payments paid out over the life or life expectancy of the Distributee (or joint lives of the Distributee and his Beneficiary); (2) equal installment payments scheduled to be made over 10 or more years; (3) the portion of any distribution that is required to be paid under Code Section 401(a)(9). (d) Limits on recipient plans and IRAs. A trust-to-trust transfer from the Trust Fund under this Section can be made only to the trustee or custodian of one of the following "eligible retirement plans" listed below, provided that the transfer is made under Plan procedures, and that the trustee or custodian accepts the trust-to-trust transfer. However, only one trust-to-trust transfer can be made with respect to any single distribution. Such "eligible retirement plans" are: (1) a qualified defined contribution plan; (2) an individual retirement account or "IRA," which holds or which will hold only amounts attributable to qualified employer plans, as described by Code Section 408(d)(3); (3) an individual retirement annuity described in Code Section 408(b); and (4) an annuity plan described in Code Section 403(a). (e) Limits on direct rollovers made by surviving spouses. Distributees who are surviving spouses, but who are not alternate payees as described by Code Section 414(p), will be able to elect a trust-to-trust transfer only to an IRA or an individual retirement annuity, subject to all of the preceding rules of this Section. L-3 Communications Corporation Pension Plan 60 11.21 Transfers Among Affiliates (a) Service among Affiliates credited for eligibility and vesting. Generally, Service performed for the Employer or any Affiliate will be credited among all Affiliates for the purposes of eligibility and vesting. Should a Plan Participant be transferred and become an Employee of an Affiliate, then he may be eligible to immediately become a participant in the new employer's plan, provided that (i) he has sufficient Service under the new plan's eligibility provisions and (2) he has submitted to the new plan all the proper forms by the appropriate deadline. (b) Vesting continues after transfer. Any Participant who transfers employment to an Affiliate shall not be treated as having terminated employment for vesting and distribution purposes. That is, his vesting under the Plan shall continue during his Service with the Affiliate, and he may not receive a distribution of Plan benefits until his Service with the Employer and any Affiliate ceases (or until the April 1, following the year he reaches age 70 1/2 or retires). However, no Accrual Service shall accrue under this Plan, upon his transfer to the Affiliate. (c) Transfer following a Break in Service. This Subsection (c) concerns the situation of an individual who has worked for the Employer or an Affiliate, terminates employment from that employer, but does not immediately transfer to the Employer or an Affiliate. Instead, this Subsection (c) concerns those individuals who incur a period during which they are not employed by the Employer or an Affiliate, and then, subsequently, become reemployed by the Employer or an Affiliate. (1) If such an individual (described in the introductory paragraph of this Subsection (c) does not incur a Break in Service prior to his subsequent reemployment with the Employer or an Affiliate (determined under the sole discretion of the administrator of the new employer's plan under the terms of that plan), then the period of time preceding his employment with the Employer or an Affiliate (following his termination with the Employer or Affiliate) shall be credited for the purpose of eligibility and vesting. (2) If such an individual has incurred a Break in Service (determined under the sole discretion of the administrator of the new employer's plan, under the terms of that plan) then the terms of the new employer's plan shall govern how the individual's total L-3 Communications Corporation Pension Plan 61 service among the Employer and all Affiliates shall be credited, for the purposes of the new employer's plan. (3) If an individual described in this Subsection (c) has incurred one or more Breaks in Service under the terms of his first employer's plan, and has consequently lost the recognition of pre-Break in Service under the first employer's plan, then any provisions in the first employer's plan regarding (i) repayment of distributed amounts back into the first employer's plan, within five years of "rehire" by the Employer or an Affiliate in order to have forfeited amounts restored by the first employer's plan and pre-Break Service recognized by both plans and (ii) completing one year of Service with the new employer in order to have forfeited amounts restored under the former employer's plan and pre-Break Service recognized by both plans must be acknowledged and effected by the administrator of the new employer's plan, as if these provisions in the first employer's plan were fully a part of the new employer's plan. It will therefore be necessary for the administrators of the two plans to share information concerning the individual. L-3 Communications Corporation Pension Plan 62 ARTICLE XII. TOP-HEAVY PROVISIONS 12.1 Applicable Plans Included in Determination of "Top Heavy" Status For purposes of this Article, "Applicable Plans" shall include (a) each plan of the Employer or an Affiliate in which a Key Employee (as defined in the next Section for this Plan, and as defined in section 416(i) of the Code for each other Applicable Plan) participates and (b) each other plan of the Employer or an Affiliate which enables any plan described in clause (a) of this sentence to meet the requirements of section 401(a)(4) or 410 of the Code. Any plan not required to be included under the preceding sentence may also be included, at the option of the Committee, provided that the requirements of sections 401(a)(4) and 410 of the Code continue to be satisfied for the group of Applicable Plans after such inclusion. Applicable Plans may include terminated plans, frozen plans and, to the extent that benefits are provided with respect to Service with the Employer or an Affiliate, multi-employer plans (described in section 414(f) of the Code) and multiple employer plans (described in section 413(c) of the Code) to which the Employer or an Affiliate makes contributions. 12.2 "Key Employee" For purposes of this Article, "Key Employee" shall mean an employee (including a former employee, whether or not deceased) of the Employer or an Affiliate who, at any time during a given Plan Year or any of the four preceding Plan Years, is one or more of the following: (a) An officer of the Employer or an Affiliate having "compensation" (as defined in section 414(q)(7) of Code) ("Top-Heavy Compensation") greater than fifty percent (50%) of the maximum dollar limitation described in the Article entitled "Limitation of Benefits" for any such Plan Year; provided, that the number of employees treated as officers shall be no more than 50 or, if fewer, the greater of three employees or 10% of the employees (including leased employees as described in Code Section 414), exclusive of employees described in section 414(q)(8) of the Code. (b) One of the 1) employees (a) having Top-Heavy Compensation of more than the maximum dollar limitation for defined contribution plans in effect under section 415(c)(1)(A) of the Code and (b) owning (or considered as owning, within the meaning of section 416(i) the Code), the largest percentage interests in value of the Employer or an Affiliate, provided that such percentage interest exceeds 0.5% in value. If two employees have the same interest in the Employer or an L-3 Communications Corporation Pension Plan 63 Affiliate, the employee having the greater Top-Heavy Compensation shall be treated as having the larger interest. (c) A person owning or considered as owning, within the meaning of section 416(i) of the Code, more than 5% of the outstanding stock of the Employer or an Affiliate, or stock possessing more than 5% of the total combined voting power of all stock of the corporation (or having more than 5%) of the capital or profits interest in the Employer or an Affiliate that is not a corporation, determined under similar principles). (d) A 1% owner of the Employer or an Affiliate having Top-Heavy Compensation of more than $150,000. "One-percent owner" means any person who would be described in the preceding paragraph if "1%" were substituted for "5%" in each place where it appears therein. 12.3 "Top Heavy" Test In any Plan Year during which the sum, for all Key Employees (as defined in this Section and as defined in section 416(i) of the Code for each other Applicable Plan) (and their beneficiaries) of the present value of the cumulative accrued benefits under all Applicable Plans which are defined benefit plans (determined based on an interest assumption of 5% and the UP-1984 mortality table) and the aggregate of the accounts under all Applicable Plans which are defined contribution plans, exceeds 60% of a similar sum determined for all participants in such plans (but excluding participants who are former Key Employees), the Plan shall be deemed "Top Heavy". Solely for purposes of determining whether this Plan or any other Applicable Plan is "Top Heavy" for a given Plan Year, the accrued benefit of a participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all Applicable Plans that are defined benefit plans maintained by the Employer or an Affiliate, or (b) if there is no method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of section 411(b)(1)(C) of the Code. 12.4 Determination Dates The determination as to whether this Plan is "Top Heavy" for a given Plan Year shall be made as of the last day of the preceding Plan Year (the "Determination Date"); and other Applicable Plans shall be included in determining whether this Plan is "Top Heavy" based on the determination date (as defined in section 414(g)(4)(C) of the Code) for each such plan which occurs in the same calendar year as such Determination Date for this Plan. The date on which plan benefits are valued for the purpose of determining the topheaviness of any Applicable Plan L-3 Communications Corporation Pension Plan 64 which is a defined benefit plan shall be the most recent valuation date used for determining such plan's minimum funding requirements that occurs during the 12- month period ending on the Determination Date. The date on which plan assets are valued for the purpose of determining the topheaviness of an Applicable Plan which is a defined contribution plan is the most recent valuation date used for valuing plan assets that occurs during the 12-month period ending on the Determination Date. 12.5 Add-Back of Prior Distributions Subject to the next Section, distributions from the Plan or any other Applicable Plan during the five-year period ending on the applicable determination date shall be taken into account in determining whether the Plan is "Top Heavy." 12.6 Former Employees Disregarded after Five Plan Years Benefits and distributions under this Plan or any other Applicable Plan shall not be taken into account with respect to any individual who has not performed any services as an employee for the Employer or an Affiliate at any time during the five-year period ending on the applicable determination date. 12.7 Compliance with Section 416 of the Code The calculation of the Top-Heavy ratio, and the extent to which distributions, amounts attributable to rollovers or similar transfers to and from this Plan or any other Applicable Plan shall be taken into account in accordance with section 416 of the Code and applicable regulations. 12.8 Beneficiaries The terms "Key Employee" and, for purposes of this Article "participant" include their beneficiaries. 12.9 Provisions Applicable in "Top Heavy" Plan Years For any Plan Year in which the Plan is deemed to be "Top Heavy", the following provisions shall apply: (a) Minimum Accrued Benefit. The accrued benefit derived from Employer contributions under the Plan of each Participant who is not a Key Employee, expressed as an annual benefit in single life annuity form beginning at Normal Retirement Date, shall be at least (a) 2% of the average of such Participant's Top-Heavy Compensation not in excess of the limits under section 401(a)(17) of the Code, for the five L-3 Communications Corporation Pension Plan 65 calendar years in which such average is highest (excluding any such year after the Plan ceased to be "Top Heavy" or during which the Participant had less than 1,000 Hours of Service) multiplied by (b) the number of Plan Years beginning on or after January 1, 1984 during which the Plan is "Top Heavy" and he has at least 1,000 Hours of Service, but not more than 10 years. The foregoing provisions of this paragraph shall apply before the corresponding provision of any Applicable Plan that is a defined contribution plan, and shall, to the extent necessary or appropriate, be deemed satisfied in whole or in part by benefits to the Participant provided under any other Applicable Plan, including without limitation, the actuarial equivalent of accumulated account balances derived from employer contributions under any defined contribution plan (other than employer contributions described in section 401(k) of the Code). A Participant's accrued benefit, determined as of the last day of any Plan Year in which the Plan ceases to be "Top Heavy", shall not be reduced because the Plan ceased to be "Top Heavy". (b) Adjustment of Combined Limits. Except as otherwise provided by law, "125%" in the Article entitled Limitation of Benefits shall become "100%" unless the following conditions are met: (a) the percentage described in the Top-Heavy Test in this Article does not exceed 90%, and (b) the Company amends paragraph (a) of this Section to substitute "3%" for "2%" therein. Notwithstanding any other provision of this Plan, if the sum of the combined limitation fractions described in the Article entitled Limitation of Benefits, calculated by substituting "100%" for "125%" therein, for any Participant exceeds 100% for the last Plan Year before the Plan becomes "Top Heavy", such fractions shall be adjusted, in accordance with applicable regulations, so that their sum does not exceed 100% for such Plan Year. (c) Vesting. Any Participant shall be vested in his accrued benefit derived from employer contributions on a basis at least as favorable as is provided under the following schedule: L-3 Communications Corporation Pension Plan 66 Completed Years of Vesting Service Nonforfeitable Interest ------------------------ ----------------------- 2 20% 3 40 4 60 5 100 In any Plan Year in which the Plan is not deemed to be "Top Heavy", the minimum vested percentage shall be no less than that which was determined as of the last day of the last Plan Year in which the Plan was deemed to be "Top Heavy". IN WITNESS WHEREOF, this L-3 Communications Corporation Pension Plan is hereby adopted effective April 30, 1997. L-3 COMMUNICATIONS CORPORATION By:_____________________________________ Title:__________________________________ L-3 Communications Corporation Pension Plan 67 EXHIBIT A. ACTUARIAL EQUIVALENT FACTORS 1. Conversion of life annuity into 50% joint and survivor annuity -- multiply life annuity benefit by 86% minus (or plus) 0.6% for each full year the Participant is older (or younger) than age 65, minus (or plus) 0.5% for each full year the Participant is older (or younger) than the Eligible Spouse. 2. Conversion of life annuity into 100% joint and survivor annuity -- multiply life annuity benefit by 75% minus (or plus) 0.6% for each full year the Participant is older (or younger) than age 65, minus (or plus) 1.0% for each full year the Participant is older (or younger) than the Eligible Spouse. 3. Conversion of life annuity into life annuity with 10-year period certain guarantee -- multiply life annuity benefit by 91% plus 0.7% for each full year the Participant is younger than age 65, or minus 0.7% for each full year the participant is older than age 65. 4. Conversion of life annuity into life annuity with 15-year period certain guarantee -- multiply life annuity benefit by 82.5% plus 1.3% for each full year the Participant is younger than age 65, or minus 1.3% for each full year the Participant is older than age 65. 5. Conversion of life annuity into life annuity with 20-year period certain guarantee -- multiply life annuity benefit by 74% plus 1.6% for each full year the Participant is younger than age 65, or minus 1.6% for each full year the Participant is older than age 65. 6. All other conversions -- use 1971 Group Annuity Mortality Table assuming an 80% male mix and 7% annual interest (5% annual interest for purposes of Article X); provided, however, that for purposes of converting a retirement benefit or spouse's benefit into a lump sum, the lump sum will be determined on the basis of the Pension Benefit Guaranty Corporation interest rate for immediate and deferred annuities on plan terminations in effect on the January 1 of the calendar year in which such lump sum is paid. NOTE: All ages are to be determined as age at nearest birthday; and all conversion factors are not to exceed 99%. 7. In determining the present value of any vested accrued benefit under this Plan, the interest rate used shall be no greater than the rate that would be used, as of the distribution date, by the Pension Benefit Guaranty Corporation for the purposes of determining the present value of a distribution (immediate or deferred, as is applicable) on plan termination (the "Applicable Interest Rate"). L-3 Communications Corporation Pension Plan 1 The Applicable Interest Rate used shall be the rate in effect by the PBGC on the first day of the calendar year that contains the relevant Annuity Starting Date. The Applicable Interest Rate shall be used only if the present value of the vested accrued benefit is $25,000 or less, (as a result of using the Applicable Interest Rate). 8. However, if after using the Applicable Interest Rate, the present value of the vested accrued benefit exceeds $25,000, then the present value shall be recalculated, using an interest rate that is no greater than 120% of the Applicable Interest Rate. However, in this event, the distributed amount shall not be reduced to any amount below $25,000. L-3 Communications Corporation Pension Plan 2 EXHIBIT B. CONTRIBUTORY BENEFITS
Monthly Amount of Contributory Name of Contributory Benefit Payable as a Life Participant Annuity Commencing at Age 55 - ---------------------- ------------------------------ BENENSON, C. 187.77 CARROLL, MELVIN 69.84 CIPRIANI, PHILIP 63.69 DAVIS, ALLEN H. 47.92 GLEIMER, LEON 35.29 HISCHE, EDWARD H. 16.11 IERVOLINO, NICK 45.24 IRIZARRY, REYNALDO 3.92 MARCIANO, JOHN 9.99 OWSICK, ALEXANDER 37.54 PENN, HAROLD 144.67 PLOTKIN, MURRAY 55.07 SACKS, MARVIN 69.97 SCHWARTZ, WALTER 30.30 SOLOMON, MURRAY 161.58 TURF, HAROLD 32.99 WONG, KENNETH L. 74.37
L-3 Communications Corporation Pension Plan 3 EX-12 6 L-3 COMMUNICATIONS CORPORATION COMPUTATION OF RATIO OF EARNINGS L-3 COMMUNICATIONS CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS, EXCEPT FOR RATIO DATA)
PRO FORMA COMPANY PREDECESSOR COMPANY ------- ------------------- YEAR FOR THE NINE FOR THE THREE YEARS ENDED DECEMBER 31, FOR THE NINE FOR THE THREE ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, 1997 1997 1997 1996 1995 1994 1993 1993 ------------ ------------- ------------- --------- ------- ------- ------------- ------------ Earnings: Income before income taxes $14,400 $27,402 ($505) $19,494 $174 $2,929 $8,300 $5,100 Add: Interest expense 43,800 29,884 8,441 24,197 4,475 5,450 4,100 - Interest component of rent expense 5,133 3,445 851 2,832 1,591 1,866 1,400 467 ------------ ------------- ------------- --------- ------- ------- ------------- ------------ Earnings $63,333 $60,731 $8,787 $46,523 $6,240 $10,245 $13,800 $5,567 ============ ============= ============= ========= ======= ======= ============= ============ Fixed Charges: Interest expense $43,800 $29,884 $8,441 $24,197 $4,475 $5,450 $4,100 - Interest component of rent expense 5,133 3,445 851 2,832 1,591 1,866 1,400 467 ------------ ------------- ------------- --------- ------- ------- ------------- ------------ Fixed Charges $48,933 $33,329 $9,292 $27,029 $6,066 $7,316 $5,500 $467 ============ ============= ============= ========= ======= ======= ============= ============ Ratio of earnings to fixed charges 1.3x 1.8x N/A (a) 1.7x 1.0x 1.4x 2.5x N/A (b) ============ ============= ============= ========= ======= ======= ============= ============
(a) For the three months ended March 31, 1997, earnings were insufficient to cover fixed charges by $0.5 million. (b) For the three months ended March 31, 1993, no interest expense was incurred. EX-99.1 7 UNITED PRO FORMA CONDENSED CONSOLIDATED FIN STATEMENT UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma financial information gives effect to the L-3 Acquisition, the 1998 Acquisitions and the Offerings (collectively, the "Transactions"). The Offerings include the Notes Offering and the contribution by Holdings to the Company of the proceeds of the Common Stock Offering. The unaudited pro forma condensed consolidated statement of operations gives effect to the Transactions as if they had occurred as of January 1, 1997. The unaudited pro forma condensed consolidated balance sheet gives effect to the Transactions as if they had occurred as of December 31, 1997. The pro forma financial information is based on (i) the consolidated financial statements of the Company for the nine-month period ended December 31, 1997, (ii) the Combined Statement of Operations of the Predecessor Company for the three-month period ended March 31, 1997 and (iii) the financial statements of the 1998 Acquisitions for the year ended December 31, 1997, using the purchase method of accounting and the assumptions and adjustments in the accompanying notes to the unaudited pro forma condensed consolidated financial statements. The pro forma adjustments are based upon preliminary estimates. Actual adjustments will be based on final appraisals and other analyses of fair values and adjustment of the final purchase price. Changes between preliminary and final allocations for the valuation of contracts-in-process, inventories, fixed assets, pension liabilities and deferred taxes could be material. The pro forma statement of operations does not reflect any cost savings that management of the Company believes would have resulted had the Transactions occurred on January 1, 1997. The pro forma financial information should be read in conjunction with (i) the audited Consolidated (Combined) Financial Statements of the Company and the Predecessor Company as of December 31, 1997 and for the nine months ended December 31, 1997 and the three months ended March 31, 1997, (ii) the audited financial statements of STS for the year ended June 30, 1997, (iii) the unaudited condensed financial statements of STS as of December 31, 1997 and for the six months ended December 31, 1997 and 1996, (iv) the audited consolidated financial statements of ILEX as of December 31, 1997 and for the year ended December 31, 1997 and (v) the audited combined financial statements of Ocean Systems as of December 31, 1997 and for the year ended December 31, 1997, all of which are included elsewhere herein. The unaudited pro forma condensed financial information may not be indicative of the financial position and results of operations of the Company that actually would have occurred had the Transactions been in effect on the dates indicated or the financial position and results of operations that may be obtained in the future. 1 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER DATA YEAR ENDED DECEMBER 31, 1997
PREDECESSOR COMPANY COMPANY NINE MONTHS THREE MONTHS PRO FORMA ENDED ENDED ADJUSTMENTS DECEMBER 31, MARCH 31, L-3 1997 1997(1) ACQUISITION(1) -------------- -------------- ---------------- ($ in millions) STATEMENT OF OPERATIONS DATA: Sales............. $546.5 $158.9 $(1.8) Costs and expenses......... 490.6 151.0 (3.2) -------------- -------------- ---------------- Operating income (loss) . 55.9 7.9 1.4 Interest and investment income (expense)........ 1.4 -- -- Interest expense . 29.9 8.4 1.5 -------------- -------------- ---------------- Income (loss) before income taxes.......... 27.4 (0.5) (0.1) Income tax expense (benefit)........ 10.7 (0.2) -- -------------- -------------- ---------------- Net income (loss)......... $ 16.7 $ (0.3) $(0.1) ============== ============== ================ OTHER DATA: EBITDA(7)......... $ 78.1 Depreciation expense.......... 13.3 Amortization expense ......... 8.9 Capital expenditures .... 11.9 Ratio of earnings to fixed charges(8)....... 1.8x Ratio of EBITDA(7) to cash interest expense(9)....... 2.8x Ratio of net debt to EBITDA(7).....
(RESTUBBED TABLE CONTINUED FROM ABOVE)
PRO FORMA ADJUSTMENTS PRO FORMA PRO FORMA --------------- COMPANY L-3 1998 1998 BEFORE THE THE ACQUISITION ACQUISITIONS(3) ACQUISITIONS OFFERINGS OFFERINGS PRO FORMA ------------- --------------- -------------- ------------ ----------- ----------- STATEMENT OF OPERATIONS DATA: Sales............. $703.6 $190.4 $ -- $894.0 $ -- $894.0 Costs and expenses......... 638.4 196.3 1.0 (4) 835.7 -- 835.7 ------------- --------------- -------------- ------------ ----------- ----------- Operating income (loss) . 65.2 (5.9) (1.0) 58.3 -- 58.3 Interest and investment income (expense)........ 1.4 (0.1) (1.4)(5) (0.1) -- (0.1) Interest expense . 39.8 0.5 5.2 (5) 45.5 (1.7)(5) 43.8 ------------- --------------- -------------- ------------ ----------- ----------- Income (loss) before income taxes.......... 26.8 (6.5) (7.6) 12.7 1.7 14.4 Income tax expense (benefit)........ 10.5 (4.0) (3.0)(6) 3.5 0.7 (6) 4.2 ------------- --------------- -------------- ------------ ----------- ----------- Net income (loss)......... $ 16.3 $ (2.5) $(4.6) 9.2 $ 1.0 $ 10.2 ============= =============== ============== ============ =========== =========== OTHER DATA: EBITDA(7)......... $ 95.1 $ 95.1 Depreciation expense.......... 22.0 22.0 Amortization expense ......... 14.8 14.8 Capital expenditures .... 19.9 19.9 Ratio of earnings to fixed charges(8)....... 1.3x 1.3x Ratio of EBITDA(7) to cash interest expense(9)....... 2.2x 2.3x Ratio of net debt to EBITDA(7)..... 4.9x 4.0x
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 2 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997
PRO FORMA ADJUSTMENTS PRO FORMA -------------- COMPANY 1998 1998 BEFORE THE THE COMPANY ACQUISITIONS(3) ACQUISITIONS OFFERINGS OFFERINGS(5) PRO FORMA --------- --------------- -------------- ------------ ------------ ----------- ($ IN MILLIONS) ASSETS Current assets: Cash and cash equivalents............ $ 77.5 $ 4.9 $(82.4)(4) -- $ 50.0 $ 50.0 Contracts in process................. 167.2 85.2 (2.5)(4) $249.9 -- 249.9 Other current assets................. 22.7 2.0 -- 24.9 -- 24.7 --------- --------------- -------------- ------------ ------------ ----------- Total current assets............... 267.4 92.1 (84.9) 274.6 50.0 324.6 --------- --------------- -------------- ------------ ------------ ----------- Property, plant and equipment, net ... 83.0 24.9 (3.4)(4) 104.5 -- 104.5 Intangibles, primarily cost in excess of net assets acquired, net of amortization......................... 297.5 2.2 91.7 (4) 391.4 -- 391.4 Other assets.......................... 55.5 2.5 12.0 (6) 70.0 5.5 75.5 --------- --------------- -------------- ------------ ------------ ----------- Total assets....................... $703.4 $121.7 $ 15.4 $840.5 $ 55.5 $896.0 ========= =============== ============== ============ ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ... $ 5.0 $ 0.3 -- $ 5.3 $ (3.2) $ 2.1 Accounts payable and accrued expenses............................ 68.6 30.6 -- 99.2 -- 99.2 Customer advances and amounts in excess of costs incurred............. 34.5 16.2 -- 50.7 -- 50.7 Other current liabilities............ 27.5 6.2 -- 33.7 -- 33.7 --------- --------------- -------------- ------------ ------------ ----------- Total current liabilities.......... 135.6 53.3 -- 188.9 (3.2) 185.7 --------- --------------- -------------- ------------ ------------ ----------- Pension, postretirement benefits and other liabilities.................... 43.1 11.0 -- 54.1 -- 54.1 Revolving credit facility............. -- -- $ 71.5 (2) 71.5 (71.5) -- Term loan facilities.................. 167.0 -- -- 167.0 (111.8) 55.2 Senior subordinated notes............. 225.0 -- -- 225.0 150.0 375.0 Industrial development bond........... -- 1.3 -- 1.3 1.3 Shareholders' equity.................. 132.7 56.1 (56.1) 132.7 92.0 224.7 --------- --------------- -------------- ------------ ------------ ----------- Total liabilities and shareholders' equity.............. $703.4 $121.7 $ 15.4 $840.5 $ 55.5 $896.0 ========= =============== ============== ============ ============ ===========
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 3 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following facts and assumptions were used in determining the pro forma effect of the Transactions. 1. The Company's historical financial statements reflect the results of operations of the Company since the effective date of the L-3 Acquisition, April 1, 1997, and the Predecessor Company historical financial statements reflect the results of operations of the Predecessor Company for the three months ended March 31, 1997. The adjustments made to the pro forma statement of operations for the three months ended March 31, 1997, relating to the Predecessor Company are: (a) the elimination of $1.8 million of sales and $1.8 million of costs and expenses related to the Hycor business, which was acquired as part of the L-3 Acquisition and which has been accounted for as "net assets of acquired business held for sale", (b) a reduction to costs and expenses of $0.8 million to record amortization expenses on the excess of the L-3 Acquisition purchase price over net assets acquired of $303.2 million over 40 years, net of the reversal of amortization expenses of intangibles included in the Predecessor Company historical financial statements, (c) a reduction to costs and expenses of $0.6 million to record estimated pension cost on a separate company basis net of the reversal of the allocated pension cost included in the Predecessor Company historical financial statements and (d) a net increase to interest expense of $1.5 million, comprised of a $0.2 million allocated interest expense reduction related to the Hycor business and a net $1.7 million increase related to the Company's assumed cost of borrowing rate of 10.15% and borrowings of $400.0 million compared to an assumed cost of borrowing rate of 7.10% and borrowings of $473.6 million reflected in the historical financial statements of the Predecessor Company. A statutory (federal, state and foreign) tax rate of 39.0% was assumed on these pro forma adjustments. 2. On February 5, 1998, L-3 Communications purchased the assets of STS for $27.0 million of cash. On February 10, 1998, L-3 Communications entered into a definitive agreement to purchase substantially all the assets of ILEX for $51.9 million of cash plus additional consideration contingent upon post-acquisition performance of ILEX. On December 22, 1997, L-3 Communications entered into a definitive agreement to purchase the assets of Ocean Systems for $67.5 million of cash. The ILEX and Ocean Systems acquisitions are expected to close in the first quarter of 1998. All of the aforementioned purchase prices are subject to adjustment based upon the actual closing net assets or working capital as defined. For purposes of the pro forma financial information, the aggregate purchase prices (including estimated expenses of $2.6 million) for the 1998 Acquisitions of $149.0 million were assumed to be financed using cash on hand of $77.5 million and initially using $71.5 million of borrowings under the Revolving Credit Facility. See Note 5 for the pro forma effects of the Offerings on interest expense and long-term debt including the Revolving Credit Facility. 3. The pro forma statement of operations and the pro forma balance sheet include the following historical financial data for the 1998 Acquisitions. Such data have been derived from each entity's historical financial statements included elsewhere herein. The pro forma statement of operations includes the following:
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------- OCEAN 1998 STS(A) ILEX SYSTEMS ACQUISITIONS -------- ------- --------- -------------- ($ IN MILLIONS) Sales.................................... $53.9 $63.5 $73.0 $190.4 Costs and expenses....................... 61.7 55.9 78.7 196.3 -------- ------- --------- -------------- Operating (loss) income................ (7.8) 7.6 (5.7) (5.9) Interest and investment income (expense)............................... -- (0.2) 0.1 (0.1) Interest expense......................... -- -- 0.5 0.5 -------- ------- --------- -------------- Income (loss) before income taxes ..... (7.8) 7.4 (6.1) (6.5) Income tax (benefit) provision .......... (2.1) 0.5 (2.4) (4.0) -------- ------- --------- -------------- Net (loss) income...................... $(5.7) $ 6.9 $(3.7) $ (2.5) ======== ======= ========= ==============
- ------------ (a) Represents fiscal year ended June 30, 1997 plus the six month period ended December 31, 1997 minus the six month period ended December 31, 1996. 4 For the 1998 Acquisitions, the pro forma balance sheet includes the following historical financial data:
OCEAN 1998 STS ILEX SYSTEMS ACQUISITIONS ------- ------- --------- -------------- ($ IN MILLIONS) ASSETS Current assets: Cash and cash equivalents....................................... -- $ 4.9 -- $ 4.9 Contracts in process............................................ $32.6 13.2 $39.4 85.2 Other current assets............................................ -- 0.3 1.7 2.0 ------- ------- --------- -------------- Total current assets........................................... 32.6 18.4 41.1 92.1 ------- ------- --------- -------------- Property, plant and equipment, net............................... 7.2 0.9 16.8 24.9 Intangibles, primarily cost in excess of net assets acquired, net of amortization............................................. -- 0.4 1.8 2.2 Other assets..................................................... -- 0.1 2.4 2.5 ------- ------- --------- -------------- Total assets................................................... $39.8 $19.8 $62.1 $121.7 ======= ======= ========= ============== LIABILITIES AND NET ASSETS Current liabilities: Current portion of long-term debt............................... $ 0.2 $ 0.1 -- $ 0.3 Accounts payable and accrued expenses........................... 6.5 5.4 $18.7 30.6 Customer advances and amounts in excess of costs incurred ...... -- -- 16.2 16.2 Other current liabilities....................................... 3.7 2.5 -- 6.2 ------- ------- --------- -------------- Total current liabilities...................................... 10.4 8.0 34.9 53.3 ------- ------- --------- -------------- Pension, postretirement benefits and other liabilities .......... -- -- 11.0 11.0 Industrial development bond...................................... 1.3 -- -- 1.3 Net assets....................................................... 28.1 11.8 16.2 56.1 ------- ------- --------- -------------- Total liabilities and net assets............................... $39.8 $19.8 $62.1 $121.7 ======= ======= ========= ==============
4. The aggregate estimated excess of purchase price over fair value of net assets acquired of the 1998 Acquisitions of $93.9 million relates to Ocean Systems ($51.8 million) and ILEX ($42.1 million) and is being amortized over 40 years resulting in a pro forma charge of $2.3 million per annum. The pro forma balance sheet includes an incremental increase to costs in excess of net assets acquired of $91.7 million after considering acquired cost in excess of net assets acquired of $2.2 million included in the 1998 Acquisitions historical financial statements. Other adjustments to the pro forma balance sheet include reductions to cash of $82.4 million representing the use of $77.5 million of the Company's historical cash assumed to have been used to fund partially the 1998 Acquisitions and the elimination of $4.9 million of cash included in the 1998 Acquisitions historical financial statements but not acquired by the Company. Contracts-in-process pro forma adjustments include a net reduction of $2.5 million to reflect $1.0 million of accounts receivable not acquired relating to ILEX, an inventory write-up to fair value of $3.5 million primarily related to finished goods at Ocean Systems and a reduction of $5.0 million relating to the valuation of acquired contracts-in-process at contract price, less the estimated cost to complete and an allowance for normal profit margin on the Company's effort to complete such contracts. The pro forma balance sheet includes a reduction to fixed assets of $3.4 million to eliminate net book value of the Ocean Systems Sylmar facility which will not be acquired by L-3 Communications. The fair value of other fixed assets is not expected to differ materially from their historical carrying amounts. The pro forma statement of operations does not reflect any adjustments related to the inventory write-up and the valuation of acquired contracts-in-process since such adjustments are neither recurring nor material. 5 A net increase of $1.0 million was made to the costs and expenses data in the pro forma statement of operations relating to the 1998 Acquisitions, comprised of the following:
($ in millions) (a) Amortization expense of estimated purchase cost in excess of net assets $ 2.3 (b) Elimination of goodwill amortization expense included in the historical financial statements for the 1998 Acquisitions......................... (2.1) (c) Estimated annual rent expense on the Sylmar facility of Ocean Systems which will not be acquired by L-3 Communications....................... 1.1 (d) Elimination of depreciation expense on buildings and improvements on the Sylmar facility of Ocean Systems which will not be acquired by L-3 Communications......................................................... (0.3) --------------- Total increase to costs and expenses.................................. $ 1.0 ===============
5. The pro forma adjustments for the 1998 Acquisitions, reflecting the Company before the Offerings, include (a) the elimination of $1.4 million of interest income included in the historical financial statements of the Company to reflect the use of cash on hand to fund partially the purchase price for the 1998 Acquisitions and (b) an increase to interest expense of $5.2 million on debt incurred to fund the remaining purchase prices for the 1998 Acquisitions. Pro forma adjustments for the Offerings reflect a decrease to interest expense of $1.7 million to reflect the reduction in debt from the use of proceeds. The details of interest expense, after such pro forma adjustments follow:
YEAR ENDED DECEMBER 31, 1997 --------------------------------- PRO FORMA COMPANY BEFORE THE OFFERINGS PRO FORMA -------------------- ----------- ($ in millions) Interest on Revolving Credit Facility (7.625% on $71.5 million) ......... $ 5.5 -- Interest on the 1997 Notes (10.375% on $225.0 million)................... 23.3 $23.3 Interest on the Notes (assumed 8.25% on $150.0 million).................. -- 12.4 Interest on borrowings under Term Loan Facilities (8.0% on $172.0 million and $57.0 million, respectively)........................................ 14.0 4.5 Interest on industrial development bond (4.0% on $1.3 million) .......... 0.1 0.1 Commitment fee of 0.5% on unused portion of the Revolving Credit Facility (0.5% on $128.5 million and $200.0 million, respectively) .... 0.6 1.0 Amortization of deferred debt issuance costs............................. 2.0 2.5 -------------------- ----------- Total pro forma interest expense ...................................... $45.5 $43.8 ==================== ===========
In accordance with SEC regulations, the pro forma statement of operations does not reflect interest income on the $50.0 million cash balance in the pro forma balance sheet resulting from the Offerings. The Offerings include the Notes Offering and the contribution to the Company by Holdings of the proceeds of the Common Stock Offering. The net proceeds from the Offerings of $236.5 million, comprised of $150.0 million from the Notes Offering less estimated debt issue costs of $5.5 million, and $100.0 million from the contribution of the proceeds of the Common Stock Offering less estimated issuance expenses of $8.0 million, have been assumed to reduce borrowings under the Revolving Credit Facility and Term Loan Facilities by $186.5 million and increase cash and cash equivalents by $50.0 million. The pro forma balance sheet includes the following adjustments:
INCREASE (DECREASE) ----------------- ($ in millions) Cash and cash equivalents ............................................... $ 50.0 ================= Senior subordinated notes (proceeds from the Notes)...................... 150.0 ================= Other assets (deferred debt issuance costs).............................. $ 5.5 ================= The net proceeds from the Offerings will be used to reduce borrowings and were recorded as follows: Current portion of long-term debt....................................... $ (3.2) Revolving Credit Facility............................................... (71.5) Term Loan Facilities.................................................... (111.8) ----------------- $(186.5) ================= Shareholders' equity: Contribution by Holdings of proceeds of Common Stock Offering, less expenses................................................................. $ 92.0 =================
6 6. The pro forma adjustments were tax-effected, as appropriate, using a statutory (federal, state and foreign) tax rate of 39.0%. The pro forma balance sheet includes an estimated $12.0 million of deferred tax assets related principally to differences between book and tax bases of assumed liabilities related to the 1998 Acquisitions. 7. EBITDA is defined as operating income plus depreciation expenses and amortization expenses (excluding the amortization of debt issuance costs). 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 management believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. Net debt is defined as long-term debt plus current portion of long-term debt less cash and cash equivalents. 8. For purposes of this computation, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest on indebtedness plus that portion of lease rental expense representative of the interest element. 9. For purposes of this computation, cash interest expense consists of pro forma interest expense excluding amortization of deferred debt issuance costs. 7 EX-99.2 8 SATELLITE TRANSMISSION EXHIBIT 99.2 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. UNAUDITED CONDENSED FINANCIAL STATEMENTS Six months ended December 31, 1996 and 1997 1 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. BALANCE SHEET (UNAUDITED) DECEMBER 31, 1997 (In Thousands)
ASSETS Current assets: Accounts receivable, less $554 allowance for doubtful accounts .................................................... $ 22,204 Inventories .................................................. 10,382 ---------- Total current assets .......................................... 32,586 Property, plant and equipment, at cost ........................ 21,663 Less accumulated depreciation and amortization ................ (14,467) ---------- Net property and equipment .................................... 7,196 Other assets .................................................. 15 ---------- Total assets .................................................. $ 39,797 ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ............................................. $ 6,508 Accrued liabilities .......................................... 3,703 Current portion of long-term debt ............................ 200 ---------- Total current liabilities ..................................... 10,411 Long-term debt ................................................ 1,330 ---------- Total liabilities ............................................. 11,741 Commitments Division equity ............................................... 28,056 ---------- Total liabilities and Division equity ......................... $ 39,797 ==========
See accompanying notes. 2 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. STATEMENTS OF OPERATIONS (UNAUDITED) (In Thousands)
SIX MONTHS ENDED DECEMBER 31 ---------------------- 1997 1996 ---------- ---------- Net sales ........................... $24,551 $ 38,770 Cost of products sold ............... 23,226 42,530 ---------- ---------- Gross margin ........................ 1,325 (3,760) ---------- ---------- Expenses: Research and development ........... 712 721 Marketing and administration ...... 5,123 8,064 Amortization of intangible assets . -- 72 ---------- ---------- Total expenses ...................... 5,835 8,857 ---------- ---------- Operating loss ...................... (4,510) (12,617) Interest expense .................... (43) (70) Interest income ..................... -- 5 ---------- ---------- Loss before income tax benefit ..... (4,553) (12,682) Allocated benefit from income taxes 1,639 4,185 ---------- ---------- Net loss ............................ $(2,914) $ (8,497) ========== ==========
See accompanying notes. 3 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands)
SIX MONTHS ENDED DECEMBER 31 ---------------------- 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................................ $(2,914) $ (8,497) Adjustments for noncash items: Amortization of intangible assets .............................. -- 72 Depreciation and amortization of property, plant and equipment 780 1,200 Loss on sale of assets ........................................ -- 151 Provision for doubtful accounts ............................... 66 750 Changes in asset and liability accounts: Accounts receivable ............................................ 6,053 16,124 Inventories .................................................... (2,644) 6,789 Prepaid expenses and other assets .............................. 85 213 Accounts payable ............................................... (1,256) (10,238) Accrued liabilities ............................................ 132 (208) ---------- ---------- Net cash provided by operations ................................. 302 6,356 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ............................................ (160) (1,072) Proceeds from sale of building .................................. -- 1,617 ---------- ---------- Net cash provided by (used in) investing activities ............ (160) 545 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt ...................................... (100) (200) Net cash provided to CMI ........................................ (42) (6,701) ---------- ---------- Net cash used in financing activities ........................... (142) (6,901) ---------- ---------- Cash and cash equivalents ....................................... $ -- $ -- ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the six month period for interest .............. $ 36 $ 32 ========== ==========
See accompanying notes. 4 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited financial statements include the operations of the Satellite Transmission Systems Division ("STS" or the "Division") of California Microwave, Inc. ("CMI" or the "Company"). The Division is a global satellite communication systems integrator providing hardware, software and services for turnkey projects to large commercial customers, principally domestic and foreign telephone companies and major common carriers and to the U.S. and foreign governments. These financial statements are presented as if the Division had existed as an entity separate from CMI during the periods presented and include the historical assets, liabilities, sales and expenses that are directly related to the Division's operations. However, these financial statements are not necessarily indicative of the financial position and results of operations which would have occurred had the Division been an independent entity. The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month periods ended December 31, 1996 and 1997 are not necessarily indicative of the results that may be expected for the years ended June 30, 1997 and 1998. For further information, refer to the financial statements and footnotes thereto included in the Division's financial statements for the year ended June 30, 1997. USE OF ESTIMATES; RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates are used in determining the collectibility of accounts receivable, warranty costs, inventory realization, profitability on long-term contracts, restructuring reserves, recoverability of property, plant and equipment, and contingencies. Actual results could differ from estimates. INVENTORIES AND COST OF PRODUCTS SOLD Inventories are recorded at the lower of cost or market. Project inventories are transferred to cost of products sold at the time revenue is recognized based on the estimated total manufacturing costs and total contract prices under each contract. Losses on contracts are recognized in full when the losses become determinable. The cost of other inventories is generally based on standard costs which approximate actual costs determined by the first-in, first-out method. 5 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. INVENTORIES Inventories consisted of the following:
DECEMBER 31, 1997 -------------- (in thousands) Projects in process..................................... $ 9,351 Less: progress billings................................. 1,547 -------------- 7,804 Product inventories, principally materials and supplies............................................... 2,578 -------------- Total................................................... $10,382 ==============
3. CORPORATE ALLOCATIONS CMI allocates corporate expenses on a value-added basis to each division, which CMI believes results in a reasonable allocation of such costs. The accompanying financial statements reflect charges for general corporate administrative expenses incurred by CMI which amounted to approximately $832,000 and $793,000 for the six months ended December 31, 1996 and 1997, respectively. No interest is allocated by CMI to the Division. The Division is charged for its proportional share of CMI's self-insured medical plan. Such charges amounted to $1,015,000 and $732,000 for the six months ended December 31, 1996 and 1997, respectively. In addition, there were direct charges from CMI as follows:
SIX MONTHS ENDED DECEMBER 31, -------------- 1997 1996 ------ ------ (in thousands) Marketing.................. $304 $389 General and administrative............ -- 142 ------ ------ Total...................... $304 $531 ====== ======
The Division believes that the direct charges from CMI were reasonable during the periods presented. 4. RESTRUCTURING During fiscal 1997, a comprehensive review of the Division's operations was performed, including a review of inventory levels, product development and migration plans and facility and personnel needs. It was determined to focus the Division on potentially higher margin products. This resulted in the write-down of certain inventories and the restructuring of the Division's operations. During the six month period ended December 31, 1996 inventory and other charges of $10,300,000, arising from this review, were included in cost of products sold. During February 1997, additional charges of $800,000 relating to excess facilities and severance were recorded. There are no remaining cash outlays associated with the restructuring at December 31, 1997. 6 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. OTHER In November 1997, the Division recorded a $1 million charge to cost of sales relating to a contract with a customer in Sudan. The President of the United States imposed economic sanctions on Sudan which banned U.S. companies from doing business in Sudan and as a result, the Division could not continue to perform under the existing contract. Based upon this, the contract was terminated and the Division has been released from further performance requirements. On December 19, 1997, L-3 Communications Corporation, an unrelated party, reached an agreement to purchase from CMI substantially all of the assets of the Division, and to assume certain of the liabilities of the Division, for approximately $27 million in cash. The final purchase price is subject to adjustment based on the net assets of the Division at the closing date of the transaction. 7 EX-99.3 9 SATELLITE TRANSMISSION SYSTEM FINANCIAL STATEMENTS EXHIBIT 99.3 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. FINANCIAL STATEMENTS As of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995 8 REPORT OF INDEPENDENT AUDITORS The Board of Directors California Microwave, Inc. We have audited the accompanying balance sheets of the Satellite Transmission Systems Division of California Microwave, Inc. (the "Company") as of June 30, 1997 and 1996, and the related statements of operations and cash flows for each of the three years in the period ended June 30, 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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Satellite Transmission Systems Division of California Microwave, Inc., as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Melville, New York January 27, 1998 9 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. BALANCE SHEETS (In Thousands)
JUNE 30, ---------------------- 1997 1996 ---------- ---------- ASSETS Current assets: Accounts receivable, less $140 and $508 allowance for doubtful accounts in 1996 and 1997......................................... $ 28,323 $ 46,750 Inventories........................................................ 7,738 10,412 Prepaid expenses and other assets.................................. 77 121 ---------- ---------- Total current assets................................................ 36,138 57,283 Property, plant and equipment, at cost.............................. 21,503 21,378 Less accumulated depreciation and amortization...................... (13,687) (12,984) ---------- ---------- Net property and equipment ......................................... 7,816 8,394 Intangible assets, net of accumulated amortization of $2,268 in 1996............................................................... -- 2,032 Other assets........................................................ 23 2,045 ---------- ---------- Total assets ....................................................... $ 43,977 $ 69,754 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable................................................... $ 7,764 $ 19,548 Accrued liabilities................................................ 3,571 3,584 Current portion of long-term debt.................................. 100 200 ---------- ---------- Total current liabilities........................................... 11,435 23,332 Long-term debt...................................................... 1,530 1,630 ---------- ---------- Total liabilities................................................... 12,965 24,962 Commitments Division equity..................................................... 31,012 44,792 ---------- ---------- Total liabilities and Division equity............................... $ 43,977 $ 69,754 ========== ==========
See accompanying notes. 10 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. STATEMENTS OF OPERATIONS (In Thousands)
YEARS ENDED JUNE 30, ---------------------------------- 1997 1996 1995 ----------- ---------- --------- Net sales......................................... $ 68,037 $124,393 $94,271 Cost of products sold............................. 65,724 102,399 86,335 ----------- ---------- --------- Gross margin...................................... 2,313 21,994 7,936 ----------- ---------- --------- Expenses: Research and development......................... 1,360 2,540 2,288 Marketing and administration..................... 14,154 13,295 12,655 Amortization and write-down of intangible assets........................................... 2,032 171 171 Restructuring.................................... 800 -- 2,446 ----------- ---------- --------- Total expenses.................................... 18,346 16,006 17,560 ----------- ---------- --------- Operating (loss) income........................... (16,033) 5,988 (9,624) Interest expense.................................. (65) (69) (98) Interest income................................... 40 11 3 ----------- ---------- --------- (Loss) income before income tax benefit (expense)........................................ (16,058) 5,930 (9,719) Allocated benefit (expense) from income taxes .... 4,676 (2,135) 3,207 ----------- ---------- --------- Net (loss) income................................. $(11,382) $ 3,795 $(6,512) =========== ========== =========
See accompanying notes. 11 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. STATEMENTS OF CASH FLOWS (In Thousands)
YEARS ENDED JUNE 30, ----------------------------------- 1997 1996 1995 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income................................... $(11,382) $ 3,795 $(6,512) Adjustments for noncash items: Amortization and write-down of intangible assets .. 2,032 171 171 Depreciation and amortization of property, plant and equipment..................................... 1,639 1,746 1,848 Loss on sale of assets............................. 77 140 64 Provision for doubtful accounts.................... 750 100 150 Changes in asset and liability accounts: Accounts receivable................................ 17,677 (17,019) 14,937 Inventories........................................ 2,674 12,243 (8,211) Prepaid expenses and other assets.................. 449 1,449 5,627 Accounts payable................................... (11,783) 5,736 (3,747) Accrued and other liabilities...................... (14) (1,697) 1,895 ----------- ---------- ---------- Net cash provided by operations..................... 2,119 6,664 6,222 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................ (1,138) (1,099) (1,881) Proceeds from sale of building...................... 1,617 -- -- ----------- ---------- ---------- Net cash (used in) provided by investing activities......................................... 479 (1,099) (1,881) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt.......................... (200) (100) (200) Net cash provided to CMI............................ (2,398) (5,465) (4,141) ----------- ---------- ---------- Net cash used in financing activities............... (2,598) (5,565) (4,341) ----------- ---------- ---------- Cash and cash equivalents........................... $ -- $ -- $ -- =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest.............. $ 38 $ 66 $ 70 =========== ========== ==========
See accompanying notes. 12 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1996 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the operations of the Satellite Transmission Systems Division ("STS" or the "Division") of California Microwave, Inc. ("CMI" or the "Company"). The Division is a global satellite communication systems integrator providing hardware, software and services for turnkey projects to large commercial customers, principally domestic and foreign telephone companies and major common carriers and to the U.S. and foreign governments. These financial statements are presented as if the Division had existed as an entity separate from CMI during the periods presented and include the historical assets, liabilities, sales and expenses that are directly related to the Division's operations. However, these financial statements are not necessarily indicative of the financial position and results of operations which would have occurred had the Division been an independent entity. USE OF ESTIMATES; RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates are used in determining the collectibility of accounts receivable, warranty costs, inventory realization, profitability on long-term contracts, restructuring reserves, recoverability of property, plant and equipment, and contingencies. Actual results could differ from estimates. CASH AND CASH EQUIVALENTS The Division participates in CMI's centralized cash management function; accordingly, the Division does not maintain separate cash accounts, other than payroll and foreign subsidiary accounts, which are deemed insignificant, and its cash disbursements and collections are settled through Division equity. INVENTORIES AND COST OF PRODUCTS SOLD Inventories are recorded at the lower of cost or market. Project inventories are transferred to cost of products sold at the time revenue is recognized based on the estimated total manufacturing costs and total contract prices under each contract. Losses on contracts are recognized in full when the losses become determinable. During the year ended June 30, 1995, the Division recognized losses of approximately $2,800,000 on such contracts. The cost of other inventories is generally based on standard costs which approximate actual costs determined by the first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method based on the estimated useful lives of the related assets. INTANGIBLE ASSETS OF BUSINESS ACQUIRED During 1997, CMI wrote off $1,888,000 of purchased intangible assets, principally goodwill, relating to the original acquisition of STS by CMI, which was pushed down to the Division's books. The intangible 13 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) assets consisted of the excess of the purchase price paid for STS over the net tangible assets acquired and was amortized using the straight-line method over 30 years. During 1997, CMI determined that the excess purchase price was not recoverable due to a significant reduction in sales by the Division in 1997 as compared to prior periods and appropriately reduced the carrying value. OTHER LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," the Division records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of such assets. Other than as described above related to purchased intangibles, no such losses have been incurred. REVENUE RECOGNITION, RECEIVABLES AND CREDIT RISK Revenue from product sales is recognized at the time of shipment. Sales on certain long-term, small quantity, high unit value contracts are recognized at the completion of significant project milestones, which are generally contract line items. Scheduled billings and retainages under certain contracts (principally export contracts) have deferred billing provisions resulting in unbilled accounts receivable (included in accounts receivable) of $7,426,000 and $4,425,000 at June 30, 1996 and 1997, respectively. The unbilled receivable at June 30, 1997, is expected to be collected within one year. The Division manufactures and sells satellite communications products, systems and turnkey telecommunications networks to large commercial customers, principally domestic and foreign telephone companies and major common carriers, and to the U.S. government. The Division generally requires no collateral, but generally requires letters of credit, denominated in U.S. dollars, from its foreign customers. During 1996 and 1997, the Division periodically transferred certain international accounts receivable to CMI. CMI insures these receivables under a credit insurance program and then sells the receivables, without recourse, at prevailing discount rates. The Division retains the responsibility to collect and service these amounts. Outstanding customer receivables transferred to CMI through Division equity amounted to approximately $421,000 and $2,100,000 during 1996 and 1997, respectively. The Division charged to operations $150,000, $100,000 and $750,000 for its provision for doubtful accounts in 1995, 1996 and 1997, respectively. WARRANTY The Company generally warrants its products for a period of 12 to 24 months from completion of contract or shipment. Warranty expense was approximately $679,000, $753,000 and $688,000 for 1995, 1996 and 1997, respectively. INCOME TAXES Income taxes reflect an allocation of CMI's income tax expense (benefit) calculated based on CMI's effective tax rate. All deferred tax assets and liabilities relating to the Division are included in intercompany balances with CMI and are accounted for within Division equity (see Note 7). 14 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) FISCAL YEAR The Division's fiscal year ends on the Saturday closest to June 30, and includes 52 weeks in fiscal 1995, 1996 and 1997. For 1995, 1996 and 1997, the fiscal years ended on July 1, 1995, June 29, 1996 and June 28, 1997, respectively. For clarity of presentation, the financial statements are reported as ending on a calendar month end. 2. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, ------------------- LIFE 1997 1996 ---------- --------- -------- (in Years (in Thousands) Land........................... $ 950 $ 950 Buildings ..................... 30 3,559 3,559 Machinery and equipment ...... 3-5 8,780 9,256 Office and computer equipment 3-10 6,440 5,653 Building improvements.......... -- 1,721 1,813 Vehicles ...................... 5 53 147 --------- -------- $21,503 $21,378 ========= ========
Building improvements are depreciated over the shorter of the life of the improvement or the remaining life of the building. 3. INVENTORIES Inventories consisted of the following:
JUNE 30, ------------------ 1997 1996 -------- -------- (in Thousands) Projects in process..................................... $6,484 $ 6,287 Less: progress billings................................. 2,544 1,991 -------- -------- 3,940 4,296 Product inventories, principally materials and supplies............................................... 3,798 6,116 -------- -------- Total................................................... $7,738 $10,412 ======== ========
15 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. ACCRUED LIABILITIES Accrued liabilities consisted of the following:
JUNE 30, ------------------ 1997 1996 -------- -------- (in Thousands) Salaries and bonuses . $ 497 $1,381 Vacation.............. 610 873 Other payroll related.............. 123 115 Warranties............ 899 758 Commissions........... 813 -- Other................. 629 457 -------- -------- $3,571 $3,584 ======== ========
5. LONG-TERM DEBT The Division has industrial development bonds that are payable in annual installments through November 9, 2007, may be prepaid at any time without penalty and bear interest at 65% of the bank's floating rate (5.5% at June 30, 1997), based upon prevailing market conditions, which is redetermined daily. The obligor of the industrial development bonds is a related entity, and the bonds are secured by mortgages on the equipment and properties involved. At June 30, 1997, the annual maturities of long-term debt are as follows:
1998................. $ 100,000 1999................. 200,000 2000................. 100,000 2001................. 200,000 2002................. 100,000 Thereafter........... 930,000 ----------- 1,630,000 Less current portion............. 100,000 ----------- $1,530,000 ===========
6. COMMITMENTS On November 15, 1996, the Division leased a facility under an 18-month noncancelable operating lease. Rent expense was approximately $209,000, $229,000 and $69,000 for 1995, 1996, and 1997, respectively. Future minimum lease payments under the operating lease is $48,000 for 1998. 16 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. DIVISION EQUITY A summary of the Division equity activity is as follows:
JUNE 30, --------------------- 1997 1996 ---------- --------- (In Thousands) Beginning balance........ $ 44,792 $46,462 Net income (loss)........ (11,382) 3,795 Net cash provided to CMI..................... (2,398) (5,465) ---------- --------- Ending balance........... $ 31,012 $44,792 ========== =========
8. EMPLOYEE BENEFITS The Division participates in the CMI defined contribution retirement plan which covers substantially all of the employees of the Division. The Division's contribution was $379,000, $700,000 and $180,000 for 1995, 1996 and 1997, respectively. 9. SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION The Division operates in a single industry segment and is engaged in the manufacture and sale of electronics equipment for satellite communications. International sales were as follows:
JUNE 30, ------------------------------- 1997 1996 1995 --------- --------- --------- (In Thousands) Asia Pacific....... $22,333 $27,106 $17,164 Africa/Middle East.............. 13,052 41,827 9,572 Latin America...... 5,149 11,137 14,768 Europe............. 7,828 15,984 9,784 Other.............. 1,391 2,973 4,312 --------- --------- --------- $49,753 $99,027 $55,600 ========= ========= =========
The Division had revenues from one customer representing 17.3%, 31.5% and 11% of total revenues in 1995, 1996 and 1997, respectively. 10. CORPORATE ALLOCATIONS CMI allocates corporate expenses on a value-added basis to each division, which CMI believes results in a reasonable allocation of such costs. The accompanying financial statements reflect charges for general corporate administrative expenses incurred by CMI which amounted to approximately $1,477,000, $1,555,000 and $1,663,000 in 1995, 1996 and 1997, respectively. No interest is allocated by CMI to the Division. The Division is charged for its proportional share of CMI's self-insured medical plan. Such charges amounted to $944,000, $1,437,000 and $1,856,000 in 1995, 1996, and 1997, respectively. 17 SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. CORPORATE ALLOCATIONS (CONTINUED) In addition, there were direct charges from CMI as follows:
JUNE 30, ------------------------ 1997 1996 1995 -------- ------ ------ (IN THOUSANDS) Marketing.................. $ 889 -- $-- General and administrative............ 285 $508 -- -------- ------ ------ Total...................... $1,174 $508 $-- ======== ====== ======
The Division believes that the direct charges from CMI were reasonable during the periods presented. 11. RELATED PARTY TRANSACTIONS Included in net sales are product sales to other divisions of CMI. These sales totaled $3,584,000, $640,000 and $1,800,000 for 1995, 1996 and 1997, respectively. In addition, there is approximately $2,363,000, $2,937,000 and $776,000 of purchases from another division of CMI which is included in ending inventory and $2,139,000, $3,576,000 and $1,129,000 due to this division which is included in accounts payable at June 30, 1995, 1996 and 1997, respectively. 12. RESTRUCTURING In June 1995, a decision was made to close the Division's Melbourne, Florida facility as well as to perform a review of personnel needs at the Division's operations. Pursuant to these decisions, approximately $2.4 million of restructuring charges were recorded, including approximately $600,000 to reflect the facility at its net realizable value. There are no remaining cash outlays associated with the restructuring at June 30, 1997. In December 1996 and January 1997, a comprehensive review of the Division's operations was performed, including a review of inventory levels, product development and migration plans and facility and personnel needs. It was determined to focus the Division on potentially higher margin products. This resulted in the write-down of certain inventories and the restructuring of the Division's operations. Inventory and other charges of $10,300,000, arising from this review, were included in cost of products sold and excess facilities and severance charges of $800,000 were included in restructuring. There are no remaining cash outlays associated with the restructuring at June 30, 1997. 13. SUBSEQUENT EVENTS In November 1997, the Division recorded a $1 million charge to cost of sales relating to a contract with a customer in Sudan. The President of the United States imposed economic sanctions on Sudan which banned U.S. companies from doing business in Sudan, and as a result the Division could not continue to perform under the existing contract. Based upon this, the contract was terminated and the Division has been released from further performance requirements. On December 19, 1997, L-3 Communications Corporation, an unrelated party, reached an agreement to purchase from CMI substantially all of the assets of the Division, and to assume certain of the liabilities of the Division, for approximately $27 million in cash. The final purchase price is subject to adjustment based on the net assets of the Division at the closing date of the transaction. 18 EX-99.4 10 ILEX SYSTEMS FINANCIAL STATEMENTS EXHIBIT 99.4 ILEX SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1 INDEPENDENT AUDITORS' REPORT The Board of Directors Ilex Systems, Inc.: We have audited the accompanying consolidated balance sheet of Ilex Systems, Inc. and subsidiary as of December 31, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ilex Systems, Inc. and subsidiary as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP February 9, 1998 2 ILEX SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997
ASSETS Current assets: Cash and cash equivalents ..................................................... $ 4,919,548 Accounts receivable, net of allowance for doubtful accounts of $327,422 ...... 7,354,640 Unbilled accounts receivable .................................................. 4,868,453 Inventories ................................................................... 923,466 Deferred income taxes ......................................................... 13,000 Other current assets .......................................................... 278,771 ------------- Total current assets ......................................................... 18,357,878 Property, plant, and equipment: Equipment ..................................................................... 2,343,643 Furniture, fixtures, and leasehold improvements ............................... 634,425 ------------- 2,978,068 Accumulated depreciation and amortization ..................................... (2,031,763) ------------- 946,305 Goodwill, net of accumulated amortization of $117,940 .......................... 343,564 Deposits and other assets ...................................................... 138,730 ------------- $19,786,477 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............................................. $ 62,833 Accounts payable .............................................................. 2,226,340 Accrued payroll and related expenses .......................................... 3,176,151 Deferred income ............................................................... 37,843 Distribution payable to shareholders .......................................... 2,216,877 Income taxes payable .......................................................... 80,552 Other current liabilities ..................................................... 175,011 ------------- Total current liabilities .................................................... 7,975,607 Other liabilities .............................................................. 18,678 ------------- Total liabilities ............................................................ 7,994,285 Shareholders' equity: Common stock, no par value; 5,000,000 shares authorized; 1,317,605 shares issued and outstanding ....................................................... 1,386,417 Retained earnings ............................................................. 10,405,775 ------------- Total shareholders' equity ................................................... 11,792,192 Commitments .................................................................... ------------- $19,786,477 =============
See accompanying notes to consolidated financial statements. 3 ILEX SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1997
Revenues: Consulting fees ...................... $57,309,190 Equipment sales ...................... 6,213,038 ------------- 63,522,228 ------------- Costs and expenses: Cost of revenue, consulting .......... 41,852,031 Cost of sales, equipment ............. 3,314,614 Selling, general, and administrative 9,507,879 Research and development ............. 1,211,497 ------------- 55,886,021 ------------- Operating income .................... 7,636,207 Other income (expense): Interest income ...................... 135,114 Interest expense ..................... (8,579) Loss on write-down of investment .... (250,000) Other expense ........................ (108,000) ------------- Income before income taxes .......... 7,404,742 Income taxes .......................... 550,000 ------------- Net income .......................... $ 6,854,742 =============
See accompanying notes to consolidated financial statements. 4 ILEX SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1997
COMMON STOCK TOTAL ------------------------- RETAINED SHAREHOLDERS' SHARES AMOUNT EARNINGS EQUITY ----------- ------------ ------------- --------------- Balances as of December 31, 1996 ........ 1,315,720 $1,352,249 $10,606,517 $11,958,766 Issuance of common stock in exchange for services ............................... 3,400 42,500 -- 42,500 Stock repurchase ........................ (1,515) (8,332) (6,060) (14,392) Distributions to shareholders ........... -- -- (7,049,424) (7,049,424) Net income .............................. -- -- 6,854,742 6,854,742 ----------- ------------ ------------- --------------- Balances as of December 31, 1997 ........ 1,317,605 $1,386,417 $10,405,775 $11,792,192 =========== ============ ============= ===============
See accompanying notes to consolidated financial statements. 5 ILEX SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities: Net income .......................................................................... $ 6,854,742 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................................................... 419,593 Allowance for doubtful accounts .................................................... (203,255) Loss on write-down of investment ................................................... 250,000 Deferred income taxes .............................................................. 485,000 Issuance of common stock for services .............................................. 42,500 Changes in operating assets and liabilities: Receivables ....................................................................... (1,267,205) Inventories ....................................................................... 387,485 Other current assets .............................................................. (112,176) Deposits and other assets ......................................................... 140,884 Accounts payable and accrued liabilities .......................................... 324,963 Deferred income ................................................................... (159,012) Income taxes payable .............................................................. 80,552 Other liabilities ................................................................. (459,166) ------------- Net cash provided by operating activities ........................................ 6,784,905 ------------- Cash flows used in investing activities--purchases of property, plant, and equipment (416,630) ------------- Cash flows from financing activities: Payments on debt .................................................................... (67,265) Distributions paid to shareholders .................................................. (4,832,547) Repurchase of common stock .......................................................... (14,392) ------------- Net cash used in financing activities ............................................ (4,914,204) ------------- Increase in cash and cash equivalents ................................................ 1,454,071 Cash and cash equivalents, beginning of year ......................................... 3,465,477 ------------- Cash and cash equivalents, end of year ............................................... $ 4,919,548 ============= Supplemental disclosures of cash flow information: Cash paid during year: Income taxes ....................................................................... $ 716,190 ============= Interest ........................................................................... $ 8,579 ============= Noncash investing and financing activities--distributions payable to shareholders .. $ 2,216,877 =============
See accompanying notes to consolidated financial statements. 6 ILEX SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Ilex Systems, Inc. (the "Company") provides services and products primarily in four areas: environmental consulting services to private and public sector customers; software consulting services to the federal government and its contractors; supervisory control and data acquisition products and services to the electrical utility industry; and secured communications products, principally to the federal government and its agencies. The majority of the Company's revenues are derived from its software consulting services. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION The Company's consulting services are generally performed on time-and materials-based contracts for the federal government and its contractors. Accordingly, revenues are recognized as services are performed. Equipment sales revenues are recognized upon shipment. Unbilled accounts receivable comprise charges for services and materials provided to customers that have not been invoiced. The Company does not require collateral for its receivables. Reserves are maintained for potential credit losses. CASH EQUIVALENTS Cash equivalents of $1,879,285 as of December 31, 1997, consist principally of money market investments. For purposes of the accompanying consolidated statement of cash flows, the Company considers all highly liquid debt instruments with remaining maturities of three months or less when acquired to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments in the Company's consolidated financial statements approximates fair value due to the short-term maturities of these instruments. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets (generally five years). Leasehold improvements are amortized straight-line over the shorter of the lease term or the estimated useful life of the asset. GOODWILL Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited of 10 to 15 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. 7 INCOME TAXES The Company elected S corporation status on March 17, 1997, effective January 1, 1997. Federal and the majority of state income taxes on the income of S corporations are generally payable by the individual shareholders rather than the Company. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES The Company's management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) INVENTORIES Inventories consisted of the following as of December 31, 1997:
Raw materials and subassemblies.................. $833,945 Work in process................. 89,521 ---------- $923,466 ==========
(3) LINE OF CREDIT AND LONG-TERM DEBT The Company has a $5,000,000 line of credit with a bank that is due on demand. Interest is payable at the bank's prime rate (8.5% as of December 31, 1997) and is secured by trade accounts receivable, inventories, and other assets. Borrowings outstanding under the line of credit were $-0-as of December 31, 1997. The line of credit contains certain restrictive financial covenants, including a minimum level of net worth and cash flow to debt ratio. As of December 31, 1997, the Company was in compliance with all such covenants. The Company has an unsecured promissory note payable to a former shareholder that was issued in conjunction with the repurchase of shares of common stock in 1992. The note bears interest at 10% with payments of $6,000 per month, including interest, through December 1998. As of December 31, 1997, the principal balance of this note was $62,833. (4) INCOME TAXES The provision for income taxes for the year ended December 31, 1997, consisted of the following:
Federal: Current .. -- Deferred . $388,000 ---------- 388,000 ---------- State: Current .. 65,000 Deferred . 97,000 ---------- 162,000 ---------- $550,000 ==========
8 The provision for income taxes for the year ended December 31, 1997, differs from the federal statutory rate, primarily due to the flow through nature of income tax liability to the shareholders and reduction of the federal and partial state deferred income tax assets and liabilities as of December 31, 1996, resulting from the S corporation election as follows:
Federal income tax statutory rate ........ 34.0% State income tax rate..................... 2.2 Benefit of federal S corporation election................................. (28.8) -------- 7.4% ========
The gross deferred tax assets were $13,000 as of December 31, 1997, consisting of the state deferred income tax assets and liabilities for those states who do not recognize S corporation status. Management considers realization of the net deferred tax assets more likely than not due to continued profitability of the Company and significant carryback opportunities. (5) EMPLOYEE BENEFIT PLANS The Company has two Section 401(k) retirement savings plans (the Plans). Under the terms of the Plans, employees may make contributions based on a percentage of eligible earnings. Company contributions to the Plans are discretionary and totaled $359,718 in 1997. (6) STOCK OPTION PLAN The Company has 100,000 shares of common stock reserved for issuance under its 1992 Incentive Stock Option Plan (the "Plan"). Under the Plan, the Company may grant options to employees, officers, and directors. Options are granted at prices not less than the fair market value of the Company's common stock as determined by the Board of Directors on the grant date. Options vest ratably over 48 months and expire 49 months from the date of grant. The Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock options. Accordingly, no compensation cost has been recorded for these stock options. Had compensation cost been determined, consistent with Statement of Financial Accounting Standards No. 123, the Company's 1997 net income would not have been significantly impacted. On January 1, 1997, the Company had no options outstanding. In July 1997, the Company granted 25,000 options at an exercise price of $17.50, all of which were outstanding but not exercisable as of December 31, 1997. (7) COMMITMENTS The Company leases certain facilities under operating leases that expire at various dates through 2001. The Company in turn subleases some of these facilities. As of December 31, 1997, future minimum lease payments under noncancelable operating leases, exclusive of the sublease rentals, are as follows:
YEAR ENDING DECEMBER 31, - -------------- 1998......... $1,474,448 1999......... 510,551 2000......... 292,096 2001......... 124,212 ------------ $2,401,307 ============
Rent expense, exclusive of sublease rentals, was approximately $1,081,636 in 1997. Sublease rental income was approximately $186,733 in 1997. 9 (8) SIGNIFICANT CUSTOMERS For the year ended December 31, 1997, sales to a single customer represented 26% of revenues. The outstanding accounts receivable and unbilled receivable balances for this customer as of December 31, 1997, were $1,257,875 and $2,228,650, respectively. (9) SUBSEQUENT EVENT In January 1998, shareholders of the Company agreed to sell all of their common stock for approximately $50,000,000, subject to certain adjustments, plus additional consideration based on post-acquisition performance. The expected closing date is scheduled for February 25, 1998, subject to satisfaction of closing conditions. 10 EX-99.5 11 ALLIEDSIGNAL COMBINED FINANCIAL STATEMENTS EXHIBIT 99.5 ALLIEDSIGNAL OCEAN SYSTEMS A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC. COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1997 1 REPORT OF INDEPENDENT AUDITORS To the Management and Board of Directors L-3 Communications Holdings, Inc. We have audited the accompanying combined balance sheet of AlliedSignal Ocean Systems, a wholly owned operation of AlliedSignal, Inc. ("Ocean Systems"), as of December 31, 1997 and the related combined statements of operations, equity and cash flows for the year then ended. These financial statements are the responsibility of Ocean System's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Ocean Systems as of December 31, 1997, and the combined results of their operations and cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Los Angeles, California February 23, 1998 2 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.) COMBINED BALANCE SHEET AS OF DECEMBER 31, 1997 (IN THOUSANDS)
ASSETS Current assets: Accounts receivable, net of allowances for doubtful accounts of $81 $13,313 Inventories ........................................................ 25,274 Contracts in progress .............................................. 793 Prepaid expenses and other current assets .......................... 1,743 --------- Total current assets .............................................. 41,123 Property, plant and equipment, net .................................. 16,845 Capitalized software, net ........................................... 2,248 Goodwill, net ....................................................... 1,820 Other assets ........................................................ 31 --------- Total assets ........................................................ $62,067 ========= LIABILITIES AND EQUITY Current liabilities: Accounts payable ................................................... $ 2,626 Accrued liabilities ................................................ 16,112 Advance payments ................................................... 16,162 --------- Total current liabilities ......................................... 34,900 Accrued pension and postretirement benefits ......................... 10,959 --------- Total liabilities ................................................... 45,859 --------- Commitment and contingencies Equity: Invested equity..................................................... 9,312 ELAC common stock .................................................. 3,424 ELAC retained earnings ............................................. 4,570 Cumulative translation adjustment .................................. (1,098) --------- Total equity......................................................... 16,208 --------- Total liabilities and equity ........................................ $62,067 =========
See accompanying notes to the combined financial statements 3 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.) COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
Sales ................................. $73,033 Cost of sales ......................... 56,049 --------- Gross profit ......................... 16,984 Operating expenses: General and administrative ........... 11,981 Selling .............................. 5,933 Bid and proposal ..................... 2,053 Independent research and development 2,765 --------- Total operating expenses ............ 22,732 --------- Loss from operations .................. (5,748) Interest expense, net ................. 490 Other income .......................... (185) --------- Loss before income taxes .............. (6,053) Benefit for income taxes .............. (2,378) --------- Net loss ............................ $(3,675) =========
See accompanying notes to the combined financial statements 4 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) COMBINED STATEMENT OF EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
INVESTED ELAC ELAC CUMULATIVE EQUITY IN OS COMMON RETAINED TRANSLATION TOTAL (DEFICIT) STOCK EARNINGS ADJUSTMENT EQUITY -------------- -------- ---------- ------------- --------- Balance at December 31, 1996 ..... $ 8,298 $3,424 $6,403 $ 87 $18,212 Net loss .......................... (2,680) -- (995) -- (3,675) Cumulative translation adjustment -- -- -- (1,185) (1,185) Advances from (repayments to) AlliedSignal ..................... 3,694 -- (838) -- 2,856 -------------- -------- ---------- ------------- --------- Balance at December 31, 1997 ..... $ 9,312 $3,424 $4,570 $(1,098) $16,208 ============== ======== ========== ============= =========
See accompanying notes to the combined financial statements 5 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
Cash flows from operating activities: Net loss ..................................................................... ($ 3,675) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation of property, plant and equipment ............................... 2,976 Amortization of capitalized software ........................................ 1,078 Amortization of intangible assets ........................................... 70 Loss on the disposal of property, plant and equipment ....................... 8 Changes in operating assets and liabilities: Accounts receivable ........................................................ 13,561 Inventories ................................................................ (359) Contracts in progress ...................................................... 1,666 Prepaid and other current assets ........................................... (220) Accounts payable ........................................................... (1,976) Accrued liabilities ........................................................ (10,472) Advance payments ........................................................... (1,092) Accrued pension and postretirement benefits ................................ (20) ---------- Net cash provided by operating activities ................................. 1,545 ---------- Cash flows from investing activities: Property, plant and equipment purchased ...................................... (3,090) Software purchased ........................................................... (265) ---------- Net cash used in investing activities ..................................... (3,355) ---------- Cash flows from financing activities: Advances from AlliedSignal, net .............................................. 3,198 ---------- Net cash provided by financing activities ................................. 3,198 ---------- Effect of foreign currency exchange rate changes on cash ..................... (1,388) ---------- Net change in cash ............................................................ -- Cash and cash equivalents at the beginning of the year ........................ -- ---------- Cash and cash equivalents at the end of the year .............................. $ -- ========== Supplement disclosures of cash flow information: Cash paid during the year for: Interest--AlliedSignal ...................................................... $ 552 ----------
See accompanying notes to the combined financial statements 6 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 1. BACKGROUND AND DESCRIPTION OF BUSINESS The Ocean Systems business ("Ocean Systems" or the "Company") is a wholly owned operation of AlliedSignal Inc. ("AlliedSignal") comprised of the Ocean Systems Division ("OS"), and AlliedSignal ELAC Nautik GmbH ("ELAC"). The OS Division headquarters and principal operations, including one manufacturing site, are located in Sylmar, California, a suburb of Los Angeles. OS also operates marketing offices located in Canada ("ASCI") and England ("BOSL"). OS was acquired through AlliedSignal's merger with the Bendix Corporation in 1982. ELAC is a wholly owned subsidiary of AlliedSignal Deutschland ("AS Deutschland") and is a separate legal entity located in Kiel, Germany. ELAC was acquired from Honeywell Inc. in 1994. On December 22, 1997, L-3 Communications Corporation, a wholly owned subsidiary of L-3 Communications Holdings, Inc. ("L-3") entered into a definitive Purchase Agreement with AlliedSignal to acquire substantially all the net assets excluding land and buildings, and assumed certain of the liabilities of OS and purchased the outstanding capital stock of ELAC from AS Deutschland. Ocean Systems develops, manufactures and sells sophisticated sonar detection and tracking devices for underwater use. The Company's customers include the U.S. Government, foreign governments, defense industry prime contractors and commercial customers. The Company operates primarily in one industry segment, electronic sonar components and systems. All domestic government contracts and subcontracts of Ocean Systems are subject to audit and various cost controls, and 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 foreign government. The decline in the U.S. defense budget since the late 1980s has resulted in program delays, cancellations and scope reduction for defense contracts in general. These events may or may not have an effect on the Company's programs; however, in the event that U.S. Government expenditures for products of the type manufactured by the Company are reduced, and not offset by greater foreign sales or other new programs or products, or acquisitions, there may be a reduction in the volume of contracts or subcontracts awarded to the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES BASIS OF PRESENTATION AND USE OF ESTIMATES The accompanying combined financial statements reflect the assets, liabilities and operations of Ocean Systems including OS and ELAC which are combined herein as they are entities under common control and management. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principals requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to contract estimates of sales and costs, excess and obsolete inventory reserves, warranty reserves, pension estimates and recoverability of recorded amounts of fixed assets. Actual results could differ from these estimates. REVENUE RECOGNITION Under fixed-price contracts, sales and related costs are recorded upon delivery and customer acceptance. Sales and related costs under cost-reimbursable contracts are recorded on the percentage of 7 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) completion method. Anticipated future losses on contracts are charged to income when identified. Revisions in profit estimates are reflected in the period in which the facts, which require the revision, become known. ACCOUNTS RECEIVABLE Management assesses the credit risk and records an allowance for uncollectable accounts as considered necessary based on several factors including, but not limited to, an analysis of specific customers, historical trends, current economic conditions and other information. The U.S. Navy comprises a significant portion of Ocean System's revenues. The Company's other customers include the navies of many foreign countries. The Company's credit risk is affected by conditions or occurrences within the U.S. Government and economic conditions of the countries in which the Company operates or has customers. Sales are made on unsecured, customer-specific credit terms, which may include extended terms. INVENTORIES Inventories are valued at the lower of cost or market using the average cost method. Inventories consist of raw materials and supplies, work in process and finished goods. An excess and obsolete inventory reserve has been established primarily for raw materials and parts that have not been allocated to firm contracts. The excess and obsolete inventory reserve is based on estimates of future usage of inventory on hand. CONTRACTS IN PROCESS Costs accumulated under cost-reimbursable contracts include direct costs, as well as manufacturing overhead. In accordance with industry practice, these amounts are included in current assets. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at historical cost net of accumulated depreciation. For financial purposes, property, plant and equipment is generally depreciated on the straight line method using estimated useful lives ranging from 3 to 20 years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Interest costs incurred during the construction of plant and equipment are capitalized using an imputed interest rate approximating 8%. Interest costs capitalized during 1997 amounted to $57. CAPITALIZED SOFTWARE Capitalized software primarily represents costs incurred related to the purchase and implementation of the Company's MRP II business system. Capitalized software is reported at historical cost less accumulated amortization. Amortization is based on the estimated useful service life not to exceed five years. Amortization of capitalized software was $1,078 for the year ended December 31, 1997. Accumulated amortization was $2,368 at December 31, 1997. GOODWILL Goodwill represents the excess of the cost of the purchased business over the net assets acquired and is being amortized on a straight-line basis over 40 years. This excess relates primarily to the allocated portion of goodwill arising out of the AlliedSignal merger with Bendix in 1982 and was allocated to OS 8 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) based on the proportionate percentage of OS pretax earnings to the total Bendix Aerospace Group pretax earnings at the time of the AlliedSignal acquisition from Bendix. Amortization expense was $70 for the year ended December 31, 1997. Accumulated amortization was $980 at December 31, 1997. The carrying amounts of intangible assets are reviewed if the facts and circumstances indicate potential impairment of their carrying value. If this review indicates that intangible assets are not recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying values related to the intangible assets are reduced to the fair value of the asset. RESEARCH AND DEVELOPMENT AND SIMILAR COSTS Research and development costs sponsored by the Company include research and development and bid and proposal efforts related to government products and services. Customer-sponsored research and development costs incurred are included in contract costs. FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSLATION The Company's major foreign operation is ELAC located in Germany with the Deutsche mark as its functional currency. Assets and liabilities are translated at current exchange rates at the end of the period. Income and expenses are translated using the monthly average exchange rates. The effect of the unrealized rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as a separate component of equity in the accompanying combined balance sheet. There are no material foreign currency gains or losses for the year ended December 31, 1997 as the Company's U.S. sales to foreign customers are denominated in U.S. dollars. ASCI Canadian sales are denominated in Canadian dollars and the ELAC foreign sales are denominated in Deutsche Marks. FINANCIAL INSTRUMENTS At December 31, 1997, the carrying value of the Company's financial instruments, such as receivables, accounts payable and accrued liabilities, approximate fair value, based on the short-term maturities of these instruments. INCOME TAXES The benefit for income taxes for OS was computed by applying statutory tax rates to the reported loss before income taxes after considering items that do not enter into the determination of taxable income and tax credits reflected in the consolidated provision of AlliedSignal which are related to OS. Income taxes for OS are assumed to have been settled with AlliedSignal at December 31, 1997 and there are no separate tax attributes related to OS. For ELAC, separate tax attributes that relate specifically to ELAC have been considered in computing taxes. 3. TRANSACTIONS WITH ALLIEDSIGNAL Ocean Systems relies on AlliedSignal for certain services, including treasury, cash management, employee benefits, taxes, risk management, internal audit, financial reporting, legal, contract administration and general corporate services. Although certain assets, liabilities and expenses related to these services have been allocated to the Company, the combined financial position, results of operations and cash flows presented in the accompanying combined financial statements would not be the same as would have occurred had the Company been an independent entity. The following describes the related party transactions. 9 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ALLOCATION OF CORPORATE EXPENSES The amount of allocated corporate expenses reflected in these combined financial statements has been estimated based primarily on an allocation methodology prescribed by government regulations pertaining to government contractors. Corporate expenses allocated to Ocean Systems were $2,258 for the year ended December 31, 1997, and are included in general and administrative expense in the accompanying combined statement of operations. PENSIONS Certain of the Company's employees participate in various AlliedSignal sponsored pension plans covering certain employees. Eligibility for participation in these plans varies, and benefits are generally based on employees' compensation and years of service. AlliedSignal funding policy is generally to contribute in accordance with cost accounting standards that affect government contractors subject to the Internal Revenue code and regulations. Although the aforementioned pension arrangements are part of certain AlliedSignal defined benefit plans, separate actuarial estimates were made for the portion allocable to the Company. Pension expense included in the accompanying combined statement of operations was $1,452 for the year ended December 31, 1997. The pension plan liability at December 31, 1997 was fully funded. The Company also has a supplemental pension plan for highly compensated employees as defined by IRS rules. The liability reflected in the accompanying combined balance sheet was $650 at December 31, 1997. Pension expense included in the combined statement of operations for the supplemental pension plan was $24 for the year ended December 31, 1997. The Company's German employees of ELAC are covered by a separate pension plan. Pension costs included the following components for the year ended December 31, 1997:
Service costs earned during the year ......... $163 Interest cost on projected benefit obligation 119 Actual return on plan assets .................. (92) Amortization of unrecognized net obligation .. 24 ------ Net periodic pension cost ..................... $214 ======
10 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) The following table sets forth the ELAC pension plan funded status and amounts recognized in the Company's combined balance sheet at December 31, 1997:
Actuarial present value of benefit obligation Vested ................................................ $1,067 Nonvested ............................................. 296 -------- Accumulated benefit obligation ....................... 1,363 ======== Projected benefit obligation .......................... 1,919 Plan assets at fair value ............................. 1,422 -------- Projected benefit obligation in excess of plan assets 497 Unrecognized net loss ................................ 37 Unrecognized prior service costs ..................... Unrecognized net obligation .......................... (361) -------- Accrued pension costs ............................... $ 173 ========
Major assumptions were: Discount Rate ................................... 6.8% Expected long-term rate of return on assets .... 6.8% Rate of increase in compensation levels ........ 4.0%
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS In addition to participating in AlliedSignal pension plans, employees of OS are provided varying levels of health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits when they retire from active service and meet the pension plan eligibility requirements. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying of the cost through contributions, deductibles and coinsurance provisions. Although the aforementioned postretirement benefits are part of certain AlliedSignal postretirement arrangements, separate actuarial estimates were made for the portion allocable to the Company. The weighted average discount rate utilized in determining the accumulated postretirement benefit obligation was 7.25% for 1997. The liability reflected in the accompanying combined balance sheet was $9,747 at December 31, 1997. Postretirement benefit costs included in the combined statements of operations was $1,072 for the year ended December 31, 1997. EMPLOYEE SAVINGS PLANS Ocean Systems North American operation also has a supplemental savings plan in which the Company matches the contributions of participating employees up to a designated level. Under this plan, the matching contributions, in cash, were $54 for the year ended December 31, 1997 and the liability recorded at December 31, 1997 was $562. INTEREST EXPENSE Interest expense has been allocated to the Company by applying AlliedSignal's weighted average consolidated interest rate to the portion of the beginning of the period equity account deemed to be 11 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) financed by consolidated debt, which has been determined based on AlliedSignal's debt to equity ratio on such date. Management of the Company believes that this allocation methodology is reasonable. The allocated interest expense was calculated using the following equity balance and interest rate, for the year ended December 31, 1997:
Equity ........ $5,751 Interest Rate 9.6%
Allocated interest expense for the year ended December 31, 1997 amounted to $552 and is included in interest expense, net in the accompanying combined statement of operations. INCOME TAXES The Company will be included in the consolidated Federal income tax return, foreign tax returns and certain combined and separate state and local income tax returns of AlliedSignal for 1997. Income taxes for OS are considered to have been settled with AlliedSignal at December 31, 1997 and are recorded through the invested equity account with AlliedSignal as there are no separate stand alone tax attributes related to OS. ELAC participates in the AlliedSignal Deutschland GmbH profit pooling agreement for corporate income tax and municipal trade tax. Since entering into this agreement ELAC has not paid German taxes, as any profits or losses of ELAC are transferred to AlliedSignal Deutschland. For purposes of these combined financial statements, the tax attributes that relate to ELAC prior to entering into the pooling agreement have been considered in computing the separate ELAC tax computations as these attributes will remain with ELAC after the termination of the pooling agreement after the acquisition by L-3. STATEMENT OF CASH FLOWS The company participates in the AlliedSignal cash management system, under which all cash is received and payments are made by AlliedSignal. All transactions between the Company and AlliedSignal have been accounted for as settled in cash at the time such transactions were recorded by the Company. 4. INVENTORIES AND CONTRACTS IN PROCESS Net inventories are comprised of the following components at December 31, 1997:
Raw materials and supplies ............ $14,494 Work in process ....................... 6,675 Finished goods ........................ 12,080 Excess and obsolete inventory reserve (7,772) Net inventories ...................... 25,477 Less, unliquidated progress payments (603) --------- $24,874 =========
For the year ended December 31, 1997, there were no general and administrative, independent research and development, or bid and proposal costs charged to inventory. Contracts in process include accumulated inventoried costs and profits on cost or cost-reimbursement contracts, principally with the U.S. Government. The U.S. Government has title to, or a security interest in, inventories to which progress payments are applied. The Company believes that substantially all such amounts will be billed and collected within one year. 12 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1997 are comprised of the following components:
Buildings, building improvements and land improvements ................................ $ 9,108 Machinery, equipment, furniture and fixtures 48,060 Leasehold improvements ....................... 300 ---------- 57,468 Less, accumulated depreciation and amortization ................................ (43,324) ---------- 14,144 Land ......................................... 388 Construction in progress ..................... 2,313 ---------- $ 16,845 ==========
Depreciation and amortization expense was $2,976 for the year ended December 31, 1997. 6. INCOME TAXES The effective tax rate differs from the statutory federal income tax rate for the following reasons:
Statutory federal income tax rate .... (35.0)% State taxes net of federal benefit ... (6.0)% Foreign losses with no tax benefit ... 6.7 % Foreign sales corporation tax benefit.............................. (4.5)% Other, net............................ (0.5)% --------- (39.3)% =========
At December 31, 1997, the German trade tax and corporate income tax net operating loss ("NOL") carryovers amounted to $953 and $1,180, respectively, and may be carried forward indefinitely. At December 31, 1997, deferred tax assets related to ELAC's German trade tax and corporate income tax NOL carryovers amounted to $468. A full valuation is recorded against the deferred tax asset. The valuation allowance for deferred taxes was based on ELAC's historical losses from operations and its current year loss. In addition, certain aspects of the acquisition could limit the utilization of a portion or all of these NOL carryovers. Accordingly, management believes currently there is not enough historical information to support that it is more likely than not that ELAC will realize the future tax benefit of these NOL carryovers. 7. EQUITY Invested equity represents the equity contributed to OS by AlliedSignal and related accumulated results of operations of OS. ELAC common stock represents the one share of common stock held by AS Deutschland. ELAC's retained earnings includes the impact of ELAC's accumulated operating losses, and repayments to AlliedSignal offset by the effects of the amortization of negative goodwill associated with the ELAC acquisition from Honeywell. 13 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 8. SALES TO PRINCIPAL CUSTOMERS The Company operates primarily in one industry segment, electronic sonar components and systems. Sales to principal customers are as follows for the year ended December 31, 1997:
U.S. Government agencies and prime contractors $36,133 German government............................... 5,895 Other foreign governments....................... 24,883 Commercial customers............................ 6,122 --------- $73,033 =========
Summarized data of the Company's operations by geographic area for the year ended December 31, 1997 are as follows:
NORTH REST OF AMERICA GERMANY EUROPE ASIA OTHER ELIM TOTAL --------- --------- --------- --------- -------- ----------- --------- Sales to unaffiliated customer ............. $39,002 $ 8,146 $6,220 $18,611 $1,054 -- $73,033 Inter-area sales ...... 19,536 4,334 -- -- -- $(23,870) -- Loss from operations . (4,658) (1,090) -- -- -- -- (5,748) Identifiable assets at December 31, 1997 ... 51,613 10,454 -- -- -- -- 62,067
9. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and equipment under agreements expiring at various dates through 2011. At December 31, 1997, future minimum payments for noncancellable operating leases with initial or remaining terms in excess of one year are $933 for 1998, $340 for 1999, $161 for 2000, $35 for 2001 and $7 for 2002. Leases covering major items of real estate and equipment contain renewal and or purchase options which may be exercised by the company. Rent expense, net of sublease income from other AlliedSignal entities, was $1,342 for the year ended December 31, 1997. Management is continually assessing the Company's obligations with respect to applicable environmental protection laws. While it is difficult to determine the timing and ultimate cost to be incurred by the Company in order to comply with these laws, based upon available internal and external assessments, with respect to those environmental loss contingencies of which management of the Company is aware, the Company believes that even without considering potential insurance recoveries, if any, there are no environmental loss contingencies that individually or in the aggregate, would be material to the Company's combined financial position, cash flows and results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company is engaged in providing products and services under contracts with the U.S. Government and foreign government agencies. 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 federal government for a specified term. 14 ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) The Company is also periodically subject to periodic review or audit by agencies of the U.S. Government. At December 31, 1997, there are several pending issues with these agencies that are incidental to the Company's business. One of these reviews was critical of the Company's procedures for maintaining control of Government owned property in the Company's custody. The Company is responsible and liable for $93 million of Government-owned property in its possession. With respect to this and other U.S. Government matters, the Company's management believes the ultimate resolution of any such matters will not have a material adverse effect on the combined financial position, cash flows or results of operations of the Company. The Company is periodically subject to litigation, claims or assessments and various contingent liabilities (including environmental matters) incidental to their business. With respect to those investigative actions, items of litigation, claims or assessments of which they are aware, management of the 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 combined financial position, cash flows or results of operations of the Company. 15 -----END PRIVACY-ENHANCED MESSAGE-----