SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): June 6, 2002
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L-3 COMMUNICATIONS HOLDINGS, INC.
L-3 COMMUNICATIONS CORPORATION
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(Exact Name of Registrants as Specified in Charter)
DELAWARE
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(State or Other Jurisdiction of Incorporation)
001-14141 13-3937434
333-46983 13-3937436
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(Commission File Number) (IRS Employer Identification No.)
600 THIRD AVENUE, NEW YORK, NEW YORK 10016
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(Address of Principal Executive Offices) (Zip Code)
(212) 697-1111
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(Registrants' Telephone Number, Including Area Code)
ITEM 5. OTHER EVENTS.
SENIOR SUBORDINATED NOTES OFFERING
L-3 Communications Holdings, Inc. announced on June 6, 2002 that
L-3 Communications Corporation, its wholly owned subsidiary, intends to raise
$750.0 million of gross proceeds through a private placement of senior
subordinated notes, subject to market and other conditions. The senior
subordinated notes will have a ten-year maturity with interest payable in cash.
The notes will be offered within the United States only to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
and, outside the United States, only to non-U.S. investors.
L-3 stated that it intends to use the net proceeds to repay indebtedness
outstanding under its senior subordinated interim loan agreement and to
repurchase and/or redeem its outstanding 10 3/8% Senior Subordinated Notes due
in 2007.
The senior subordinated notes to be offered have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or any state
securities laws, and unless so registered, may not be offered or sold in the
United States except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act and applicable
state securities laws.
COMMON STOCK OFFERING
L-3 Communications Holdings, Inc. announced on June 6, 2002 that it intends
to offer publicly a total of 14.0 million shares of its Common Stock.
L-3 Communications stated that it intends to use the proceeds of the common
stock offering to repay existing indebtedness and for general corporate
purposes, including potential common stock acquisitions.
A registration statement relating to these shares of common stock has been
filed with the Securities and Exchange Commission, but has not yet become
effective. These shares of common stock may not be sold, nor offers to buy be
accepted, prior to the time the registration statement becomes effective.
DEBT TENDER OFFER
L-3 Communications Holdings, Inc., announced on June 6, 2002 that L-3
Communications Corporation, its wholly owned subsidiary, is commencing a cash
tender offer to purchase all of its outstanding $225 million aggregate principal
amount of 10 3/8% Senior Subordinated Notes due 2007. The tender offer is being
made pursuant to an Offer to Purchase and a related Letter of Transmittal, dated
June 6, 2002. The tender offer is scheduled to expire at 5:00 p.m., New York
City time, on July 3, 2002, unless extended or earlier terminated. Tenders of
notes made prior to 5:00 p.m., New York City time, on June 19, 2002, may not be
validly withdrawn or revoked, unless the Company reduces the tender offer
consideration or the principal amount of notes subject to the tender offer or is
otherwise required by law to permit withdrawal. Tenders of notes made after 5:00
p.m., New York City time, on June 19, 2002, may be validly withdrawn at any time
until 5:00 p.m., New York City time, on the expiration date.
The total consideration to be paid for each validly tendered note accepted
for payment will be $1,053.50 per $1,000.00 of principal amount, plus accrued
and unpaid interest. The total consideration for each note tendered includes an
early tender premium of $20.00 per $1,000.00 of principal amount of notes
tendered prior to 5:00 p.m., New York City time, on June 19, 2002. Holders that
tender their notes after that time but prior to the expiration of the tender
offer will receive $1,033.50 per $1,000.00 of principal amount of notes validly
tendered and accepted for payment, plus accrued and unpaid interest.
The tendered offer is conditioned upon the satisfaction of certain
financing conditions and other customary conditions. If the tender offer is
consummated, L-3 Communications Corporation currently intends promptly
thereafter to call for redemption, in accordance with the amended terms of the
indenture governing the notes, all notes that remain outstanding, at the
applicable price of $1,051.88 per $1,000.00 of principal amount thereof, plus
interest accrued to the redemption date.
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A copy of the press releases are attached hereto as Exhibits 99.1, 99.2,
and 99.3 and are incorporated herein by reference. Except for historical
information contained in the press releases and this Form 8-K, the matters set
forth herein and therein are forward-looking statements. The forward-looking
statements set forth involve a number of risks and uncertainties that could
cause actual results to differ materially from any such statement, including the
risks and uncertainties discussed in the company's Safe Harbor Compliance
Statement for Forward-looking Statements included in the company's recent
filings, including Form 10-K, with the Securities and Exchange Commission. The
information contained or incorporated in this Form 8-K shall not constitute an
offer to call or the solicitation of and offer to buy nor shall there be any
sale of any of the securities referred to herein in any state in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under securities laws of any state.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
Exhibit
Number Title
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99.1 Press Release relating to senior subordinated notes offering
99.2 Press Release relating to common stock offering
99.3 Press Release relating to debt tender offer
ITEM 9. REGULATION FD DISCLOSURE.
In connection with L-3 Communications Corporation's private placement of
senior subordinated notes, the following information was provided to potential
investors.
"L-3 Holdings" refers to L-3 Communications Holdings, Inc., and "L-3
Communications" refers to L-3 Communications Corporation, a wholly-owned
operating subsidiary of L-3 Holdings. "L-3," "we," "us" and "our" refer to L-3
Holdings and its subsidiaries. L-3 Holdings has no other assets or liabilities
and conducts no other operations other than through L-3 Communications.
"Guarantors" refers to our current and future domestic restricted subsidiaries,
which will be guaranteeing the obligations of L-3 Communications under the
senior subordinated notes. The obligations of the guarantors are referred to
herein as the "guarantees." "Senior credit facilities" refers to our 364-day
revolving credit facility together with our five-year revolving credit facility.
"This offering" refers to the offering by L-3 Communications of senior
subordinated notes.
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RISK FACTORS
RISKS RELATED TO L-3
OUR SIGNIFICANT LEVEL OF DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING
ACTIVITY.
We have incurred substantial indebtedness to finance our acquisitions. As
of March 31, 2002, we had $2,175.0 million of outstanding debt, excluding
outstanding letters of credit (which aggregated approximately $166.6 million)
under our 364-day and five-year revolving credit facilities. As of May 31,
2002, we had $2,176.0 million of outstanding debt, excluding outstanding
letters of credit (which aggregated approximately $169.8 million) under our
senior credit facilities. In addition, available borrowings under our senior
credit facilities after reductions for outstanding letters of credit were
$229.2 million as of May 31, 2002. For the three months ended March 31, 2002,
our ratio of earnings to fixed charges, adjusted on a pro forma basis to give
effect to our acquisition of AIS, related financings and this offering, would
have been 2.1 to 1.0 and would have been 2.3 to 1.0 if further adjusted on a
pro forma basis to give effect to the concurrent offering by L-3 Communications
Holdings of 14,000,000 shares of its common stock. In the future we may borrow
more money, subject to limitations imposed on us by our debt agreements.
Our ability to make scheduled payments of principal and interest on our
indebtedness and to refinance our indebtedness depends on our future
performance. We do not have complete control over our future performance
because it is subject to economic, political, financial, competitive,
regulatory and other factors affecting the aerospace and defense industry. It
is possible that in the future our business may not generate sufficient cash
flow from operations to allow us to service our debt and make necessary capital
expenditures. If this situation occurs, we may have to sell assets, restructure
debt or obtain additional equity capital. We may not be able to do so or do so
without additional expense.
Our level of indebtedness has important consequences to you and your
investment in the notes. These consequences may include:
o requiring a substantial portion of our cash flow from operations to be
used to pay interest and principal on our debt and therefore be
unavailable for other purposes including capital expenditures, research
and development and other investments;
o limiting our ability to obtain additional financing for acquisitions or
working capital to make investments or other expenditures, which may
limit our ability to carry out our acquisition strategy;
o higher interest expenses due to increases in interest rates on our
borrowings that have variable interest rates;
o heightening our vulnerability to downturns in our business or in the
general economy and restricting us from making acquisitions, introducing
new technologies and products or exploiting business opportunities; and
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o covenants that limit our ability to borrow additional funds, dispose of
assets or pay cash dividends. Failure to comply with such covenants could
result in an event of default which, if not cured or waived, could result
in the acceleration of our outstanding indebtedness.
Additionally, on December 31, 2001, we had contractual obligations,
including outstanding indebtedness, of $1,680.2 million and contingent
commitments, including outstanding letters of credit under our senior credit
facilities, of $261.1 million. These contractual obligations and contingent
commitments are described elsewhere herein and in our Annual Report on Form
10-K for the fiscal year ended December 31, 2001, which is incorporated herein
by reference.
OUR ACQUISITION STRATEGY INVOLVES RISKS, AND WE MAY NOT SUCCESSFULLY IMPLEMENT
OUR STRATEGY.
We seek to acquire companies that complement our business. We may not be
able to continue to identify acquisition candidates on commercially reasonable
terms or at all. If we make additional acquisitions, we may not realize the
benefits anticipated from the acquisitions. Likewise, we may not be able to
obtain additional financing for acquisitions. Such additional financing could
be restricted by the terms of our debt agreements.
The process of integrating acquired operations, including our recent
acquisitions, into our existing operations may result in unforeseen operating
difficulties and may require significant financial and managerial resources
that would otherwise be available for the ongoing development or expansion of
our existing operations. Possible future acquisitions could result in the
incurrence of additional debt and related interest expense, contingent
liabilities and amortization expenses related to certain purchased intangible
assets, all of which could result in an increase to our already significant
level of outstanding debt. We consider and execute strategic acquisitions on an
ongoing basis and may be evaluating acquisitions or engaged in acquisition
negotiations at any given time. We regularly evaluate potential acquisitions
and joint venture transactions, and, except as disclosed herein or in the
documents incorporated herein by reference, we have not entered into any
agreements with respect to any material transactions.
WE RELY ON SALES TO U.S. GOVERNMENT ENTITIES, AND THE LOSS OF SUCH CONTRACTS
WOULD RESULT IN A SIGNIFICANT DECREASE TO OUR REVENUE AND PROFITS.
Our government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Approximately
64.7%, or $1,519 million, of our sales for the year ended December 31, 2001
were made directly or indirectly to the U.S. Department of Defense. At December
31, 2001, the number of contracts with a value exceeding $1.0 million was
approximately 575. Our largest program is a long-term, fixed-priced contract
for secure terminal equipment that we sell to the U.S. Armed Services,
intelligence and securities agencies that provided approximately 3.9% of our
sales for the year ended December 31, 2001. No other program provided more than
3.2% of our sales for the year ended December 31, 2001. The loss of all or a
substantial portion of our sales to the U.S. Government would result in a
significant decrease to our revenue and profits.
OUR GOVERNMENT CONTRACTS ENTAIL CERTAIN RISKS.
o Government contracts are dependent upon the U.S. defense budget.
The reduction in the U.S. defense budget in the early 1990s caused most
defense-related government contractors to experience decreased sales, increased
downward pressure on operating margins and, in certain cases, net losses. Our
predecessor company experienced a substantial decline in sales during that
period. A significant decline in U.S. military expenditures in the future could
result in a material decrease to our sales, earnings and cash flow. The loss or
significant reduction in government funding of a large program in which we
participate could also result in a material decrease to our future sales,
earnings and cash flows and thus limit our ability to satisfy our financial
obligations, including those relating to the notes. U.S. Government contracts
are also conditioned upon the continuing approval by Congress of the amount of
necessary spending. Congress usually appropriates funds for a given program
each fiscal year even though contract periods of performance
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may exceed one year. Consequently, at the beginning of a major program, the
contract is usually partially funded, and additional monies are normally
committed to the contract only if appropriations are made by Congress for
future fiscal years.
o Government contracts contain unfavorable termination provisions and
are subject to audit and modification.
Companies engaged primarily in supplying defense-related equipment and
services to U.S. Government agencies are subject to certain business risks
peculiar to the defense industry. These risks include the ability of the U.S.
Government to unilaterally:
o suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
o terminate existing contracts;
o reduce the value of existing contracts;
o audit our contract-related costs and fees, including allocated indirect
costs; and
o control and potentially prohibit the export of our products.
All of our U.S. Government contracts can be terminated by the U.S.
Government either for its convenience or if we default by failing to perform
under the contract. Termination for convenience provisions provide only for our
recovery of costs incurred or committed, settlement expenses and profit on the
work completed prior to termination. Termination for default provisions provide
for the contractor to be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from another source. Our contracts
with foreign governments generally contain similar provisions relating to
termination at the convenience of the customer.
The U.S. Government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. Government may adjust our contract-related
costs and fees, including allocated indirect costs. In addition, under U.S.
Government purchasing regulations, some of our costs, including most financing
costs, amortization of goodwill, portions of research and development costs,
and certain marketing expenses may not be reimbursable under U.S. Government
contracts. Further, as a U.S. Government contractor, we are subject to
investigation, legal action and/or liability that would not apply to a
commercial company.
o Government contracts are subject to competitive bidding and we are
required to obtain licenses for non-U.S. sales.
We obtain many of our U.S. Government contracts through a competitive
bidding process. We may not be able to continue to win competitively awarded
contracts. In addition, awarded contracts may not generate sales sufficient to
result in our profitability. We are also subject to risks associated with the
following:
o the frequent need to bid on programs in advance of the completion of
their design, which may result in unforeseen technological difficulties
and/or cost overruns;
o the substantial time and effort including the relatively unproductive
design and development required to prepare bids and proposals for
competitively awarded contracts that may not be awarded to us;
o design complexity and rapid technological obsolescence; and
o the constant need for design improvement.
In addition to these U.S. Government contract risks, we are required to
obtain licenses from U.S. Government agencies to export many of our products
and systems. Additionally, we are not permitted to export some of our products.
Failure to receive required licenses would eliminate our ability to sell our
products outside the United States.
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OUR FIXED-PRICE AND COST-REIMBURSABLE CONTRACTS MAY COMMIT US TO UNFAVORABLE
TERMS.
We provide our products and services primarily through fixed-price or
cost-reimbursable contracts. Fixed-price contracts provided 68.3% of our sales
for the year ended December 31, 2001. Under a fixed-price contract we agree to
perform the scope of work required by the contract for a predetermined contract
price. Although a fixed-price contract generally permits us to retain profits
if the total actual contract costs are less than the estimated contract costs,
we bear the risk that increased or unexpected costs may reduce our profit or
cause us to sustain losses on the contract. Therefore, we fully absorb cost
overruns on fixed-price contracts and this reduces our profit margin on the
contract. Those cost overruns may result in a loss. A further risk associated
with fixed-price contracts is the difficulty of estimating sales and costs that
are related to performance in accordance with contract specifications and the
possibility of obsolescence in connection with long-term procurements. Failure
to anticipate technical problems, estimate costs accurately or control costs
during performance of a fixed-price contract may reduce our profitability or
cause a loss.
Cost-reimbursable contracts provided 31.7% of our sales for the year ended
December 31, 2001. On a cost-reimbursable contract we are paid up to
predetermined funding levels determined by our customers, our allowable
incurred costs and generally a fee representing a profit on those costs, which
can be fixed or variable depending on the contract's pricing arrangement.
Therefore, unless costs exceed specified funding limitations, on a
cost-reimbursable contract we usually do not bear the risks of unexpected cost
overruns. However, U.S. Government regulations require that we notify our
customer of any cost overruns or underruns on a cost-reimbursable contract on a
timely basis. If we incur costs in excess of the funding limitation specified
in a cost-reimbusable contract, we may not be able to recover those cost
overruns.
We record sales and profits on substantially all of our contracts using
percentage-of-completion methods of accounting. As a result, revisions made to
our estimates of sales and profits are recorded in the period in which the
conditions that require such revisions become known and can be estimated;
accordingly, the revisions may have a material impact in any one period. Our
provisions for losses for our fixed-price contracts are based on estimates. To
the extent our actual contract losses exceed our estimates, our contract loss
provisions will not be adequate to cover all actual future losses.
OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE.
The rapid change of technology is a key feature of all of the industries
in which our businesses operate, including the commercial communication
industry in particular. To succeed in the future, we will need to continue to
design, develop, manufacture, assemble, test, market and support new products
and enhancements on a timely and cost-effective basis. Historically, our
technology has been developed through both customer-funded and internally
funded research and development. We may not be able to continue to maintain
comparable levels of research and development. In the past we have allocated
substantial funds to capital expenditures, programs and other investments. This
practice will continue to be required in the future. Even so, we may not be
able to successfully identify new opportunities and may not have the needed
financial resources to develop new products in a timely or cost-effective
manner. At the same time, products and technologies developed by others may
render our products and systems obsolete or non-competitive.
WE MAY NOT SUCCESSFULLY IMPLEMENT OUR PLAN TO EXPAND INTO COMMERCIAL MARKETS.
Our revenues have primarily come from business with the U.S. Department of
Defense and other U.S. Government agencies. In addition to continuing to pursue
these market areas, we will continue applying our technical capabilities and
expertise to related commercial markets. Some of our commercial products, such
as airport security equipment, voyage recorders and Prime Wave fixed wireless
loop products, have only recently been introduced.
These new commercial products are subject to certain risks and may require
us to:
o develop and maintain marketing, sales and customer support capabilities;
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o secure sales and customer support capabilities;
o obtain customer and/or regulatory certification;
o respond to rapidly changing technologies including those developed by
others that may render our products and systems obsolete or
non-competitive; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in commercial markets require
significant resources, including additional working capital and capital
expenditures, as well as the use of our management's time. Our ability to sell
certain commercial products, particularly our broadband wireless communications
products, depends to a significant degree on the efforts of independent
distributors or communications service providers and on the financial viability
of our existing and target customers for the commercial products. Certain of
our existing and target customers are agencies or affiliates of governments of
emerging and under-developed countries or private business enterprises
operating in those countries. In addition, we have made equity investments in
entities that plan to commence operations as communications service providers
using some of our commercial products. These distributors and service providers
may not be able to market our products or their services successfully and we
may not be able to realize a return of investment in them. We also may not be
successful in addressing these risks or in developing these commercial business
opportunities.
CONSOLIDATION AND INTENSE COMPETITION IN THE INDUSTRIES IN WHICH OUR BUSINESSES
OPERATE COULD LIMIT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
The communications equipment industry and the other industries in which
our businesses operate, and the market for defense applications, is highly
competitive. The defense industry has experienced substantial consolidation due
to declining defense budgets and increasing pressures for cost reductions. We
expect that the U.S. Department of Defense's increased use of commercial
off-the-shelf products and components in military equipment will continue to
encourage new competitors to enter the market. We also expect that competition
for original equipment manufacturing business will increase due to the
continued emergence of merchant suppliers. Our ability to compete for defense
contracts largely depends on the following factors:
o the effectiveness and innovations of our research and development
programs;
o our ability to offer better performance than our competitors at a lower
cost to the U.S. Government; and
o the readiness of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, the U.S. Government directs all work for a particular
project to a single supplier, commonly known as a sole-source project. In such
cases, other suppliers who may otherwise be able to compete for the programs
involved can only do so if the U.S. Government chooses to reopen the particular
program to competition. Additionally, many of our competitors are larger than
us and have substantially greater financial and other resources than we have.
OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO FINANCE OUR FUTURE OPERATIONS AND,
IF WE ARE UNABLE TO MEET OUR FINANCIAL RATIOS, COULD CAUSE OUR EXISTING DEBT TO
BE ACCELERATED.
Our debt agreements contain a number of significant provisions that, among
other things, restrict our ability to:
o sell assets;
o incur more indebtedness;
o repay certain indebtedness;
o pay dividends;
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o make certain investments or acquisitions;
o repurchase or redeem capital stock;
o engage in mergers or consolidations; and
o engage in certain transactions with subsidiaries and affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or engage in other business activities that may be in our
interest. In addition, some of our debt agreements also require us to maintain
compliance with certain financial ratios, including total consolidated earnings
before interest, taxes, depreciation and amortization to total consolidated
cash interest expense and total consolidated debt to total consolidated
earnings before interest, taxes, depreciation and amortization, and to limit
our capital expenditures. Our ability to comply with these ratios and limits
may be affected by events beyond our control. A breach of any of these
agreements or our inability to comply with the required financial ratios or
limits could result in a default under those debt agreements. In the event of
any such default, the lenders under those debt agreements could elect to:
o declare all outstanding debt, accrued interest and fees to be due and
immediately payable;
o require us to apply all of our available cash to repay our outstanding
senior debt; and
o prevent us from making debt service payments on our other debt.
If we were unable to repay any of these borrowings when due, the lenders
under our senior credit facilities could proceed against their collateral,
which consists of a first priority security interest in our outstanding shares
of common stock and the capital stock of our material subsidiaries. If the
indebtedness under the existing debt agreements were to be accelerated, our
assets may not be sufficient to repay such indebtedness in full.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY
BECOME UNABLE TO OPERATE OUR BUSINESS EFFECTIVELY.
Our future success depends to a significant degree upon the continued
contributions of our management, including Messrs. Lanza and LaPenta, and our
ability to attract and retain other highly qualified management and technical
personnel. We do not maintain any key person life insurance policies for
members of our management. As of June 1, 2002, Messrs. Lanza and LaPenta
beneficially owned, in the aggregate, 12.2% of the outstanding common stock of
L-3 Communications Holdings. We have an employment agreement with Mr. Lanza. We
face competition for management and technical personnel from other companies
and organizations. Failure to attract and retain such personnel would damage
our prospects.
ENVIRONMENTAL LAWS AND REGULATION MAY SUBJECT US TO SIGNIFICANT LIABILITY.
Our operations are subject to various U.S. federal, state and local as
well as certain foreign environmental laws and regulations within the countries
in which we operate relating to the discharge, storage, treatment, handling,
disposal and remediation of certain materials, substances and wastes used in
our operations.
New laws and regulations, stricter enforcement of existing laws and
regulations, the discovery of previously unknown contamination or the
imposition of new clean-up requirements may require us to incur a significant
amount of additional costs in the future and could decrease the amount of free
cash flow available to us for other purposes, including capital expenditures,
research and development and other investments.
TERMINATION OF OUR BACKLOG OF ORDERS COULD NEGATIVELY IMPACT OUR SALES.
We currently have a backlog of orders, primarily under contracts with the
U.S. Government. The U.S. Government may unilaterally modify or terminate these
contracts. Accordingly, most of our backlog could be modified or terminated by
the U.S. Government. Therefore, existing backlog may not result in sales.
Further, any margin we record on sales from any contract included in backlog
may not be profitable.
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OUR PENSION PLAN LIABILITIES MAY RESULT IN SIGNIFICANT EXPENSES.
We have assumed certain liabilities relating to defined benefit pension
plans for present and former employees and retirees of certain businesses which
we acquired. Prior to our formation, Lockheed Martin received a letter from the
Pension Benefit Guaranty Corporation (the "PBGC") which requested information
regarding the transfer of these pension plans and indicated that the PBGC
believed certain of these pension plans were underfunded using its actuarial
assumptions. These assumptions resulted in a larger liability for accrued
benefits than the assumptions used for financial reporting under Statement of
Financial Accounting Standards No. 87.
With respect to these plans, Lockheed Martin entered into an agreement
with us and the PBGC dated as of April 30, 1997. Under that agreement, Lockheed
Martin agreed, upon the occurrence of certain circumstances, either to:
o assume sponsorship of the subject plans; or
o provide another form of financial support.
If Lockheed Martin did assume sponsorship of these plans, it would be
primarily liable for the costs associated with funding these plans or any costs
associated with the termination of them, but we would be required to reimburse
Lockheed Martin for its obligations. Should Lockheed Martin assume sponsorship
of the subject plans, or if these plans were terminated, the impact of any
increased pension expenses or funding requirements could reduce the amount of
free cash flow available to us.
RISKS RELATED TO THE NOTES
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES,
WHICH MAY REDUCE THEIR MARKET PRICE.
The notes are a new issue of securities for which there is currently no
trading market. Although we expect the notes to be eligible for trading in
PORTAL, we cannot assure you that an active trading market for the notes will
develop or be sustained. The initial purchasers have advised us that they
presently intend to make a market in the notes after this offering is
completed. The initial purchasers are not obligated, however, to make a market
in the notes and any such market making may be discontinued at any time at the
sole discretion of the initial purchasers.
In addition, the liquidity of the trading market in the notes and the
market price quoted for the notes may be adversely affected by changes in the
overall market for high yield debt securities, changes in our prospects or
financial performance or in the prospects for companies in our industry
generally. If an active market for the notes fails to develop or be sustained,
the trading price could fall. If an active trading market were to develop, they
could trade at prices that may be lower than the initial offering price.
Whether or not they could trade at lower prices depends on many factors,
including:
o prevailing interest rates;
o the markets for similar securities;
o general economic conditions; and
o our financial condition, historical financial performance and future
prospects.
THE NOTES ARE SUBORDINATED TO ALL OUR EXISTING AND FUTURE SENIOR INDEBTEDNESS,
WHICH MAY INHIBIT OUR ABILITY TO REPAY YOU.
The notes are contractually subordinated in right of payment to our
existing and future senior indebtedness. As of May 31, 2002, we had outstanding
senior debt of $351.0 million, and had the ability to borrow up to $229.2
million (after reductions for outstanding letters of credit of $169.8 million)
under our senior credit facilities, which if borrowed would be senior debt.
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Any incurrence of additional indebtedness may materially adversely impact
our ability to service our debt, including the notes. Due to the subordination
provisions of our senior indebtedness, in the event of our insolvency, funds
that would otherwise be used to pay the holders of the notes will be used to
pay the holders of senior indebtedness to the extent necessary to pay the
senior indebtedness in full. As a result of these payments, general creditors
may recover less, ratably, than the holders of senior indebtedness and the
general creditors may recover more, ratably, than the holders of the notes or
other subordinated indebtedness. In addition, the holders of senior
indebtedness may, under certain circumstances, restrict or prohibit us from
making payments on the notes.
THE TERMS OF OUR INDEBTEDNESS COULD RESTRICT OUR FLEXIBILITY AND LIMIT OUR
ABILITY TO SATISFY OBLIGATIONS UNDER THE NOTES.
We are subject to operational and financial covenants and other
restrictions contained in the bank loan documents evidencing our senior
indebtedness and the indentures evidencing our senior subordinated notes. These
covenants could limit our operational flexibility and restrict our ability to
borrow additional funds, if necessary, to finance operations and to make
principal and interest payments on the notes. Additionally, failure to comply
with these operational and financial covenants could result in an event of
default under the terms of this indebtedness which, if not cured or waived,
could result in this indebtedness becoming due and payable. The effect of these
covenants, or our failure to comply with them, could have a material adverse
effect on our business, financial condition and results of operations.
OUR ABILITY TO REPURCHASE NOTES WITH CASH UPON A CHANGE OF CONTROL MAY BE
LIMITED.
In specific circumstances involving a change of control, you may require
us to repurchase some or all of your notes. We cannot assure you that we will
have sufficient financial resources at such time or would be able to arrange
financing to pay the repurchase price of the notes in cash. Our ability to
repurchase the notes in such event may be limited by law, by our indentures, by
the terms of other agreements relating to our senior indebtedness and by such
indebtedness and agreements as may be entered into, replaced, supplemented or
amended from time to time. We may be required to refinance our senior
indebtedness in order to make such payments. We may not have the financial
ability to repurchase the notes in cash if payment for our senior indebtedness
is accelerated.
THE GUARANTEES MAY BE UNENFORCEABLE DUE TO FRAUDULENT CONVEYANCE STATUTES, AND
ACCORDINGLY, YOU COULD HAVE NO CLAIM AGAINST THE GUARANTORS.
Although laws differ among various jurisdictions, a court could, under
fraudulent conveyance laws, further subordinate or avoid the guarantees if it
found that the guarantees were incurred with actual intent to hinder, delay or
defraud creditors, or the guarantor did not receive fair consideration or
reasonably equivalent value for the guarantees and that the guarantor was any
of the following:
o insolvent or rendered insolvent because of the guarantees;
o engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay at maturity.
If a court voided a guaranty by one or more of our subsidiaries as the
result of a fraudulent conveyance, or held it unenforceable for any other
reason, holders of the notes would cease to have a claim against the subsidiary
based on the guaranty and would solely be creditors of L-3 Communications
Corporation and any guarantor whose guarantee was not similarly held
unenforceable.
NOT ALL OF OUR SUBSIDIARIES ARE GUARANTORS, AND YOUR CLAIMS WILL BE
SUBORDINATED TO ALL OF THE CREDITORS OF THE NON-GUARANTOR SUBSIDIARIES.
Many, but not all, of our direct and indirect subsidiaries will guarantee
the notes. In the event of a bankruptcy, liquidation or reorganization of any
of the non-guarantor subsidiaries, holders of their
11
indebtedness and their trade creditors will generally be entitled to payment of
their claims from the assets of those non-guarantor subsidiaries before any
assets of the non-guarantor subsidiaries are made available for distribution to
us. Assuming this offering was completed on March 31, 2002, these notes would
have been effectively junior to $68.8 million of indebtedness and other
liabilities (including trade payables) of these non-guarantor subsidiaries. The
non-guarantor subsidiaries generated 8.1% of our sales, generated earnings of
$5.0 million and cash from operating activities of $(3.8) million for the three
months ended March 31, 2002. The non-guarantor subsidiaries held 11.9% of our
consolidated assets as of March 31, 2002.
THE GUARANTEES WILL BE SUBORDINATED TO THE SENIOR DEBT OF THE GUARANTORS.
The guarantees are subordinated to all existing and future senior debt of
the guarantors, which shall consist of all of the indebtedness and other
liabilities of the guarantors designated as senior, including guarantees of
borrowings under the senior credit facilities. The guarantees issued in
connection with this offering will be pari passu with the guarantees of the
senior subordinated notes sold by L-3 Communications Corporation in May 1998
and December 1998, and with the guarantees, including the guarantee by L-3
Communications Corporation, of the 5 1/4% Convertible Senior Subordinated Notes
due 2009 sold by L-3 Communications Holdings in November 2000 and of the 4%
Senior Subordinated Convertible Contingent Notes due 2011 sold by L-3
Communications Holdings in October 2001. As of May 31, 2002, we had $351.0
million of senior debt outstanding under our senior credit facilities, all of
which has been guaranteed by our subsidiaries. As of May 31, 2002, L-3
Communications Corporation had the ability to borrow up to $229.2 million
(after reduction for outstanding letters of credit of $169.8 million) under its
senior credit facilities, which if borrowed would be senior debt. Any right of
L-3 Communications Corporation to receive the assets of any of its subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the notes to participate in those assets) will be subject to the
claims of that subsidiary's creditors, including trade creditors. To the extent
that L-3 Communications Corporation is recognized as a creditor of that
subsidiary, L-3 Communications Corporation may have such claim, but it would
still be subordinate to any security interests in the assets of that subsidiary
and any indebtedness and other liabilities of that subsidiary senior to that
held by L-3 Communications Corporation.
RESALE OF THE NOTES IS RESTRICTED, WHICH MAY IMPACT YOUR ABILITY TO SELL THE
NOTES.
The notes and the guarantees have not been registered under the Securities
Act of 1933 ("Securities Act") or any state securities laws. Thus, unless they
are registered, the notes and the guarantees may not be offered or sold except
pursuant to an exemption from registration under the Securities Act and
applicable state laws or in a transaction not subject to such laws. Although we
are required to register the resale by the holders of the notes and the
guarantees, such registration may not be available to holders at all times and
selling holders may therefore be subject to potential liability under the
Securities Act.
THIS OFFERING MEMORANDUM CONTAINS FORWARD LOOKING STATEMENTS, WHICH MAY NOT BE
CORRECT.
Certain of the matters discussed concerning our operations, economic
performance and financial condition, including in particular, the likelihood of
our success in developing and expanding our business and the realization of
sales from backlog, include forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" and similar expressions are
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, we can give no assurance that their goals will be
achieved.
12
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statements of
operations ("pro forma statement of operations") data gives effect to the
following transactions as if they had occurred on January 1, 2001: (1) our
acquisition of AIS, which was completed on March 8, 2002, and the acquisitions
of KDI Precision Products, Inc., EER Systems, Inc., Spar Aerospace Limited,
Emergent Government Services Group, Bulova Technologies, and SY Technology,
Inc., which we completed during the year ended December 31, 2001, and their
related financings (collectively, the "Acquisitions") and (2) this offering and
the application of the net proceeds of this offering (assuming that the
concurrent sale of common stock by L-3 Communications Holdings, Inc. is not
consummated) to repay $500.0 million of indebtedness outstanding under our
senior subordinated interim loan agreement incurred in connection with our
acquisition of AIS and to repurchase and/or redeem our 10 3/8% Senior
Subordinated Notes due 2007. All of the Acquisitions described above are
included in our consolidated balance sheet as of March 31, 2002, and therefore,
an unaudited pro forma condensed consolidated balance sheet is not provided.
The pro forma statements of operations do not include an extraordinary
pre-tax charge of $16.1 million ($9.7 million after-tax) related to the
repurchase and/or redemption of our $225.0 million 10 3/8% Senior Subordinated
Notes due 2007. The extraordinary charge includes the call premium of 5.188% or
approximately $11.6 million and fees and other expenses of approximately $4.5
million, including the write-off of unamortized deferred debt issue costs
relating to the $225.0 million 10 3/8% Senior Subordinated Notes due 2007.
The pro forma adjustments related to our Acquisitions are based on
preliminary purchase prices and purchase price allocations. Actual adjustments
will be based on final purchase prices, audited historical net assets for the
Acquisitions, and final appraisals and other analyses of fair values of
contracts in process, inventories, estimated costs in excess of billings to
complete contracts in process, identifiable intangibles, pension and
postretirement benefit obligations and deferred tax assets and liabilities,
which will be completed after we obtain and review all of the data required for
the acquired assets and liabilities and complete our valuations of them.
Differences between the preliminary and final purchase price allocations could
have a material impact on our results of operations and financial position. The
unaudited pro forma condensed consolidated statement of operations does not
reflect any cost savings that we believe would have resulted had the
Acquisitions occurred on January 1, 2001.
The supplemental pro forma data is provided as additional information and
gives effect as of January 1, 2001 to this offering and the concurrent sale of
common stock by L-3 Communications Holdings, Inc. and the application of the
net proceeds from this offering and the concurrent sale of common stock to (1)
repay $500.0 million of indebtedness outstanding under our senior subordinated
interim loan agreement, (2) repay $349.9 million of indebtedness outstanding
under our senior credit facilities, (3) repurchase and/or redeem the $225.0
million 10 3/8% Senior Subordinated Notes due 2007 for approximately $237.4
million and (4) increase our cash and cash equivalents, which will be used for
general corporate purposes, including potential acquisitions.
The unaudited pro forma condensed consolidated financial information should
be read in conjunction with (1) our unaudited condensed consolidated financial
statements for the three months ended March 31, 2002 and 2001, and our audited
consolidated financial statements for the year ended December 31, 2001 included
in our Annual Report on Form 10-K for the year ended December 31, 2001; and (2)
the audited combined financial statements of AIS for the year ended December 31,
2001 included in our Current Report on Form 8-K dated March 22, 2002. The other
historical statement of operations data for the Acquisitions are based on
unaudited financial statement data not included or incorporated by reference
herein. The unaudited pro forma condensed consolidated financial information may
not be indicative of the results of operations that actually would have occurred
had the Acquisitions, this offering and the concurrent sale of common stock by
L-3 Communications Holdings been completed on January 1, 2001 or the results of
our operations that may be obtained in the future.
13
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN MILLIONS)
PRO FORMA
L-3 ADJUSTMENTS PRO FORMA
AS ACQUISITION FOR OUR FOR OUR
REPORTED HISTORICAL(1)(2) ACQUISITIONS ACQUISITIONS
---------- ------------------ -------------- --------------
Sales ....................... $ 696.8 $ 213.4 $ -- $ 910.2
Costs and expenses .......... 625.5 209.1 -- 834.6
-------- -------- -------- --------
Operating income .......... 71.3 4.3 -- 75.6
Interest and other income
(expense) .................. 1.0 -- (1.2)(3) ( 0.2)
Interest expense ............ 26.1 -- 7.3 (4) 33.4
Minority interest ........... 0.9 -- -- 0.9
-------- -------- -------- --------
Income (loss) before
income taxes ............. 45.3 4.3 (8.5) 41.1
Provision (benefit) for
income taxes(7) ............ 16.0 2.4 (3.4) 15.0
-------- -------- -------- --------
Income (loss) from
continuing
operations ............... $ 29.3 $ 1.9 $ (5.1) $ 26.1
======== ======== ======== ========
SUPPLEMENTAL DATA
-----------------------------------
PRO FORMA
FOR OUR
ADDITIONAL ACQUISITIONS
ADJUSTMENTS AND THIS
PRO FORMA FOR L-3 OFFERING AND L-3
FOR OUR COMMUNICATIONS COMMUNICATIONS
ADJUSTMENTS ACQUISITIONS HOLDINGS' HOLDINGS'
FOR THIS AND THIS CONCURRENT CONCURRENT
OFFERING OFFERING EQUITY OFFERING EQUITY OFFERING
------------- -------------- ----------------- -----------------
Sales ....................... $ -- $ 910.2 $ -- $ 910.2
Costs and expenses .......... -- 834.6 -- 834.6
------ -------- --------- --------
Operating income .......... -- 75.6 -- 75.6
Interest and other income
(expense) .................. -- ( 0.2) -- ( 0.2)
Interest expense ............ 2.2 (5) 35.6 (4.2) (6) 31.4
Minority interest ........... -- 0.9 -- 0.9
--------- -------- --------- --------
Income (loss) before
income taxes ............. (2.2) 38.9 4.2 43.1
Provision (benefit) for
income taxes(7) ............ (0.9) 14.1 1.7 15.8
--------- -------- --------- --------
Income (loss) from
continuing
operations ............... $ (1.3) $ 24.8 $ 2.5 $ 27.3
====== ======== ========= ========
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
14
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN MILLIONS)
PRO FORMA
L-3 ADJUSTMENTS PRO FORMA
AS ACQUISITIONS FOR OUR FOR OUR
REPORTED HISTORICAL(1)(8) ACQUISITIONS ACQUISITIONS
---------- ------------------ -------------- --------------
Sales ....................... $ 461.9 $ 327.9 $ -- $ 789.8
Costs and expenses .......... 415.0 312.6 ( 7.1)(9) 720.5
-------- -------- -------- --------
Operating income .......... 46.9 15.3 7.1 69.3
Interest and other income
(expense) .................. 0.5 ( 0.2) ( 1.0)(3) ( 0.7)
Interest expense ............ 24.4 0.3 22.5 (4) 47.2
Minority interest ........... -- -- -- --
-------- -------- -------- --------
Income (loss) before
income taxes ............. 23.0 14.8 (16.4) 21.4
Provision (benefit) for
income taxes(7) ............ 8.8 6.4 ( 6.0) 9.2
-------- -------- -------- --------
Income (loss) from
continuing
operations ............... 14.2 8.4 (10.4) 12.2
Goodwill amortization
expense, net of tax ........ 7.3 -- -- 7.3
-------- -------- -------- --------
Income (loss) from
continuing
operations, as
adjusted ................. $ 21.5 $ 8.4 $ (10.4) $ 19.5
======== ======== ======== ========
SUPPLEMENTAL DATA
-----------------------------------
PRO FORMA
FOR OUR
ADDITIONAL ACQUISITIONS
ADJUSTMENTS AND THIS
PRO FORMA FOR L-3 OFFERING AND L-3
FOR OUR COMMUNICATIONS COMMUNICATIONS
ADJUSTMENTS ACQUISITIONS HOLDINGS' HOLDINGS'
FOR THIS AND THIS CONCURRENT CONCURRENT
OFFERING OFFERING EQUITY OFFERING EQUITY OFFERING
----------------- -------------- ----------------- -----------------
Sales ....................... $ -- $ 789.8 $ -- $ 789.8
Costs and expenses .......... -- 720.5 -- 720.5
-------- -------- --------- --------
Operating income .......... -- 69.3 -- 69.3
Interest and other income
(expense) .................. -- ( 0.7) -- ( 0.7)
Interest expense ............ (2.7) (5) 44.5 (6.6) (6) 37.9
Minority interest ........... -- -- -- --
-------- -------- --------- --------
Income (loss) before
income taxes ............. 2.7 24.1 6.6 30.7
Provision (benefit) for
income taxes(7) ............ 1.1 10.3 2.6 12.9
-------- -------- --------- --------
Income (loss) from
continuing
operations ............... 1.6 13.8 4.0 17.8
Goodwill amortization
expense, net of tax ........ -- 7.3 -- 7.3
-------- -------- --------- --------
Income (loss) from
continuing
operations, as
adjusted ................. $ 1.6(10) $ 21.1 $ 4.0 $ 25.1
======== ======== ========= ========
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
15
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS)
PRO FORMA
L-3 ADJUSTMENTS PRO FORMA
AS ACQUISITIONS FOR OUR FOR OUR
REPORTED HISTORICAL(1)(11) ACQUISITIONS ACQUISITIONS
------------- ------------------- ---------------- --------------
Sales ....................... $ 2,347.4 $ 1,209.9 $ -- $ 3,557.3
Costs and expenses .......... 2,072.1 1,146.9 (28.9)(9) 3,190.1
---------- ---------- --------- ----------
Operating income .......... 275.3 63.0 28.9 367.2
Interest and other income
(expense) .................. 1.8 ( 11.2) ( 3.8)(3) ( 13.2)
Interest expense ............ 86.3 0.5 75.7 (4) 162.5
Minority interest ........... 4.5 -- -- 4.5
---------- ---------- --------- ----------
Income (loss) before
income taxes ............. 186.3 51.3 (50.6) 187.0
Provision (benefit) for
income taxes(7) ............ 70.8 25.7 (19.1) 77.4
---------- ---------- --------- ----------
Income (loss) from
continuing
operations ............... 115.5 25.6 (31.5) 109.6
Goodwill amortization
expense, net of tax ........ 33.9 -- -- 33.9
---------- ---------- --------- ----------
Income (loss) from
continuing
operations, as
adjusted ................. $ 149.4 $ 25.6 $ (31.5) $ 143.5
========== ========== ========= ==========
SUPPLEMENTAL DATA
----------------------------------------
PRO FORMA
FOR OUR
ACQUISITIONS
ADDITIONAL AND THIS
PRO FORMA ADJUSTMENTS FOR OFFERING AND
FOR OUR L-3 COMMUNICATIONS L-3 COMMUNICATIONS
ADJUSTMENTS ACQUISITIONS HOLDINGS' HOLDINGS'
FOR THIS AND THIS CONCURRENT CONCURRENT
OFFERING OFFERING EQUITY OFFERING EQUITY OFFERING
----------------- -------------- -------------------- -------------------
Sales ....................... $ -- $ 3,557.3 $ -- $ 3,557.3
Costs and expenses .......... -- 3,190.1 -- 3,190.1
-------- ---------- ---------- ----------
Operating income .......... -- 367.2 -- 367.2
Interest and other income
(expense) .................. -- ( 13.2) -- ( 13.2)
Interest expense ............ (2.3) (5) 160.2 (23.0) (6) 137.2
Minority interest ........... -- 4.5 -- 4.5
-------- ---------- ---------- ----------
Income (loss) before
income taxes ............. 2.3 189.3 23.0 212.3
Provision (benefit) for
income taxes(7) ............ 0.9 78.3 9.2 87.5
-------- ---------- ---------- ----------
Income (loss) from
continuing
operations ............... 1.4 111.0 13.8 124.8
Goodwill amortization
expense, net of tax ........ -- 33.9 -- 33.9
-------- ---------- ---------- ----------
Income (loss) from
continuing
operations, as
adjusted ................. $ 1.4(10) $ 144.9 $ 13.8 $ 158.7
======== ========== ========== ==========
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
16
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. On March 8, 2002, we acquired AIS for $1,152.7 million in cash which
includes $1,130.0 million for the original contract purchase price, $4.0
million for estimated acquisition costs and an increase to the contract
purchase price of $18.7 million related to additional assets contributed by
Raytheon to AIS. The purchase price is subject to adjustment based on the
AIS closing date net tangible book value, as defined. The AIS acquisition
was financed using cash on hand as well as available borrowings under our
senior credit facilities and a $500.0 million senior subordinated interim
loan. During the year ended December 31, 2001, we also made the following
acquisitions:
o in May 2001, all the outstanding common stock of KDI Precision Products,
Inc. ("KDI") for $79.4 million in cash including acquisition costs.
o in May 2001, all the outstanding common stock of EER Systems, Inc.
("EER") for $119.5 million in cash including acquisition costs, and
subject to an additional purchase price not to exceed $5.0 million which
is contingent upon the financial performance of EER for the year ending
December 31, 2002.
o in November and December 2001, 70.3% of the outstanding common stock of
Spar Aerospace Limited ("Spar") for $105.1 million in cash including
acquisition costs. We acquired and paid for the remaining outstanding
common stock of Spar in January 2002 for $43.6 million.
o in November 2001, all the outstanding common stock of Emergent
Government Services Group ("EMG") for $39.8 million, subject to
adjustment based on closing date net working capital. Following the
acquisition, we changed Emergent Government Services Group's name to L-3
Communications Analytics.
o in December 2001, the net assets of Bulova Technologies for $49.5
million, subject to adjustment based on closing date net assets.
Following the acquisition, we changed Bulova Technologies name to BT Fuze
Products ("BT Fuze").
o in December 2001, the net assets of SY Technology Inc. ("SY") for $49.8
million, subject to adjustment based on closing date net assets, and
additional purchase price not to exceed $3.0 million, which is contingent
upon the financial performance of SY for the years ending December 31,
2002 and 2003.
The aggregate purchase price of these acquisitions, including acquisition
costs, is $1,639.4 million.
2. The pro forma statement of operations for the three months ended March 31,
2002 includes the unaudited historical financial data for AIS for the two
months ended February 28, 2002. All of the other acquisitions are included in
our results of operations for the entire three months ended March 31, 2002.
3. Our historical interest income has been eliminated because the cash and cash
equivalents which earned the interest income were obtained from the net
proceeds from the CODES (as defined below) offering and the May 2001 Common
Stock Offering (as defined below) that were assumed entirely to be used to
finance the Acqusitions. Such eliminations amounted to $1.2 million for the
three months ended March 31, 2002, $1.0 million for the three months ended
March 31, 2001 and $3.8 million for the year ended December 31, 2001.
4. The aggregate purchase prices, including acquisition costs, for the
Acquisitions of $1,639.4 million were assumed to be financed at January 1,
2001 using (1) borrowings under our senior credit facilities of $349.9
million, (2) borrowings of $500.0 million under the senior subordinated
interim loan, (3) cash on hand of $28.4 million, (4) the net proceeds from
the sale of $420.0 million of 4% Senior Subordinated Convertible Contingent
Debt Securities due September 15, 2011 ("CODES") in October and November of
2001 which amounted to $407.5 million, and (5) the net proceeds from L-3
Holdings' public offering of 9,150,000 shares of its common stock in May
2001 (the
17
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"May 2001 Common Stock Offering") which amounted to $353.6 million. The
borrowings under the senior credit facilities and the senior subordinated
interim loan that we made to finance the AIS acquisition were included in
our historical results of operations effective March 1, 2002.
The adjustments to our historical interest expense for the three months
ended March 31, 2002 and 2001 and the year ended December 31, 2001 to give
effect to the financing of the Acquisitions are presented below.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
------------------- DECEMBER 31,
2002 2001 2001
--------- --------- -------------
(IN MILLIONS)
Interest on borrowings under the senior credit
facilities (on $349.9 million) for the periods prior
to March 1, 2002(a) ................................ $ 2.8 $ 6.6 $ 23.0
Interest on senior subordinated interim loan (on
$500.0 million) for the periods prior to March 1,
2002(a) ............................................ 4.5 11.6 38.0
Interest on the CODES offering for the periods
prior to October 31, 2001 (4% on $420.0 million
for 10 months). .................................... -- 4.2 14.0
Amortization of deferred debt issue costs incurred
on the CODES for periods prior to October 31,
2001 ............................................... -- 0.4 1.2
Eliminate historical interest expense for the KDI
and SY Technology acquisitions ..................... -- ( 0.3) ( 0.5)
------ ------ -------
Total pro forma adjustments to interest
expense ......................................... $ 7.3 $ 22.5 $ 75.7
====== ====== =======
----------
(a) The adjustments to pro forma interest for the pro forma
adjustments for borrowings under the senior credit facilities and
senior subordinated interim loan are based on the average
prevailing interest rates that we would have paid on those
borrowings for the periods presented had such borrowings been
outstanding at the beginning of each of the periods presented.
The average prevailing interest rates on the senior credit
facilities would have been 4.85% for the three months ended March
31, 2002, 7.55% for the three months ended March 31, 2001 and
6.57% for the year ended December 31, 2001. The average
prevailing interest rates on the senior subordinated interim loan
would have been 5.38% for the three months ended March 31, 2002,
9.30% for the three months ended March 31, 2001, and 7.59% for
the year ended December 31, 2001.
5. Assuming this offering was completed on January 1, 2001, the net proceeds
from this offering of $733.1 million, after deductions for underwriting
commissions and discounts and other offering expenses of $16.9 million,
would have been applied to repay all of the borrowings under the senior
subordinated interim loan of $500.0 million and repurchase and/or redeem
our 10 3/8% Senior Subordinated Notes due 2007. Total interest expense after
the pro forma adjustments for our acquisitions but prior to this offering
amounted to $33.4 million for the three months ended March 31, 2002, $47.2
million for the three months ended March 31, 2001, and $162.5 million for
the year ended December 31, 2001. As a result of this offering, total pro
forma interest expense would have increased by $2.2 million for the three
months ended March 31, 2002, decreased by $2.7 million for the three months
ended March 31, 2001 and $2.3 million for the year ended December 31, 2001.
The details of the changes to interest expense are described in the table
below.
18
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED MARCH
31,
--------------------------- YEAR ENDED
2002 2001 DECEMBER 31, 2001
---------- -------------- ------------------
(IN MILLIONS)
Estimated interest on $750.0 million 7.75%
Senior Subordinated Notes offered
hereby ..................................... $ 14.5 $ 14.5 $ 58.1
Amortization of deferred debt issue costs
incurred on $750.0 million Senior
Subordinated Notes offered hereby .......... 0.4 0.4 1.7
Eliminate interest on the senior
subordinated interim loan(a) ............... ( 6.7) (11.6) (38.0)
Eliminate interest on $225.0 million 10 3/8%
Senior Subordinated Notes due 2007 ......... ( 5.8) ( 5.8) (23.3)
Eliminate amortization of deferred debt
issue costs incurred on $225.0 million
10 3/8% Senior Subordinated Notes due
2007 ....................................... ( 0.2) ( 0.2) ( 0.8)
------- ------- -------
Total pro forma interest expense ........... $ 2.2 $ (2.7) $ (2.3)
======= ======= =======
----------
(a) The adjustments to pro forma interest expense for the pro forma
adjustments for borrowings under the senior subordinated interim
loan are based on the average prevailing interest rates that we
would have paid on those borrowings for the periods presented had
such borrowings been outstanding at the beginning of each of the
periods presented. The average prevailing interest rates on the
senior subordinated interim loan would have been 5.38% for the
three months ended March 31, 2002, 9.30% for the three months
ended March 31, 2001, and 7.59% for the year ended December 31,
2001.
An increase of 100 basis points or 1.0% to the assumed rate of interest
paid on the $750.0 million of senior subordinated notes would increase the
pro forma interest expense by $1.9 million for the three months ended March
31, 2002 and 2001, and $7.5 million for the year ended December 31, 2001.
6. Assuming the concurrent sale of common stock by L-3 Communications Holdings
of 14,000,000 million shares was simultaneously completed with this offering
on January 1, 2001, the net proceeds from that offering would have been
$807.3 million based on the last reported sales price of L-3 Communications
Holdings' common stock on June 6, 2002 of $59.52 and after deducting related
discounts, commissions and other estimated expenses of $26.0 million. The net
proceeds of that offering would have been used to repay $349.9 million of
borrowings outstanding under the senior credit facilities, and $457.4 million
would have been invested in cash and cash equivalents. Total interest expense
after the pro forma adjustments for our acquisitions and this offering, but
prior to the concurrent sale of common stock amounted to $35.6 million for
the three months ended March 31, 2002, $44.5 million for the three months
ended March 31, 2001, and $160.2 million for the year ended December 31,
2001. As a result of the sale of common stock by L-3 Communications Holdings
total pro forma interest expense would have decreased by $4.2 million for the
three months ended March 31, 2002, $6.6 million for the three months ended
March 31, 2001 and $23.0 million for the year ended December 31, 2001 because
interest expense on the $349.9 million of the borrowings under the senior
credit facilities would be eliminated. The adjustments to pro forma interest
expense for the pro forma adjustments for borrowings under the senior credit
facilities are based on the average prevailing interest rates that we would
have paid on those borrowings for the periods presented had such borrowings
been outstanding at the beginning of each of the periods presented. The
average prevailing interest rates on the senior credit facilities would have
been 4.85% for the three months ended March 31, 2002, 7.55% for the three
months ended March 31, 2001 and 6.57% for the year ended December 31, 2001.
The pro forma statements of operations do not reflect interest income on
the $457.4 million pro forma cash balance at January 1, 2001 that we would
have had after the concurrent sale of common stock.
7. The pro forma adjustments for our Acquisitions, this offering, and the
concurrent sale of common stock were all tax-effected, as appropriate,
using an estimated statutory (federal and state) tax rate
19
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of 40.0%. The pro forma adjustments also include an income tax provision
($0.6 million for the three months ended March 31, 2001 and $1.1 million
for the year ended December 31, 2001) to record the aggregate income tax
expense for the historical results of operations of KDI, EER, BT Fuze and
SY to the statutory income tax rate of 40.0% that they would have incurred
had we acquired them on January 1, 2001, but did not because they were not
subject to income tax prior to their acquisition by us.
8. The pro forma statement of operations for the three months ended March 31,
2001 includes the following unaudited historical financial data for our
Acquisitions.
BT SY
KDI EER SPAR EMG FUZE TECHNOLOGY AIS ACQUISITIONS
--------- ---------- ---------- ---------- --------- ------------ ----------- -------------
(IN MILLIONS)
Sales ............................ $ 8.7 $ 37.0 $ 23.5 $ 16.5 $ 8.0 $ 15.0 $ 219.2 $ 327.9
Costs and expenses ............... 9.3 35.9 20.0 15.8 8.0 14.0 209.6 312.6
------ ------- ------- ------- ------ ------- -------- --------
Operating income (loss) ......... (0.6) 1.1 3.5 0.7 -- 1.0 9.6 15.3
Interest and other income
(expense) ..................... 0.1 0.1 (0.4) -- -- -- -- (0.2)
Interest expense ................ 0.2 -- -- -- -- 0.1 -- 0.3
------ ------- ------- ------- ------ ------- -------- --------
Income (loss) before
income taxes .................. (0.7) 1.2 3.1 0.7 -- 0.9 9.6 14.8
Income tax provision ............. -- -- 1.2 -- -- -- 5.2 6.4
------ ------- ------- ------- ------ ------- -------- --------
Income (loss) from
continuing operations ......... $ (0.7) $ 1.2 $ 1.9 $ 0.7 $ -- $ 0.9 $ 4.4 $ 8.4
====== ======= ======= ======= ====== ======= ======== ========
9. Adjustments to costs and expenses relating to the Acquisitions are presented
in the table below:
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 2001 DECEMBER 31, 2001
---------------- ------------------
(IN MILLIONS)
Eliminate historical goodwill amortization
for AIS, EMG and Spar(a) ....................... $ (7.6) $ (29.6)
Increase to goodwill amortization for KDI and EER
for higher goodwill recorded by L-3 than their
historical amounts of goodwill(a) .............. 0.5 0.7
------ -------
Total pro forma adjustments to costs and
expenses .................................... $ (7.1) $ (28.9)
====== =======
----------
(a) In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, no goodwill amortization expenses would have
been recorded by us in 2001 for the acquisitions of EMG, Spar, BT
Fuze, SY and AIS because these acquisitions were completed after
June 30, 2001. Additionally, in accordance with SFAS No. 142,
effective January 1, 2002 goodwill amortization is no longer
being recorded for any of the Acquisitions.
The assets and liabilities recorded in connection with the purchase price
allocations for the Acquisitions are all based upon preliminary estimates
of fair values for contracts in process, estimated costs in excess of
billings to complete contracts in process, inventories, identifiable
intangibles and deferred taxes. Actual adjustments will be based on the
final purchase prices and final appraisals and other analyses of fair
values which are in process. With the exception of the AIS acquisition, we
do not expect the differences between the preliminary and final purchase
price allocations for the acquisitions to be material. Material differences
between the preliminary and final purchase price allocations for the AIS
acquisition could result from the valuation of
20
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contracts in process, estimated costs in excess of billings to complete
contracts in process, identifiable intangibles, deferred income taxes and
pension and postretirement benefits and other items. A review of the
contracts in process and identifiable intangible assets included in the AIS
acquisition is being performed. All of the data required to prepare this
review and the related valuations is not currently available and at this
time it is not practicable to reasonably estimate these valuations. In
addition, no adjustment has been made to contracts in process which will be
valued at their estimated contract prices less the estimated costs to
complete and an allowance for a normal profit on the effort to complete
such contracts. Although the final purchase price allocation for the
contracts in process, estimated costs in excess of billings to complete
contracts in process, deferred taxes and pension and postretirement
benefits of AIS could materially affect the amount of goodwill recorded for
AIS, such final purchase price allocations are not expected to have a
material effect on our results of operations. Furthermore, any allocation
of purchase price to identifiable intangible assets with finite lives will
result in additional amortization expense and a reduction to the estimated
goodwill for AIS. For example, an allocation of $50.0 million to
identifiable intangible assets with a 10 year life would result in an
increase of $5.0 million per annum to costs and expenses and a decrease of
$3.0 million per annum to income from continuing operations.
10. The pro forma adjustments for this offering for the three months ended
March 31, 2001 and the year ended December 31, 2001 do not include an
extraordinary charge of $16.1 million ($9.7 million after-tax) related to
the repurchase and/or redemption of our $225.0 million 10 3/8% Senior
Subordinated Notes due 2007. The extraordinary charge includes the call
premium of 5.188% or approximately $11.6 million and fees and other
expenses of approximately $4.5 million, including the write-off of the
unamortized deferred debt issue costs on the $225.0 million 10 3/8%
Senior Subordinated Notes due 2007. This charge will be recognized in the
period during which such outstanding notes are repurchased and/or redeemed.
11. The pro forma statement of operations for the year ended December 31, 2001
includes the following unaudited historical financial data for our
Acquisitions.
KDI(A) EER(A) SPAR(B)
--------------- --------------- ---------------
(IN MILLIONS)
Sales ........................ $ 16.2 $ 49.3 $ 76.9
Costs and expenses ........... 16.6 47.4 67.8
-------- -------- --------
Operating income (loss) ..... (0.4) 1.9 9.1
Interest and other income
(expense) ................. (1.6)(d) (4.0)(e) (0.4)(f)
Interest expense ............ 0.3 -- --
-------- -------- --------
Income (loss) before
income taxes .............. (2.3) (2.1) 8.7
Income tax provision ......... -- -- 3.3
-------- -------- --------
Income (loss) from
continuing operations ..... $ (2.3) $ (2.1) $ 5.4
======== ======== ========
BT SY
EMG(B) FUZE(C) TECHNOLOGY(C) AIS ACQUISITIONS
--------------- --------- --------------- ----------- -------------
(IN MILLIONS)
Sales ........................ $ 52.2 $ 34.7 $ 62.0 $ 918.6 $ 1,209.9
Costs and expenses ........... 49.1 32.8 56.5 876.7 1,146.9
-------- ------- ------- -------- ----------
Operating income (loss) ..... 3.1 1.9 5.5 41.9 63.0
Interest and other income
(expense) ................. (3.8)(g) -- -- (1.4) (11.2)
Interest expense ............ -- -- 0.2 -- 0.5
-------- ------- ------- -------- ----------
Income (loss) before
income taxes .............. (0.7) 1.9 5.3 40.5 51.3
Income tax provision ......... 0.3 -- -- 22.1 25.7
-------- ------- ------- -------- ----------
Income (loss) from
continuing operations ..... $ (1.0) $ 1.9 $ 5.3 $ 18.4 $ 25.6
======== ======= ======= ======== ==========
----------
(a) Represents historical results of operations for the four-month
period ended April 30, 2001.
(b) Represents historical results of operations for the ten-month
period ended October 31, 2001.
(c) Represents historical results of operations for the eleven-month
period ended November 30, 2001.
(d) Includes a charge to write-down excess inventory of $1.7
million.
(e) Includes a charge of $4.2 million for investment banking fees
and other non-recurring charges.
(f) Includes a $1.4 million restructuring charge.
(g) Includes a $3.8 million restructuring charge.
The historical results of operations for KDI, EER, BT Fuze and SY do not
include a provision for income taxes because they each were either an S
Corporation or a Limited Liability Company and the income taxes on their
income were paid by their individual stockholders rather than the entities.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC.
By: /s/ Michael T. Strianese
-----------------------------------------------
Name: Michael T. Strianese
Title: Senior Vice President-Finance
L-3 COMMUNICATIONS CORPORATION
By: /s/ Michael T. Strianese
-----------------------------------------------
Name: Michael T. Strianese
Title: Senior Vice President-Finance
Dated: June 7, 2002
EXHIBIT INDEX
Exhibit
Number Title
------- -----
99.1 Press Release relating to senior subordinated notes offering
99.2 Press Release relating to common stock offering
99.3 Press Release relating to debt tender offer