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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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) March 8, 2002
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
(Exact name of registrants as specified in their charters)
DELAWARE
(State or other jurisdiction of incorporation)
001-14141 13-3937434
333-46983 13-3937436
(Commission file numbers) (IRS Employer Identification No.)
600 THIRD AVE
NEW YORK, NY 10016
(212) 697-1111
(Address of principal executive office)
--------------------------------------------------------------------------------
ITEM 2. ACQUISITION OF ASSETS
On March 8, 2002, L-3 Communications Corporation acquired the assets of
Aircraft Integration Systems ("AIS"), a portion of a reportable segment of
Raytheon Company for $1.13 billion in cash, subject to adjustment based on the
closing date net tangible book value as defined in the Asset Purchase Agreement
dated as of January 11, 2002 among Raytheon Company, Raytheon Australia Ltd. and
L-3 Communications Corporation. The acquisition was financed using cash on hand,
borrowings under L-3 Communications Corporation's senior credit facilities and a
$500.0 million senior subordinated bridge loan. AIS has been renamed L-3
Communications Integrated Systems ("IS"). L-3 Communications Integrated Systems
is a leader in the global Intelligence, Surveillance and Reconnaissance ("ISR")
market. Its signals intelligence (SIGINT) and communications intelligence
(COMINT) systems provide the unique ability to collect, decode and analyze
electronic signals from command centers, communication nodes and air defense for
real-time communication and response to the warfighter. IS is also a leader in
integration services and modernization of key, special purpose fixed and rotary
wing platforms and programs for both domestic and international customers.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
A. FINANCIAL STATEMENTS
Aircraft Integration Systems Business
o Report of Independent Accountants ........................................... A-1
o Combined Financial Statements
- Combined Balance Sheets as of December 31, 2001 and 2000 .................... A-2
- Combined Statements of Operations and Comprehensive Income for the years
ended December 31, 2001, 2000 and 1999 ...................................... A-3
- Combined Statements of Parent Company Investment for the years ended
December 31, 2001, 2000 and 1999 ............................................ A-4
- Combined Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999 ............................................................... A-5
- Notes to Combined Financial Statements ...................................... A-6 - A-18
B. PRO FORMA FINANCIAL INFORMATION
L-3 Communications Holdings, Inc. and L-3 Communications Corporation Unaudited
Pro Forma Condensed Consolidated Financial Statements ........................... B-1
L-3 Communications Holdings, Inc. and L-3 Communications Corporation Unaudited
Pro Forma Condensed Consolidated Balance Sheet .................................. B-3
L-3 Communications Holdings, Inc. and L-3 Communications Corporation Unaudited
Pro Forma Condensed Consolidated Statement of Operations ........................ B-4
L-3 Communications Holdings, Inc. and L-3 Communications Corporation Notes to
Unaudited Pro Forma Condensed Consolidated Financial Statements ................. B-5 - B-8
C. EXHIBITS
23. Consent of PricewaterhouseCoopers LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC. and
L-3 COMMUNICATIONS CORPORATION
Registrant
Date: March 22, 2002 By: /s/ Robert V. LaPenta
President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Raytheon Company:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and comprehensive income, parent company
investment and cash flows present fairly, in all material respects, the
financial position of the Aircraft Integration Systems Business (the "Company")
of Raytheon Company at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The Company is a member of a group of affiliated companies and, as disclosed in
the financial statements, has extensive transactions and relationships with
members of the group. Because of these relationships, it is possible that the
terms of these transactions are not the same as those that would result from
transactions among wholly unrelated parties.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 2002
A-1
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
COMBINED BALANCE SHEETS
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 4.0 $ 4.3
Contracts in process ............................................ 310.8 394.6
Inventories ..................................................... 13.1 16.1
Deferred federal income taxes ................................... 13.3 27.1
Prepaid expenses and other current assets ....................... 1.2 7.8
--------- ---------
Total current assets .......................................... 342.4 449.9
Property, plant, and equipment, net .............................. 156.8 150.7
Goodwill, net of accumulated amortization of $173.8 in 2001 and
$146.0 in 2000 .................................................. 940.1 967.9
Other assets, net ................................................ 52.2 47.1
--------- ---------
Total assets .................................................. $ 1,491.5 $ 1,615.6
========= =========
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Current portion of long-term debt ............................... $ 1.4 $ 1.4
Advance payments ................................................ -- 4.7
Accounts payable ................................................ 36.0 62.3
Accrued salaries and wages ...................................... 22.6 22.2
Other accrued expenses .......................................... 1.1 11.8
--------- ---------
Total current liabilities ..................................... 61.1 102.4
Accrued retiree benefits and other long-term liabilities ......... 36.4 24.0
Deferred federal income taxes .................................... 12.5 14.8
Long-term debt ................................................... 0.3 1.7
Commitments and contingencies (Note 13)
Accumulated other comprehensive loss ............................. (5.8) --
Parent company investment ........................................ 1,387.0 1,472.7
--------- ---------
Total liabilities and parent company investment ............... $ 1,491.5 $ 1,615.6
========= =========
See notes to combined financial statements.
A-2
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN MILLIONS)
Net sales ............................................ $ 856.4 $ 964.4 $ 886.5
Net sales to the Parent .............................. 62.2 58.7 21.9
-------- -------- -------
918.6 1,023.1 908.4
Cost of sales ........................................ 677.5 723.0 764.6
Cost of sales to the Parent .......................... 59.9 54.6 20.4
Cost of sales -- Parent subcontract services ......... 20.6 16.9 27.2
Administrative and selling expenses .................. 100.1 97.3 107.6
Research and development expenses .................... 18.6 18.9 21.2
-------- -------- -------
Total operating expenses ............................. 876.7 910.7 941.0
Operating income (loss) .............................. 41.9 112.4 (32.6)
Non-operating expense, net ........................... 1.4 0.9 1.6
-------- -------- -------
Income (loss) before taxes ........................... 40.5 111.5 (34.2)
Federal income taxes ................................. 22.1 47.1 (4.0)
-------- -------- -------
Net income (loss) .................................... 18.4 64.4 (30.2)
-------- -------- -------
Other comprehensive loss, net of tax:
Minimum pension liability adjustment ................. (5.8) -- --
-------- -------- -------
Comprehensive income (loss) .......................... $ 12.6 $ 64.4 $ (30.2)
======== ======== ========
See notes to combined financial statements.
A-3
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
COMBINED STATEMENTS OF PARENT COMPANY INVESTMENT
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
(IN MILLIONS)
Parent company investment, beginning of year ......... $ 1,472.7 $ 1,524.5 $ 1,496.3
Net income (loss) .................................... 18.4 64.4 (30.2)
Net transfers (to) from Parent ....................... (104.1) (116.2) 58.4
---------- ---------- ----------
Parent company investment, end of year ............... $ 1,387.0 $ 1,472.7 $ 1,524.5
========== ========== ==========
See notes to combined financial statements.
A-4
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
---------- ---------- -----------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 18.4 $ 64.4 $ (30.2)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization ............................... 51.2 50.3 51.4
Deferred federal income taxes ............................... 14.5 15.8 (23.5)
Changes in assets and liabilities:
Contracts in process ...................................... 83.8 6.5 38.5
Inventories ............................................... 3.0 1.1 (9.0)
Prepaid expenses and other current assets ................. 6.6 17.9 (18.9)
Advance payments .......................................... (4.7) (20.2) (2.2)
Accounts payable .......................................... (26.3) (10.5) (1.7)
Accrued salaries and wages ................................ 0.4 13.6 (5.1)
Other accrued expenses .................................... (10.7) (3.5) (28.5)
Other adjustments, net .................................... (3.3) (3.3) (2.5)
-------- -------- -------
Net cash provided by (used in) operating activities .......... 132.9 132.1 (31.7)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant, and equipment ............. (21.7) (10.2) (15.4)
Expenditures for internal use software ...................... (6.0) (0.3) (11.3)
-------- -------- -------
Net cash used in investing activities ........................ (27.7) (10.5) (26.7)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers (to) from Parent .................................. (104.1) (116.2) 58.4
Decrease in long-term debt .................................. (1.4) (1.3) (1.1)
-------- -------- -------
Net cash (used in) provided by financing activities .......... (105.5) (117.5) 57.3
-------- -------- -------
Net (decrease) increase in cash and cash equivalents ......... (0.3) 4.1 (1.1)
Cash and cash equivalents, beginning of year ................. 4.3 0.2 1.3
-------- -------- -------
Cash and cash equivalents, end of year ....................... $ 4.0 $ 4.3 $ 0.2
======== ======== =======
See notes to combined financial statements.
A-5
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
The Aircraft Integration Systems Business (the "Company") of Raytheon Company
and its subsidiaries (the "Parent") is engaged in the development and
integration of complex electronic systems for airborne intelligence,
surveillance, and reconnaissance missions. The combined financial statements
presented may not be indicative of the financial position or results of
operations that would have been achieved had the Company operated as a
nonaffiliated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of certain similar
business operations that have historically been presented as a portion of
Aircraft Integration Systems (AIS), a reportable segment of the Parent. The
portion of AIS that has not been included consists primarily of a majority of
the ASTOR program and the Boeing Business Jet programs. All material
intercompany transactions have been eliminated.
REVENUE RECOGNITION
Sales under long-term contracts are recorded under the percentage of completion
method. Costs and estimated gross margins are recorded as sales as work is
performed based on the percentage that incurred costs bear to estimated total
costs utilizing the most recent estimates of costs and funding. Amounts
representing contract change orders, claims or other items are included in
sales only when they can be reasonably estimated and realization is probable.
Some contracts contain incentive provisions based upon performance in relation
to established targets which are recognized in the contract estimates when
deemed realizable. Since many contracts extend over a long period of time,
revisions in cost and funding estimates during the progress of work have the
effect of adjusting earnings applicable to performance in prior periods in the
current period. When the current contract estimate indicates a loss, provision
is made for the total anticipated loss in the current period.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for company-sponsored research and development projects are
expensed as incurred. Customer-sponsored research and development projects
performed under contracts are accounted for as contract costs as the work is
performed.
FEDERAL INCOME TAXES
Historically, the Company's operations have been included in the consolidated
income tax returns filed by the Parent. Federal income tax expense in the
statement of operations is calculated on a separate tax return basis as if the
Company had operated as a stand-alone entity. The provision for income taxes is
calculated in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, which requires the recognition of deferred
income taxes using the liability method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term, highly liquid
investments with original maturities of 90 days or less.
CONTRACTS IN PROCESS
Contracts in process are stated at cost plus estimated profit but not in excess
of realizable value.
A-6
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories consist of consumables and parts used in the performance of
contracts and are valued at the lower of cost or market, cost being determined
on a weighted-average basis. A reserve is established for inventory items
considered excess or obsolete.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Major improvements are
capitalized while expenditures for maintenance, repairs, and minor improvements
are charged to expense. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation and amortization are eliminated
from the accounts and any resulting gain or loss is reflected in income.
Provisions for depreciation are computed on a combination of accelerated and
straight-line methods. Depreciation provisions are based on estimated useful
lives as follows: buildings -- 20 to 45 years and machinery and equipment -- 3
to 10 years. Leasehold improvements are amortized over the lesser of the
remaining life of the lease or the estimated useful life of the improvement.
GOODWILL
Goodwill, which represents the excess of the acquisition cost over the fair
value of the net assets recorded, relates to the allocation of a portion of the
goodwill associated with the Parent's acquisition of E-Systems, Inc. in 1995
and Chrysler Technologies, Inc. in 1996. Goodwill is amortized using the
straight-line method over its estimated useful life of 40 years.
COMPUTER SOFTWARE
Internal use computer software is stated at cost less accumulated amortization
and is amortized using the straight-line method over its estimated useful life
ranging from 4 to 10 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Upon indication of possible impairment, the Company evaluates the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the related undiscounted future cash flows. When an evaluation
indicates that the future undiscounted cash flows are not sufficient to recover
the carrying value of the asset, the asset is adjusted to its estimated fair
value.
ADVANCE PAYMENTS
Advance payments represent funds received in excess of work performed on
contracts in process.
ACCOUNTS PAYABLE
Accounts payable includes a book overdraft of $3.1 million at December 31, 2001
and $5.9 million at December 31, 2000.
FOREIGN CURRENCY
Foreign exchange transaction gains and losses in 2001, 2000, and 1999 were not
material.
COMPREHENSIVE INCOME
Comprehensive income and its components are presented in the statement of
operations and other comprehensive income. The minimum pension liability
adjustment is shown net of tax benefits of $3.1 million in 2001.
A-7
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION AND POSTRETIREMENT COSTS
The Parent has several pension and retirement plans covering the majority of
the Company's employees. In addition, the Company maintains a separate plan for
certain employees (see Note 12). Annual charges to income are made for the cost
of the plans, including current service costs, interest on projected benefit
obligations, and net amortization and deferrals, increased or reduced by the
return on assets. Unfunded accumulated benefit obligations for the Company's
separate plan are included in accrued retiree benefits and other long-term
liabilities on the balance sheet. The Parent funds annually those pension costs
which are calculated in accordance with Internal Revenue Service regulations
and standards issued by the Cost Accounting Standards Board.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain financial instruments including cash and cash
equivalents and the current portion of long-term debt approximates fair value
due to their short maturities and varying interest rates. The carrying value of
long-term debt, which approximates fair value, is based on current rates
offered to the Company for similar debt with the same remaining maturities.
ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). This accounting
standard, which is effective for fiscal years beginning after December 31,
2001, requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and will be eliminated from the ongoing operations
of the entity in a disposal transaction. The effect of adopting SFAS No. 144 on
the Company's financial position and results of operations has not yet been
determined.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS No. 142). This accounting
standard addresses financial accounting and reporting for goodwill and other
intangible assets and requires that goodwill amortization be discontinued and
replaced with periodic tests of impairment. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, and is required to be applied
at the beginning of the fiscal year. Impairment losses that arise due to the
initial application of this standard will be reported as a change in accounting
principle. The Company has not completed its analysis of the effect of adopting
SFAS No. 142, however the Company expects that this analysis will result in a
goodwill impairment loss in the first quarter of 2002.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). This accounting standard requires that all
derivatives be recognized as either assets or liabilities at estimated fair
value. The Company also adopted Statement of Financial Accounting Standards No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No. 133. This accounting standard amended the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and hedging activities. The January 1, 2001 adoption of SFAS No.
133, as amended, had no effect on the Company's financial position or results
of operations.
RISKS AND UNCERTAINTIES
The Company is engaged in supplying primarily defense-related equipment to U.S.
and foreign governments and is subject to certain business risks peculiar to
the defense industry. Sales to governments may be affected by changes in
procurement policies, budget considerations, changing concepts of national
defense, political developments abroad, and other factors.
A-8
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 revenues and expenses during the reporting period.
Significant estimates are used when accounting for long-term contracts including
estimates of the extent of progress towards completion, contract revenue,
contract completion costs, contingencies, and customer and vendor claims, as
well as estimates for litigation and environmental liabilities. Actual results
could differ from those estimates.
3. RESTRUCTURING
Restructuring costs include the cost of involuntary employee termination
benefits and related employee severance costs, facility closures, and other
costs associated with the Company's approved plans. Employee termination
benefits include severance, wage continuation, medical, and other benefits.
Facility closure and related costs include disposal costs of property, plant,
and equipment, lease payments, and lease terminations costs.
The Parent created Raytheon Systems Company (RSC) in December 1997, which
included the Company. In conjunction with the formation of RSC, the Parent
established certain restructuring reserves. A portion of these reserves was for
actions related to the Company.
In 1999, the Company determined that the cost of the restructuring initiatives
would be higher than originally planned and recorded a $7.8 million
restructuring charge which was included in cost of sales. The increase in the
estimated costs related to higher than anticipated costs for severance. The
Company also recorded an additional $0.7 million restructuring charge in 1999,
which was included in cost of sales, to further reduce the manufacturing and
administrative workforce by 39 employees.
The restructuring and exit costs discussed above provided for severance and
related benefits for approximately 400 employees. There were no major
activities that were continued as a result of these actions. Employee-related
exit costs included severance and other termination benefit costs for employees
in various functional areas including manufacturing, engineering, and
administration. The Company completed all restructuring actions during 2000.
While these actions were intended to improve the Company's competitive
position, there can be no assurances as to their ultimate success or that
additional restructuring actions will not be required.
Restructuring activity is as follows (in millions):
2000 1999
--------- ---------
Accrued liability at beginning of year ................................ $ 2.2 $ 0.4
Charges and liabilities accrued
Severance and other employee-related costs ........................... -- 8.5
Costs incurred
Severance and other employee related costs ........................... 2.2 6.7
------ ------
Accrued liability at end of year ...................................... $ 0.0 $ 2.2
====== ======
Cash expenditures ..................................................... $ 2.2 $ 6.7
Number of employee terminations due to restructuring actions .......... 39 80
4. PARENT COMPANY INVESTMENT AND INTERCOMPANY COST ALLOCATIONS
PARENT COMPANY INVESTMENT
The Company has obtained financing for its day-to-day operations from the
Parent. Parent company investment includes the Parent's equity investment in
the Company and net amounts due to the Parent.
A-9
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Neither intercompany interest expense nor interest expense associated with the
Parent's general corporate debt has been included in the combined financial
statements. All transfers to and from the Parent have been reported in the
parent company investment account.
INTERCOMPANY COST ALLOCATIONS
Certain costs are allocated to the Company by the Parent, primarily related to
certain services, legal expenses, information systems, risk management and
employee benefits (see Note 12 for further disclosure regarding employee
benefits). The estimated costs of such services and benefits have been included
in the combined financial statements based primarily on the proportion of the
Parent's expenses allocated to the Company based on factors including employee
headcount and costs incurred. Management believes these allocations are
reasonable.
The amounts allocated to the Company in 2001, 2000, and 1999 in the combined
statement of operations are as follows (in millions):
2001 2000 1999
----------- ----------- -----------
Cost of sales ................................ $ 103.4 $ 101.2 $ 121.9
Administrative and selling expenses .......... 11.2 9.9 10.6
5. CONTRACTS IN PROCESS
Contracts in process consisted of the following at December 31, 2001 (in
millions):
COST TYPE FIXED PRICE TOTAL
----------- ------------- ----------
U.S. government end-use contracts:
Billed .......................... $ 4.1 $ 22.2 $ 26.3
Unbilled ........................ 65.0 190.7 255.7
Less: progress payments ......... -- (60.0) (60.0)
------ ------- -------
69.1 152.9 222.0
------ ------- -------
Other customers
Billed .......................... -- 4.9 4.9
Unbilled ........................ -- 83.9 83.9
Less: progress payments ......... -- -- --
------ ------- -------
-- 88.8 88.8
------ ------- -------
$ 69.1 $ 241.7 $ 310.8
====== ======= =======
A-10
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Contracts in process consisted of the following at December 31, 2000 (in
millions):
COST TYPE FIXED PRICE TOTAL
----------- ------------- ----------
U.S. government end-use contracts:
Billed .......................... $ 4.2 $ 15.6 $ 19.8
Unbilled ........................ 49.6 387.4 437.0
Less: progress payments ......... -- (197.2) (197.2)
------ -------- --------
53.8 205.8 259.6
------ -------- --------
Other customers
Billed .......................... -- 14.1 14.1
Unbilled ........................ 12.6 108.3 120.9
Less: progress payments ......... -- -- --
------ -------- --------
12.6 122.4 135.0
------ -------- --------
$ 66.4 $ 328.2 $ 394.6
====== ======== ========
The U.S. government has title to the costs incurred underlying unbilled amounts
on contracts that provide for progress payments. Unbilled amounts are primarily
recorded on the percentage of completion method and are recoverable from the
customer upon shipment of the product, presentation of billings, or completion
of the contract.
Included in contracts in process at December 31, 2001 was approximately $11
million related to claims on contracts, which are included at their estimated
realizable value. The Company believes that it has a contractual or legal basis
for pursuing recovery of these claims, and that collection is probable. The
settlement of these amounts depends on individual circumstances and
negotiations with the counterparty, therefore, the timing of the collection
will vary. There were no such claim amounts included in contracts in process at
December 31, 2000.
Billed and unbilled contracts in process include retentions arising from
contractual provisions. At December 31, 2001, retentions amounted to $1.6
million and are anticipated to be collected as follows: 2002 -- $0.8 million,
2003 -- $0.5 million, and the balance thereafter.
The Parent sold short-term government receivables through Raytheon Receivables,
Inc. (RRI), a special purpose entity, which sold a portion of these short-term
government receivables to a financial institution. The Company's pro-rata
amount of these receivables sold through RRI, which totaled $1.7 million at
December 31, 2000, has been removed from these combined financial statements.
During the first quarter of 2001, the Parent terminated its short-term
government receivables facility.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31 (in
millions):
2001 2000
----------- -----------
Land .......................................... $ 0.4 $ 0.4
Buildings and leasehold improvements .......... 223.1 215.4
Machinery and equipment ....................... 166.2 134.1
-------- --------
389.7 349.9
Less: accumulated depreciation ................ (232.9) (199.2)
-------- --------
$ 156.8 $ 150.7
======== ========
A-11
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was $18.2 million, $18.5 million, and $18.7 million in
2001, 2000, and 1999, respectively.
In 1998, the Parent entered into a property sale and five-year operating lease
facility whereby property, plant, and equipment with a net book value of $16.6
million was removed from the Company's balance sheet. Operating lease expense
of $3.2 million, $2.9 million, and $3.4 million was included in cost of sales
in 2001, 2000, and 1999, respectively. During November 2001, the Parent
repurchased the remaining property, plant, and equipment with a net book value
of $6.0 million from this facility.
7. OTHER ASSETS
Other assets consisted of the following at December 31 (in millions):
2001 2000
---------- ----------
Computer software ................. $ 27.9 $ 26.3
Licenses .......................... 17.1 18.1
Pension intangible asset .......... 6.7 --
Other noncurrent assets ........... 0.5 2.7
------- -------
$ 52.2 $ 47.1
======= =======
The Company capitalizes certain costs incurred in connection with the purchase
and development of internal use computer software. The Company capitalized $6.0
million, $0.3 million, and $11.3 million of computer software during 2001,
2000, and 1999, respectively.
Licenses represent P-3 data rights acquired to allow the Company to compete on
a worldwide basis for P-3 airframe maintenance and modification contracts.
8. LONG-TERM DEBT
The Parent has not allocated intercompany indebtedness or associated interest
expense to the Company at December 31, 2001 and during 2001, 2000, and 1999.
Long-term debt consists solely of revenue bonds. The Airport Revenue Bond,
issued in 1996, has a floating interest rate as follows: 5.0% for 1999, 5.15%
for 2000, 5.3% for 2001, and 5.4% for 2002. The bond requires annual principal
and interest payments with the final principal installment of $1.1 million due
August 1, 2002. The Industrial Development Revenue Bond, issued in 1983 has a
stated interest rate of 83.11% of the prime rate (3.9% at December 31, 2001)
and is collateralized by certain buildings. The bond requires monthly principal
payments of $27,000 with the final payment due December 31, 2003. Total
interest payments on these revenue bonds approximated $0.2 million in 2001, and
$0.3 million in 2000, and 1999.
Debt consisted of the following at December 31 (in millions):
2001 2000
---------- ---------
Airport Revenue Bond ............................ $ 1.1 $ 2.1
Industrial Development Revenue Bond ............. 0.6 1.0
Less: installments due within one year .......... (1.4) (1.4)
------- ------
Long-term debt .................................. 0.3 1.7
------- ------
$ 1.7 $ 3.1
======= ======
A-12
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate amounts of installments due on long-term debt for the next five
years are (in millions):
2002 ......... $ 1.4
2003 ......... 0.3
2004 ......... --
2005 ......... --
2006 ......... --
9. INCOME TAXES
Federal income taxes consisted of the following (in millions):
2001 2000 1999
--------- ---------- ----------
Current income tax expense ..................... $ 7.6 $ 31.3 $ 19.5
Deferred income tax expense (benefit) .......... 14.5 15.8 (23.5)
------ ------- -------
$ 22.1 $ 47.1 $ (4.0)
====== ======= =======
The provision for income taxes differs from the U.S. statutory rate due to the
following (in millions):
2001 2000 1999
---------- ---------- -----------
Tax expense (benefit) at statutory rate .......... $ 14.1 $ 39.0 $ (12.0)
Foreign sales corporation benefit ................ (2.0) (2.0) (1.9)
Nondeductible goodwill amortization .............. 9.8 9.8 9.8
Nondeductible meals .............................. 0.2 0.3 0.1
------- ------- -------
Total ............................................ $ 22.1 $ 47.1 $ (4.0)
======= ======= =======
Current income tax expense amounts are included as a transfer to the Parent in
the parent company investment account. The effect of temporary differences
which give rise to deferred income tax balances was as follows at December 31
(in millions):
2001 2000
---------- ----------
Current deferred tax assets:
Contracts in process and other reserves ......... $ 13.0 $ 26.4
Inventory ....................................... 0.3 0.7
------- -------
Net current deferred tax assets .................. $ 13.3 $ 27.1
======= =======
Noncurrent deferred tax liability:
Depreciation and amortization ................... $ 15.6 $ 14.8
Additional pension minimum liability ............ (3.1) --
------- -------
Net noncurrent deferred tax liability ............ $ 12.5 $ 14.8
======= =======
10. EMPLOYEE STOCK OPTION PLAN
The Company has no separate employee stock option plan, however, certain
employees of the Company participate in the Parent's 1995 Stock Option Plan
(the "Stock Option Plan") which provides for the grant of both incentive and
nonqualified options at an exercise price which is 100% of the fair market
value of the option on the date of grant. The plan provides that all stock
options may be exercised in their entirety 12 to 36 months after the date of
grant. Incentive stock options terminate 10 years from the date of grant and
become exercisable to a maximum of $100,000 per year. Nonqualified stock
options expire 10 years and a day from the date of grant.
A-13
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following stock option information relates to options granted to the
employees of the Company under the Stock Option Plan:
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
----------- -----------------
Outstanding at December 31, 1998 ......... 282,442 $ 56.27
Granted .................................. 158,600 68.42
Exercised ................................ (62,248) 68.61
Canceled ................................. (500) 60.52
------- --------
Outstanding at December 31, 1999 ......... 378,294 $ 59.33
Granted .................................. 304,500 19.69
Exercised ................................ -- --
Canceled ................................. (4,775) 55.75
------- --------
Outstanding at December 31, 2000 ......... 678,019 $ 41.55
Granted .................................. 293,832 29.82
Exercised ................................ (12,781) 19.33
Canceled ................................. (485) 39.68
------- --------
Outstanding at December 31, 2001 ......... 958,585 $ 38.25
======= ========
The Parent adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS No.
123) and accordingly, no compensation expense has been recognized for the Stock
Option Plan. Had compensation cost for the stock options awarded to the
employees of the Company been determined based on the fair value at the grant
date for awards under the Stock Option Plan, consistent with the methodology
prescribed under SFAS No. 123, the Company's net income in 2001, 2000, and 1999
would include an additional $1.8 million, $2.4 million, and $1.5 million of
compensation expense, respectively.
The weighted-average fair value of each option granted in 2001, 2000, and 1999,
respectively, was estimated at $9.24, $5.86, and $22.60 on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
2001 2000 1999
----------- ----------- -----------
Expected life ................................ 4 years 4 years 4 years
Assumed annual dividend growth rate .......... 1% 1% 5%
Expected volatility .......................... 40% 40% 35%
Assumed annual forfeiture rate ............... 12% 12% 5%
The risk free interest rate (month-end yields on 4-year treasury strips
equivalent zero coupon) ranged from 4.38% to 5.04% in 2001, 5.28% to 6.72% in
2000, and 4.63% to 6.16% in 1999.
A-14
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED
SHARES AVERAGE SHARES WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL WEIGHTED EXERCISABLE AT AVERAGE
PRICE AT DECEMBER REMAINING AVERAGE DECEMBER 31, EXERCISE
RANGE 31, 2001 LIFE (YEARS) EXERCISE PRICE 2001 PRICE
--------------------- ------------- -------------- ---------------- ---------------- -----------
$19.19-29.69......... 565,460 8.72 $ 24.49 98,333 $ 19.55
$31.24-48.97......... 39,457 6.97 $ 35.50 17,457 $ 40.03
$51.69-68.47......... 353,668 6.59 $ 60.56 353,668 $ 60.56
------- -------
958,585 7.86 $ 38.25 469,458 $ 51.21
======= =======
11. BUSINESS SEGMENT REPORTING
The Company operates in the following geographic areas (in millions):
OUTSIDE
UNITED STATES UNITED STATES COMBINED
--------------- --------------- ------------
Sales:
2001 ...................... $ 864.4 $ 54.2 $ 918.6
2000 ...................... 941.8 81.3 1,023.1
1999 ...................... 856.1 52.3 908.4
Long-lived assets at:
December 31, 2001 ......... $ 208.9 $ 0.1 $ 209.0
December 31, 2000 ......... 197.7 0.1 197.8
The country of destination was used to attribute sales to either United States
or Outside United States. Sales to major customers in 2001, 2000, and 1999
were: U.S. government, including foreign military sales $808.4 million, $898.9
million, and $819.1 million, respectively, and U.S. Department of Defense
$779.2 million, $857.5 million, and $781.8 million, respectively.
12. PENSION AND OTHER EMPLOYEE BENEFITS
The Parent sponsors defined benefit pension and postretirement plans which
cover certain of the Company's employees and provide income and life insurance
benefits. In addition, the Company maintains a separate plan for certain other
employees.
The following table summarizes information regarding the Company's separate
pension and other postretirement benefits' prepaid (accrued) benefit cost at
December 31 (in millions):
OTHER POST-
PENSION BENEFITS RETIREMENT BENEFITS
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Changes in benefit obligation:
Benefit obligation, beginning of year ......... $ 53.7 $ 57.0 $ 41.1 $ 38.8
Service cost .................................. 1.5 1.7 0.8 1.0
Interest cost ................................. 4.0 4.2 3.1 2.7
Plan amendments ............................... 3.9 -- -- --
Benefits paid ................................. (3.5) (2.0) (2.0) (1.6)
Actuarial (gain) loss ......................... 3.5 (7.2) (6.1) 0.2
------- ------- ------- -------
Benefits obligation, end of year ............... $ 63.1 $ 53.7 $ 36.9 $ 41.1
======= ======= ======= =======
A-15
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER POST-
PENSION BENEFITS RETIREMENT BENEFITS
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Changes in plan assets:
Fair value of plan assets, beginning of year ......... $ 69.6 $ 68.3 $ 32.4 $ 29.2
Actual return on plan assets ......................... (14.9) 0.4 0.8 1.6
Employer contributions ............................... 0.7 2.8 1.7 3.2
Benefits paid ........................................ (3.5) (1.9) (2.0) (1.6)
------- ------- ------- -------
Fair value of plan assets, end of year ............... $ 51.9 $ 69.6 $ 32.9 $ 32.4
======= ======= ======= =======
Funded status -- unrecognized components ............. $ (11.3) $ 15.9 $ (3.9) $ (8.6)
Additional contributions ............................. -- -- 1.0 --
Unrecognized net actuarial gain ...................... 8.9 (14.6) (14.9) (11.2)
Unrecognized prior service cost ...................... 6.7 3.0 (6.4) (7.6)
------- ------- ------- -------
Prepaid (accrued) benefit cost ....................... $ 4.3 $ 4.3 $ (24.2) $ (27.4)
======= ======= ======= =======
Funded status -- recognized in balance sheets
Prepaid benefit cost .................................. 4.3 4.3 - -
Accrued benefit liability ............................. (15.6) -- (24.2) (27.4)
Intangible asset ...................................... 6.7 -- -- --
Accumulated other comprehensive income ................ 8.9 -- -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost ........................ $ 4.3 $ 4.3 $ (24.2) $ (27.4)
======= ======= ======= =======
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted-average assumptions:
Discount rate ................................... 7.25% 7.75% 7.25% 7.75%
Expected return on plan assets .................. 9.50% 9.50% 8.50% 8.50%
Rate of compensation increase ................... 4.50% 4.50% 4.50% 4.50%
Health care trend rate in the next year ......... 9.00% 8.25%
Gradually declining to a trend rate of .......... 5.00% 5.00%
In the years beyond ............................. 2010 2006
The effect of a one percent increase and decrease in the assumed health care
trend rate for each future year for the aggregate of service and interest cost
is $0.2 million and $(0.2) million, respectively, and for the accumulated
postretirement benefit obligation is $2.4 million and $(2.2) million,
respectively.
A-16
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the net periodic cost (benefit) for the
Company's pension and other postretirement benefits (in millions):
OTHER POST-
PENSION BENEFITS RETIREMENT BENEFITS
--------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999
--------- --------- --------- --------- --------- ---------
Components of net periodic
benefit cost:
Service cost .............................. $ 1.5 $ 1.7 $ 1.6 $ 0.8 $ 1.0 $ 0.9
Interest cost ............................. 4.0 4.2 4.2 3.1 2.7 3.5
Expected return on plan assets ............ (5.1) (5.0) (3.9) (2.7) (2.8) (2.4)
Amortization of prio service cost ......... 0.3 0.3 0.3 (1.1) (1.1) (1.1)
Recognized actuarial loss (gain) .......... -- -- 0.5 (0.5) (0.7) --
------ ------ ------ ------ ------ ------
Net periodic benefit cost (benefit) .......... $ 0.7 $ 1.2 $ 2.7 $ (0.4) $ (0.9) $ 0.9
====== ====== ====== ====== ====== ======
As noted above, the Company also contributes to multiemployer pension and other
employee benefit plans administered by Raytheon Company, and contributed and
charged to expense $13.3 million, $12.9 million, and $26.0 million in 2001,
2000, and 1999, respectively.
Under the terms of various savings and investment plans (defined contribution
plans), covered employees are allowed to contribute up to a specific percentage
of their pay, generally limited to $30,000 per year. The Company matches the
employee's contribution, up to a certain percent of the employee's pay. Total
expense for defined contribution plans was $9.2 million, $10.1 million, and
$10.4 million in 2001, 2000, and 1999, respectively.
The Company makes annual contributions to the Raytheon Company stock fund of
the various savings and investment plans of approximately one-half of one
percent of salaries and wages, limited to $170,000 in 2001, 2000, and 1999, of
most U.S. salaried and hourly employees. The expense was $1.4 million, $1.5
million, and $1.6 million in 2001, 2000, and 1999, respectively.
13. COMMITMENTS AND CONTINGENCIES
At December 31, 2001, the Company had commitments under long-term operating
leases requiring approximate annual rentals as follows (in millions):
2002 ............... $ 6.4
2003 ............... 4.1
2004 ............... 1.1
2005 ............... 0.5
2006 ............... 0.3
Thereafter ......... 1.0
Rent expense in 2001, 2000, and 1999 was $10.5 million, $7.0 million, and $6.6
million, respectively.
The Company has banks and insurance companies issue, on its behalf, letters of
credit to meet various bid, warranty, retention, and advance payment
obligations, $133.7 million of which were outstanding at December 31, 2001.
Approximately $32.8 million of this total relates to letters of credit issued
to meet performance clauses in certain contracts. These instruments expire on
various dates in 2002.
Government contractors are subject to various levels of audit and
investigation. Agencies that oversee contract performance include: the Defense
Contract Audit Agency, the Department of Defense Inspector General, the General
Accounting Office, the Department of Justice, and Congressional Committees.
A-17
AIRCRAFT INTEGRATION SYSTEMS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, various claims and legal proceedings generally incidental to the
normal course of business are pending or threatened against the Company. While
the ultimate liability from these proceedings is presently indeterminable, any
additional liability is not expected to have a material adverse effect on
the Company's financial position or results of operations after giving effect to
provisions already recorded.
14. RELATED PARTY TRANSACTIONS
Included in the accompanying combined statements of operations are net sales to
the Parent of $62.2 million, $58.7 million, and $21.9 million in 2001, 2000,
and 1999, respectively. The Company's costs of sales related to these sales
were $59.9 million, $54.6 million, and $20.4 million in 2001, 2000, and 1999,
respectively. Services performed by the Parent were $20.6 million, $16.9
million, and $27.2 million in 2001, 2000, and 1999, respectively. The Company's
combined statements of operations also include certain allocated costs in 2001,
2000, and 1999 (see Note 4).
Amounts included in contracts in process for services provided to the Parent
were $7.4 million and $3.5 million at December 31, 2001 and 2000, respectively.
Amounts included in parent company investment for services obtained from the
Parent were $529.8 million and $498.3 million at December 31, 2001 and 2000,
respectively.
15. SUBSEQUENT EVENT
In January 2002, the Parent announced that it had entered into an agreement to
sell the Aircraft Integration Systems Business for approximately $1.13 billion.
In connection with this agreement the Parent will retain certain assets and
liabilities of the business, including all amounts related to taxes and
employee benefits. There can be no assurance that the sale will be consummated.
A-18
b. Pro Forma Financial Information
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
Unaudited Pro Forma Condensed Consolidated Financial Statements
B-1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statement of
operations ("pro forma statement of operations") data gives effect to the
following transactions as if they had occurred on January 1, 2001: (1) the
acquisition by L-3 Communications Corporation ("L-3 Communications") of Aircraft
Integration Systems ("AIS"), a portion of a reportable segment of Raytheon
Company ("Raytheon") which was completed on March 8, 2002 and the related
financing which was comprised of cash on hand, borrowings under L-3
Communications' senior credit facilities and a $500.0 million senior
subordinated bridge loan; and (2) certain other businesses acquired during the
year ended December 31, 2001 (the "Other Acquisitions"), comprised of KDI
Precision Products, Inc., EER Systems, Inc., Spar Aerospace Limited, Emergent
Government Services Group, Bulova Technologies, and SY Technology, Inc., and
their related financings. L-3 Communications is a wholly-owned subsidiary of L-3
Communications Holdings, Inc. ("L-3 Holdings"). L-3 Holdings and its
subsidiaries, including L-3 Communications, are referred to as "L-3" herein.
The unaudited pro forma condensed consolidated balance sheet ("pro forma
balance sheet") gives effect to the AIS acquisition as if it had occurred on
December 31, 2001. All of the Other Acquisitions are included in the Company's
consolidated balance sheet as of December 31, 2001.
The pro forma adjustments are based on preliminary purchase prices and
purchase price allocations for the AIS acquisition and Other Acquisitions.
Actual adjustments will be based on final purchase prices and final appraisals
and other analyses of fair values of the acquired businesses for 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 L-3 obtains and reviews all of the data required for the
acquired assets and liabilities and completes its valuations of them.
Differences between the preliminary and final purchase price allocations could
have a material impact on L-3's results of operations and financial position.
The unaudited pro forma condensed consolidated statement of operations and
unaudited pro forma condensed consolidated balance sheet do not reflect any
cost savings that management of L-3 believes would have resulted had the AIS
acquisition and Other Acquisitions occurred on January 1, 2001.
The unaudited pro forma condensed consolidated financial information should
be read in conjunction with (1) the audited consolidated financial statements of
L-3 Holdings and L-3 Communications included in their 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 elsewhere in
this report on Form 8-K. The historical statement of operations data for the
Other Acquisitions are based on unaudited financial statement data not included
herein. The unaudited pro forma condensed consolidated financial information may
not be indicative of the results of operations of L-3 that actually would have
occurred had the acquisitions been completed on January 1, 2001 or the results
of operations of L-3 that may be obtained in the future.
B-2
L-3 COMMUNICATIONS HOLDING, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
(IN MILLIONS)
L-3 AIS PRO FORMA
AS REPORTED HISTORICAL(1) ADJUSTMENTS PRO FORMA
ASSETS ------------- --------------- ------------------------------ ------------
Current assets:
Cash and cash equivalents ............................ $ 361.0 $ 4.0 $ (280.3)(2)(5)(7) $ 84.7
Contracts in process ................................. 801.8 323.9 (7.4)(2)(3) 1,118.3
Other current assets ................................. 75.8 14.5 (13.3)(2) 77.0
--------- --------- -------------- ---------
Total current assets ............................... 1,238.6 342.4 (301.0) 1,280.0
--------- --------- -------------- ---------
Property, plant and equipment, net .................... 203.4 156.8 -- 360.2
Intangibles, primarily goodwill ....................... 1,711.6 940.1 (159.3)(3) 2,492.4
Other assets .......................................... 181.8 52.2 38.0 (3) 272.0
--------- --------- -------------- ---------
Total assets ....................................... $ 3,335.4 $ 1,491.5 $ (422.3) $ 4,404.6
========= ========= ============== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................... $ -- $ 1.4 $ -- $ 1.4
Accounts payable and accrued expenses ................ 325.4 59.7 -- 385.1
Customer advances .................................... 74.1 -- -- 74.1
Other current liabilities ............................ 124.8 -- (43.6)(7) 81.2
--------- --------- -------------- ---------
Total current liabilities .......................... 524.3 61.1 (43.6) 541.8
--------- --------- -------------- ---------
Pension and postretirement benefits and other
liabilities .......................................... 212.0 48.9 82.5 (2)(3) 343.4
Long-term debt ........................................ 1,315.3 0.3 920.0 (5) 2,235.6
--------- --------- ----------------- ---------
Total liabilities .................................. 2,051.6 110.3 958.9 3,120.8
Minority interest ..................................... 69.9 -- -- 69.9
Parent company invested equity ........................ -- 1,381.2 (1,381.2)(3) --
Shareholders' equity .................................. 1,213.9 -- -- 1,213.9
--------- --------- ----------------- ---------
Total liabilities and shareholders' equity ......... $ 3,335.4 $ 1,491.5 $ (422.3) $ 4,404.6
========= ========= ================= =========
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
B-3
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS, EXCEPT PER SHARE DATA)
L-3 PRO FORMA
AS REPORTED AIS (1) ADJUSTMENTS
--------------------- ------------ ----------------
Sales ...................... $ 2,347.4 $ 918.6 $ --
Costs and expenses ......... 2,072.1 876.7 (27.8)(4)
------------ --------- ---------
Operating income (loss) 275.3 41.9 27.8
Interest and other income
(expense) ................. 1.8 (1.4) (1.0)(5)
Interest expense ........... 86.3 -- 74.6 (5)
Minority interest .......... 4.5 --
------------ ---------
Income (loss) before
income taxes ........... 186.3 40.5 (47.8)
Provision (benefit) for
income taxes .............. 70.8 22.1 (19.1)(6)
------------ --------- ---------
Net income (loss)........ $ 115.5 $ 18.4 $ (28.7)
============ ========= =========
L-3 Holdings' earnings per
share:
Basic ................... $ 3.08
Diluted ................. $ 2.95(13)
L-3 Holdings' weighted
average shares outstanding:
Basic ................... 37.4
Diluted ................. 42.7 (13)
L-3 +AIS OTHER PRO FORMA
PRO FORMA ACQUISITIONS(7)(8) ADJUSTMENTS PRO FORMA
-------------------- -------------------- ----------------- --------------------
Sales ...................... $ 3,266.0 $ 291.3 $ -- $ 3,557.3
Costs and expenses ......... 2,921.0 270.2 (1.1)(9) 3,190.1
----------- -------- --------- -----------
Operating income (loss) 345.0 21.1 1.1 367.2
Interest and other income
(expense) ................. (0.6) (6.6) (0.7)(10) (7.9)
Interest expense ........... 160.9 0.5 6.6 (10) 168.0
Minority interest .......... 4.5 -- -- 4.5
------------ -------- ------------- ------------
Income (loss) before
income taxes ........... 179.0 14.0 (6.2)(11) 186.8
Provision (benefit) for
income taxes .............. 73.8 4.9 (1.4)(11) 77.3
------------ -------- ------------- ------------
Net income (loss)........ $ 105.2 $ 9.1 $ (4.8) $ 109.5
============ ======== ============= ============
L-3 Holdings' earnings per
share:
Basic ................... $ 2.81 $ 2.81
Diluted ................. $ 2.71(13) $ 2.71(13)
L-3 Holdings' weighted
average shares outstanding:
Basic ................... 37.4 1.5 (10) 38.9
Diluted ................. 42.7 (13) 1.5 (10) 44.2 (13)
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
B-4
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. On March 8, 2002, L-3 Communications acquired AIS, a portion of a
reportable segment of Raytheon, 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 acquisition was financed
using cash on hand, available borrowings under L-3 Communications' senior
credit facilities and a $500.0 million senior subordinated bridge loan.
L-3 expects to offer and sell approximately $1.0 billion of debt and equity
securities during the first half of 2002, depending on capital market
conditions, and use the proceeds from the offerings to repay the $500.0
million senior subordinated bridge loan and repay the outstanding balance
under the senior credit facilities. The unaudited pro forma condensed
consolidated financial statements do not give effect to these anticipated
refinancings for the AIS acquisition.
2. The pro forma balance sheet includes adjustments to remove AIS historical
assets and liabilities at December 31, 2001 which were not included in the
AIS acquisition. The excluded assets and liabilities are comprised of cash
and cash equivalents of $4.0 million, receivables due from Raytheon of $7.4
million, current deferred tax assets of $13.3 million, and non-current
deferred tax liabilities of $12.5 million.
3. The estimated excess of purchase price over fair value of identifiable net
assets acquired (goodwill) for AIS is $780.8 million and is not being
amortized in accordance with Statement of Financial Accounting Standard
(SFAS) No. 142 Goodwill and Other Intangibles because the AIS acquisition
was completed after June 30, 2001. Additionally, the pro forma balance
sheet includes the elimination of $940.1 million of goodwill included in
the AIS historical balance sheet, and $1,381.2 million of AIS historical
parent company invested equity. The pro forma balance sheet also reflects
the following related to the preliminary AIS purchase price allocation:
(a) 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. All of the data required to
prepare these valuations is not currently available and at this
time it is not practicable to reasonably estimate these
valuations.
(b) a review of the identifiable intangible assets included in the
AIS acquisition will be 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. Any allocation of purchase price to
identifiable intangible assets with finite lives will result in
additional amortization expense and a reduction to the goodwill
estimate of AIS;
(c) an increase to pension and postretirement benefits liabilities
of $95.0 million to reflect the benefit obligations assumed by
L-3 in accordance with SFAS No. 87 Employers' Accounting for
Pensions and SFAS No. 106 Employers' Accounting for
Postretirement Benefits Other Than Pensions; and
(d) an increase in other assets of $38.0 million to reflect the
deferred tax asset related to the increase in the AIS pension and
postretirement benefits obligations.
4. The adjustment to costs and expenses relating to the AIS acquisition in the
pro forma statement of operations for the year ended December 31, 2001
represents the elimination of goodwill amortization expense included in the
historical financial statements of AIS of $27.8 million. In accordance with
SFAS No. 142, no goodwill amortization is reflected for L-3's goodwill
resulting from the acquisition of AIS.
B-5
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. The purchase price including acquisition costs for the AIS acquisition of
$1,152.7 million was financed using (1) borrowings under L-3
Communications' senior credit facilities of $420.0 million, (2) a $500.0
million senior subordinated bridge loan and (3) cash on hand of $232.7
million. The cash on hand of $232.7 million was assumed to be a use of the
net proceeds from L-3 Holdings' 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 $407.5 million.
The remaining portion of the net proceeds from the CODES offering were used
to partially finance the Other Acquisitions (See Note 10). The adjustments
to L-3's pro forma interest expense for the year ended December 31, 2001 to
give effect to the financing of the AIS acquisition are based on the
average prevailing interest rates during 2001 on the related borrowings and
the assumed completion of the CODES offering on January 1, 2001, and are
presented below.
($ in millions)
Interest on borrowings under the senior credit facilities (6.57% on
$420.0 million)........................................................ $ 27.6
Interest on senior subordinated bridge loan (7.59% on $500.0 million).... 38.0
Interest on $232.7 million of the net proceeds from the CODES offering
for the ten month period ended October 31, 2001 (4% on $232.7 million
for 10 months). ....................................................... 7.8
Amortization of deferred debt issue costs ............................... 1.2
-------
Total adjustments to pro forma interest expense ...................... $ 74.6
=======
Additionally, L-3's historical interest income for the year ended December
31, 2001 has been adjusted to eliminate the interest income of $1.0 million
earned on investments in cash and cash equivalents for the $232.7 million
portion of the net proceeds from the CODES offering that was assumed to be
used to finance the AIS acqusition.
6. The pro forma adjustments for the AIS acquisition were tax-effected, as
appropriate, using an estimated statutory (federal and state) tax rate of
40.0%.
7. During the year ended December 31, 2001, the Company acquired the following
Other 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
additional purchase price not to exceed $10.0 million which is contingent
upon the financial performance of EER for the year ended December 31,
2001 and 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. The Company 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 the
Company 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 the Company changed Bulova Technologies name to
BT Fuze Products ("BT Fuze").
B-6
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
o in December 2001, the net assets of SY Technology Inc. ("SY") for $48.0
million, subject to adjustment based on closing date net assets, and
additional purchase price not to exceed $4.8 million which is contingent
upon the financial performance of SY for the year ended December 31,
2001, and the years ending December 31, 2002 and 2003.
The pro forma balance sheet includes an adjustment to reflect the payment
of $43.6 million in cash for the remaining outstanding common stock of Spar
in January 2002, assuming the payment occurred on December 31, 2001.
8. The pro forma statement of operations includes the following unaudited
historical financial data for the Other Acquisitions for the year ended
December 31, 2001.
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) 2.8(f)
Interest expense ................ 0.3 -- --
-------- --------- -----
Income (loss) before
income taxes .................. (2.3) (2.1) 11.9
Income tax provision ............. -- -- 4.6
-------- --------- -----
Net income (loss) ............... $ (2.3) $ (2.1) 7.3
======== ========= =====
TOTAL
BT SY OTHER
EMG(B) FUZE(C) TECHNOLOGY(C) ACQUISITIONS
--------------- --------- --------------- -------------
(IN MILLIONS)
Sales ............................ $ 52.2 $ 34.7 $ 62.0 $ 291.3
Costs and expenses ............... 49.1 32.8 56.5 270.2
-------- ------- ------- --------
Operating income (loss) ......... 3.1 1.9 5.5 21.1
Interest and other income
(expense) ..................... (3.8)(g) -- -- (6.6)
Interest expense ................ -- -- 0.2 0.5
-------- ------- ------- --------
Income (loss) before
income taxes .................. (0.7) 1.9 5.3 14.0
Income tax provision ............. 0.3 -- -- 4.9
-------- ------- ------- --------
Net income (loss) ............... $ (1.0) $ 1.9 $ 5.3 $ 9.1
======== ======= ======= ========
----------
(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 $3.3 million gain on the sale of discontinued
operations and 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 Limited Liability Corporation and the income taxes on their
income were paid by their individual stockholders rather than by them.
9. Adjustments to costs and expenses relating to the Other Acquisitions in the
pro forma statement of operations for the year ended December 31, 2001
amounted to a net decrease of $1.1 million and were comprised of (1) an
increase to goodwill amortization expense of $0.7 million for the KDI and
EER acquisitions for the higher goodwill amounts recorded by L-3 for these
acquisitions compared to their historical goodwill amounts and (2) the
elimination of historical goodwill amortization expense of $1.2 million for
EMG and $0.6 million for Spar. In accordance with the provisions of SFAS
No. 142, no goodwill amortization is recorded on EMG, Spar, BT Fuze and SY.
10. The aggregate purchase price including acquisition costs for the Other
Acquisitions of $484.9 million was financed using cash on hand which
assumed to be a use of (1) the net proceeds from L-3 Holdings'
B-7
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
public offering of 4,575,000 shares of L-3 Holdings, Inc. common stock in
May 2001 (the "May 2001 Common Stock Offering") which amounted to $353.6
million, and (2) the remaining net proceeds of $174.8 million from L-3
Holdings' CODES offering after the portion of the CODES offering assumed to
be used to finance $232.7 million of the AIS acquisition (see Note 5). The
adjustment to L-3's pro forma interest expense for the year ended December
31, 2001 to give effect to the financing of the Other Acquisitions is $6.6
million and was calculated on the $187.3 million of the remaining principal
amount of the CODES assuming the completion of the CODES offering on
January 1, 2001 (4% on $187.3 million for the ten-month period ended
October 31, 2001 and $0.4 million for amortization of deferred debt issue
costs).
Additionally, L-3 Holdings' basic and diluted weighted average shares
outsanding for the year ended December 31, 2001 were each increased by 1.5
million shares of common stock to give effect to the assumed completion of
the May 2001 Common Stock Offering as of January 1, 2001.
Additionally, L-3's historical interest income for the year ended December
31, 2001 was adjusted to eliminate the interest income of $0.7 million
earned on investments in cash and cash equivalents for the $174.8 million
portion of the net proceeds from the CODES offering that was assumed to be
used to finance the Other Acqusitions.
11. The pro forma adjustments for the Other Acquisitions were tax-effected, as
appropriate, using an estimated statutory (federal and state) tax rate of
40.0%. The pro forma adjustments also include an income tax provision of
$1.1 million 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, but did not because they
were not subject to income tax prior to their acquisition by L-3.
12. All the assets and liabilities of the Other Acquisitions, the CODES
Offering and the May 2001 Common Stock Offering are included in L-3's
balance sheet at December 31, 2001. Accordingly, L-3's December 31, 2001
balance sheet is not adjusted to give effect to these transactions.
13. L-3 Holdings' diluted weighted average shares outstanding and diluted
earnings per share give effect to the assumed conversion of the 3,680,982
shares issuable upon the conversion of L-3 Holdings $300.0 million of
5 1/4% Convertible Senior Subordinated Notes due 2009. The assumed
conversion results in the addition of $10.5 million of after-tax interest
expense savings to reported net income for the year ended
December 31, 2001 for the purposes of calculating diluted earnings per
share.
B-8