424B4 1 d424b4.txt 424(B)(4) Filed Pursuant to Rule 424(B)(4) Registration No. 333-71986 21,100,000 Shares [GRAPHIC] United Defense UNITED DEFENSE INDUSTRIES, INC. Common Stock This is our initial public offering of common stock. We are offering 9,250,000 shares and the selling stockholders identified in this prospectus are offering 11,850,000 shares. No public market currently exists for our shares. We will not receive any proceeds from the sale of shares offered by the selling stockholders. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "UDI". Investing in the shares involves risks. See "Risk Factors" beginning on page 8.
Per Share Total --------- ------------ Public Offering Price...................... $19.00 $400,900,000 Underwriting Discounts and Commissions..... $ 1.14 $ 24,054,000 Proceeds to United Defense Industries, Inc. $17.86 $165,205,000 Proceeds to Selling Stockholders........... $17.86 $211,641,000
The selling stockholders have granted the underwriters a 30-day option to purchase up to 3,165,000 additional shares of common stock on the same terms and conditions set forth above solely to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any state securities commission or regulatory authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Lehman Brothers and Goldman, Sachs & Co., on behalf of the underwriters, expect to deliver the shares on or about December 19, 2001. LEHMAN BROTHERS GOLDMAN, SACHS & CO. ----------------- MERRILL LYNCH & CO. ----------------- CREDIT SUISSE FIRST BOSTON Prospectus dated December 13, 2001 DESCRIPTION OF INSIDE FRONT COVER: The black, red and white United Defense logo is positioned in the middle right side of the front cover page. Below the logo is a photograph of two individuals working in a virtual development environment. Above the logo and spanning the width of the page is a one-inch strip of photographs depicting the Crusader, the Bradley Fighting Vehicle, the HERCULES, a future naval vessel utilizing the Advanced Gun System, and the Vertical Launch System, respectively. DESCRIPTION OF INSIDE GATEFOLD: The inside gatefold consists of a collage of our products. The bottom left of the gatefold depicts an individual manning an Advanced Crew Station. Above this graphic are additional photographs illustrating our current products, products in development, and some of our future design concepts including; the Linebacker, the M109A6 Paladin, the M7 Bradley Fire Support Vehicle, a Universal Carrier, the M2A3 Bradley, an Assault Amphibious Vehicle, the Mobile Tactical Vehicle Light, the M8 Armored Gun System, a vehicle with hybrid electric drive, the HERCULES, and a computer- generated depiction of a future combat system. The right side of the inside gatefold depicts the Mk 13 Guided Missile Launch System, the Mk 25 Quad Pack Canister, the Mk 45 Mod 4 Naval Gun, the Mk 41 Vertical Launch System, a Bonus munition, a future naval vessel utilizing the Advanced Gun System, and a picture of two individuals at work in a virtual simulation integration laboratory. TABLE OF CONTENTS
Page ---- Available Information.................. i Prospectus Summary..................... 1 Risk Factors........................... 8 Forward-Looking Statements............. 15 Use of Proceeds........................ 16 Dividend Policy........................ 16 Capitalization......................... 17 Dilution............................... 18 Selected Consolidated Financial Data... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 22 Business............................... 29
Page ---- Management.............................. 47 Certain Relationships and Related Transactions.......................... 55 Principal and Selling Stockholders...... 57 Description of Capital Stock............ 59 Description of Credit Facility.......... 61 Certain United States Federal Income Tax Consequences to Non-U.S. Holders...... 62 Shares Eligible for Future Sale......... 64 Underwriting............................ 65 Legal Matters........................... 68 Experts................................. 68 Index to Financial Statements........... F-1
----------------- AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to the shares of our common stock offered by this prospectus. This prospectus, filed as a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules thereto as permitted by the rules and regulations of the Commission. For further information about us and our common stock, you should refer to the registration statement. This prospectus summarizes material provisions of certain contracts and other documents to which we refer you. Because the summaries may not contain all of the information that you may find important, you should review the full text of those documents. We have included copies of those documents as exhibits to the registration statement. We are subject to the informational requirements of the Securities Exchange Act of 1934, referred to herein as the Exchange Act, and, in accordance therewith, file reports, and other information with the Securities and Exchange Commission, referred to herein as the SEC. Such reports, the registration statement and the exhibits thereto filed and other information may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The registration statement and other information filed by us with the Commission are also available at the Commission's World Wide Web site on the internet at http://www.sec.gov. You may request copies of these filings, at no cost, by telephone at (703) 312-6100 or by mail to: United Defense Industries, Inc., 1525 Wilson Boulevard, Suite 700, Arlington, Virginia 22209, Attn: Chief Financial Officer. As a result of the offering, we and our stockholders will become subject to the proxy solicitation rules, annual and periodic reporting requirements and other requirements of the Exchange Act. We will furnish our stockholders with annual reports containing audited financial statements certified by our independent auditors and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year. You should rely only on the information contained in this prospectus. We and the underwriters have not authorized anyone to provide you with different or additional information. This prospectus is not an offer to sell or a solicitation of an offer to buy our common stock in any jurisdiction where it is unlawful to do so. The information contained in this prospectus is accurate only as of its date, regardless of the date of delivery of this prospectus or of any sale of our common stock. i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read carefully this summary together with the more detailed information, including our financial statements and the related notes, appearing elsewhere in this prospectus. For convenience in this prospectus, "United Defense," "we," "us," and "our" refer to United Defense Industries, Inc. and its subsidiaries, taken as a whole. Unless otherwise stated herein, all share numbers contained in this prospectus assume the completion of a 2.25:1 stock dividend which took place December 13, 2001. United Defense United Defense is a leader in the design, development and production of combat vehicles, artillery, naval guns, missile launchers and precision munitions used by the U.S. Department of Defense and allied militaries around the world. We are a sole-source, prime contractor on several programs comprising critical elements of the U.S. military force structure. We have an installed base of over 100,000 combat vehicles and weapon systems with the U.S. Department of Defense and more than 40 foreign militaries. Our 60 years of experience has led to long standing customer relationships, proprietary technologies, a diversified product portfolio, disciplined program management and a competitive cost structure. For the twelve months ended September 30, 2001, we had revenue of $1.2 billion, Adjusted EBITDA of $164.7 million, income from operations of $50.4 million and net income of $6.5 million. Approximately 25% of our sales for the twelve months ended September 30, 2001, were to international customers. As of September 30, 2001, we had a funded backlog of $2.0 billion. We are currently the sole-source, prime contractor for a number of critical U.S. military programs, including: Bradley Fighting Vehicle, the U.S. Army's primary armored infantry vehicle; Mk 45 Gun System, a lightweight and reliable, fully automated 5-inch naval gun system; Mk 41 Vertical Launch System, missile canisters and, in conjunction with Lockheed Martin Corporation, missile launchers for the U.S. Navy's surface fleet; Crusader, a technologically advanced, long-range, precision artillery system being developed for the U.S. Army; and Advanced Gun System, the next generation 155mm naval gun system being developed for the U.S. Navy. We have developed expertise in the design and manufacture of technologically advanced combat systems that can acquire, synthesize and utilize battlefield information from multiple sources. This expertise enables us to: . increase significantly the effectiveness of combat vehicles and weapon systems; . integrate new technologies into our installed base; and . compete effectively to win prime contracts for next-generation combat systems. Industry Overview/Market Opportunity We derive our revenues predominantly from contracts with the U.S. Department of Defense, allied governments and other prime contractors. As a result, funding for our development and production programs is generally linked to trends in U.S. and international defense spending. We believe that domestic and international defense spending will grow over the next several years as a result of an increased focus on national security by the U.S. Government and its allies. We believe the following trends and developments will drive the growth in our industry: . the U.S. defense budget submission for fiscal 2002 reflects an 11% increase over fiscal 2001; . defense procurement and development accounts are growing proportionately with overall national security spending and are expected to continue growing in the near future; 1 . the Bush Administration's recently published Quadrennial Defense Review calls for retaining the current force structure and increasing investment in next-generation technologies and capabilities to enable U.S. military forces to more effectively counter emerging threats; and . the terrorist attacks of September 11, 2001 have generated strong Congressional support for increased defense spending. Business Strengths We believe that the following strengths are critical to our success as a leading sole-source, prime contractor to the U.S. Department of Defense and allied militaries: We are a leading developer of key combat vehicles and weapon systems. We are at the forefront of research, development and design technologies necessary for advanced armored combat vehicles, artillery, naval guns, missile launchers and precision munitions. These technologies have been instrumental in our selection as the prime sole-source developer, system integrator and producer for critical combat systems of the U.S. military, including the Bradley, the Mk 45 naval gun system, the Crusader artillery system and the Advanced Gun System. We have an extensive installed base of combat systems. We have a global installed base of approximately 100,000 combat vehicles and weapon systems with the U.S. military and more than 40 foreign militaries. Through our ongoing research and development efforts, we have created a large number of derivative products and upgrades to these combat systems that we sell to our customers to extend the lifecycle of their equipment. We have a balanced portfolio of development and production contracts. In addition to our ongoing production and upgrade programs, we are involved in a number of development programs such as the Crusader, which based on U.S. Army estimates could become a $7 billion program, and the U.S. Navy's Advanced Gun System, which could become a $3 billion program. This program mix provides consistent revenue while positioning us for future growth. We are a global defense contractor. We have expanded our international presence over the past several years through our direct foreign sales, joint ventures in Turkey and Saudi Arabia, and co-production programs. We further expanded our international operations, gained technology and enhanced our engineering capabilities through the acquisition of Bofors Defence, a leading provider of weapon systems and precision munitions based in Sweden. Our senior management team and Board of Directors have extensive experience in the defense industry. On average, our senior management team has been with us for more than 20 years. Members of our Board of Directors have served in senior positions within the U.S. Government, such as Secretary of Defense, Chairman of the Joint Chiefs of Staff and Commander-in-Chief of the U.S. Central Command. Moreover, four of our directors are affiliated with our major stockholder, The Carlyle Group, a Washington D.C.-based global private equity firm with extensive experience in finance and acquisitions in the aerospace and defense industries. Business Strategy We intend to increase our revenues, profitability and shareholder value by expanding our role as a leading systems integrator and prime contractor to the U.S. Department of Defense and allied militaries. Our strategy for achieving this objective is: Continue to invest in research, development and advanced technologies and design techniques to capture new business. We intend to lead our current development programs into production and to capture key next-generation programs through our systems integration expertise, technology leadership and ongoing commitment to core research. 2 Generate revenue from our installed base through upgrades incorporating advanced technologies and by providing aftermarket services. We will capitalize on our advanced technologies and systems integration capabilities to upgrade our installed base of combat systems and provide lifecycle services to enhance their performance and extend their effective service lives. Apply advanced technologies across a range of new programs. We intend to apply our existing technologies across a broad range of additional combat systems and develop derivative products to expand our program base. Capitalize on our global presence. We intend to use our long-standing relationships with foreign militaries, our global manufacturing and marketing operations, and our experience with foreign joint ventures and co-production programs to broaden our technology and product base and grow international revenues. Selectively pursue acquisitions with complementary products and technologies. We intend to continue participating in the current consolidation of the defense industry by utilizing the business relationships of our senior management team, our Board of Directors and The Carlyle Group to acquire companies with complementary products and technologies, as exemplified by our September 2000 acquisition of Bofors Defence. Recapitalization Since the acquisition of United Defense by affiliates of The Carlyle Group in October 1997, we have generated substantial cash flows. From October 1997 to August 2001, we generated sufficient cash flow to repay $524.2 million of debt, invest in the research and development of combat system technologies, and pursue strategic acquisitions. In August 2001, we undertook a recapitalization that included the repurchase of $182.8 million of our 8.75% senior subordinated notes and provided funds for the payment of dividends to holders of our common stock of up to $381.7 million. To fund the recapitalization, we entered into a new senior secured credit facility consisting of $600.0 million in term loans and a $200.0 million revolving credit facility. We used the proceeds from the term loans to pay a $289.7 million dividend to our stockholders and to complete a tender offer for our outstanding 8.75% senior subordinated notes. On November 16, 2001, our Board of Directors approved the declaration of a dividend of $92.0 million, which we paid on November 26, 2001 with the remaining proceeds from the term loans. On a pro forma basis, after giving effect to this offering, and the use of its proceeds, as well as the $92.0 million dividend, we would have had $437.0 million principal amount of indebtedness outstanding as of September 30, 2001. ----------------- We were incorporated in Delaware in August 1997, with our principal executive offices located at 1525 Wilson Boulevard, Suite 700, Arlington, Virginia 22209. Our telephone number is (703) 312-6100. 3 The Offering Common stock offered by us: 9,250,000 shares Common stock offered by the selling stockholders: 11,850,000 shares Common stock to be outstanding after the offering: 50,663,088 shares Use of proceeds from this offering: We estimate that our share of the net proceeds from this offering will be approximately $163.0 million. We plan to use those funds to reduce the principal amount outstanding under our senior secured credit facility and, potentially, for other purposes permitted by the terms of that facility. We will receive no proceeds from the sale of common stock by the selling stockholders. New York Stock Exchange symbol: "UDI"
The number of shares of common stock to be outstanding after this offering: . includes 40,739,551 shares outstanding as of September 30, 2001; . includes 673,537 shares issued upon the exercise of vested stock options after September 30, 2001 and prior to the date hereof; . excludes 2,446,666 shares that may be issued upon the exercise of outstanding stock options; and . excludes 81,097 shares reserved for issuance pursuant to our stock option plan. Risk Factors You should carefully read and consider the information set forth under "Risk Factors" and all other information set forth in this prospectus before investing in our common stock. 4 Summary Consolidated Financial Data We derived the summary financial data presented below as of and for each of the three years in the period ended December 31, 2000 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary financial data as of and for the nine months ended September 30, 2000 and 2001 from our unaudited consolidated interim financial statements included elsewhere in this prospectus. In our opinion, the unaudited consolidated interim financial statements have been prepared on a basis consistent with the audited financial statements and include all adjustments, which are normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The "Pro Forma" column in the summary balance sheet data presented below as of September 30, 2001, gives effect to our payment of a dividend of $92.0 million on November 26, 2001 and to the application of the net proceeds from the sale by us of 9,250,000 shares of common stock in the offering at an offering price of $19.00 per share. See "Use of Proceeds" and "Capitalization." Our historical results are not necessarily indicative of future operating results. You should read the information set forth below in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and their related notes included elsewhere in this prospectus.
Nine Months Ended Year Ended December 31, September 30, ------------------------------------- ------------------------ 1998 1999 2000 2000 2001 ----------- ----------- ----------- ----------- ----------- (in thousands, except share and per share data) Statement of Operations Data: Revenues............................................... $ 1,217,555 $ 1,213,526 $ 1,183,886 $ 867,426 $ 913,863 Costs and expenses: Cost of sales....................................... 1,099,291 991,907 943,892 687,801 728,836 Selling, general and administrative expenses........ 172,888 167,877 173,694 129,681 131,140 Research and development............................ 13,021 12,782 15,760 12,287 16,418 ----------- ----------- ----------- ----------- ----------- Total expenses................................... 1,285,200 1,172,566 1,133,346 829,769 876,394 ----------- ----------- ----------- ----------- ----------- (Loss) income from operations.......................... (67,645) 40,960 50,540 37,657 37,469 Other income (expense): Earnings (loss) related to investments in foreign affiliates......................................... 1,647 1,639 (1,262) (460) 9,187 Interest income..................................... 1,396 1,820 4,152 2,672 4,621 Interest expense.................................... (52,155) (38,835) (29,265) (23,163) (19,215) ----------- ----------- ----------- ----------- ----------- Total other expense.................................... (49,112) (35,376) (26,375) (20,951) (5,407) (Loss) income before income taxes and extraordinary item.................................................. (116,757) 5,584 24,165 16,706 32,062 Provision for income taxes............................. 5,841 2,646 6,000 2,224 6,682 ----------- ----------- ----------- ----------- ----------- (Loss) income before extraordinary item................ (122,598) 2,938 18,165 14,482 25,380 Extraordinary item--net gain (loss) from extinguishment of debt............................................... -- -- 680 680 (22,599) ----------- ----------- ----------- ----------- ----------- Net (loss) income...................................... $ (122,598) $ 2,938 $ 18,845 $ 15,162 $ 2,781 =========== =========== =========== =========== =========== Per Share Data: Earnings per common share--basic: (Loss) income before extraordinary item............. $ (3.08) $ 0.07 $ 0.45 $ 0.36 $ 0.62 Extraordinary item.................................. -- -- 0.01 0.01 (0.55) ----------- ----------- ----------- ----------- ----------- Net (loss) income................................... $ (3.08) $ 0.07 $ 0.46 $ 0.37 $ 0.07 =========== =========== =========== =========== =========== Weighted average common shares outstanding.......... 39,815,942 40,593,348 40,584,049 40,584,566 40,683,641 Earnings per common share--diluted: (Loss) income before extraordinary item............. $ (3.08) $ 0.07 $ 0.43 $ 0.34 $ 0.59 Extraordinary item.................................. -- -- 0.01 0.01 (0.53) ----------- ----------- ----------- ----------- ----------- Net (loss) income................................... $ (3.08) $ 0.07 $ 0.44 $ 0.35 $ 0.06 =========== =========== =========== =========== =========== Weighted average common shares outstanding.......... 39,815,942 42,052,127 42,419,473 42,401,930 42,663,452 Pro forma earnings per common share--diluted (1): Net income (loss)................................... $ 0.36 $ 0.05 =========== =========== Weighted average common shares outstanding.......... 51,669,473 51,913,452 Dividends paid per common share........................ $ -- $ -- $ -- $ -- $ 7.11 =========== =========== =========== =========== ===========
5
Nine Months Ended Year Ended December 31, September 30, ---------------------------------- ---------------------- 1998 1999 2000 2000 2001 ---------- ---------- ---------- ---------- ---------- (in thousands) Other Financial Data: Funded backlog (at period end).............. $1,430,908 $1,433,485 $1,862,529 $1,819,659 $2,028,436 Net cash from operating activities.......... 197,302 189,633 95,346 46,462 16,662 Net cash (used in) from investing activities (648) (23,714) 2,868 1,041 (13,029) Net cash (used in) from financing activities (146,757) (157,114) (79,182) (73,409) 5,358 Capital expenditures........................ 24,020 25,246 19,721 11,717 13,318 Adjusted EBITDA (2)......................... 173,447 173,721 148,889 107,644 123,440
-------- (1)In accordance with SEC Staff Accounting Bulletin No. 55, pro forma earnings per common share gives effect to the issuance of the shares sold by the Company in this offering as if those shares were issued on January 1, 2000 and used to fund a portion of the dividend paid in August 2001. (2)EBITDA represents income (loss) from operations, plus earnings related to investments in foreign affiliates, plus depreciation and amortization expense. Adjusted EBITDA represents EBITDA adjusted for recapitalization expenses and other non-recurring charges, the impact of purchase accounting adjustments on inventory from our acquisition of United Defense, L.P. in October 1997 on cost of sales and the impact of the use of the LIFO inventory method. EBITDA and Adjusted EBITDA are not presentations made in accordance with generally accepted accounting principles. EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as measures of profitability or liquidity. EBITDA and Adjusted EBITDA are included in this prospectus to provide additional information with respect to our ability to satisfy our debt service, capital expenditure and working capital requirements and because certain covenants in our senior secured credit facility are based on similar measures. While EBITDA and Adjusted EBITDA are used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculations. The calculations of EBITDA and Adjusted EBITDA are shown below:
Nine Months Ended Year Ended December 31, September 30, ----------------------------- ------------------ 1998 1999 2000 2000 2001 -------- -------- -------- -------- -------- - (in thousands) (Loss) income from operations......................... $(67,645) $ 40,960 $ 50,540 $ 37,657 $ 37,469 Earnings (loss) related to investments in foreign affiliates........................................ 1,647 1,639 (1,262) (460) 9,187 Depreciation expense................................ 83,153 55,528 23,882 18,073 15,797 Amortization expense................................ 91,895 72,408 68,422 52,374 36,947 -------- -------- -------- -------- -------- EBITDA................................................ 109,050 170,535 141,582 107,644 99,400 Recapitalization and other non-recurring charges.... 39,168(a) -- -- -- 18,633(b) Impact of inventory purchase accounting adjustment on cost of sales (c)................... 19,978 3,186 -- -- -- Impact of use of LIFO inventory method.............. 5,251 -- 7,307 -- 5,407 -------- -------- -------- -------- -------- Adjusted EBITDA..................................... $173,447 $173,721 $148,889 $107,644 $123,440 ======== ======== ======== ======== ========
-------- (a)Non-recurring charges for the year ended December 31, 1998 are related to charges associated with restructuring our Fridley, Minnesota operation, including special pension termination benefits and curtailments, and charges for impaired assets, as well as charges for impaired assets at our York operation. (b)Recapitalization charges for the nine months ended September 30, 2001 include special performance-related bonuses to our management and directors, and management and consulting fees to The Carlyle Group and other unaffiliated advisors and consultants. (c)Relates to purchase accounting adjustments resulting from our acquisition of United Defense, L.P. in October 1997. 6
As of September 30, As of December 31, 2001 ---------------------------- -------------------- 1998 1999 2000 Actual Pro Forma -------- -------- -------- --------- --------- (in thousands) Balance Sheet Data: Cash and cash equivalents................ $ 85,520 $ 94,325 $113,357 $ 120,240 $ 28,211 Working capital.......................... (30,854) (71,801) (60,382) (4,992) (69,371) Total assets............................. 977,450 853,142 895,820 973,391 881,362 Long-term debt, including current portion 506,986 349,843 269,577 600,000 437,045 Stockholders' equity (deficit)........... 20,200 23,167 41,901 (247,422) (176,496)
7 RISK FACTORS Investing in our common stock involves risk. You should carefully consider the following risks as well as the other information contained in this prospectus, including our financial statements and the related notes, before investing in our common stock. Risks Related to Our Business Our government contracts entail risks. We are a sole-source, prime contractor for many different military programs with the U.S. Department of Defense. We depend heavily on the government contracts underlying these programs. Over its lifetime, a program may be implemented by the award of many different individual contracts and subcontracts. The funding of government programs is subject to congressional appropriation. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded and additional funds are committed only as Congress makes further appropriations. The government's termination of, or failure to fully fund, one or more of the contracts for our programs would have a negative impact on our operating results and financial condition. We also serve as a subcontractor on several military programs that, in large part, involve the same risks as prime contracts. A reduction in the U.S. defense budget could result in a decrease in our revenue. The reduction in the U.S. defense budget that began in the early 1990s caused most defense-related government contractors, including our predecessor company, to experience decreased sales, reduced operating margins and, in some cases, net losses. A significant decline in U.S. military expenditures in the future could materially adversely affect our sales and earnings. The loss or significant reduction in government funding of a large program in which we participate could also materially adversely affect our sales and earnings and thus our ability to meet our financial obligations. Government contracts contain termination provisions unfavorable to us and are subject to audit and modification by the government at its sole discretion. As a company engaged primarily in supplying defense-related equipment and services to the U.S. Government, we are subject to business risks specific to our industry. These risks include the ability of the U.S. Government to unilaterally: . suspend or permanently prevent us from receiving new contracts or extending existing contracts based on violations or suspected violations of procurement laws or regulations; . terminate our existing contracts; . reduce the value of our existing contracts; . audit and object to our contract-related costs and fees, including allocated indirect costs; . control and potentially prohibit the export of our products; and . change certain terms and conditions in our contracts. The U.S. Government can terminate any of its contracts with us either for its convenience or if we default by failing to perform. Termination for convenience provisions generally enable us to recover only our costs incurred or committed, and settlement expenses and profit on the work completed, prior to termination. Termination for default provisions do not permit these recoveries and make us liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. Our contracts with foreign governments may contain similar provisions. As a U.S. Government contractor, we are subject to financial audits and other reviews by the U.S. Government of our costs and performance, accounting and general business practices relating to these contracts. 8 Like most large government contractors, we are audited and reviewed on a continual basis. Based on the results of its audits, the U.S. Government may adjust our contract-related costs and fees, including allocated indirect costs. Although adjustments arising from government audits and reviews have not had a material adverse effect on our results of operations in the past, there can be no assurance that future audits and reviews will not have these effects. In addition, under U.S. Government purchasing regulations, some of our costs, including most financing costs, amortization of goodwill and other intangible assets, portions of our research and development costs, and some marketing expenses may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, as a U.S. Government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not, the results of which could have a material adverse effect on our operations. Our policy is to cooperate with governmental investigations and inquiries regarding compliance matters, and we also make voluntary disclosures of any compliance issues to governmental agencies as appropriate. We are currently providing information on compliance matters to various government agencies, and we expect to continue to do so in the future. Government contracts are subject to competitive bidding. We obtain many of our U.S. Government contracts through a competitive bidding process that subjects us to risks associated with: . the frequent need to bid on programs in advance of the completion of their design, that may result in unforeseen technological difficulties and/or cost overruns; . the substantial time and effort, including design, development and marketing activities, required to prepare bids and proposals for contracts that may not be awarded to us, such as the contract for the U.S. Army's Interim Armored Vehicle; and . the design complexity and rapid rate of technological advancement of defense related products. In addition, in order to win the award of developmental programs, we must be able to align our research and development and product offerings with the government's changing concepts of national defense and defense systems. For example, in recent years, there has been a trend in military procurement toward achieving a balance between wheeled and tracked combat vehicles; including the U.S. Army's announced procurement of over 2,000 of these wheeled vehicles in November 2000 for its Interim Armored Vehicle program. We unsuccessfully offered tracked vehicle candidates for the Interim Armored Vehicle program. To the extent that future armored vehicle procurements emphasize wheeled designs, we may remain at a competitive disadvantage if we are unable to offer a competitive wheeled vehicle design. Moreover, we cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sales sufficient to result in profits. We rely on key contracts with U.S. Government entities for a significant portion of our sales. A substantial reduction in these contracts would materially adversely affect our operating results. We derive revenues predominantly from contracts with agencies of, and prime contractors to, the U.S. Department of Defense. Approximately 70% of our sales for the year ended December 31, 2000, and approximately 77% of our sales for the nine months ended September 30, 2001, were made directly or indirectly to agencies of the U.S. Government, excluding U.S. Foreign Military Sales contracts. Any significant disruption or deterioration in our relationship with the U.S. Government would significantly reduce our revenues. Our largest production program is the Bradley Fighting Vehicle. Our Bradley contracts provided 24%, or $284.8 million, of our sales for the year ended December 31, 2000, and 21%, or $193.0 million, of our sales for the nine months ended September 30, 2001. Our largest development program is the Crusader, which provided 16%, or $184.5 million, of our sales for the year ended December 31, 2000, and 20%, or $183.3 million, of our sales for the nine months ended September 30, 2001. The termination or reduction in scope of either of these 9 major programs or the loss of all or a substantial portion of our sales to the U.S. Government would have a material adverse effect on our financial condition and operating results. Our fixed-price and cost-plus contracts may commit us to unfavorable terms. We provide our products and services primarily through fixed-price and cost-plus contracts. Fixed-price contracts provided 67% of our sales for the year ended December 31, 2000 and 65% of our sales for the nine months ended September 30, 2001, and cost-plus contracts provided 33% and 35% of our sales for those two periods, respectively. In a fixed-price contract, we must fully absorb cost overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing these contracts and in projecting the ultimate level of sales that we may achieve. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-price contract may reduce the profitability of a fixed-price contract or cause a loss. In a cost-plus contract, we are allowed to recover our approved costs plus a fee. The total price on a cost- plus contract is based primarily on allowable costs incurred, but generally is subject to a maximum contract funding limit. U.S. Government regulations require us to notify our customer of any cost overruns or underruns on a cost-plus contract. If we incur costs in excess of the funding limitation specified in the contract, we may not be able to recover those cost overruns. Although we believe that we have recorded adequate provisions in our financial statements for losses on our fixed-price contracts, as required under U.S. generally accepted accounting principles, we cannot assure you that our contract loss provisions will be adequate to cover all actual future losses. Intense competition in the defense industry could limit our ability to win and retain government contracts. The defense industry is highly competitive and we encounter significant domestic and international competition for government contracts from other companies, some of which have substantially greater financial, technical, marketing, manufacturing and distribution resources than we do. Our ability to compete for these contracts depends on: . the effectiveness of our research and development programs; . our ability to offer better program performance than our competitors at a lower cost to the U.S. Government; and . the readiness of our facilities, equipment and personnel to undertake the programs for which we compete. Additionally, our U.S. Government programs must compete with programs managed by other defense contractors for limited funding. Our competitors continually engage in efforts to expand their business relationship with the U.S. Government and are likely to continue these efforts in the future. The U.S. Government may choose to use other defense contractors for its limited number of defense programs. In addition, defense programs compete with non-defense spending of the U.S. Government for funding. Budget decisions made by the U.S. Government are outside of our control and can have long term consequences for the size and structure of United Defense. In some instances, the U.S. Government directs to a single supplier all work for a particular program, commonly known as a sole-source program. In those instances, other suppliers who might otherwise be able to compete for various components of the program can only do so if the U.S. Government chooses to reopen the program to competition. While we have derived most of our historical revenues from sole-source programs, we derive and expect to derive a significant portion of our sales through competitive bidding. In addition, although the U.S. Government has historically awarded certain programs to us on a sole-source basis, it may in the future determine to open programs to a competitive bidding process. We cannot assure you that we will continue to be the sole-source contractor on various 10 programs, that we will compete successfully for specific program opportunities or, if we are successful, that awarded contracts will generate sufficient sales to be profitable. Changes in defense procurement models may make it more difficult for us to successfully bid on projects as a prime contractor and limit sole-source opportunities available to us. In recent years, the trend in future combat system design and development has evolved towards the technological integration of various battlefield components, including combat vehicles, command and control network communications, advanced technology artillery systems and robotics. If the U.S. military procurement approach requires this kind of overall battlefield combat system integration, we may be subject to new competition from aerospace and defense companies who have significantly greater resources than we do. This trend could create a role for a prime contractor with broader capabilities that would be responsible for integrating various battlefield component systems and potentially eliminating the role of sole-source providers or prime contractors of component weapon systems. We cannot assure you that we will be able to compete successfully for these broader prime contractor roles with larger horizontally integrated contractors. Our operating performance is heavily dependent upon the timing of manufacturing and delivery of products under our U.S. Government contracts. Our operating results and cash flow are dependent, to a material extent, upon the timing of manufacturing and delivery of products under our government contracts. For example, under recent Bradley production contracts, we do not recognize sales on a unit until we deliver or "field" such unit. This extends the period of time during which we carry these vehicles as inventory and may result in an uneven distribution of revenue from these contracts between periods. Our operating results can also be affected by the timing and amounts of dividends we receive from our foreign joint ventures. As a result, our period-to-period performance may fluctuate significantly, and you should not consider our performance during any particular period as necessarily indicative of longer term results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." If we are not successful in integrating the new and complex technologies to be used in our products, our business could be materially and adversely affected. The integration of diverse technologies involved in producing our products is a complex task, which in many instances has not been previously attempted. For example, we are currently the prime contractor for the Crusader, which requires us to integrate a number of sophisticated technologies while meeting challenging performance requirements and aggressive timetables. The nature and complexity of the Crusader system is such that we cannot assure the ability of the system to function in its intended manner. As a result, there is a risk that the Crusader may not proceed into the next program phase or eventual production, which would have a material adverse effect on our financial condition and results of operations. In addition, our ability to integrate the new and complex technologies involved in our products is subject to risks associated with uncertain costs and availability of resources, including: . frequent need to bid on programs before their design is completed, which may result in unforeseen engineering difficulties and/or cost overruns; . substantial time and effort required for design and development, and the constant need for design improvement; . delays in delivery of necessary components or their scarcity; and . limitations on the availability of human resources, such as software engineers and information technology professionals. 11 Our international operations and foreign joint ventures subject us to risks that could materially adversely affect our results of operations and financial condition. We participate in unconsolidated joint ventures in Turkey and Saudi Arabia and in selected co-production programs in several other countries. We recognized a loss from our joint ventures of $1.3 million for the year ended December 31, 2000 and earnings of $9.2 million for the nine months ended September 30, 2001. Our export sales, which include U.S. direct foreign sales, U.S. Foreign Military Sales and our revenues from our Bofors Defence subsidiary, totaled $351.0 million for the year ended December 31, 2000 and $207.6 million for the nine months ended September 30, 2001, representing approximately 29.6% and 22.7% of our total revenues for those periods, respectively. Our strategy includes expansion of our international operations and export sales. In connection with these international operations and sales we are subject to risks, including the following: . devaluations and fluctuations in currency exchange rates; . the ability to obtain distributions of cash which require the approval of joint venture partners; . changes in, or changes in interpretations of, foreign regulations that may adversely affect our ability to sell certain products or repatriate profits to the United States; . imposition of limitations on conversions of foreign currencies into U.S. dollars; . imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; . hyperinflation or political instability in the countries in which we operate or sell to; . imposition or increase of investment and other restrictions by foreign governments; . the potential imposition of trade or foreign exchange restrictions or increased tariffs; . U.S. arms export control regulations and policies that restrict our ability to supply foreign affiliates and customers; and . local political pressure to shift from majority to minority ownership positions in joint ventures, which could further reduce our ability to influence the conduct, strategy and profitability of these ventures. If we expand our international operations, these and other associated risks are likely to become more significant to us. Although these risks have not had a material adverse effect on our financial condition or results of operations in the past, we cannot assure you that these risks will not have a material adverse effect on our results of operations and financial position in the future. We may not have the ability to make acquisitions, develop strategic alliances, expand or implement new joint ventures, or successfully implement and maintain co-production programs. As part of our growth strategy, we intend to expand our current joint ventures and pursue new strategic alliances, selected acquisitions and co-production programs. We consider strategic transactions from time to time and may be evaluating acquisitions, alliances or co-production programs or engaged in negotiations at any time. We compete with other defense contractors for these opportunities. We cannot assure you, therefore, that we will be able to effect transactions with strategic alliance, acquisition or co-production program candidates on commercially reasonable terms or at all. If we enter into these transactions, we also cannot be sure that we will realize the benefits we anticipate. In addition, we cannot be sure that we will be able to obtain additional financing for these transactions. The integration of any strategic alliances, acquisitions or co-production programs into our business 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. Consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our financial 12 condition and operating results. In addition, we may be required to enter into novation agreements with the U.S. Government in order to succeed to the U.S. Government contracts. Novation can be a lengthy process that often occurs after the consummation of an acquisition. Accordingly, our failure to obtain any required novation could have a material adverse effect on the value to us of an acquired business. We may not be able to receive or retain the necessary licenses or authorizations required for us to sell our products overseas. U.S. Government licenses are required for us to export our products. In the case of certain sales of defense equipment to foreign governments, the U.S. Government's Executive Branch must notify Congress at least 15 to 30 days, depending on the location of the sale, prior to authorizing these sales. During this time, Congress may take action to block the proposed sale. We cannot be sure of our ability to obtain any licenses required to export our products or to receive authorization from the Executive Branch for sales to foreign governments. Failure to receive required licenses or authorization would hinder our ability to sell our products outside the United States. Our significant level of debt may adversely affect our financial and operating activity. We incurred substantial indebtedness in connection with our refinancing in August 2001. As of September 30, 2001, we had $600.0 million of indebtedness outstanding under our senior secured credit facility. Assuming we had completed this offering as of September 30, 2001 and applied the net proceeds from the offering to repay outstanding indebtedness, and that we had declared and paid a $92.0 million dividend, we would have had $437.0 million of debt outstanding compared to a stockholders' deficit of $176.5 million as of that date. In the future, we may borrow more money, subject to the limitations imposed on us by our senior secured credit facility. Our level of indebtedness has important consequences to you and your investment in our common stock. For example, our level of indebtedness may: . require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, thereby reducing the availability of that cash flow for other purposes such as capital expenditures, research and development, and other investments; . limit our ability to obtain additional financing for acquisitions, investments, working capital and other expenditures, which may limit our ability to carry out our business strategy; . result in higher interest expenses if interest rates increase on our floating rate borrowings; . heighten our vulnerability to downturns in our business or in the general economy and restrict us from making acquisitions, introducing new technologies and products, or exploiting business opportunities; or . subject us to covenants that limit our ability to borrow additional funds, dispose of assets or pay cash dividends, or that require us to maintain or meet specified financial ratios or tests, with any failure by us to comply with those covenants potentially resulting in an event of default on that debt and a foreclosure on the assets securing that debt, which would have a material adverse effect on our financial position and results of operations. We depend on key management and personnel and may not be able to retain those employees or recruit additional qualified personnel. We believe that our future success will be due, in part, to the continued services of our senior management team, including Thomas W. Rabaut and Francis Raborn, each of whom is party to an employment agreement. Losing the services of one or more members of our management team could adversely affect our business and our expansion efforts. In addition, competition for some qualified employees, such as software engineers or other advanced engineering professionals, has intensified in recent years and may become even more intense in the future. Our ability to implement our business plan is dependent on our ability to hire and retain technically 13 skilled workers. Our failure to recruit and retain qualified employees could adversely affect our results of operations, and may impair our ability to obtain future contracts. Environmental laws and regulations may subject us to significant liabilities. Our operations are subject to U.S. federal, state and local environmental laws and regulations, as well as environmental laws and regulations in the various countries in which we operate, relating to the discharge, storage, treatment, handling, disposal and remediation of certain materials, substances and wastes. 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 substantial costs in the future. Although a significant portion of our ongoing environmental costs are recoverable from other parties or allowable as costs under the terms of many of our contracts, we cannot assure you that we will not incur material unrecoverable or unallowable costs in the future. In addition, we cannot assure you that environmental costs we expect to be reimbursed by other parties or allowed as charges in U.S. Government contracts will be reimbursed or allowed. A decline in such reimbursement or allowability could have a material adverse effect on our financial condition and results of operations. We may need to raise additional capital on terms unfavorable to our stockholders. Based on our current level of operations, we believe that our cash flow from operations, together with amounts we are able to borrow under our senior secured credit facility, will be adequate to meet our anticipated operating, capital expenditure and debt service requirements for the foreseeable future. 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 defense industry. It is possible that our business may not generate sufficient cash flow from operations, and we may not otherwise have the capital resources, to allow us to service our debt and make necessary capital expenditures. If this occurs, we may have to sell assets, restructure our debt or obtain additional equity capital, which could be on terms dilutive to our stockholders. We cannot be sure that we would be able to take any of the foregoing actions or that we could do so on terms favorable to us or you. Risks Related to this Offering We cannot assure you that a market will develop for our stock. Prior to the offering, you could not buy or sell our common stock publicly. Our common stock has been approved for listing on the New York Stock Exchange. However, an active public market for our common stock may not develop or be sustained after the offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. The initial public offering price of our common stock has been determined through negotiations between the representatives of the underwriters and us and may not be indicative of the price that will prevail in the open market. Future sales of shares by existing stockholders could affect our stock price. If our existing stockholders sell substantial amounts of our common stock in the public market following the offering or if there is a perception that they may do so, the market price of our common stock could decline. Based on shares outstanding as of September 30, 2001, and including options exercised since that date, upon completion of the offering we would have had outstanding 50,663,088 shares of common stock. Of these shares, all 21,100,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. In addition, 1,158,500 shares of common stock will be freely tradeable pursuant to Rule 144, in some cases, subject to volume limitations and manner of sale requirements, or because they were issued pursuant to our registration statement on Form S-8. In conjunction with this offering, our directors, officers and certain of our stockholders will enter into lock-up agreements with the underwriters under which they will agree not to sell or hedge their shares of our common stock until 180 days from the date of this prospectus. After these lockup agreements expire, an additional 28,404,588 shares will be eligible for sale in the public market, subject to volume limits and manner of sale requirements. In addition, the 3,120,203 shares subject to outstanding options and the 81,097 shares reserved for future issuance under our stock option plan will become available for sale immediately upon the exercise of those options. 14 This offering will have substantial benefits for the individuals and entities that participated in The Carlyle Group's acquisition of our predecessor company. The Carlyle Group, our other stockholders and our executive officers will realize substantial benefits from the inclusion of their shares in this offering. In addition, the management agreement we have with Carlyle that is described under "Certain Relationships and Related Transactions" will remain in effect after the offering. In addition to the increase in value of our stockholders' investments, this offering will create a liquid market for our common stock presenting an opportunity for Carlyle and our other stockholders to realize their gain. The lock-up agreements and other transfer restrictions that pertain to our shares immediately after the offering are described elsewhere in this prospectus. The registration rights of Carlyle and our other existing stockholders are described elsewhere in this prospectus. A sale of a substantial number of shares of our stock by Carlyle could cause our stock price to decline. Our principal stockholder owns a controlling interest in our voting securities. Entities controlled by The Carlyle Group hold substantially all of the voting power of Iron Horse Investors, L.L.C., our largest stockholder. Following the completion of the offering, Iron Horse will beneficially own 54.5% of our outstanding shares of common stock, or 48.5% if the underwriters exercise their over-allotment option in full. Consequently, Carlyle has the power to elect all of our directors, appoint new management and control the outcome of all matters submitted to a vote of our stockholders. In addition, pursuant to our agreements with Carlyle, we have agreed to nominate for election as directors each year four individuals designated by Carlyle. This concentration of ownership and agreement to nominate directors may delay or deter possible changes in control of our company, which may reduce the market price of our common stock. The interests of Carlyle may conflict with the interests of other holders of our common stock. You will incur immediate and substantial dilution. The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in the offering will incur immediate and substantial dilution in the amount of $25.48 per share. In addition, we have issued options to acquire common stock at prices below the initial public offering price. To the extent these outstanding options are exercised, there will be further dilution to investors in this offering. Our stock does not have a trading history and the price of our common stock may fluctuate significantly. The trading price of our common stock is likely to be volatile. The stock market has experienced extreme volatility, and this volatility has often been unrelated to the operating performance of particular companies. We cannot be sure that an active public market for our common stock will develop or continue after the offering. Investors may not be able to sell their common stock at or above our initial public offering price or at all. Trading prices for the common stock will be influenced by many factors, including variations in our financial results, changes in earnings estimates by industry research analysts, investors' perceptions of us and general economic, industry and market conditions. FORWARD-LOOKING STATEMENTS Our disclosure and analysis in this prospectus concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in developing and expanding our business and the realization of sales from our 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 these statements are based upon assumptions we consider reasonable, they are subject to risks and uncertainties that are described more fully in this prospectus in the section titled "Risk Factors." Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements. 15 USE OF PROCEEDS We estimate that we will receive net proceeds from this offering of approximately $163.0 million, after deducting underwriting discounts and commissions of approximately $10.5 million and other estimated expenses of $2.3 million payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders. We intend to use our net proceeds from the offering to repay outstanding indebtedness under our senior secured credit facility. Assuming the completion of this offering and our application of the net proceeds as intended, we would have had $437.0 million outstanding under our senior secured credit facility as of September 30, 2001. Our credit facility generally requires us to use all of the net proceeds of this offering to repay indebtedness. However, our credit facility allows us to use the net proceeds from the offering for a limited number of other purposes, including acquisitions, investments in foreign subsidiaries, joint ventures and co-production programs, and capital expenditures. While we have no current intention to use the proceeds for any of these purposes, if the opportunity to use the net proceeds for any of these purposes presents itself and we believe it is appropriate to do so, we may use some or all of the net proceeds for one or more of those permitted purposes. Our credit facility consists of a Term A loan that currently bears interest at LIBOR + 3.00% per annum with a final maturity date of August 13, 2007, and a Term B loan that currently bears interest at LIBOR + 3.25% per annum with a final maturity date of August 13, 2009. We used the proceeds from the term loans to pay a $289.7 million dividend to the holders of our common stock and to complete a tender offer for our outstanding 8.75% senior subordinated notes. On November 26, 2001, we paid a dividend of $92.0 million out of proceeds from the new senior secured credit facility. See "Summary--Recapitalization." DIVIDEND POLICY In connection with our recapitalization, we entered into a senior secured credit facility allowing for a dividend of up to $400.0 million to holders of our common stock. On August 13, 2001, we paid a dividend of $289.7 million to holders of our common stock and on November 16, 2001, we declared an additional dividend of $92.0 million, which we paid on November 26, 2001. Except for those dividends, we currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth; however our Board of Directors from time to time may consider paying dividends based on our financial performance and other relevant factors. Our senior secured credit facility limits our ability to pay dividends or make other distributions on our common stock. 16 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2001: . on an actual basis; . on a pro forma basis, to give effect to (i) our payment on November 26, 2001 of the remaining $92.0 million dividend related to our recapitalization and (ii) our sale of 9,250,000 shares of common stock in this offering and the application of our net proceeds of $163.0 million to reduce our outstanding indebtedness; and . does not reflect the borrowing of $17.9 million under our revolving credit facility made in connection with the payment of the remaining dividend related to the recapitalization. You should read this table in conjunction with the consolidated financial statements and the related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Use of Proceeds" included elsewhere in this prospectus.
As of September 30, 2001 ----------------------- Actual Pro Forma --------- --------- (in thousands) Cash and cash equivalents...................... $ 120,240 $ 28,211 ========= ========= Total long-term debt, including current portion $ 600,000 $ 437,045 Stockholders' deficit: Common stock................................ 407 500 Additional paid-in capital.................. -- 162,862 Retained deficit............................ (243,494) (335,523) Accumulated other comprehensive loss........ (4,335) (4,335) --------- --------- Total stockholders' deficit............. (247,422) (176,496) --------- --------- Total capitalization................. $ 352,578 $ 260,549 ========= =========
17 DILUTION Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in the offering exceeds the net tangible book value per share of our common stock after the offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date. Our net tangible book value as of September 30, 2001, after giving pro forma effect to the $92.0 million dividend related to our recapitalization that we declared and paid in November 2001, would have been $(486.9) million, or $(11.95) per share. After giving effect to our receipt and intended use of approximately $163.0 million of estimated net proceeds from our sale of 9,250,000 shares of common stock in the offering, our pro forma as adjusted net tangible book value as of September 30, 2001 would have been approximately $(324.0) million, or $(6.48) per share. This represents an immediate increase in pro forma net tangible book value of $5.47 per share to existing stockholders and an immediate dilution of $25.48 per share to new investors purchasing shares of common stock in the offering. The following table illustrates this substantial and immediate dilution to new investors:
Per Share ------ Assumed initial public offering price........................... $19.00 Pro forma net tangible book value before the offering........ $(11.95) Increase per share attributable to investors in the offering. 5.47 ------- Pro forma as adjusted net tangible book value after the offering (6.48) ------ Dilution per share to new investors............................. $25.48 ======
The following table summarizes on a pro forma basis as of September 30, 2001: . the total number of shares of common stock purchased from us; . the total consideration paid to us (before deducting the estimated underwriting discount and commissions and offering expenses payable by us in connection with this offering); and . the average price per share paid by existing stockholders and by new investors purchasing shares in this offering:
Shares Purchased Total Consideration Average ----------------- ------------------- Price Per Number Percent Amount Percent Share ---------- ------- ------------ ------- --------- Existing stockholders...................... 40,739,551 81.5% $181,064,670 50.7% $ 4.44 Investors in the offering purchasing shares offered by us . ......................... 9,250,000 18.5 175,750,000 49.3 19.00 ---------- ---- ------------ ---- Total................................... 49,989,551 100% $356,814,670 100% $ 7.14 ========== ==== ============ ====
The tables and calculations above assume no exercise of stock options outstanding as of September 30, 2001 to purchase 3,120,203 shares of common stock at a weighted average exercise price of $4.71 per share. To the extent any of these options are exercised, there will be further dilution to new investors. 18 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth our selected consolidated financial data for the periods indicated. We have derived our consolidated statement of operations data for the years ended December 31, 1998, 1999 and 2000, the three months ended December 31, 1997 and our balance sheet data as of December 31, 1997, 1998, 1999 and 2000, as well as the statements of operations and balance sheet data for the predecessor company as of and for the year ended December 31, 1996 and the nine months ended September 30, 1997, from our consolidated financial statements, which Ernst & Young LLP, our independent auditors, have audited. We have derived the selected consolidated financial data for the nine-month periods ended September 30, 2000 and 2001 from our unaudited consolidated interim financial statements. In our opinion, the unaudited consolidated interim financial statements have been prepared on a basis consistent with the audited financial statements and include all adjustments, which are normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The historical results presented are not necessarily indicative of future results. Our consolidated financial statements for the years ended December 31, 1998, 1999, and 2000 and our unaudited consolidated interim financial statements for the nine months ended September 30, 2000 and 2001 are included elsewhere in this prospectus. The "Pro Forma" column in the summary balance sheet data presented below as of September 30, 2001, gives effect to our payment of a $92.0 million dividend on November 26, 2001, and to the application of the net proceeds from the sale by us of 9,250,000 shares of common stock in the offering. See "Use of Proceeds" and "Capitalization." You should read the information set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and their related notes included elsewhere in this prospectus. Our predecessor company is United Defense, L.P., which we acquired on October 6, 1997. As a result of adjustments to the carrying value of assets and liabilities pursuant to this transaction, the financial position and results of operations for periods subsequent to the acquisition are not comparable to those of our predecessor. In addition, on March 6, 2000, we acquired all of the outstanding stock of Barnes & Reinecke, Inc., and on September 6, 2000, we acquired all of the outstanding stock of Bofors Defence. Accordingly, the financial statements reflect the results of operations of the acquired entities since the respective dates of acquisition. These acquisitions affect the comparability of the financial data for the periods presented.
Predecessor -------------------------- ------------ Nine Months Three Months Year Ended Ended Ended December 31, September 30, December 31, 1996 1997 1997 ------------ ------------- ------------ Statement of Operations Data: Revenues.............................................. $1,029,333 $913,925 $342,627 Costs and expenses: Cost of sales...................................... 820,845 754,977 324,123 Selling, general and administrative expenses....... 128,455 91,413 34,947 Research and development........................... 12,853 12,096 4,558 ---------- -------- -------- Total expenses................................... 962,153 858,486 363,628 ---------- -------- -------- Income (loss) from operations......................... 67,180 55,439 (21,001) Other income (expense): Earnings (loss) related to investments in foreign affiliates........................................ 8,425 22,758 432 Interest income.................................... 1,933 1,456 -- Interest expense................................... -- -- (15,690) ---------- -------- -------- Total other income (expense).......................... 10,358 24,214 (15,258) Income (loss) before income taxes and extraordinary item................................................. 77,538 79,653 (36,259) Provision for income taxes............................ 2,859 1,523 -- ---------- -------- -------- Income (loss) before extraordinary item............... 74,679 78,130 (36,259) Extraordinary item--net gain (loss) from extinguishment of debt............................... -- -- -- ---------- -------- -------- Net income (loss)..................................... $ 74,679 $ 78,130 $(36,259) ========== ======== ========
Nine Months Ended Year Ended December 31, September 30, ---------------------------------- ------------------ 1998 1999 2000 2000 2001 ---------- ---------- ---------- -------- -------- Statement of Operations Data: Revenues.............................................. $1,217,555 $1,213,526 $1,183,886 $867,426 $913,863 Costs and expenses: Cost of sales...................................... 1,099,291 991,907 943,892 687,801 728,836 Selling, general and administrative expenses....... 172,888 167,877 173,694 129,681 131,140 Research and development........................... 13,021 12,782 15,760 12,287 16,418 ---------- ---------- ---------- -------- -------- Total expenses................................... 1,285,200 1,172,566 1,133,346 829,769 876,394 ---------- ---------- ---------- -------- -------- Income (loss) from operations......................... (67,645) 40,960 50,540 37,657 37,469 Other income (expense): Earnings (loss) related to investments in foreign affiliates........................................ 1,647 1,639 (1,262) (460) 9,187 Interest income.................................... 1,396 1,820 4,152 2,672 4,621 Interest expense................................... (52,155) (38,835) (29,265) (23,163) (19,215) ---------- ---------- ---------- -------- -------- Total other income (expense).......................... (49,112) (35,376) (26,375) (20,951) (5,407) Income (loss) before income taxes and extraordinary item................................................. (116,757) 5,584 24,165 16,706 32,062 Provision for income taxes............................ 5,841 2,646 6,000 2,224 6,682 ---------- ---------- ---------- -------- -------- Income (loss) before extraordinary item............... (122,598) 2,938 18,165 14,482 25,380 Extraordinary item--net gain (loss) from extinguishment of debt............................... -- -- 680 680 (22,599) ---------- ---------- ---------- -------- -------- Net income (loss)..................................... $ (122,598) $ 2,938 $ 18,845 $ 15,162 $ 2,781 ========== ========== ========== ======== ========
19
Predecessor United Defense ------------------------- --------------------------------------------------- Nine Months Three Months Year Ended Ended Ended Year Ended December 31, December 31, September 30, December 31, ------------------------------------- 1996 1997 1997 1998 1999 2000 ------------ ------------- ------------ ----------- ----------- ----------- (in thousands , except per share data) Per Share Data(1): Earnings per common share - basic (Loss) income before extraordinary item.................................... N/A N/A $ (0.93) $ (3.08) $ 0.07 $ 0.45 Extraordinary item....................... N/A N/A -- -- -- 0.01 ----------- ----------- ----------- ----------- Net (loss) income........................ N/A N/A $ (0.93) $ (3.08) $ 0.07 $ 0.46 =========== =========== =========== =========== Weighted average common shares outstanding............................. N/A N/A 38,923,929 39,815,942 40,593,348 40,584,049 Earnings per common share--diluted: (Loss) income before extraordinary item.. N/A N/A $ (0.93) $ (3.08) $ 0.07 $ 0.43 Extraordinary item....................... N/A N/A -- -- -- 0.01 ------------ ----------- ----------- ----------- Net (loss) income........................ N/A N/A $ (0.93) $ (3.08) $ 0.07 $ 0.44 =========== =========== =========== =========== Weighted average common shares outstanding............................. N/A N/A 38,923,929 39,815,942 42,052,127 42,419,473 Pro forma earnings per common share-- diluted(2): Net (loss) income........................ N/A N/A $ 0.36 =========== Weighted average common shares outstanding............................. N/A N/A 51,669,473 Dividends paid per common share............. N/A N/A $ -- $ -- $ -- $ -- =========== =========== =========== =========== Other Financial Data: Funded backlog (period end)................. $1,548,357 $1,456,715 $ 1,534,108 $ 1,430,908 $ 1,433,485 $ 1,862,529 Net cash from operating activities.......... 81,092 122,780 72,058 197,302 189,633 95,346 Net cash (used in) from investing activities (7,000) 2,713 (851,616) (648) (23,714) 2,868 Net cash (used in) from financing activities (74,965) (114,409) 804,074 (146,757) (157,114) (79,182) Capital expenditures........................ 22,396 23,722 15,893 24,020 25,246 19,721 Adjusted EBITDA (3)......................... 123,399 117,075 56,746 173,447 173,721 148,889
Nine Months Ended September 30, ------------------------ 2000 2001 ----------- ----------- Per Share Data(1): Earnings per common share - basic (Loss) income before extraordinary item.................................... $ 0.36 $ 0.62 Extraordinary item....................... 0.01 (0.55) ----------- ----------- Net (loss) income........................ $ 0.37 $ 0.07 =========== =========== Weighted average common shares outstanding............................. 40,584,566 40,683,641 Earnings per common share--diluted: (Loss) income before extraordinary item.. $ 0.34 $ 0.59 Extraordinary item....................... 0.01 (0.53) ----------- ----------- Net (loss) income........................ $ 0.35 $ 0.06 =========== =========== Weighted average common shares outstanding............................. 42,401,930 42,663,452 Pro forma earnings per common share-- diluted(2): Net (loss) income........................ $ (0.05) =========== Weighted average common shares outstanding............................. 51,913,452 Dividends paid per common share............. $ -- $ 7.11 =========== =========== Other Financial Data: Funded backlog (period end)................. $ 1,819,659 $ 2,028,436 Net cash from operating activities.......... 46,462 16,662 Net cash (used in) from investing activities 1,041 (13,029) Net cash (used in) from financing activities (73,409) 5,358 Capital expenditures........................ 11,717 13,318 Adjusted EBITDA (3)......................... 107,644 123,440
-------- (1)No per share data is provided for our predecessor for the year ended December 31, 1996 and for the nine months ended September 30, 1997, because our business was operated as a partnership prior to September 30, 1997. As such, there were no common shares outstanding prior to that date. (2)In accordance with SEC Staff Accounting Bulletin No. 55, pro forma earnings per common share gives effect to the issuance of the shares sold by the Company in this offering as if those shares were issued on January 1, 2000 and used to fund a portion of the dividend paid in August 2001. (3)EBITDA represents income (loss) from operations, plus earnings related to investments in foreign affiliates, plus depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted for recapitalization expenses and other non-recurring charges, the impact of purchase accounting adjustments on inventory from our acquisition of United Defense, L.P. in October 1997 on cost of sales and the impact of the use of the LIFO inventory method. EBITDA and Adjusted EBITDA are not presentations made in accordance with generally accepted accounting principles. EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as measures of profitability or liquidity. EBITDA and Adjusted EBITDA are included in this prospectus to provide additional information with respect to our ability to satisfy our debt service, capital expenditure and working capital requirements and because certain covenants in our senior secured credit facility are based on similar measures. While EBITDA and Adjusted EBITDA are used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculations. The calculations of EBITDA and Adjusted EBITDA are shown below: 20
Predecessor United Defense -------------------------- ---------------------------------------------- Nine Months Three Months Year Ended Ended Ended Year Ended December 31, December 31, September 30, December 31, -------------------------------- 1996 1997 1997 1998 1999 2000 ------------ ------------- ------------ -------------- -------- -------- (in thousands) Income (loss) from operations............. $ 67,180 $ 55,439 $(21,001) $(67,645) $ 40,960 $ 50,540 Earnings (loss) related to investments in foreign affiliates...................... 8,425 22,758 432 1,647 1,639 (1,262) Depreciation expense..................... 26,327 19,331 20,660 83,153 55,528 23,882 Amortization expense..................... 15,167 11,589 19,410 91,895 72,408 68,422 -------- -------- -------- -------- -------- -------- EBITDA.................................... 117,099 109,117 19,501 109,050 170,535 141,582 Recapitalization and other non-recurring charges................................. -- -- -- 39,168(a) -- -- Impact of inventory purchase accounting adjustment on cost of sales (c)......... -- -- 37,245 19,978 3,186 -- Impact of use of LIFO inventory method... 6,300 7,958 -- 5,251 -- 7,307 -------- -------- -------- -------- -------- -------- Adjusted EBITDA........................... $123,399 $117,075 $ 56,746 $173,447 $173,721 $148,889 ======== ======== ======== ======== ======== ========
Nine Months Ended September 30, ------------------ 2000 2001 -------- -------- Income (loss) from operations............. $ 37,657 $ 37,469 Earnings (loss) related to investments in foreign affiliates...................... (460) 9,187 Depreciation expense..................... 18,073 15,797 Amortization expense..................... 52,374 36,947 -------- -------- EBITDA.................................... 107,644 99,400 Recapitalization and other non-recurring charges................................. -- 18,633(b) Impact of inventory purchase accounting adjustment on cost of sales (c)......... -- -- Impact of use of LIFO inventory method... -- 5,407 -------- -------- Adjusted EBITDA........................... $107,644 $123,440 ======== ========
-------- (a)Non-recurring charges for the year ended December 31, 1998 are related to charges associated with restructuring our Fridley, Minnesota operation, including special pension termination benefits and curtailments, and charges for impaired assets as well as charges for impaired assets at our York operation. (b)Recapitalization charges for the nine months ended September 30, 2001 include special performance- related bonuses to our management and directors, and management and consulting fees to The Carlyle Group and other unaffiliated advisors and consultants. (c)Relates to purchase accounting adjustments resulting from our acquisition of United Defense, L.P. in October 1997. -----------------
Predecessor United Defense -------------------------- --------------------------------------------------------------- As of September 30, As of As of As of December 31, 2001 December 31, September 30, ----------------------------------------- -------------------- 1996 1997 1997 1998 1999 2000 Actual Pro Forma ------------ ------------- ---------- -------- --------- --------- --------- --------- (in thousands) Balance Sheet Data: Cash and cash equivalents........ $ 23 $ 11,107 $ 35,623 $ 85,520 $ 94,325 $ 113,357 $ 120,240 $ 28,211 Working capital.................. 46,555 3,137 29,797 (30,854) (71,801) (60,382) (4,992) (69,371) Total assets..................... 649,632 626,658 1,246,083 977,450 853,142 895,820 973,391 881,362 Long-term debt, including current portion......................... -- -- 659,800 506,986 349,843 269,577 600,000 437,045 Stockholders' equity (deficit)... 184,291 145,522 136,741 20,200 23,167 41,901 (247,422) (176,496)
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under "Risk Factors" and elsewhere in this prospectus. Overview United Defense is a leader in the design, development and production of combat vehicles, artillery, naval guns, missile launchers and precision munitions used by the U.S. Department of Defense and more than 40 foreign militaries. For many of our key U.S. Department of Defense programs, we are the sole-source prime contractor and systems integrator. We conduct our global operations through our manufacturing facilities in the United States and Sweden, through manufacturing joint ventures in Turkey and Saudi Arabia, and through co-production programs with various other governments and foreign contractors. For the twelve months ended September 30, 2001, we had revenue of $1.2 billion, Adjusted EBITDA of $164.7 million, income from operations of $50.4 million and net income of $6.5 million. As of September 30, 2001, we had a funded backlog of approximately $2.0 billion. Our results of operations, particularly our revenue, gross profits and cash flows, vary significantly from period to period, depending largely upon the timing of our delivery of finished products, the terms of our contracts and our level of export sales. As a result, period-to-period comparisons may show substantial changes disproportionate to our underlying business activity. Accordingly, we do not believe that our quarterly results of operations are necessarily indicative of the results for future periods. Our contracts typically fall into two categories, cost-plus and fixed-price contracts. Our contracts for research, engineering, prototypes, repair and maintenance and some other matters are typically cost-plus arrangements, under which our customer reimburses us for our approved costs and pays us a fee. Our production contracts are typically fixed-price arrangements under which we assume the risk of cost overruns and receive the benefit of cost savings. All of our U.S. Government contracts, whether we are the prime contractor or a subcontractor, are subject to audit and cost controls. As a result, the U.S. Department of Defense typically has the right to object to our costs as not allowable or as unreasonable, which can increase the costs we bear ourselves rather than recovering as costs reimbursed or allowed in our negotiation of fixed-price contracts. We recognize sales on our fixed-price production contracts when the risks and rewards of ownership have been transferred to the customer. For our U.S. Department of Defense production contracts, those criteria are typically met when we complete the manufacture of the product and the customer has certified it as meeting the contract specifications and as having passed quality control tests. However, under recent Bradley production contracts, we do not recognize sales until the U.S. Army fields individual units because it is at that point that the risks and rewards of ownership are transferred. This contractual provision extends the period of time during which we carry these vehicles as inventory and may result in an uneven distribution of revenue from these contracts between periods. For our foreign production contracts, we generally record sales when we ship our products to the customer which corresponds to when the risks and rewards of ownership transfer. We tend to deliver products to our foreign customers in lots, which also results in an inventory build-up pending delivery. We record sales under cost reimbursement contracts as costs are incurred. We use the contract method of accounting for our fixed-price contracts and therefore record our gross margin on each unit produced at the time we recognize its sale based on our estimate of the margin we will realize over the life of the related contract. We currently evaluate our estimates of gross margin three times each year and we use the cumulative catch-up method to recognize changes in our estimates of sales and gross margins during the period in which those changes are determined. We charge any anticipated losses on a contract to operations as soon as those losses are determined. The principal components of our operating costs for production contracts are materials, subcontractor costs, labor and overhead. The principal operating costs for 22 engineering and development contracts are compensation costs for the engineers and designers and related overhead necessary to support those personnel. We charge all of these operating costs to inventory as incurred. We also use the last-in, first-out, or LIFO, method of accounting, which generally results in higher cost of sales in periods when current costs of our inventory are higher than comparable costs in prior periods and a periodic charge to earnings to reflect changes in the costs of components of inventory. We expense selling, general, administrative, and research and development costs in the period incurred. The major components of these costs include compensation, overhead and amortization of goodwill and other intangibles. Beginning January 1, 2002, we will be subject to new accounting standards under which we will cease to amortize goodwill, although we will test it periodically for impairment. We participate in two majority owned foreign joint ventures, one in Turkey and the other in Saudi Arabia. We account for these investments using the equity method of accounting because we do not control the joint ventures. Acquisitions The Carlyle Group formed us in October 1997 to facilitate the acquisition of United Defense, L.P., our predecessor. As a result of purchase price adjustments to the carrying value of the acquired assets and liabilities of United Defense, L.P., our financial position and results of operations for periods subsequent to the acquisition are not comparable to those of our predecessor. In addition, comparability of our results of operations since then have been affected by our March 2000 acquisition of Barnes & Reinecke, Inc. and our September 2000 acquisition of Bofors Weapon Systems AB, which we have renamed Bofors Defence. Our financial statements reflect the results of operations of those acquired entities from their respective dates of acquisition. We expect that affiliates of The Carlyle Group will continue to own a significant portion of our common stock after the completion of this offering. Individuals affiliated with The Carlyle Group are expected to continue to significantly influence our operations and financial policies. Results of Operations Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000. Revenue. Our revenue for the nine months ended September 30, 2001 was $913.9 million, an increase of $46.4 million, or 5.4%, from the comparable 2000 period. Revenue for 2001 increased primarily as a result of the inclusion of $68.7 million from Bofors Defence, which we acquired in September 2000, higher billings of $38.3 million for the Crusader, increases in revenue for Advanced Gun System development program and the Hercules tank recovery vehicle upgrade program and increased shipments of vehicles and kits to foreign customers, such as assault amphibious vehicles to Korea, self-propelled howitzers to Egypt and armored personnel carriers to Canada. These increases were partially offset by decreases in sales of upgrades of the Bradley family of vehicles, principally as a result of the change in the timing of revenue recognition which relies upon customer acceptance, and a reduction in shipments of co-production kits to Egypt, amphibious assault vehicle kits to Spain, multiple launch rocket system vehicles to Greece and kit sales to the U.S. Government. Under the recent Bradley contract, customer acceptance is deferred until units are fielded by the U.S. Army. Gross Profit. As a result of our increased sales, gross profit increased $5.4 million, or 3.0%, to $185.0 million for the nine months ended September 30, 2001. Our gross profit margin of 20.2% for the nine months ended September 30, 2001 is slightly less than our 20.7% gross profit margin for the comparable 2000 period, primarily as a result of the effects of LIFO accounting. Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased $1.5 million, or 1.1% to $131.1 million for the nine months ended September 30, 2001. The increase is attributable to $11.8 million in expenses related to the inclusion of Bofors Defence for the entire period, and $18.6 million in expenses incurred in connection with our August 2001 recapitalization, including performance 23 bonuses of $11.1 million paid to management and outside directors and consulting and management fees of $7.5 million, which includes $2.3 million paid to The Carlyle Group. These increases were partially offset by reduced amortization of goodwill and other intangibles of $15.1 million, and bid and proposal costs which were $10.8 million lower in this period compared to the prior year period when we incurred significant costs in connection with our unsuccessful bid for the Interim Armored Vehicle program. Research and Development. Research and development costs were $16.4 million for the nine months ended September 30, 2001, a $4.1 million, or 33.6%, increase from the prior year period. This increase resulted from the inclusion of $1.8 million of expenses for Bofors Defence for the entire 2001 period and increased spending associated with missile launch systems, the Advanced Gun System, work for the DD 21 destroyer program and on other technologies that we believe will enhance our ability to compete for future programs. Earnings from Foreign Affiliates. Earnings from foreign affiliates for the nine months ended September 30, 2001 were $9.2 million, a $9.6 million increase from the prior year period. This increase was primarily due to $4.0 million of income representing our share of income recognized by our joint venture in Saudi Arabia due to a change in estimated contract costs and fees recorded by that joint venture and $5.2 million of increased earnings from our joint venture in Turkey. This $5.2 million increase was due to a positive impact of $8.6 million from a reduction in the estimate of our joint venture's offset reserves, partially reduced by our share of the increase in our joint venture's operating loss. See further discussion of our Turkish joint venture's offset obligations in the notes to the consolidated financial statements. Net Interest Expense. Net interest expense for the nine months ended September 30, 2001 was $14.6 million, a $5.9 million decline from the prior year period. This decrease was the result of lower debt levels during the first seven months of 2001, declines in interest rates and higher interest income on higher average cash balances in 2001. Provision for Income Taxes. The provision for income taxes for the nine months ended September 30, 2001 increased $4.5 million over the prior year period, primarily as a result of increased taxes for the state of Pennsylvania and to reflect a provision for Bofors Defence, partially offset by the reduction in foreign sales corporation taxes due to the application of the new "FSC Repeal and Extraterritorial Income Exclusion Act of 2000" to foreign sales. Extraordinary Item. During the nine months ended September 30, 2001, we incurred a $22.6 million charge for the early retirement of our senior subordinated notes in August 2001. This charge was taken in conjunction with the recapitalization and was comprised of an $18.1 million tender premium paid to the debt holders and a write-off of $4.5 million in unamortized finance charges. During the same period in 2000, we had a $0.7 million extraordinary gain related to the purchase of some of these subordinated notes for less than their principal amount. Net Income. As a result of the foregoing, we had net earnings of $2.8 million, after an extraordinary loss of $22.6 million for the early retirement of debt, for the nine months ended September 30, 2001, a $12.4 million decline from the prior year period. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999. Revenue. Our 2000 revenue of $1,183.9 million declined $29.6 million, or 2.4%, from revenue of $1,213.5 million for 1999. The decrease primarily resulted from the winding down and closing of the Paladin production operation in June 1999, which accounted for $45.8 million in sales during the first six months of 1999, a decrease of $67.8 million in billings for the Crusader development program and the completion of shipments for several programs in 1999. These declines were partially offset by the additional sales of $58.5 million generated by Barnes & Reinecke and Bofors Defence, both of which we acquired in 2000, increased shipments of $61.2 million of Bradley upgrades and by engineering development sales for the Advanced Gun System. Gross Profit. Gross profit increased $18.4 million, or 8.3%, to $240.0 million for 2000. This gross profit increase was primarily due to the reduced depreciation and amortization costs of $28.0 million related to assets 24 revalued in connection with our acquisition of United Defense, L.P. and higher award fees for the Crusader program, partially offset by the lower sales volume described above and the effects of LIFO accounting. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $5.8 million, or 3.5%, to $173.7 million for 2000. This increase was primarily the result of heavy spending for marketing activity and proposals, principally for the Interim Armored Vehicle program, and expenses associated with businesses acquired in 2000. These increases were partially offset by lower depreciation and amortization of intangible assets revalued in connection with our acquisition of United Defense, L.P. Research and Development. Research and development costs were $15.8 million for 2000, a $3.0 million, or 23.3%, increase over 1999. During 2000, research and development spending increased to support our effort to win an award related to the Interim Armored Vehicle program. In addition, our net research and development cost in 1999 was favorably affected by the reimbursement of research and development costs incurred in prior periods in connection with the development of the Advanced Gun System. Earnings from Foreign Affiliates. The loss recognized from foreign affiliates was $1.3 million in 2000. The $2.9 million decrease from the prior year was primarily due to a loss in 2000 related to our Turkish joint venture. Net Interest Expense. Net interest expense for 2000 was $25.1 million, an $11.9 million decrease from 1999 as a result of lower debt levels. Net Income. As a result of the foregoing, we had net income of $18.8 million in 2000, including an extraordinary gain of $0.7 million from the early retirement of debt, compared to net income of $2.9 million for 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998. Revenue. Revenue for 1999 was $1,213.5 million, a decline of $4.0 million, or 0.3%, from 1998. The lower revenue was largely due to the winding down of the Paladin artillery upgrade program at the end of the second quarter of 1999 resulting in a $69.5 million reduction and the completion of self-propelled howitzer and armored personnel carrier shipments to foreign customers. These declines were offset by higher revenue from the shipments of Vertical Launch Systems, increased billings for the Crusader program and new deliveries of armored combat earth movers, self propelled howitzers and rebuilt assault amphibious vehicles. Gross Profit. Gross profit increased $103.4 million, or 87.4%, to $221.6 million for 1999. Our gross profit margin improved to 18.3% for 1999 from 9.7% for 1998. This improvement was due to lower costs related to assets revalued in connection with our acquisition of United Defense, L.P. In addition, in 1998 we incurred a non-cash pension charge of $27.5 million related to restructuring one of our business units, and we wrote off and charged cost of sales for unusable capitalized software related to manufacturing systems and other impaired manufacturing assets totaling $11.7 million. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $167.9 million in 1999, a decrease of $5.0 million, or 2.9%, from 1998. This decrease in expenses resulted from lower depreciation and amortization of goodwill and other intangible assets compared to 1998. Earnings from Foreign Affiliates. Earnings from foreign affiliates were $1.6 million in both 1998 and 1999. Net Interest Expense. Net interest expense declined 27.1% from 1998 to $37.0 million for 1999 as a result of lower debt levels in 1999. Net Income. As a result of the foregoing, we had net income of $2.9 million for 1999 compared with a net loss of $122.6 million for 1998. 25 Liquidity, Capital Resources and Financial Condition Our primary source of liquidity is cash provided by operations. We have generated positive cash flow from operating activities since our acquisition of United Defense, L.P., in October 1997. Our liquidity requirements depend on a number of factors, including the timing of production under our U.S. Government and foreign sales contracts. We typically receive payments on these contracts based on performance milestones or when we have incurred a specified percentage of contract expenses. These advance payments help reduce our need to finance our working capital. However, our working capital needs fluctuate between periods as a result of changes in program status and the timing of payments by program. For example, under our recent production contract related to the Bradley program, we do not receive final payment for each vehicle until the U.S. Army fields the vehicle, which may be significantly later than the time at which we complete the finished vehicle and it passes all required certifications. Cash provided by operating activities was $16.7 million for the nine months ended September 30, 2001, a decrease of $29.8 million from the prior year period. The primary reason for this decrease was a significant build-up of inventories net of increased advance payments associated with producing units for several foreign customers, which we will ship in later periods. Cash provided by operating activities for 2000, 1999 and 1998 was $95.3 million, $189.6 million and $197.3 million, respectively. During 2000, cash provided by operating activities was significantly lower than in recent years. The majority of cash was generated by net income plus depreciation and amortization of $113.9 million, but it was adversely affected by increases in working capital, primarily to fund an increase in receivables. Cash provided by operating activities in 2000 was also adversely affected by non-recurring costs (net of recoveries of allowable costs under U.S. Government contracts) of $9.4 million incurred in connection with our unsuccessful bid for the Interim Armored Vehicle program. In 1999 cash flow was principally due to net income plus depreciation and amortization of $136.7 million, and significant collections of progress payments from the U.S. Government and foreign advance payments. In 1998 we also generated a high volume of cash resulting from net loss plus depreciation and amortization of $58.1 million, and sizeable reductions in receivables and inventories as the U.S. Government payment office paid all billings received by a certain deadline, and we aggressively reduced inventories consistent with shipping schedules. Cash used in investing activities was $13.0 million for the nine months ended September 30, 2001, compared to $1.0 million of cash provided by investing activities for the prior year period. Our principal use of cash in investing activities is for capital equipment and software. Bofors Defence had a significant cash balance when we acquired it, which resulted in positive cash flows from investing activities in 2000. We anticipate making capital expenditures of approximately $25.0 to $30.0 million per year for each of the next several years. We expect to finalize the purchase of our Fridley, Minnesota facility from the U.S. Government for $8.8 million, however, we are unable to predict when the purchase will occur. Cash provided by financing activities was $5.4 million for the nine months ended September 30, 2001, compared to $73.4 million of cash used during the 2000 period. The net cash provided during 2001 is primarily the result of our August 2001 refinancing of all of our indebtedness, offset by principal repayments on that debt of $86.8 million prior to the refinancing. The primary use of cash in 2000 was for debt repayments. Cash used for financing activities included the pay down of $79.1 million in debt for 2000, $157.1 million for 1999 and $152.8 million for 1998. In 1998, the Company raised $6.1 million from the sale of additional shares of its common stock to certain officers, directors and other management members of the Company and to individuals affiliated with its parent. On August 13, 2001, we refinanced all of our existing indebtedness. In connection with the refinancing, we entered into a new senior secured credit facility, consisting of $600.0 million in term loans and a $200.0 million 26 revolving credit facility. As part of the refinancing, we contemplated paying a dividend of approximately $381.7 million to the holders of our common stock. We used a portion of the proceeds from the term loans to pay $289.7 million of the dividend, and on November 16, 2001, we declared, and on November 26, 2001, we paid the remaining dividend of $92.0 million using cash on hand and borrowings of $17.9 million under our revolving credit facility. In addition, we used a portion of the proceeds from the term loans to complete a tender offer for the remaining $182.8 million outstanding aggregate principal amount of our 8.75% senior subordinated notes, as well as an $18.1 million prepayment premium. In connection with the refinancing, we also paid $18.6 million of performance bonuses, consulting and management fees, all of which are reflected in costs and expenses for the nine months ended September 30, 2001. As of September 30, 2001, we had letters of credit issued under the facility of $118.0 million and unused borrowing capacity of approximately $82.0 million under our revolving credit facility, $17.9 million of which we used in connection with payment of the $92.0 million dividend. Our new credit facility agreement requires mandatory principal repayments of $5.7 million in 2001, $32.6 million in 2002 and $42.6 million per year from 2003 to 2006. These payments will reduce cash available for other corporate purposes. We expect interest charges under the new financing to be approximately $15 million in 2001. Interest charges in future years will depend upon periodic fluctuations in LIBOR and our outstanding debt balances. Although we cannot predict our future interest expense, we expect those charges to be substantially in excess of those in 2000 and 2001. Our effective tax rate is substantially lower than the statutory tax rate because of tax net operating losses generated in 1997 and 1998 which are being utilized in subsequent years. We expect our tax payments will be lower than the statutory tax rate on any income earned at least through the end of 2002. Based on our current level of operations and our anticipated growth, we believe that our cash from operations, together with other available sources of liquidity, including borrowings available under our revolving credit facility, will be sufficient to fund our anticipated capital expenditures and required payments of principal and interest on our debt through at least December 31, 2002. Our growth and acquisition strategy, however, may require substantial additional capital. We cannot assure you that we will be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all. Any additional equity or equity-convertible financing in the future may dilute your investment in the company. Potential Future Charge We intend to pay special bonuses to key employees and directors that could result in income statement charges of approximately $17 million through completion of our initial public offering. Of this amount, approximately $12 million will be paid upon successful completion of this offering and will replace obligations associated with our current retention bonus plan. The remaining approximately $5 million relates to performance bonuses and will be incurred in the fourth quarter of 2001. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill will no longer be amortized starting in 2002 but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. We will apply these new rules beginning January 1, 2002. We will perform the first of the required impairment tests of goodwill as of January 1, 2002; we have not yet determined what the effect of those tests will be on our results of operations and financial position. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value starting January 1, 2001. We had previously accounted for these instruments as hedges. 27 At December 31, 2000, the Company's subsidiary Bofors had foreign currency forward exchange contracts with a notional contract value of $14.4 million. These contracts which were designated as cash flow hedges were entered into to hedge firm commitments related to purchases or sales denominated in foreign currencies. The fair value of the contracts was a liability of approximately $0.95 million at December 31, 2000. The transition adjustment to implement this new standard on January 1, 2001, which is presented as a cumulative effect of change in accounting principle, and the subsequent change in market value of $1.3 million for the nine months ended September 30, 2001 were charged to accumulated other comprehensive loss within stockholders' equity. Quantitative and Qualitative Disclosure about Market Risk All of our financial instruments that are sensitive to market risk are entered into for purposes other than trading. Forward Currency Exchange Risk We conduct some of our operations outside the U.S. in functional currencies other than the U.S. dollar. To mitigate the risk associated with fluctuating currencies on short term foreign currency-denominated transactions, Bofors Defence enters into foreign currency forward exchange contracts. The Company does not enter into foreign currency forward exchange contracts for trading purposes. The following table provides information concerning the U.S. dollar functional currency of Bofors' forward exchange contracts at December 31, 2000. The table presents the U.S. dollar equivalent notional amounts and weighted average contractual exchange rates by expected maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.
Expected Maturity Date - ---------------------- Fair (US $ equivalent in thousands): 2001 2002 Total Value ------------------------------- ------ ------ ------ ------- Receive Swedish krona/pay U.S. dollars Contract amount........................ $ 847 $8,670 $9,517 $10,603 Average contractual exchange rate...... 8.65 8.24 8.28 Receive British pounds/pay Swedish krona Contract amount........................ $3,664 $ -- $3,664 $ 3,561 Average contractual exchange rate...... 15.15 -- 15.15 Receive euro/pay Swedish krona Contract amount........................ $ 115 $1,099 $1,214 $ 1,182 Average contractual exchange rate...... 9.83 8.40 8.54
Interest Rate Risk Borrowings under our senior secured credit facility are sensitive to changes in interest rates. As of September 30, 2001, the interest rate on the $100 million Term A borrowings was 6.57% and on the $500 million Term B borrowings was 6.82%. Loans made pursuant to the Term A loan facility require equal quarterly amortization payments of $1.6 million until December 31, 2001 and thereafter in the amount of $4.4 million. Loans made pursuant to the Term B facility require quarterly amortization payments of $1.25 million until June 30, 2002, and during each of the five years thereafter require equal quarterly amortization payments of $6.25 million. The remaining aggregate principal amount of loans under the Term B facility is subject to equal quarterly amortization payments during the seventh and eighth years. The weighted average interest rate on all of our borrowings outstanding under the senior secured credit facility as of September 30, 2001 was 6.78% per annum. Based on our current outstanding indebtedness and our expected repayment schedule, our interest expense would increase or decrease by approximately $5.9 million for the next twelve months for every 1% change in interest rates. We plan to enter into interest rate protection agreements to mitigate risks associated with variable interest rate borrowings under our senior secured credit facility. The interest rate protection agreements will provide protection against increases in interest rates on borrowings. 28 BUSINESS Introduction United Defense is a global leader in the design, development and production of combat vehicles, artillery, naval guns, missile launchers and precision munitions used by the U.S. Department of Defense and more than 40 foreign militaries. We are currently the sole-source, prime contractor for a number of critical U.S. military programs, including: Bradley Fighting Vehicle. The Bradley is the U.S. Army's primary armored infantry vehicle, with over 7,000 units produced to date. The U.S. Army plans to upgrade over 1,000 Bradleys to the latest A3 configuration, and we have recently been awarded a $697 million, three-year production contract for 389 upgrades. We believe that the Bradley family of vehicles will remain an integral part of the U.S. Army's mechanized forces beyond 2020. Mk 45 Gun System. The Mk 45 is a lightweight and reliable, fully automated, 5-inch naval gun system. We have delivered more than 180 gun systems to date, which are in service on all destroyers and cruisers in the U.S. Navy, and on the ships of seven allied navies. The newest modification, the Mod 4, is in full production for the DDG 51 Arleigh Burke class destroyer. Mk 41 Vertical Launch System. The Mk 41 missile launch system is the U.S. Navy's principal surface fleet missile launcher. It is capable of firing Tomahawk cruise, Standard and Sea Sparrow missiles, providing combat ships with a range of options for effective fire power. We are one of two partners on the sole-source contract for the Mk 41 missile launch system and we are the sole-source manufacturer of the launch canisters that house the missiles, which must be refurbished or replaced as missiles are fired. In addition, we are participating on the design of the U.S. Navy's next generation vertical launch system. Crusader. The Crusader is the next generation technologically advanced, long-range, precision artillery system being developed for the U.S. Army consisting of a fully automated, 155mm, self-propelled howitzer and a re-supply vehicle. The Crusader is designed to provide significant improvements over current howitzers in range and rate of fire, accuracy, mobility, survivability and automation while providing substantial crew size reductions. We are responsible for the design, development and systems integration of the Crusader. We received a $665 million contract in September 2001 to complete the on-going development phase. Current U.S. Army plans call for the fielding of 480 Crusader systems. Advanced Gun System. The AGS is a 155mm naval gun system being developed for the U.S. Navy's next generation surface combatant fleet designed to deliver sustained and accurate firepower from the sea. AGS is designed to provide high volumes of precision fire at ranges far beyond those of any existing naval gun system. Through our 60 years of experience, we have developed expertise in the design and manufacture of technologically advanced combat systems that can acquire, synthesize and utilize battlefield information from multiple sources. This expertise enables us to: . increase significantly the effectiveness of combat vehicles and weapon systems, solidifying our position as a sole-source prime contractor for current generation combat systems; . integrate new technologies into our installed base of more than 100,000 combat vehicles and weapon systems through upgrades and derivatives; and . compete effectively to win prime contracts for next generation combat systems, which form the basis of future production and support service revenue. 29 We have expanded our international presence over the past several years through our direct foreign sales, joint ventures and co-production programs with foreign governments. We participate in joint ventures in Turkey and Saudi Arabia, and we participate in co-production programs for selected systems with the governments of Canada, Japan, Italy, South Korea, Egypt and other allied nations. We further expanded our international operations and enhanced our technology and engineering capabilities through the acquisition of Bofors Defence, a Sweden-based leading provider of weapons systems and precision munitions. This global infrastructure broadens our range of product offerings and expands our customer base. For the twelve months ended September 30, 2001, approximately 25% of our revenues were from sales to foreign customers. Industry Overview/Market Opportunity Trends in Defense Spending We generate our revenues predominantly from contracts with the U.S. Department of Defense, allied governments and other prime contractors. As a result, funding for our development and production programs is generally linked to trends in U.S. and international defense spending. We believe that domestic and international defense spending will grow over the next several years as a result of the following trends and developments: Increase in Overall Spending. As part of President George W. Bush's stated commitment to strengthen national defense, the Bush Administration submitted to Congress a $328 billion fiscal 2002 defense budget that reflects an 11.0% increase over the fiscal 2001 defense budget submitted by the Clinton Administration, representing the first double digit increase since Operation Desert Storm. Concurrently, defense spending by some other NATO member countries and U.S. allies is also showing growth. Following decreases in defense spending in the post-Cold War era, U.S. allies have recently increased their focus on the development and procurement of advanced combat systems. Projected Increases in Procurement and Development. We expect that the U.S. Department of Defense budgets for research, development, test and evaluation, and procurement, both of which fund our programs, will grow proportionately with the overall level of defense spending. As a leading, technology-driven, prime contractor possessing a large installed base of products throughout the world, we believe we are well positioned to participate in this trend. Conversion to "Capabilities Based Approach." The Bush Administration's recently published Quadrennial Defense Review reflects a "capabilities based approach," calling for the U.S. military to maintain its current capabilities while developing new areas of military advantage. This review calls for an increase in military readiness through the upgrade of the existing force structure and an increasing investment in next-generation technologies and capabilities to enable U.S. military forces to more effectively counter emerging threats. Decisive Reaction to Recent Attacks. The terrorist attacks of September 11, 2001 have emphasized the importance of a strong national defense. Since September 11, 2001, Congress has passed a $40 billion supplemental appropriation, approximately half of which we expect to be spent on defense. Furthermore, the U.S. House of Representatives and the Senate have each passed their respective defense authorization bills related to the Bush Administration's $328 billion budget request for fiscal 2002. The Bush Administration has stated that the defense budget for fiscal 2003, which it will submit to Congress in early 2002, may also reflect further increases over fiscal 2002. The Contract Process The lifecycle of a military production program typically commences with an award for design and development. The defense company awarded the development contract proceeds to develop the desired system. Throughout a system's progression from design to production, the U.S. Government periodically evaluates a program for cost and operational effectiveness. Following successful development of a combat system and its 30 authorization by the U.S. Government, the U.S. Department of Defense awards a contract for the production of the combat system. The U.S. Department of Defense may award the contract to the contractor who developed the combat system on a sole-source basis or it may re-open competition for the production of that combat system. Typically, the company developing a combat system has a competitive advantage in obtaining a contract for production and fielding of the system. The following table outlines the life of a typical U.S. Department of Defense program: [FLOW CHART] PHASE: PRODUCTION: DEVELOPMENT: DURATION 10-30 5-10 (YEARS): TASKS: SIGN CONTRACT DESIGN, FABRICATION, DEVELOPMENT, SIMULATION, RISK REDUCTION (PROGRAM DEFINITION/RISK REDUCTION/PRE-PRODUCTION PROGRAM) FOLLOW-ON DEVELOPMENT PHASE: ENGINEERING AND MANUFACTURING DEVELOPMENT DEMONSTRATION AND VALIDATION DEFENSE ACQUISITION BOARD DETERMINES WHAT CRITERIA MUST BE MET IN ORDER TO ENTER LRIP TEST TECHNOLOGY CAPABILITIES, MONITOR COSTS AND QUALITY (LOW-RATE INITIAL PRODUCTION) FULL-RATE PRODUCTION SUSTAINMENT UPGRADE/DISPOSAL FINANCIAL IMPLICATION: LOWEST MARGINS MODERATE MARGINS POTENTIAL FOR BEST MARGINS MODERATE MARGINS A prime contractor has a direct contract with the government, rather than with an intermediary contractor. Subcontractors supply key components and subsystems directly to the prime contractor. We believe that government procurement is shifting towards providers of comprehensive solutions and integrated systems. Our U.S. Government business is performed under both cost-plus contracts and fixed-price contracts. Generally, our engineering and development programs are performed under cost-plus contracts, while our production programs operate under fixed-price contracts. Cost-plus contracts allow us to recover our approved costs plus a fee, which may be fixed or variable depending on the contract arrangement. Fixed-price contracts have a fixed product price and the contractor generally assumes the risk of cost overruns and receives the benefit of cost savings. Business Strengths We believe that the following strengths are critical to our success as a leading sole-source, systems integrator and prime contractor to the U.S. Department of Defense and allied militaries: We are a leading developer of key combat vehicles and weapon systems. We are at the forefront of research, development and design technologies necessary for advanced armored combat vehicles, artillery, naval guns, missile launchers and precision munitions. For example, we have developed: . combat vehicles that integrate active threat detection and countermeasure systems with advanced hull designs, including blast-resistant, lighter-weight, composite materials; . electrothermal-chemical and electromagnetic propellant technologies that extend the range and increase the precision of artillery and gun systems; . aerodynamic design expertise that increases the accuracy and effectiveness of precision munitions; . hybrid fuel-and-electric propulsion systems that significantly decrease fuel consumption, while providing power for sensors, weapons, communications and other critical systems; and 31 . a proprietary "virtual development" tool that uses state-of-the-art 3D engineering and modeling software to design and visualize a weapon system and its constituent subassemblies and test it in the same simulation-based environment. In addition, we have the ability to integrate numerous complex weapons, communications and other battlefield devices into a single combat system. For example, the Crusader incorporates nearly 2 million lines of software code, comparable in complexity to the avionics systems used in advanced fighter aircraft. Our expertise in advanced design and systems integration positions us well to serve as a prime contractor for increasingly complex combat systems. We have an extensive installed base of combat systems. As a result of our long operating history, our production contracts have generated a global installed base of approximately 100,000 combat vehicles and weapon systems. Through our ongoing research and development efforts, we have created a large number of derivative products and upgrades to these combat systems, that we sell to our customers to extend the effective life of many of these systems. In addition, we provide contractor logistic support, including spare parts and training simulators, to support our installed base. For example: . We have built more than twenty derivatives of combat vehicles, across multiple upgrade programs, for the U.S. and allied armed forces. We also offer manufacturing technology packages and co-production programs that facilitate the overhaul and conversion of combat vehicles in the respective host country. . Almost every surface combatant in the U.S. Navy fleet carries our naval guns and missile launchers. We have also supplied weapons systems to the navies of many countries, including Australia, Brazil, Egypt, Germany, Italy, Japan, the Netherlands, Spain and Taiwan. In addition to engineering and manufacturing capabilities, we also provide complete service support for these systems, including shipyard system installation, training, repair, overhaul and logistics support. We have a balanced portfolio of development and production contracts. We have a diversified portfolio of production, development and upgrade contracts, which we consider one of our key assets. For example, we are in full-rate production of the fourth upgrade version of the Bradley Fighting Vehicle, the fourth upgrade version of the Mk 45 naval gun system, and the Mk 41 Vertical Launch System. In addition to these production programs, we are also the sole-source prime contractor on a number of development contracts, such as the Crusader, that could become a $7 billion program if successfully developed and advanced to production, and the Navy's Advanced Gun System, which could become a $3 billion program if the Navy moves forward with its next generation fleet of surface combatants. This mix of programs provides us with stable revenues from our established production programs, while positioning us for growth as development programs progress into full rate production. We are a global defense contractor. In addition to direct foreign sales made from our domestic production facilities, we participate in joint ventures in Turkey and Saudi Arabia, where the ventures manufacture combat vehicles sold in the Middle East and Asia. Moreover, our Bofors Defence subsidiary, based in Sweden, manufactures and sells gun systems and precision munitions in Europe, Asia and the Americas. We also participate in international co-production programs with foreign governments where we work with local production facilities to manufacture combat systems under license from us. Our mix of direct foreign sales, sales by our foreign joint ventures and sales through our co-production programs have enabled us to reach markets that we otherwise could not serve. We believe that our global installed base of combat systems, combined with our global design, development and manufacturing capabilities positions us to continue to grow internationally. Our senior management team and Board of Directors have extensive experience in the defense industry. On average, our senior management team has been with us for more than 20 years. This team has been responsible for positioning our business to compete effectively to meet changing U.S. Department of Defense requirements as well as increasing our international presence. Our senior management team also has a proven acquisition track record, as demonstrated by its integration of the Harsco and FMC defense businesses to 32 form our predecessor in 1994. The management team consolidated facilities, standardized operations and significantly improved performance following the combination. Our Board of Directors consists of members who have served in senior positions within the U.S. Government, such as Secretary of Defense, Chairman of the Joint Chiefs of Staff and Commander-in-Chief of the United States Central Command. Moreover, four of our directors are affiliated with our major stockholder, The Carlyle Group, a Washington, D.C.-based global private equity firm with extensive experience in the aerospace and defense industries. This combination of experienced senior managers and directors with unique insights into the U.S. Department of Defense and allied militaries is one of our key assets. Business Strategy We intend to increase our revenue, profitability and shareholder value by expanding our role as a leading systems integrator and prime contractor to the U.S. Department of Defense and allied militaries. Our strategy for achieving this objective is: Continue to invest in research, development and advanced technologies and design techniques to capture new business. We intend to lead our current development programs into production and to capture key next generation programs through our systems integration expertise, technology leadership, and ongoing commitment to core research. Our leadership role in current development programs, such as the U.S. Navy's Advanced Gun System and the U.S. Army's Crusader advanced artillery system continues to strengthen our position as a systems integrator and technology provider. We believe that our expertise positions us well to become a key member of the development team for future programs, such as the U.S. Army's Future Combat System and programs being considered by allied militaries. These new programs require leadership by a contractor able to design new systems, develop new technologies and integrate complex operating systems into a single weapons platform that can meet increasingly challenging military performance requirements. Generate revenue from our installed base through upgrades incorporating advanced technologies and by providing aftermarket services. We will capitalize on our advanced technologies and systems integration capabilities to upgrade our installed base of combat systems and provide lifecycle services to enhance their performance and extend their service life. We believe that our ability to upgrade these systems and build derivative products provides an opportunity for us to earn a continuing revenue stream from these systems for many years after their initial fielding. For example, the U.S. Army recently awarded us a multi-year contract to upgrade 389 of its Bradley Fighting Vehicles to the new A3 configuration. The U.S. military and allied militaries have also awarded us other contracts to upgrade our Assault Amphibious Vehicles and our M113 Armored Personnel Carriers to incorporate advanced technology and capability improvements. Finally, we are extending our experience in providing logistics and training support services for our current products to a broader range of land and naval products. Apply advanced technologies across a range of new programs. We believe we can generate future growth by applying our existing technologies across a broad range of platforms and by developing derivative products. For example, we have extended the lifecycle of the Bradley Fighting Vehicle through our design and production of six derivative vehicles built on the same chassis, each of which performs a distinct mission, such as fire support or air defense. We are also linking previously discrete technologies in gun systems and precision munitions to develop fully integrated gun platforms that incorporate precision munitions capabilities. For example, we are the prime contractor for both the U.S. Navy's Advanced Gun System and the associated Long Range Land Attack Projectile precision munition program. We are also using the expertise we have developed through our advanced "virtual design" tools to create training simulators that use the same operating system software as the actual combat vehicles or gun systems being simulated. Capitalize on our global presence. We intend to use our long-standing relationships with allied militaries, our global manufacturing and marketing operations and our experience with foreign joint ventures and co-production programs to continue to grow internationally. For example, we are aggressively pursuing international sales opportunities in Australia, Egypt, Greece, Israel, South Korea, Taiwan and other nations. We are also 33 expanding the range of products offered by our joint ventures in Turkey and Saudi Arabia, which enhance our marketing capabilities in the Middle East and Southeast Asia. We continue to pursue foreign co-production opportunities, including new co-production programs with allies such as Canada. Finally, our Bofors Defence subsidiary is actively engaged in technology development programs and product initiatives related to advanced gun systems and precision munitions, that we believe will have sales potential in Europe, the Middle East, Asia and the United States. Selectively pursue acquisitions with complementary products and technologies. The global defense industry has consolidated significantly over the past several years as a result of an increasing focus by the U.S. and other militaries on managing costs. We believe that this consolidation trend, in which we have participated through acquisitions such as that of Bofors Defence in September 2000, will continue. We intend to continue participating in this consolidation by utilizing the relationships that our senior management team, our Board of Directors and The Carlyle Group, our largest stockholder, have in the global defense industry. We intend to be active in seeking out domestic and international acquisition opportunities. In evaluating acquisition candidates, we intend to focus on those companies that have complementary product portfolios or technological competencies, as well as those we believe can enhance our ability to implement our business strategy. Products and Programs The following table summarizes our principal products and programs. In this context, a sole-source contractor is the single provider of specified products and programs to the customer, whether manufactured by us or integrated from other sources. A prime contractor has a direct contract with the end customer, rather than through another contractor.
Prime Principal Products and Programs Sole-Source Contract Description ------------------------------- ----------- -------- -------------------------------------------------- .Bradley Fighting Vehicle M2A3 X X .Armored infantry fighting vehicles with and Derivatives stabilized turret, 25mm cannon and missile capability. Derivative vehicles include: M3 Cavalry Vehicle, M6 Linebacker air defense system, M7 BFIST fire support vehicle, M270 MLRS rocket launcher, and Engineer Squad Vehicle .Mk 45 Naval Gun System X X .A lightweight and reliable, 5-inch, 54-caliber, fully-automated naval gun .Mk 41 Vertical Launch System X .Naval missile launcher and canisters for Tomahawk cruise, anti- air and ship self-defense missiles .Crusader Advanced Artillery X X .Next generation precision artillery system System incorporating a fully-automated cannon and cockpit design .Advanced Gun System X X .Next generation 155mm naval gun system being developed for future warships .M88 Recovery Vehicle X X .Improved heavy recovery vehicle capable of safely recovering and towing an impaired Abrams tank .Grizzly Breaching System .Development program for combat vehicle designed to breach complex obstacles .M113 Armored Personnel Carrier X X .Armored, tracked, C-130-deployable light combat family of vehicles providing protection, speed, and high mobility; the upgraded and extended Mobile Tactical Vehicle Light is in production
34
Prime Principal Products and Programs Sole-Source Contract Description -------------------------------- ----------- -------- -------------------------------------------------- .Assault Amphibious Vehicles X X .Family of AAV7 armored assault amphibious vehicles including Personnel Carriers, Command Vehicles, and Recovery Vehicles .Future Combat System .U.S. Army research and development program for a full range of future information-based combat systems .Submarine Propulsor X X .Specialized propulsors for the Virginia and Seawolf class of U.S. Navy submarines .M109 Self-Propelled Howitzer X X .Mobile field artillery capable of delivering a rapid and high volume of ammunition. M109A6 is the latest and most advanced howitzer upgrade fielded in the U.S. Army today .M992 Field Artillery Ammunition X X .Provides safe transport of ammunition, supplies, Supply Vehicle and personnel to the battlefield for the M109 self-propelled howitzer .M9 ACE - Armored Combat X X .Tracked, C-130-deployable, armored combat Earthmover vehicle used to bulldoze, rough grade, excavate, haul, scrape, and tow .M8 Armored Gun System .Highly maneuverable light tank capable of being air dropped from a C-130 aircraft .Training Devices X X .Fully functional, realistic training and engineering simulators leveraging combat vehicle operating system software for Bradley, Crusader, Grizzly and other combat systems .120mm Strix X .Precision mortar round developed and produced by Bofors Defence and Saab, which is already fielded in Sweden and Switzerland .155mm BONUS X X .Sensor-fused anti-tank submunition in production for the French and Swedish military by the Bofors Defence and Giat partnership .155mm Trajectory Correctable X .Precision guided artillery cargo round being Munition jointly developed for the U.S. and Swedish militaries to accurately deliver sensored submunitions .ABRAHAM missile defense .Precision munition development program munition combining long-range laser-based sensors and focused warhead to defeat cruise and attack missiles .Track Forging and suspension X .Producer of forged track shoes and suspension systems components for armored vehicles .Medium Caliber Guns X .40mm and 57mm gun systems and associated multi-option precision ammunition
35 Our program portfolio consists of a balanced mix of current production, upgrade and life-cycle support, and development programs. Revenue generated from each of our major programs and details of selected programs are discussed below.
Nine Months Ended Year Ended December 31, September 30, - -------------------------- ------------- 1998 1999 2000 2000 2001 -------- -------- -------- ------ ------ (in millions) Bradley Family of Vehicles................. $ 238.2 $ 223.6 $ 284.8 $241.3 $193.0 Naval Ordnance (a)......................... 108.8 112.8 175.5 125.2 141.7 Vertical Launch System..................... 83.7 119.0 98.8 75.2 65.2 Crusader................................... 243.8 252.3 184.5 145.0 183.3 Combat, Engineering & Recovery Vehicles (b) 107.7 175.8 144.5 91.0 69.8 M109 Howitzer System....................... 268.5 128.4 42.1 26.5 21.1 Assault Amphibious Vehicles................ 32.9 90.3 57.0 48.7 48.2 Other...................................... 134.0 111.3 196.7 114.5 191.6 -------- -------- -------- ------ ------ Total...................................... $1,217.6 $1,213.5 $1,183.9 $867.4 $913.9
-------- (a)Includes Mk 45, AGS, DD 21 work and other naval equipment. (b)Includes vehicles such as the M88 recovery vehicle, Grizzly breaching system, M9 ACE and other engineering related equipment. Bradley Fighting Vehicle ("Bradley") We have been the sole-source producer of the Bradley Fighting Vehicle for the U.S. Army since the system's introduction in 1981. We believe that our in-house knowledge of the Bradley, gained through years of experience in developing and manufacturing over 7,000 systems, gives us an edge in pursuing additional domestic and international opportunities. The Bradley carries a 25mm rapid-fire cannon, TOW anti-tank missiles, and a stabilized turret with integrated fire control. The latest model, the Bradley M2A3 Infantry Fighting Vehicle is the first platform to be digitized with embedded electronic components using an open system architecture. This upgrade is outfitted with reactive armor and advanced target detection systems, and can transport up to nine soldiers safely across rough terrain. The Bradley M2A3 also incorporates significant technology improvements including enhanced navigation and information processing software, digital displays and onboard system diagnostics. It also features improved sights with automated dual target tracking and an improved suite of protective features. The U.S. Army plans to upgrade over 1,000 Bradleys to the A3 configuration. In June 2001, we were awarded a three-year contract worth $697 million for the full-rate production of 389 Bradley A3s. We believe the Bradley's unique combination of lethality, survivability, mobility and situational awareness has established it as a key component of U.S. Army forces well beyond 2020. Through our strategy of developing derivatives to existing products, we have developed the Bradley into a family of vehicles encompassing a broad range of battlefield capabilities, including the: . M3 Cavalry Fighting Vehicle ("CFV"). The CFV supports a crew of five soldiers and is specifically configured for the armed scout and reconnaissance mission. . M6 Bradley Linebacker ("Linebacker"). The Linebacker provides short-range air defense using the Stinger missile to defeat airborne threats. . M7 Bradley Fire Support Vehicle ("BFIST"). The BFIST supports armored maneuver forces by pinpointing enemy targets using laser technology and an advanced targeting station. . Bradley Engineer Squad Vehicle ("BESV"). The BESV provides armored transport and equipment capability for engineer soldiers in mechanized units. 36 . M270 Multiple Launch Rocket System ("MLRS"). The MLRS provides long-range artillery support and is outfitted with rockets, a launcher, and fire control produced by Lockheed Martin. . Bradley M2A2 Operation Desert Storm ("A2 ODS") Upgrade. The Bradley A2 ODS is a cost-effective upgrade incorporating technologies that address lessons learned from Operation Desert Storm. Other Bradley derivative vehicles under consideration include the following: Medical Evacuation Vehicle, Battle Command Vehicle, Maintenance Vehicle, Forward Area Rearm or Refuel Vehicle, and Mortar Vehicle. In addition to the development and manufacture of Bradley derivatives, we also: . provide Bradley upgrade kits, spare parts and field services; . send experts to provide on-site advice to customers, conduct maintenance and repairs, and provide training; . maintain a website that supports Bradley users worldwide and generates a growing source of revenues and profits; and . design a range of training devices, such as a realistic, fully-functional crew training simulator that employs the actual vehicle operating system software. Mk 45 Naval Gun System ("Mk 45") We are the sole-source producer of the Mk 45, a lightweight, reliable and widely deployed 5-inch naval gun with over 180 systems installed worldwide. The Mk 45 is a compact, remote-controlled system with an on-deck turret gun and below-deck ammunition handling and storage. With the retirement of the U.S. Navy battleships, it is the primary gun system for U.S. Navy and Marine Corps surface fire support. The U.S. Navy is currently modernizing its fire support capabilities and has designated us as the prime contractor for gun-related development. We have upgraded the Mk 45 to handle new precision ammunition designed to range 63 nautical miles, while reducing cost and maintenance requirements. We are now in full production of the Mod 4 program for new destroyers. The U.S. Navy is also upgrading its installed base of older Mk 45 model guns to this Mod 4 configuration, including those on cruisers. Mk 41 Vertical Launching System ("Mk 41 VLS") We produce the Mk 4l VLS in conjunction with Lockheed Martin and are the sole-source manufacturer of VLS canisters, which must be refurbished or replaced as missiles are fired. The Mk 4l VLS provides fast-reaction, multi-mission firepower that is adaptable to a wide range of ship classes and hull configurations. Our more than 20 years of Mk 4l design, production and support experience for U.S. and allied navies brings significant expertise in missile launching systems. We are leveraging this expertise in the design of missile launching systems for the next generation of warships. The Mk 41 VLS is superior to conventional, mechanical, pointing-type launching systems, and has consequently become the U.S. Navy's primary missile launcher on surface combatant ships. With its ability to fire a variety of Standard, Sea Sparrow and Tomahawk cruise missiles for air, sea and land attack missions, the Mk 41 VLS enables combatant ships to react to multiple threats with concentrated and continuous firepower. Each new destroyer produced incorporates 90 Mk 41 launching cells. Crusader Advanced Artillery System We are the sole-source, prime contractor for the development of the Crusader Advanced Artillery System. Crusader is a long-range precision attack system that enables commanders to extend their reach and increase the 37 pace of operations. This weapon is relevant across the spectrum of conflict from major war to special forces operations or peace enforcement. Each Crusader system consists of a fully automated 155mm self-propelled howitzer and a resupply vehicle. Crusader incorporates advanced technologies in robotic munitions handling, laser propellant ignition, advanced software operating systems and composite armor. The system is designed to provide significant improvements in range and rate of fire, accuracy, mobility and survivability, while providing a substantial crew size reduction. Crusader's advanced autoloading technology, actively-cooled cannon and fire control software enable a single system to deliver many projectiles on several targets near simultaneously, enabling one Crusader to provide the effects of several of today's howitzers. Ammunition for this system is handled only when initially loaded, with all subsequent operations completely automated using advanced robotics. A traditionally long and labor intensive operation, resupplying the howitzer's fuel and ammunition can now can be completed in less than ten minutes while the crew remains in the vehicle cockpit. Furthermore, as a result of aggressive weight reduction, two Crusader howitzers are now rapidly deployable on a single C17 or C5 military transport aircraft. As system integrator, we are responsible for the design of Crusader under a $1.7 billion development program scheduled for completion in 2003 (which includes our current contract for $665 million awarded in September 2001 to complete this effort). Our Crusader firing prototype is being tested at Yuma Proving Grounds, where it has already fired over 3,500 rounds. The follow-on system development and demonstration phase is scheduled to begin in 2003, with delivery of the first operational prototype in 2004. Current U.S. Army plans call for the production of 480 Crusader systems, which would represent approximately $7 billion of program potential if we are awarded the remaining development and production contracts. Advanced Gun System ("AGS") The Advanced Gun System is a 155mm, 62-caliber naval gun system being developed for the U.S. Navy's next generation surface combatant fleet. The AGS has a fully automated magazine holding between 600 and 750 guided and ballistic projectiles. The AGS will be able to sustain a rate of fire of 12 rounds per minute due to its ammunition handling system and liquid-cooled barrel technologies. With a range of 100 nautical miles provided by its rocket-assisted, precision land-attack projectiles, AGS will provide large volumes of precision fire at ranges far beyond those of any previous or existing naval gun system. Our engineers are working in a virtual development environment that facilitates system integration, rapid prototyping and testing to meet aggressive cost, performance and schedule goals. We are the sole-source developer of AGS for both the General Dynamics and Northrop Grumman teams competing for the DD-X program, which could cover several classes of next generation warships. The significant land-attack capabilities provided by the Advanced Gun System and next-generation missile launchers will enable U.S. naval forces to effectively project power well inland. M88A2 Hercules Improved Recovery Vehicles ("Hercules") We are the sole-source provider of the Hercules improved recovery vehicle, designed specifically to support the 70-ton M1 tank. The Hercules system is currently in full rate production for the U.S. Army, the U.S. Marine Corps and international customers such as Egypt. The Hercules incorporates a new boom and 35-ton hoist, 70-ton constant pull main winch and significantly improved powertrain. These capabilities enable a single system with three crew members to carry a tank turret or upright and tow an M1 tank; these tasks would otherwise require eight soldiers and two recovery vehicles. Hercules is a low acquisition, operation and maintenance cost recovery system for 70-ton vehicles. 38 Grizzly Obstacle Breaching System ("Grizzly") We are completing the development of Grizzly--a system designed to provide commanders with a robust, survivable and mobile platform to breach complex obstacles including wire, mines, ditches and log cribs. Mounted on a modified M1 Abrams chassis, the Grizzly features main battle tank armor protection, open systems architecture, drive-by-wire technology and a mine-clearing blade. The system also has a power-driven arm for digging, grappling, and lifting, as well as external cameras for vision and remote operation. The two-person crew compartment has enhanced vision devices and enables soldiers to operate under armor protection for improved survivability. We are also developing the Grizzly Engineering & Training System to enable soldiers to move through and interact with a virtual battlefield. M109 Howitzer System and Other Artillery Programs We are the sole-source developer and manufacturer of the current models of M109 series self-propelled howitzer system and its associated resupply vehicle, the M992 Field Artillery Ammunition Support Vehicle (FAASV). The M109A6 Paladin, the latest upgrade, provides increased firepower, computerized navigation, digitized communications, and on-board fire control. The FAASV enables the Paladin to further increase its firing capacity by providing a mobile and protected ammunition resupply capability. Future opportunities exist for new Paladin deliveries to the U.S. Army Guard and for international upgrade versions. We also possess a substantial artillery capability and installed base through our ownership of Bofors Defence. The Indian Army currently fields approximately 400 towed artillery systems which were supplied by AB Bofors. The Government of India plans to procure, through international competition, an additional 400 howitzers followed by in-country licensed production of 1,000 howitzers. Bofors Defence is offering an upgraded version of the original howitzer for this program, which has a value projected to exceed $1 billion. We are also pursuing future artillery programs for the Scandinavian market, which could integrate the latest Crusader technology with Bofors Defence's howitzer products. Assault Amphibious Vehicles The AAV7 has served as the U.S. Marine Corps' assault amphibious vehicle for over two decades. We have produced approximately 1,500 new systems and are currently executing the second upgrade program, known as Reliability, Availability, and Maintainability / Rebuild to Standard (RAM/RS). This upgrade provides Bradley track, suspension system and engine, as well as advanced armor, to significantly enhance performance and survivability. We are executing a four-year contract for 680 RAM/RS upgrades performed in conjunction with the Marine Corps depot through 2003, with potential for over 1,000 systems. In fact, the recently published Quadrennial Defense Review highlighted this assault amphibious vehicle as a key recapitalization program. We have also sold this system to South Korea, Spain, Thailand and Italy. In addition, other countries have expressed interest in this system. M113 Armored Family of Vehicles and Mobile Tactical Vehicle Light ("MTVL") We have fielded four upgrade versions and over fifteen functional derivatives within the M113 family of vehicles for U.S. and allied armed forces. Our broad base of expertise covers every aspect of research and development, design, systems engineering, manufacturing, upgrade, and logistics support. Since 1994, we have partnered with the Anniston Army Depot for the U.S. Army's M113 upgrade program to recapitalize its inventory of over 15,000 vehicles. This process strips and rebuilds vehicles to incorporate the latest technology in mobility, survivability and subsystems. We also offer manufacturing technology and production packages to international M113 customers. The Mobile Tactical Vehicle Light is the latest upgrade of the M113, offering significantly improved automotive performance and survivability, with a greatly increased payload capacity and a large tailorable interior. All M113 and MTVL variants are roll-on, roll-off transportable on C-130 aircraft. We are currently co-producing 174 MTVLs and 156 M113A3 vehicles through January 2006 for the Government of Canada. We are also developing and testing hybrid electric versions of the MTVL with band track made of rubber. 39 Future Combat System ("FCS") The Future Combat System is a critical component of the U.S. Army's transformation, and would use significantly enhanced battlefield knowledge to improve the combat power of a network of vehicles, sensors and weapons. We are participating in several ways on this development effort aimed at fielding systems late this decade. We are participating on the "Full Spectrum Team" with Science Applications International Corp. (SAIC), Northrop Grumman, ITT Defense, and Stanford Research Institute. This team is one of four teams developing concepts in the first phase of the program. In addition, we are participating directly with the Defense Advanced Research Projects Agency (DARPA) and the U.S. Army on several technology development efforts related to advanced survivability, hybrid power systems, electrothermal-chemical gun propulsion and advanced structural composites. We are also the lead U.S. partner with BAE Systems relating to the Future Scout and Cavalry System ("FSCS") joint U.S./U.K. development effort. These FSCS teams are demonstrating the affordable application of advanced sensor, communications, armament and logistics technologies in a ground reconnaissance system. This system will offer a C-130-deployable platform with an advanced survivability suite and enhanced situational awareness. The U.K. Government has indicated its intent to transition FSCS into a Future Rapid Effects System program starting in 2003, while the U.S. Army may transition FSCS into the FCS program. M8 Armored Gun System Under a 1994 contract that we won in a competitive procurement, we designed and developed the M8 Armored Gun System to meet the U.S. Army's need for a rapidly deployable, multi-purpose weapon system to support cavalry, airborne and light infantry forces. The M8 is a highly maneuverable, 105mm light tank--20-tons versus the 70-ton M1 Abrams Tank--capable of being air dropped or air landed from a C-130 aircraft. The system is operated by a three soldier crew and features a fully automatic ammunition loading system and modular armored protection. The M8's speed, firepower and versatile deployability make it an effective mobile light armored platform for early entry forces responding to troubled spots around the world. The M8 was tested and type classified by the U.S. Army, although the program's procurement funding was eliminated in 1997 due to defense spending reductions. U.S. and international armed forces continue to express interest in this system. Precision munitions Through Bofors Defence, we are developing and producing precision munitions, including: . BONUS, a Bofors Defence / GIAT joint program, is a sensor-fused submunition that detects, evaluates and strikes targets such as main battle tanks at ranges beyond 30 km using proprietary guidance and countermeasure systems. The Bofors / GIAT team is completing development of sensor enhancements and executing a production contract of over 5,000 rounds for the Governments of France and Sweden. . STRIX, a joint Bofors Defence / SAAB program, is a 120mm precision guided mortar projectile used to destroy tanks and armored fighting vehicles. STRIX has a passive infrared homing device which enables automatic target tracking at night and in aggressive countermeasure environments. We have several international customers for STRIX and potential U.S. Army sales related to the fielding of 120mm mortar systems. . The Trajectory Correctable Munition (TCM) is a guided artillery cargo round capable of precisely delivering submunitions to the desired target. This shell extends weapon range beyond 50 km and significantly improves accuracy using canards controlled by onboard guidance systems. The TCM program is part of the U.S.-Sweden Cooperative Technology Research and Development Agreement. . ABRAHAM is an air defense technology development program for defeating cruise missile and related threats. ABRAHAM employs laser-based sensor technology to adjust its flight path based on the trajectory of incoming missiles. We are executing a development program with the Swedish government through 2002, when ABRAHAM will transition to testing. We know of no other system worldwide at a similar development stage capable of providing effective low-cost cruise missile defense. 40 Combat Vehicle Track and Commercial Forging We are a premier designer of military track systems, and we are a key producer of track shoes for U.S. and international armored vehicles. We also design and produce commercial forgings for the transportation and mining industries. We operate one of the largest forge shops in the southeastern United States, with six mechanical presses ranging from 3,000 to 6,000 tons. Our engineering and testing capabilities ensure superior performance, greater durability and extended track life. Design capabilities include three-dimensional computer modeling, finite element and experimental stress analysis, and a full-service gauge laboratory. We are the prime contractor for the development of the next track system for the M1 Abrams tank and the M88 Hercules recovery vehicle. We are also involved in the development of leap-ahead track technologies, including aluminum metal matrix composites and rubber band tracks. The aluminum metal matrix composite technology uses cast aluminum reinforced with advanced ceramics to create a durable, lightweight track system. We are also co-developing with the U.S. Army and an international company a one-piece reinforced rubber track that provides a "tire-like" ride with tracked performance. Medium Caliber Naval Guns and Advanced Munitions Through our Bofors Defence subsidiary, we provide integrated weapons systems with 40mm or 57mm Mk 3 guns and 3-P ammunition (programmable, pre-fragmented, proximity-fused). Bofors also offers various upgrades of existing 40mm and 57mm gun systems fielded across a large installed base of naval, land combat and air defense systems. Our 57mm Mk 3 gun was competitively selected as the main gun for Sweden's advanced Visby Corvette class ships. This advanced vessel incorporates stealth technology and integrated sensor-based fire control. We are currently executing a contract with the Swedish government for seven Mk 3 systems, as well as contracts with Mexico and Brazil. Our 3-P all-target ammunition carries an electronically programmed fuse that supports six function modes, including gated-proximity, armor-piercing and timed detonation. The shell body of this 40mm or 57mm ammunition contains fragmentation pellets, which disperse in set patterns to maximize effects against numerous target types. These guns and munitions can also be adapted for use in air defense systems and combat vehicles. Submarine Propulsor We are the sole-source prime contractor of U.S. submarine propulsors, a position gained through our high-precision machinery, advanced manufacturing facilities and extensive experience with a variety of materials. Propulsors enable a submarine to travel at appropriate speeds while maintaining minimal noise levels. We are presently producing four Virginia class submarine propulsors for delivery through December 2003. Based on our existing production capability, experience with titanium, and success with the Seawolf and Virginia class propulsor contracts, we are well positioned to pursue international propulsor business. Selected Advanced Technologies Our ability to compete for future defense contracts depends in part on an effective and innovative base of research and development programs. We have several specialized research facilities that focus on advancing key technologies for future land and naval integrated weapon systems. One of these facilities, the Corporate Technology Center located in Silicon Valley, acts as a technology incubator and conducts defense and commercial research in advanced materials, human factors engineering, numerical simulation and customized mechanical testing. Our advanced technologies include: Virtual Development Environments We have made significant investments in the development of state-of-the-art integrated modeling and simulation capabilities that address a full range of system development including: the modeling of requirements; simulation of the product; and development of training simulators using actual combat vehicle software. We have 41 significant expertise in the use of automated engineering tools that enable the development of virtual three-dimensional models for complete systems, subsystems and assemblies, which can be accessed and manipulated from multiple distributed locations in a single integrated data environment. Our software processes are certified at Software Engineering Institute Configuration Maturity Model(R) Level 3, and are on path to achieve Level 4 certification. Hybrid Electric Power Supply We are participating in several DARPA programs to demonstrate automotive and operational advantages of alternative power supplies for combat systems. We are developing integrated solutions for power generation, energy storage, sprocket torque production and software programmable power distribution. We are also working with the National Automotive Center to integrate hybrid electric technology for increased performance, fuel economy, enhanced reliability and reduced emissions. Our Combat Hybrid Power Supply laboratory in Santa Clara is focused on the design of next generation combat vehicles that rely on electrical power for propulsion, sensors, and weapons. Advanced Propellant Guns We are a leader in Electro-thermal Chemical (ETC) technology for large caliber guns, having received contracts from the U.S. Army, Navy, Marine Corps, and various Department of Defense research organizations. We are at the forefront of temperature compensation technology to improve velocity, lessen recoil and achieve greater weapon accuracy. We also have considerable expertise in pulse power generation to support the development of electromagnetic, ETC, and directed energy weapon systems. Integrated Survivability Solutions The Advanced Development Center in San Jose, CA is our facility for developing a broad range of survivability technologies, including advanced ballistic armor, Nuclear, Biological and Chemical survivability, detection avoidance and electronic sensors and countermeasures. ADC serves as the prime contractor for a key US Army technology integration and analysis program recently designated as a Science and Technology Objective. This program integrates and tests advanced survivability suites employing passive, active and reactive protection systems for ground combat vehicles. We are also working with SAIC to develop electromagnetic armor pulse power systems. Advanced Composite Materials We are a leader in the development of thick-walled complex composites for armored vehicle structures and their associated manufacturing processes. Our Composite Armored Vehicle Advanced Technology Demonstrator achieved weight savings of over 30%, representing a significant development in survivable, light combat vehicles. We also have considerable expertise in the use of composite materials to fabricate lighter and stronger structures for missile launching systems. Affiliates We have acquired companies and established joint ventures and co-production programs to gain technical competencies, extend product lines, and grow our international presence. Our objective in setting up a joint venture or co-production program is to provide the host country with an indigenous production capability that utilizes our developed products adapted for local requirements. This occurs through the transfer of production knowledge and technical expertise, thereby supporting the host country's industrial goals while modernizing its armed forces. Our affiliates include: 42 Bofors Defence In September 2000, we acquired Bofors Weapon Systems AB from SAAB AB. In conjunction with this transaction, we changed the name of BWS to Bofors Defence, which remains headquartered in Karlskoga, Sweden. Bofors Defence has three affiliates in Sweden: SAAB Bofors Support AB, which provides administrative support; SAAB Bofors Test Center AB, which supplies testing services and proving grounds; and HB Development AB, a joint venture with Hagglunds Vehicle AB (a subsidiary of Alvis PLC) created to oversee the development and production of combat vehicles for the Swedish Armed Forces. Bofors Defence provides us with advanced technology, products and services in the precision munitions sector for Swedish and international defense customers. Barnes & Reinecke, Inc. ("BRI") In March 2000, we acquired Barnes & Reinecke, Inc. of Arlington Heights, Illinois from Allied Research Corporation. Founded in 1934, BRI is a leading ISO 9001-registered technical services firm specializing in design, engineering, prototyping, testing, training and documentation for a variety of government and commercial customers. BRI focuses on the military automotive engineering services market, principally serving the U.S. Army and selected international customers. BRI extends our lifecycle management capabilities and customer base for system technical support, integrated logistics services, packaging and electrical assembly. FNSS--Turkey ("FNSS") We own 51% of FNSS Defense Systems (Savunma Sistemleri) A.S. in partnership with the Nurol Group, a Turkish company with commercial interests including construction, manufacturing, real estate and banking. FNSS was formed in 1987 in conjunction with a $1.1 billion contract to produce 1,698 Armored Combat Vehicles for the Turkish Army. FNSS has an experienced workforce, a world-class manufacturing plant, and a quality control and testing laboratory. FNSS has also captured international sales with the export of 133 vehicles to the United Arab Emirates and its August 2000 contract to provide 211 armored combat vehicles in ten variants to the Government of Malaysia through 2004. These programs, in conjunction with a recent sole-source contract to produce another 551 combat vehicles for the Turkish Army, result in a backlog totaling over $600 million. United Defense Systems--Saudi Arabia We own 51% of United Defense Systems, in partnership with Al-Hejailan Projects Engineering Company, Ltd. The joint venture has U.S. Foreign Military Sales contracts to support the Royal Saudi Land Forces Infantry Corps. One set of contracts, worth approximately $300 million, was for logistics and training support through 2002 for Bradley Fighting Vehicle units. The other set of contracts, for approximately $200 million, provides funding through May 2002 and covers the construction of a military vehicle repair and overhaul facility at Al-Kharj and upgrades of M113 vehicles to the A3 configuration. The Saudi government owns this facility, which United Defense Systems operates on a government-owned contractor-operated basis. United Defense Systems has successfully employed expatriates to implement programs and subsequently transition to a trained Saudi workforce, as evidenced in the M113 upgrade program, where only 15 of the 95 employees are expatriates and six Saudi nationals are in management positions. We are pursuing follow-on programs for logistics support, M113 upgrades and expansion of the depot facility. Government Contracts; Regulatory Matters We expect that approximately 85% of our sales (including approximately 10% pursuant to the U.S. Foreign Military Sales program) will continue to result from contracts with the U.S. Government, either directly, through prime contractors or pursuant to the U.S. Government's Foreign Military Sales program. Our U.S. Government business is performed under cost-plus contracts and under fixed-price contracts. Generally, our engineering and development programs are performed under cost-plus contracts, while our production contracts are awarded on a fixed-price basis. Cost-plus and fixed-price contracts accounted for approximately 33% and 67%, respectively of our business in 2000. 43 Our U.S. Government business is subject to unique procurement and administrative rules based on both laws and regulations. These laws and regulations include compliance with socio-economic requirements, the distribution of costs to contracts and non-reimbursement of certain costs such as lobbying expenses. Our contract administration and cost accounting policy and practices are subject to oversight by government inspectors, technical specialists and auditors. Certain of our sales are via Foreign Military Sales agreements directly between the U.S. Government and foreign governments. In such cases, because we serve only as the supplier, we do not have unilateral control over the terms of the agreements. These contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with these laws and regulations. Investigations could result in administrative, civil, or criminal liabilities, including repayments, disallowance of certain costs, or fines and penalties. Certain of our sales are Direct Commercial Sales to foreign governments. These sales are subject to U.S. Government approval and licensing under the Arms Export Control Act. Legal restrictions on sales of sensitive U.S. technology also limit the extent to which our foreign joint ventures can sell our products to foreign governments or private parties. U.S. Government contracts are, by their terms, subject to termination by the U.S. Government either for its convenience or default by the contractor. In addition, U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take many years. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. As is common in the industry, we are subject to business risks, including changes in governmental appropriations, national defense policies or regulations, service modernization plans, and availability of funds. Any of these factors could materially adversely affect our business with the U.S. Government in the future. Competition We face a variety of domestic and foreign competitors including Alvis, The Boeing Company, General Dynamics Corporation, General Motors Corporation, GIAT, Kraus Maffei Wegmann, Lockheed Martin, Oto Breda, Raytheon Company, Steyr and Textron. Our key competitive factors are the quality, technological advancement and cost competitiveness of our products and services. As the electronic and software content of our products increase, we may encounter future competition from electronics and aerospace companies whose historic activities have been largely unrelated to our products and programs. Our ability to compete for these contracts depends on: . the effectiveness of our research and development programs; . our ability to offer better program performance than our competitors at a lower cost; and . the readiness of our facilities, equipment and personnel to undertake the programs for which we compete. In programs where we are the sole-source provider, other suppliers may compete against us only if the U.S. Government chooses to reopen the particular program to competition. Our customers, particularly the industrial facilities operated by the U.S. Department of Defense, often compete with us for aftermarket business, such as upgrade work and various overhaul and servicing work. 44 Backlog As of September 30, 2001, our funded backlog was approximately $2.0 billion compared with $1.8 billion as of September 30, 2000. Funded backlog does not include the awarded but unfunded portion of total contract values. This backlog provides management with a useful tool to project sales and plan its business on an ongoing basis. A substantial majority of this backlog is expected to be earned as revenues by the end of 2002. Intellectual Property Although we own a number of patents and we have filed applications for additional patents, we do not believe that our operations depend upon our patents. In addition, our U.S. Government contracts generally license us to use patents owned by others. Similar provisions in the U.S. Government contracts awarded to other companies make it impossible for us to prevent the use by other companies of our patents in most domestic work. Additionally, we own certain data rights in our products under certain of our government contracts. The protection of data developed by us from use by other government contractors is from time to time a source of negotiation between us and the U.S. Government, and the extent of our data rights in any particular product generally depends upon the degree to which that product was developed by us, rather than with U.S. Government funds. We routinely enter into confidentiality and non-disclosure agreements with our employees to protect our trade secrets. Employees As of September 30, 2001, we had approximately 5,300 employees and approximately 300 contract workers, excluding employees of our foreign joint ventures. Approximately 1,500 of these employees at six locations are represented by the following nine unions: the Glass, Molders, Pottery, Plastics and Allied Workers (Anniston); the International Association of Machinists and Aerospace Workers (Louisville and San Jose); the United Automobile, Aerospace and Agricultural Implement Workers (Fridley); the International Guards (Fridley); the International Brotherhood of Teamsters (San Jose); the United Steelworkers (York); Armament Systems Guards Firefighters (Fridley); the Swedish Trade Union Cooperation (Sweden); and the Federation of Salaried Employees in Industry and Services (Sweden). While we have from time to time experienced strikes by unionized employees, we believe that currently relations with our employees are good. Sources and Availability of Raw Materials Our manufacturing operations require raw materials, primarily aluminum and steel, which we purchase in the open market and from a number of suppliers. We also purchase a variety of electronic and mechanical components for which we have multiple commercial sources. We have not experienced any significant delays in obtaining timely deliveries of essential raw materials. Environmental Matters Our operations are subject to federal, state and local laws and regulations relating to, among other things, emissions to air, discharges to water, the handling and disposal of hazardous and solid wastes, and the cleanup of hazardous substances. We continually assesses our compliance status and believe that our operations are in substantial compliance with environmental laws. Operating and maintenance costs associated with environmental compliance and prevention of contamination at our facilities are a normal, recurring part of operations, are not significant relative to total operating costs or cash flows, and are generally allowable as contract costs under our contracts with the U.S. Government. These costs have not been material in the past and, based on information presently available to us and on U.S. Government environmental policies relating to allowable costs in effect at this time, all of which are subject to change, we do not expect these to have a material adverse effect on us. 45 Under existing U.S. environmental laws, potentially responsible parties are jointly and severally liable and, therefore, we are potentially liable to the government or third parties for the full cost of remediating contamination at our sites or at third party sites. In the unlikely event that we were required to fully fund the remediation of a site, the statutory framework would allow us to pursue rights of contribution from other potentially responsible parties. We manage certain government-owned facilities on behalf of the U.S. Government. At such facilities, environmental compliance and remediation costs have historically been the responsibility of the government and we relied (and continue to rely with repsect to past contamination) upon government funding to pay such costs. While the government remains responsible for capital and operating costs associated with environmental compliance, in certain instances such costs are being shifted to the contractor with fines and penalties no longer constituting allowable costs under the contracts pursuant to which such facilities are managed. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with our facilities will continue to be allowable costs. As of September 30, 2001, we had a reserve for $14.0 million to cover any remediation and compliance costs that may not be allowable costs. Management believes that this reserve is sufficient and does not expect that these costs will materially adversely affect us. Properties Our principal manufacturing and research and development activities are located in four main facilities. These primary operating locations are Fridley, Minnesota; York, Pennsylvania; Louisville, Kentucky; and Santa Clara, California. The agreement with the government under which we currently use the 1,712,240 square feet Fridley facility expires on October 31, 2001 and automatically renews on a monthly basis thereafter. However, we have entered into discussions with the U.S. Government for the purchase of this facility. Our York facility consists of 996,518 square feet and is owned by us. We lease our 633,609 square foot Louisville facility pursuant to a lease expiring in August 2002. Our main Santa Clara facility occupies 124,940 square feet under a lease that expires in October 2011. In addition, we own or lease approximately 25 additional administrative offices, manufacturing facilities and warehouse locations throughout the U.S. and in Sweden. Legal Proceedings From time to time we are involved in legal proceedings arising in the ordinary course of our business. We believe that we have adequately reserved for these liabilities and that there is no litigation pending that could have a material adverse effect on our results of operations and financial condition. As a government contractor, we are subject from time to time to U.S. Government investigations relating to our operations and audits of our accounting procedures by the Defense Contract Audit Agency. Government contractors who are found to have violated the False Claims Act, or are indicted or convicted for violations of other federal laws, may be suspended or disbarred from government contracting for some period. Such an event could also result in fines or penalties. Given our dependence on U.S. Government contracts, suspension or debarment could have a material adverse effect on the Company. Our policy is to cooperate with governmental investigations and inquiries regarding compliance matters, and we also make voluntary disclosures of any compliance issues to governmental agencies as appropriate. We are currently providing information on compliance matters to various government agencies, and we expect to continue to do so in the future. In March 2001, we settled a qui tam case filed under the U.S. Civil False Claims Act. In the case, U.S. ex rel. Seman and Shukla v. United Defense, FMC Corp., and Harsco Corp., the plaintiff alleged that we improperly obtained payment under various government contracts by supplying components that did not comply with applicable technical specifications. Under the terms of the settlement agreement, we agreed to pay approximately $6.0 million. There was no finding of wrongdoing by us, and we received a full release of any claims raised in the case. 46 MANAGEMENT Directors and Executive Officers The following table sets forth information concerning our directors and executive officers as of September 30, 2001:
Name Age Position ---- --- ---------------------------------------------------- Thomas W. Rabaut...... 53 President, Chief Executive Officer and Director Francis Raborn........ 58 Vice President, Chief Financial Officer and Director Dennis A. Wagner...... 51 Vice President, Business Development & Marketing David V. Kolovat...... 56 Vice President, General Counsel and Secretary Peter C. Woglom....... 56 Vice President, General Manager-Armament Systems Arthur L. Roberts..... 61 Vice President, General Manager-International Elmer L. Doty......... 47 Vice President, General Manager-Ground Systems William E. Conway, Jr. 52 Chairman of the Board Frank C. Carlucci..... 70 Director Peter J. Clare........ 36 Director Allan M. Holt......... 49 Director Robert M. Kimmitt..... 53 Director J.H. Binford Peay, III 61 Director John M. Shalikashvili. 65 Director
Thomas W. Rabaut became our President and Chief Executive Officer in January 1994 and has been a director since October 1997. Mr. Rabaut joined FMC Corporation in June 1977 and worked in a variety of manufacturing management positions in its Power Transmission Group. In July 1982, he became operations manager of FMC's Fluid Control Division serving the petroleum equipment industry. In February 1986, Mr. Rabaut entered FMC's defense business as general manager of its Steel Products Division. Mr. Rabaut became the operations director of FMC's Ground Systems Division in January 1989. In April 1990, he was appointed Vice President and General Manager of Ground Systems Division. In January 1993, Mr. Rabaut assumed the position of General Manager of the Defense Systems Group, overseeing operations in the U.S., Turkey, Pakistan, and Saudi Arabia for U.S. and allied armies, navies and marines. Francis Raborn became our Vice President and Chief Financial Officer in January 1994, and has been a director since December 1997. Prior to joining us, Mr. Raborn served as FMC's Defense Systems Group Controller in Santa Clara, California where he was responsible for leading the financial planning for the four defense divisions. His previous assignment at FMC was Special Products Group Controller in Philadelphia where he presided over the finance function of a commercial business group composed of eight smaller machinery and specialty chemical divisions. His first assignment with the Company was the Director of Operations Analysis and Special Studies on the Corporate Finance staff in Chicago. Before joining FMC, Mr. Raborn worked in a financial capacity with Chemetron Corporation and Ford Motor. He also served in the U.S. Air Force as a pilot and command center duty director. Dennis A. Wagner became our Vice President of Business Development and Marketing in May 1994. Prior to his current assignment, Mr. Wagner was the Division General Manager of FMC's Steel Products Division and served as the Program Director for the M113 Family of Vehicles at FMC's Ground Systems Division. Mr. Wagner also served as the Army Programs Marketing Manager and the Advanced Technology Program Director at FMC's Defense Systems Group office in the Washington, D.C. area. Before joining FMC in July 1981, Mr. Wagner served in the U.S. Army as an Infantry Officer. After his active U.S. Army service, Mr. Wagner worked as a design engineer at the Ford Motor Company and later as a mechanical engineer and project manager at the U.S. Army Tank and Automotive Command. 47 David V. Kolovat has been our Vice President, General Counsel and Secretary since October 1997. Mr. Kolovat joined FMC Corporation in May 1988 as Associate General Counsel responsible for its Defense Systems Group. Prior to that time, Mr. Kolovat served successively as staff counsel for Deere & Company; Vice President, General Counsel and Secretary of Itel Corporation; Vice President, General Counsel and Secretary of Robot Defense Systems, Inc.; and Vice President, General Counsel and Secretary of Premisys, Inc. Peter C. Woglom has been the Vice President and General Manager of our Armament Systems operations since May 2001, after having served in this capacity for our Ground Systems operations from January 1993 to April 2001. Prior positions have included Vice President and Director, Business Strategies and Initiatives for Defense Systems Group, for over two years beginning in April of 1990; Bradley Program Director for over two years beginning in October of 1987; and Operations Manager at Bradley for four years beginning in September of 1983. Arthur L. Roberts has been the Vice President and General Manager of our International operations since January 1994. Prior to this assignment, Mr. Roberts managed our Turkey joint venture program from initial proposal through the implementation phase. He is also a member of the board of directors of FMC-Nurol Savunma Sanayii A.S., or FNSS, and represents United Defense Industries on the executive committee of its board. Before he became associated with international business, Mr. Roberts held a variety of manufacturing positions in our Ground Systems Operations and the former Construction Equipment Group of FMC. He has been with us since June 1967. Elmer L. Doty became our Vice President and General Manager of our Ground Systems operations in April 2001 after having served as Vice President and Manager of the Steel Products Division since April 1994. Mr. Doty began his career with FMC in August 1979 as Engineering Group Leader and subsequently held the positions of Engineering Manager, Director of Manufacturing/Engineering, and Division Manager of the Energy and Transportation Group's Conveyor Equipment Division. Prior to joining FMC, Mr. Doty was employed by Black & Veatch Consulting Engineers and by General Electric. William E. Conway, Jr. has been our Chairman of the Board since October 1997. He has been a Managing Director of our affiliate, The Carlyle Group, a Washington, D.C.-based global investment firm, since August 1987. Mr. Conway was Senior Vice President and Chief Financial Officer of MCI Communications Corporation from 1984 until 1987, and was a Vice President and Treasurer of MCI from 1981 to 1984. He is also Chairman of Nextel Communications, Inc. and a director of several privately held companies. Mr. Conway has been elected as a director pursuant to an agreement among us, Iron Horse Investors, L.L.C. and other affiliates of The Carlyle Group whereby we have agreed to designate nominees to our board of directors on behalf of certain affiliates of The Carlyle Group. Frank C. Carlucci became a director in December 1997. He is currently Chairman of our affiliate, The Carlyle Group. Prior to joining The Carlyle Group in 1989, Mr. Carlucci served as Secretary of Defense from November 1987 to January 1989 and as President Reagan's National Security Advisor in 1987. Mr. Carlucci currently serves as Chairman of the Board for Neurogen Corporation. He is also a director on the boards of the following companies; Ashland, Inc.; Kaman Corporation; SunResorts, Ltd., NV; Texas Biotechnology Corporation, and Pharmacia Corporation. Mr. Carlucci has been elected as a director pursuant to an agreement among us, Iron Horse Investors, L.L.C. and other affiliates of The Carlyle Group whereby we have agreed to designate nominees to our board of directors on behalf of certain affiliates of The Carlyle Group. Peter J. Clare became a director in October 1997. Since 1999, Mr. Clare has been a Managing Director with our affiliate, The Carlyle Group, which he joined in August 1992. From 1995 to 1997, Mr. Clare served as a Vice President of The Carlyle Group and from 1997 to 1999 he was a Principal with The Carlyle Group. Mr. Clare was previously with First City Capital, a private investment group, and also worked at Prudential-Bache. He also serves as a director on the board of KorAm Bank, as well as several privately held companies, and has been the Vice President and Managing Director of our principal stockholder Iron Horse Investors, L.L.C. since 48 October 1997. Mr. Clare has been elected as a director pursuant to an agreement among us, Iron Horse Investors, L.L.C. and other affiliates of The Carlyle Group whereby we have agreed to designate nominees to our Board of Directors on behalf of certain affiliates of The Carlyle Group. Allan M. Holt became a director in October 1997. He is currently a Managing Director of our affiliate, The Carlyle Group, which he joined in December 1991. Mr. Holt was previously with Avenir Group, a private investment and advisory group, and from June 1984 to December 1987 was Director of Planning and Budgets at MCI Communications Corporation, which he joined in September 1982. Mr. Holt currently serves on the boards of several privately held companies. Mr. Holt has been elected as a director pursuant to an agreement among us, Iron Horse Investors, L.L.C. and other affiliates of The Carlyle Group whereby we have agreed to designate nominees to our Board of Directors an behalf certain affiliates of The Carlyle Group. Robert M. Kimmitt was elected as a director in March 1998. He is Executive Vice President, Global & Strategic Policy, at AOL Time Warner, and is responsible for setting the company's strategic course on major public policy issues affecting the company in the United States and around the world. Prior to joining AOL Time Warner, Mr. Kimmitt was President and Vice Chairman of Commerce One, Inc., a leading electronic commerce company headquartered in Pleasanton, California. Previously, from May 1997 to February 2000, Mr. Kimmitt was a Partner in the Washington law firm of Wilmer, Cutler & Pickering, was of counsel to the firm from February 2000 to August 2000, and from September 1996 to April 1997, he served as a Managing Director of Lehman Brothers. Mr. Kimmitt served as American Ambassador to Germany from 1991 to 1993. Previously, he served as Under Secretary of State for Political Affairs, General Counsel to the Treasury Department, and was a member of the National Security Council Staff. Mr. Kimmitt serves on the boards of Allianz Life Insurance Company of North America, Commerce One, Inc., Siemens AG and Xign Corporation, as well as numerous non-profit organizations involved in public affairs. J. H. Binford Peay, III became a director of our company in December 1997. General Peay is a career U.S. Army officer who attained the rank of General and retired from the Army on October 1, 1997. He served as the Commander-In-Chief of the U.S. Central Command from 1996 to 1997, and also served as Vice Chief of Staff of the U.S. Army from 1993 to 1994. General Peay is currently the Chairman and Chief Executive Officer of Allied Research Corporation. He also serves as a Trustee of the George C. Marshall Foundation, and a Trustee of Virginia Military Institute Foundation. John M. Shalikashvili became a director of our company in June 1998 and is the Chairman of the audit and ethics committee. General Shalikashvili is an independent consultant and a Visiting Professor at Stanford University. Prior to his appointment, he was the senior officer of the United States military and principal military advisor to the President of the United States, the Secretary of Defense and the National Security Council in his capacity as the thirteenth Chairman of the Joint Chiefs of Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his tenure as Chairman of the Joint Chiefs of Staff, he served as the Commander in Chief of all U.S. States forces in Europe and as NATO's tenth Supreme Allied Commander, Europe (SACEUR). He also served in a variety of command and staff positions in the continental United States, Alaska, Belgium, Germany, Italy, Korea, Turkey and Vietnam. General Shalikashvili is a director of The Boeing Company, Frank Russell Trust Company, L-3 Communications Holdings, Inc. and Plug Power, Inc. Board of Directors Upon the closing of the offering, the number of directors will remain at nine. At each annual meeting our stockholders will elect the successors to our directors. Any director may be removed from office by a majority of our stockholders. Carlyle is the beneficial owner of a majority of our common stock and will be able to unilaterally remove directors. Our executive officers serve at the discretion of our Board of Directors. Committees of our Board of Directors Our Board of Directors directs the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the Board of Directors and three standing committees: the audit 49 and ethics committee, the compensation committee and the executive committee. In addition, from time to time, special committees may be established under the direction of the Board of Directors when necessary to address specific issues. We have no nominating committee or committee that serves a similar function. Audit and Ethics Committee Our audit and ethics committee is responsible for, among other things, making recommendations concerning the engagement of our independent public accountants, reviewing with the independent public accountants the plans and results of the audit engagement, approving professional services provided by the independent public accountants, reviewing the independence of the independent public accountants, reviewing the adequacy of our internal accounting controls and overseeing our ethics program. At the time the offering is consummated our audit and ethics committee will be comprised of J.H. Binford Peay, III, Robert M. Kimmitt and John M. Shalikashvili. Compensation Committee The compensation committee is responsible for determining compensation for our executive officers and other employees, and administering our 1998 Stock Option Plan, our Management Incentive Plan and other compensation programs. Our compensation committee is currently comprised of Peter J. Clare and J. H. Binford Peay, III. Executive Committee The executive committee is responsible for reviewing major operating, contractual and expenditure issues. Our executive committee is currently comprised of William E. Conway, Jr., Robert M. Kimmitt, and Thomas W. Rabaut. Compensation Committee Interlocks and Insider Participation The compensation committee of the Board of Directors is charged with the responsibilities, subject to full board approval, of establishing, periodically re-evaluating and, where appropriate, adjusting and administering policies concerning compensation of management personnel, including the Chief Executive Officer and all of our other executive officers. The compensation committee was established in 1998 and Messrs. Clare and Peay serve on the committee. Mr. Clare is a member of The Carlyle Group, which beneficially owns a majority of our stock. By virtue of his position as President and Chief Executive Officer, Mr. Rabaut has been invited to attend all meetings of the committee, but he is not a voting member. Director Compensation The three outside directors, Messrs. Peay, Kimmitt and Shalikashvili, are paid annual retainers of $25,000 for all services rendered. There are no other fees paid to the directors. These three directors may elect to receive their annual retainer in cash, options to purchase our stock, or a combination. We do not maintain a medical, dental, or retirement benefits plan for these directors. The remaining directors are employed either by us or The Carlyle Group, and are not separately compensated for their service as directors. A special performance bonus was paid to certain directors and executive officers in 2001, including a payment of $192,000 to Mr. Kimmitt, $160,000 to Mr. Peay and $102,856 to Mr. Shalikashvili. See "--Special Performance Bonus." These directors are also eligible for retention bonuses in the same amounts. See "--Retention Bonus Plan." 50 Executive Compensation The following table sets forth the cash and non-cash compensation paid or incurred on our behalf to our Chief Executive Officer and each of the four other most highly compensated executive officers, or the named executive officers, that earned more than $100,000 during the last three fiscal years: Summary Compensation Table
Long-Term Compensation Annual Compensation Awards ------------------- ------------ Securities All Other Name and Underlying Compensation Principal Position Year Salary($) Bonus($) Options (#) ($)(1) ------------------ ---- --------- -------- ------------ ------------ Thomas W. Rabaut................................ 2000 401,083 386,052 -- 39,554 President and Chief Executive Officer 1999 364,167 421,341 -- 40,094 1998 331,547 393,082 450,000 31,650 Peter C. Woglom................................. 2000 257,087 180,989 -- 22,849 Vice President, General Manager-- 1999 245,587 237,728 -- 20,895 Armament Systems Operations 1998 234,528 239,922 225,000 15,997 Francis Raborn.................................. 2000 248,400 198,919 -- 21,386 Vice President and Chief Financial Officer 1999 210,600 206,177 -- 20,161 1998 201,993 211,083 225,000 14,361 Arthur L. Roberts............................... 2000 185,796 204,376 -- 17,163 Vice President, General Manager-- 1999 182,645 133,806 -- 20,797 International Operations 1998 174,427 166,927 146,250 17,845 Frederick M. Strader (2)........................ 2000 214,078 180,853 -- 18,264 Vice President, General Manager-- 1999 198,749 158,721 -- 22,137 Armament Systems 1998 192,348 168,420 225,000 21,108
-------- (1)Comprised of matching contributions under our nonqualified thrift plan for salaried employees for 2000, 1999 and 1998. (2)No longer employed with the company. 2000 Options Values The following tables show information regarding options to purchase our common stock unexercised and outstanding as of December 31, 2000. We did not grant any options to our named executive officers in the year ended December 31, 2000 nor did they exercise any options. Also included is the value and number of unexercised options held as of December 31, 2000 by such named executive officers: . The value of the unexercised options is based on an offering price of $19.00 per share. . "Exercise" means an employee's acquisition of shares of common stock which have already vested, "exercisable" means options to purchase shares of common stock which are subject to exercise and "unexercisable" means all other options to purchase shares of common stock. 51
Number of Securities Value of Underlying Unexercised Unexercised Options at In-The-Money Options at Fiscal Year-End(#) Fiscal Year-End($) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Thomas W. Rabaut.... 202,500 247,500 2,948,400 3,603,600 Peter C. Woglom..... 112,500 112,500 1,638,000 1,638,000 Francis Raborn...... 112,500 112,500 1,638,000 1,638,000 Arthur L. Roberts... 73,125 73,125 1,064,700 1,064,700 Frederick M. Strader 112,500 112,500 1,638,000 1,638,000
Retirement and Pension Plans Each named executive officer participates in the UDLP Employees Pension Plan and the UDLP Excess Pension Plan described below. The following table shows the estimated annual pension benefits under those plans for the specified compensation and years of service. A portion of the retirement benefits for service prior to 1986, computed under the pension plans, is payable from annuity contracts maintained by Aetna Life Insurance Company.
Years of Credited Service Final Average -------------------------------------------- Earnings 15 20 25 30 35 ------------- -------- -------- -------- -------- -------- $150,000.. $ 31,270 $ 41,693 $ 52,117 $ 62,540 $ 72,693 250,000 53,770 71,693 89,617 107,540 125,463 350,000 76,270 101,693 127,117 152,540 177,963 450,000 98,770 131,693 164,617 197,540 230,463 550,000 121,270 161,693 202,117 242,540 282,963 650,000 143,770 191,693 239,617 287,540 335,463 900,000 200,020 266,693 333,367 400,040 466,713
. Compensation included in the final average earnings for the pension benefit computation includes base annual salary and annual bonuses, but excludes payments for most other compensation. . Unreduced retirement pension benefits are calculated pursuant to the Pension Plan's benefit formula as an individual life annuity payable at age 65. Benefits may also be payable as a joint and survivor annuity or a level income option. . Final average earnings in the above table means the average of covered remuneration for the highest 60 consecutive calendar months out of the 120 calendar months immediately preceding retirement. . Benefits applicable to a number of years of service or final average earnings different from those in the above table are equal to the sum of: - 1% of allowable Social Security Covered Compensation ($33,066) for a participant retiring at age 65 in 1999 times years of credited service; and - 1.5% of the difference between final average earnings and allowable Social Security Covered Compensation times years of credited service. . The Employment Retirement Income Security Act, or ERISA, limits the annual benefits that may be paid from a tax-qualified retirement plan. Accordingly, as permitted by ERISA, we have adopted the excess plan to maintain total benefits upon retirement at the levels shown in the table. 52 Credited Years of Service under Pension Plan for Named Executive Officers: Thomas W. Rabaut....................... 23 Peter C. Woglom........................ 27 Francis Raborn......................... 23 Arthur L. Roberts...................... 33 Frederick M. Strader................... 20
We also maintain a nonqualified thrift plan designed to provide select employees a benefit equal to the benefit the participant would receive under our 401(k) plan if the Internal Revenue Code and such plan did not require the exclusion of compensation above a certain level. All named executive officers are eligible to participate in the nonqualified thrift plan. 1998 Stock Option Plan During 1998, we adopted the 1998 Stock Option Plan, which authorizes the compensation committee to grant options to our executives and other key employees of our company and of our affiliates and any independent director. Under our plan 3,201,300 shares of our common stock were reserved for issuance at September 30, 2001. Options generally vest over a period of 10 years; however, vesting may be accelerated over 5 years if certain targets related to earnings and cash flow are met. Options granted in 1998 were at $4.44 per share and had an estimated grant date fair value of $2.00 per option. Options granted in 1999 were at $8.89 per share and had an estimated grant date fair value of $4.25 per option. Options were granted at $8.89 and $11.11 during the year ended December 31, 2000 and had an estimated weighted average fair value on the date of grant of $3.09. The weighted-average exercise price and weighted-average remaining contractual life of the stock options outstanding at December 31, 2000 was $4.61 eight years, respectively. As of September 30, 2001, 81,097 shares of our common stock were available for additional options that can be granted under the 1998 Stock Option Plan. Management Incentive Plan Our current management incentive plan for our senior managers was adopted in January 1998. The plan allows our senior managers to achieve performance based compensation in addition to base salary. Generally, target awards under the plan vary from 15% to 65% of base salary depending on level of seniority and overall performance of the individual and the relevant business unit. Actual awards, however, are not guaranteed and may range from zero to 200% of the applicable target award. Retention Bonus Plan In September 2001, our Board of Directors adopted a retention incentive program for our key employees in order to ensure their continuous full-time employment until the completion of specified transactions. We intend to amend this plan in order to accelerate certain benefits to certain key employees in connection with the consummation of this offering. Each of Messrs. Rabaut and Raborn are a party to this program, and are eligible to receive a special retention bonus of $1.6 million and $800,000, respectively for their continued employment. This program is in addition to, and does not in any way replace or reduce, any other compensation, bonus, stock or option program offered to any of our employees. Special Performance Bonus We paid special performance bonuses aggregating $11.1 million to some of our directors and key management in 2001, including special performance bonuses of $1.6 million to Mr. Rabaut; $800,000 to Mr. Woglom; $800,000 to Mr. Raborn; and $520,000 to Mr. Roberts. We intend to pay additional special performance bonuses to some of our directors and key management of approximately $5.4 million, including anticipated payments of $825,000 to Mr. Rabaut, $175,000 to Mr. Raborn, $113,750 to Mr. Roberts and $437,500 to Mr. Woglom in the fourth quarter of 2001. 53 Employment Agreements Each of Messrs. Rabaut, Raborn and Woglom entered into an employment agreement with us on May 21, 1999. Each agreement extends through December 31, 2002, and will automatically be extended for successive one year periods thereafter unless either party delivers notice within specified notice periods. Under each agreement, the executive receives a stated annual base salary and is eligible to participate in our discretionary management incentive plan. In addition to base salary, Mr. Rabaut is eligible to receive a bonus of up to 65% of base salary and each of Messrs. Raborn and Woglom are eligible to receive a bonus of up to 55% of base salary. Each of these employment agreements provides that upon termination of employment, either by us without cause or by the executive for good reason, each executive will be entitled to: . a payment equal to a multiple of the executive's base pay and target bonus. In the case of Mr. Woglom this severance period will last two years, while for each of Messrs. Raborn and Rabaut the severance period will last three years; and . the right to continue to participate in our health, life and accidental death and dismemberment and long-term disability benefits plan for one year to three years at the rates in effect for active employees. We also maintain a Severance Pay Plan that generally covers most salaried and non-union hourly employees, and provides severance payments in the event of the employee's involuntary termination of employment due to a reduction in force. Severance payments are calculated as a percentage, up to 100%, of base pay. 54 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Carlyle Management Fee In October 1997, we entered into a management agreement with TC Group Management, L.L.C., an affiliate of The Carlyle Group, for management and financial advisory services and oversight to be provided to us and our subsidiaries. The management agreement provides for the payment to Carlyle of an annual management fee of $2.0 million. In addition, in connection with our recapitalization in August 2001, we paid an aggregate fee of $3.5 million to Carlyle for their investment banking and consulting services. In addition, during 1998, we paid Carlyle a fee of $2.0 million for management services provided in 1997. Loans to Executive Officers In September 1998, Messrs. Raborn, Roberts and Kolovat purchased shares of our common stock pursuant to our employee stock purchase plan. We received promissory notes from each of Messrs. Raborn, Roberts and Kolovat for $250,000, $100,000 and $214,280, respectively, in connection with these purchases. Each of the promissory notes carried interest at 7.50% per year and the final payment was due in September 2003. Each of Messrs. Raborn, Roberts and Kolovat repaid all outstanding indebtedness in August 2001. Registration Rights Agreement We and our principal stockholder, Iron Horse Investors, L.L.C., entered into a registration rights agreement. Pursuant to that agreement, all current stockholders are entitled to registration rights. Holders of at least a majority of the shares of common stock held by these stockholders may require us to effect the registration of their shares of common stock from time to time pursuant to a demand. Such requirement is called a demand registration. We are required to pay all registration expenses in connection with the first eight demand registrations pursuant to the registration rights agreement. In addition, if we propose to register any of our common stock under the Securities Act, whether for our own account or otherwise, those stockholders are entitled to notice of the registration and are entitled to include their shares of common stock in that registration with all registration expenses paid by us. Notwithstanding the foregoing, we will not be obligated to effect a demand registration prior to 180 days after the effective date of this offering. Stockholders Agreements We and some of our stockholders entered into stockholder agreements that: . impose restrictions on their transfer of our shares; . require those stockholders to take certain actions upon the approval by stockholders party to the agreement holding a majority of the shares held by those stockholders in connection with a sale of the company; and . grant our principal stockholder the right to require other stockholders to participate pro rata in connection with a sale of shares by our principal stockholder. We plan to terminate these stockholder agreements upon the completion of this offering. Nomination of Directors We have entered into agreements with four affiliates of our principal stockholder, Iron Horse Investors, L.L.C., whereby we have agreed to designate one nominee to our Board of Directors on behalf of each of these entities. These agreements will remain in effect so long as Iron Horse owns greater than 20% of our voting stock. 55 Performance of Legal Services One of our directors, Robert M. Kimmitt, was a partner of Wilmer, Cutler & Pickering from May 1997 through February 2000, and was of counsel from February 2000 through August 2000. Wilmer, Cutler & Pickering rendered legal services to us from time to time throughout each of the last three fiscal years. Special Performance Bonus During 2001, we paid special performance bonuses to some of our directors and key management as described in "Management--Special Performance Bonus." Employment Agreements We have employment agreements with certain of our named executive officers as described in "Management--Employment Agreements." 56 PRINCIPAL AND SELLING STOCKHOLDERS Security Ownership of Certain Beneficial Owners and Management The following table provides summary information regarding the beneficial ownership of our outstanding capital stock as of November 16, 2001, for: . each person or group who beneficially owns more than 5% of our capital stock on a fully diluted basis; . each of the executive officers named in the Summary Compensation Table; . each of our directors; and . all of our directors and executive officers as a group. Beneficial ownership of shares is determined under the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. Except as indicated by footnote, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all shares of common stock held by them. Shares of common stock subject to options currently exercisable or exercisable within 60 days of November 16, 2001 are deemed outstanding for calculating the percentage of outstanding shares of the person holding these options, but are not deemed outstanding for calculating the percentage of any other person. Unless otherwise noted, the address for each director and executive officer is c/o United Defense Industries, Inc., 1525 Wilson Boulevard, Suite 700, Arlington, Virginia 22209.
Shares Owned Prior Shares Owned After the to the Offering Offering -------------------- --------------------- Name of Beneficial Owner Number Percentage Number Percentage ------------------------------------------------------- ---------- ---------- ---------- ---------- TCG Holdings, L.L.C. (1) (2)........................... 38,925,000 94.0% 27,599,502 54.5% William E. Conway, Jr. (2) (3)......................... 225,000 * 225,000 * Allan M. Holt (2) (3).................................. 45,000 * 45,000 * Peter J. Clare (2) (3)................................. 45,000 * 45,000 * Frank C. Carlucci (2) (3).............................. 45,000 * 45,000 * Robert M. Kimmitt (4).................................. 63,000 * 63,000 * J.H. Binford Peay, III................................. 45,000 * 45,000 * John M. Shalikashvili (5).............................. 25,714 * 25,714 * Thomas W. Rabaut (6)................................... 292,500 * 213,750 * Francis Raborn (7)..................................... 326,250 * 258,750 * Arthur L. Roberts (8).................................. 169,876 * 128,959 * Peter C. Woglom (9).................................... 157,500 * 130,901 * Frederick M. Strader................................... 191,250 * 191,250 * All Current Directors and Executive Officers as a Group (14 persons) (10)..................................... 1,775,378 4.3% 1,478,191 2.9%
-------- * Denotes less than 1% beneficial ownership (1)Carlyle Partners II, L.P., a Delaware limited partnership, Carlyle Partners III, L.P., a Delaware limited partnership, Carlyle International Partners II, L.P., a Cayman Islands limited partnership, Carlyle International Partners III, L.P., a Cayman Islands limited partnership, and certain additional partnerships formed by Carlyle (collectively, the "Investment Partnerships") and certain investors with respect to which TC Group, L.L.C. or an affiliate exercises investment discretion and management constitute all of the members of Iron Horse. TC Group, L.L.C. exercises investment discretion and control over the shares held by the Investment Partnership directly through its capacity as the sole general partner of certain of the Investment Partnerships or indirectly through its wholly-owned subsidiary TC Group II, L.L.C., the sole general partner of certain of the Investment Partnerships. TCG Holdings, L.L.C., a Delaware limited liability company, is the sole managing member of TC Group, L.L.C. William E. Conway, Jr., Daniel A. D'Aniello, and David M. Rubenstein, as the managing members of TCG Holdings, L.L.C., may be deemed to share beneficial ownership of the shares shown as beneficially owned by TCG Holdings, L.L.C. Such persons disclaim such beneficial ownership. (2)The address of such person is c/o The Carlyle Group, 1001 Pennsylvania Avenue, NW, Washington, D.C. 20004. (3)Individual also owns an interest in Iron Horse through Carlyle-UDLP Partners, L.P. and indirectly through such individual's interest as a member of TCG Holdings, L.L.C. (4)The number of shares owned does not include 2,250 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (5)The number of shares owned does not include 3,214 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (6)The number of shares owned does not include 157,500 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (7)The number of shares owned does not include 67,500 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (8)The number of shares owned does not include 43,875 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (9)The number of shares owned does not include 67,500 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (10)The number of shares owned does not include 524,089 shares of common stock subject to unvested options which are not currently exercisable or exercisable within 60 days of November 16, 2001. 57 Selling Stockholders The table below presents certain information regarding the beneficial ownership of our common stock outstanding as of November 16, 2001 (but without giving effect to the underwriters' exercise of the over-allotment options) by the selling stockholders.
Shares Owned Shares Owned Prior to the Offering Shares Being After the Offering - -------------------- Sold in the -------------------- Name of Beneficial Owner Number Percentage Offering Number Percentage ------------------------------------------ ---------- ---------- ------------ ---------- ---------- TCG Holdings, L.L.C....................... 38,925,000 94.0% 11,325,498 27,599,502 54.5% Thomas W. Rabaut (1)...................... 292,500 * 78,750 213,750 * Francis Raborn (2)........................ 326,250 * 67,500 258,750 * Arthur L. Roberts (3)..................... 169,876 * 40,917 128,959 * Peter C. Woglom (4)....................... 157,500 * 26,599 130,901 * David V. Kolovat (5)...................... 154,413 * 46,106 108,307 * Dennis A. Wagner (6)...................... 128,250 * 28,315 99,935 * Elmer L. Doty (7)......................... 52,875 * 9,000 43,875 * Keith B. Howe (8)......................... 88,875 * 24,877 63,998 * Heifetz-Halle Consulting Group............ 22,500 * 6,547 15,953 * Daniel A. D'Aniello....................... 225,000 * 65,465 159,535 * David M. Rubenstein....................... 225,000 * 65,465 159,535 * Jerome Powell............................. 16,875 * 4,910 11,965 * Morris Menken............................. 11,250 * 3,273 7,977 * Miriam Renee Jurgens Dupree............... 5,625 * 1,637 3,988 * Gene Dotson............................... 5,625 * 1,637 3,988 * Sharon & Brian Hall....................... 5,625 * 1,637 3,988 * John Harris............................... 5,625 * 1,637 3,988 * United Defense, L.P. Option Plan Trust (9) 100,957 * 50,230 50,727 *
-------- * Denotes less than 1% beneficial ownership (1)The number of shares owned does not include 157,500 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (2)The number of shares owned does not include 67,500 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (3)The number of shares owned does not include 43,875 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (4)The number of shares owned does not include 67,500 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (5)The number of shares owned does not include 40,500 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (6)The number of shares owned does not include 54,000 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (7)The number of shares owned does not include 87,750 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (8)The number of shares owned does not include 23,625 shares of common stock subject to unvested stock options which are not currently exercisable or exercisable within 60 days of November 16, 2001. (9)Of the 50,230 shares of common stock being sold, Messrs. Rabaut, Roberts, Woglom, Wagner and Doty have indirect economic interests in 6,355, 9,000, 22,500, 9,000 and 3,375 shares respectively, but they have no dispositive or voting control with respect to such shares. Pursuant to the terms of the trust, voting and dispositive control of the shares are held by designated employees of United Defense who do not participate in the trust. 58 DESCRIPTION OF CAPITAL STOCK Upon completion of the offering, our authorized capital stock will consist of 150,000,000 shares of common stock, par value $0.01 per share and 50,000,000 shares of preferred stock, par value $0.01 per share. Common Stock As of September 30, 2001, there were 40,739,551 shares of common stock outstanding held of record by 40 stockholders. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably those dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, our dissolution or winding up, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of the offering will be, fully-paid and nonassessable. Preferred Stock There are, and upon completion of the offering, there will be, no shares of preferred stock outstanding. The Board of Directors has the authority, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock, par value $0.01 per share, in one or more series and to fix the powers, preferences, privileges, rights and qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of the series, without any further vote or action by stockholders. We believe that the Board of Directors' authority to set the terms of, and our ability to issue, preferred stock will provide flexibility in connection with possible financing transactions in the future. The issuance of preferred stock, however, could adversely affect the voting power of holders of common stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control in us. We have no present plan to issue any shares of preferred stock. Certain provisions of our Bylaws and Delaware General Corporation Law Requirements For Advance Notification Of Stockholder Nominations And Proposals. Our bylaws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the Board of Directors or a committee of the board. Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware general corporation law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. 59 Registration Rights We and our principal stockholder, Iron Horse Investors, L.L.C., entered into a registration rights agreement. Pursuant to that agreement, all current stockholders are entitled to registration rights. Holders of at least a majority of these shares of common stock held by these stockholders may require us to effect the registration of their shares of common stock from time to time pursuant to a demand. Such requirement is called a demand registration. We are required to pay all registration expenses in connection with the first eight demand registrations pursuant to the registration rights agreement. In addition, if we propose to register any of our common stock under the Securities Act, whether for our own account or otherwise, those stockholders are entitled to notice of the registration and are entitled to include their shares of common stock in that registration with all registration expenses paid by us. Notwithstanding the foregoing, we will not be obligated to effect a demand registration prior to 180 days after the effective date of this offering. Transfer Agent and Registrar American Stock Transfer & Trust Company has been appointed as the transfer agent and registrar for our common stock. 60 DESCRIPTION OF CREDIT FACILITY In connection with our August 2001 recapitalization, we entered into a new senior secured credit facility with a syndicate of lending institutions led by Deutsche Bank Alex. Brown and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., one of the underwriters of this offering. The senior secured credit facility consists of: . a $100 million, six-year Term A loan facility; . a $500 million, eight-year Term B loan facility; and . a $200 million, six-year revolving credit facility, including sub-facilities for letters of credit and same day loans. Loans made pursuant to the Term A loan facility require equal quarterly amortization payments of $1.6 million until December 31, 2001 and thereafter in the amount of $4.4 million. Loans made pursuant to the Term B facility require quarterly amortization payments of $1.25 million, until June 30, 2002, and during each of the five years thereafter require equal quarterly amortization payments of $6.25 million. The remaining aggregate principal amount of loans under the Term B facility is subject to equal quarterly amortization payments during the seventh and eighth years. We intend to use our net proceeds of this offering to repay outstanding indebtedness under our senior secured credit facility, which would result in the reduction or elimination of some of these payments. Loans made pursuant to the revolving credit facility may be utilized for general corporate and working capital requirements. In addition, we may use up to $5 million of the proceeds from the revolving credit facility for other limited purposes. The revolving credit facility is also available for the issuance of letters of credit to support our obligations and the obligations of our subsidiaries. Maturities for letters of credit may not exceed three years, renew annually thereafter and, in any event, may not extend beyond the third business day prior to the maturity of the Term A loan facility. At no time may the aggregate principal amount of revolving loans together with any outstanding letters of credit and any unpaid drawings thereon exceed the commitments then in effect pursuant to the revolving credit facility. All outstanding loans under the senior secured credit facility are guaranteed by certain of our subsidiaries and are secured by a lien on all of our present and future, tangible and intangible assets and by a pledge of substantially all of our common stock and the equity interests of our domestic subsidiaries and two-thirds of certain of our foreign subsidiaries and joint ventures. On October 15, 2001, we entered into an amendment to our credit facility whereby all of our common stock pledged pursuant to the credit facility will be released upon the consummation of this offering. We have the option to pay interest on the credit facility at (i) the base rate in effect from time to time plus an applicable margin ranging from 2% to 2.25% or (ii) LIBOR plus an applicable margin between 3% and 3.25%, in each case depending on the type of loan. The applicable margin for each loan may be reduced if our leverage ratio decreases. Our senior secured credit facility also contains a number of negative covenants, including, among others, covenants that limit our ability to incur debt, acquire or dispose of assets, engage in mergers or acquisitions, create liens, make capital expenditures, make investments, pay dividends or enter into transactions with affiliates. In addition, our senior secured credit facility contains affirmative covenants, including, among others, covenants that require us to comply with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. Our credit facility also requires us to comply with certain financial tests and to maintain certain financial ratios on a consolidated basis. We must maintain a consolidated interest coverage ratio, a maximum leverage ratio and a minimum consolidated net worth ratio. Failure to satisfy any of the covenants would constitute an event of default under our senior secured credit facility. Our credit facility also includes other customary events of default, including, without limitation, a cross-default to other indebtedness, undischarged judgments, bankruptcy and change of control. 61 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS The following summary describes the material United States federal income and estate tax consequences of the ownership of common stock by a Non-U.S. Holder (as defined below) as of the date hereof. This discussion does not address all aspects of United States federal income and estate taxes that may be relevant to a Non-U.S. Holder of common stock, including the fact that in the case of a Non-U.S. Holder that is a partnership, the U.S. tax consequences of holding and disposing of our common stock may be effected by determinations made at the partner level. This discussion also does not address the foreign, state and local consequences that may be relevant to Non-U.S. Holders in light of their personal circumstances. Special rules may apply to certain Non-U.S. Holders, such as insurance companies, tax-exempt organizations, financial institutions, dealers in securities, holders of securities held as part of a "straddle," "hedge," or "conversion transaction," "controlled foreign corporations," "passive foreign investment companies," "foreign personal holding companies" and corporations that accumulate earnings to avoid U.S. federal income tax, that are subject to special treatment under the Internal Revenue Code. Such persons should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code, and regulations, rulings and judicial decisions thereunder as of the date hereof, and these authorities may be repealed, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. As used herein, a "U.S. Holder" of common stock means a holder that is (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless in the case of a partnership, U.S. Treasury Regulations provide otherwise, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source and (iv) a trust (X) if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons has the authority to control all substantial decisions of the trust or (Y) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person. A "Non-U.S. Holder" is a holder that is not a U.S. Holder. Dividends Dividends paid to a Non-U.S. Holder of common stock generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, where a tax treaty applies, are attributable to a United States permanent establishment of the Non-U.S. Holder, are not subject to the withholding tax, but instead are subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates. Certain certification and disclosure requirements must be complied with in order for effectively connected income to be exempt from withholding. Any such effectively connected dividends received by a foreign corporation may be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A Non-U.S. Holder of common stock who wishes to claim the benefit of an applicable treaty rate (and avoid back-up withholding as discussed below) for dividends paid will be required to satisfy applicable certification and other requirements. A Non-U.S. Holder of common stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service (the "IRS"). 62 Gain on Disposition of Common Stock A Non-U.S. Holder generally will not be subject to United States federal income tax with respect to gain recognized on a sale or other disposition of common stock unless (i) the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States, and, where a tax treaty applies, is attributable to a United States permanent establishment of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, or (iii) the Company is or has been a "U.S. real property holding corporation" for United States federal income tax purposes. A Non-U.S. Holder described in clause (i) above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates and, if it is a corporation, may be subject to the branch profits tax at a rate equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty. An individual Non-U.S. Holder described in clause (ii) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses (even though the individual is not considered a resident of the United States). The Company believes it is not and does not anticipate becoming a "U.S. real property holding corporation" for United States federal income tax purposes. Federal Estate Tax Common stock held by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Information Reporting and Backup Withholding The Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. A Non-US Holder will be subject to back-up withholding unless applicable certification requirements are met. Payment of the proceeds of a sale of common stock within the United States or conducted through certain U.S. related financial intermediaries is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a Non-U.S. Holder (and the payor does not have actual knowledge that the beneficial owner is a United States person) or the holder otherwise establishes an exemption. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished to the IRS. 63 SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell, or there is a perception they may sell, substantial amounts of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market following the offering, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Based on shares outstanding as of September 30, 2001, and including options exercised since that date, upon completion of the offering, we will have outstanding an aggregate of 50,663,088 shares of our common stock, assuming no exercise of outstanding options. Of these shares, all 21,100,000 shares sold in the offering will be freely tradeable without restriction or further registration under the Securities Act, unless the shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. In addition, 1,158,500 shares of common stock will be freely tradable pursuant to Rule 144, in some cases, subject to volume limitations and manner of sale requirements, or because they were issued pursuant to our registration statement on Form S-8. This leaves 28,404,588 shares eligible for sale in the public market, subject to volume limits and manner of sale requirements, upon the expiration of lockup agreements with our directors, officers and certain of our shareholders. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after the offering; or . the average weekly trading volume of our common stock on the New York Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Lock-Up Agreements All of our officers and directors and some of our stockholders holding substantially all of our common stock have entered into lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, including by way of any hedging or derivatives transaction, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, except for shares sold in this offering by the selling stockholders, for a period of 180 days after the date of this prospectus without the prior written consent of Lehman Brothers Inc. and Goldman, Sachs & Co. on behalf of the underwriters. Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares immediately after the effective date of the offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. 64 UNDERWRITING Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below has severally agreed to purchase from us and the selling stockholders the respective number of shares of common stock opposite their names below:
Underwriters Number of Shares ------------ ---------------- Lehman Brothers Inc................... 6,752,000 Goldman, Sachs & Co................... 6,752,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 4,325,500 Credit Suisse First Boston Corporation 3,270,500 ---------- Total........................ 21,100,000 ==========
The underwriting agreement provides that the underwriters' obligations to purchase shares of our common stock depends on the satisfaction of the conditions contained in the underwriting agreement, including: . the obligation to purchase all of the shares of our common stock, if any of the shares are purchased (other than those shares subject to the underwriters' over-allotment option, until that option is exercised); . if an underwriter defaults, purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated; . the representations and warranties made by us and the selling stockholders to the underwriters are true; . there is no material change in the financial markets; and . we and the selling stockholders deliver customary closing documents to the underwriters. The selling stockholders have granted the underwriters a 30-day option after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of 3,165,000 shares at the public offering price less underwriting discounts and commissions. The option may be exercised to cover over-allotments, if any, made in connection with the offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter's percentage underwriting commitment in the offering as indicated in the preceding table. The selling stockholders may be deemed to be underwriters. Shares sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to selected dealers may be sold at the public offering price less a selling concession not in excess of $0.68 per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $0.10 per share to other dealers. After the offering, the underwriters may change the public offering price and other offering terms. The following table summarizes the underwriting discounts and commissions we and the selling stockholders will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase 3,165,000 additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to us and the selling stockholders for the shares.
No Exercise Full Exercise ----------- ------------- Underwriting discounts and commissions to be paid by United Defense Industries, Inc.......................................................................... $10,545,000 $10,545,000 Underwriting discounts and commissions to be paid by selling stockholders...... $13,509,000 $17,117,100 Total....................................................................... $24,054,000 $27,662,100
65 The expenses of the offering that are payable by us are estimated to be $2.3 million. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "UDI". In connection with that listing, the underwriters have undertaken to sell the minimum number of shares to the minimum number of beneficial owners necessary to meet the New York Stock Exchange listing requirements. Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation among us, the underwriters and selling shareholders. The factors that the underwriters will consider in determining the public offering price include: . the history and prospects for the industry in which we compete; . the ability of our management and our business potential and earning prospects; . the prevailing securities markets at the time of this offering; and . the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act of 1934, as amended: . Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market; . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum; . Syndicate covering transactions involve purchases of common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, creating a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering; and . Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Neither we, the selling stockholders, nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we, the selling stockholders, nor any of the underwriters make representations that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. 66 The underwriters have informed us that they do not intend to confirm sales to discretionary accounts in excess of 5% of the shares offered by them. Each underwriter has represented, warranted and agreed that: (i) it has not offered or sold and, prior to the expiration of a period of six months from the closing date, will not offer or sell any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers at Securities Regulations 1995; (ii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the "FSMA")) received by it in connection with the issue or sale of any shares in circumstances in which section 21(1) of the FSMA does not apply to us; and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom. The shares may not be offered, sold, transferred or delivered in or from The Netherlands, as part of their initial distribution or as part of any re-offering, and neither this prospectus nor any other document in respect of the offering may be distributed or circulated in The Netherlands, other than to individuals or legal entities which include, but are not limited to, banks, brokers, dealers, institutional investors and undertakings with a treasury department, who or which trade or invest in shares in the conduct of a business or profession. We, our directors, officers, and stockholders holding substantially all our common stock have agreed, subject to specified exceptions, not to offer to sell, sell or otherwise dispose of, directly or indirectly, by way of any hedging or derivatives transaction, any shares of capital stock or any securities that may be converted into or exchanged for any shares of capital stock for a period of 180 days from the date of the prospectus without the prior written consent of Lehman Brothers Inc. and Goldman, Sachs & Co. We and the selling stockholders, subject to certain limitations, have agreed to indemnify, under certain circumstances, the underwriters against liabilities relating to this offering, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and liabilities incurred in connection with the directed share program referred to below, and to contribute, under certain circumstances, to payments that the underwriters may be required to make for these liabilities. At our request, the underwriters have reserved up to 1,266,000 shares of the common stock offered by this prospectus for sale pursuant to a directed share program to our employees, directors and friends at the initial public offering price on the cover page of this prospectus. These persons must commit to purchase no later than December 14, 2001. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Fidelity Capital Markets, a division of National Financial LLC, is acting as a selling agent in connection with this offering. A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on any underwriter's or selling group member's web site and any information contained in any other web site maintained by an underwriter or selling 67 group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors. Purchasers of the shares of our common stock offered by this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover of the prospectus. Accordingly, we urge you to consult a tax advisor with respect to whether you may be required to pay those taxes or charges, as well as any other tax consequences that may arise under the laws of the country of purchase. Lehman Commercial Paper, Inc., an affiliate of Lehman Brothers Inc., is a lender under our credit facility. Affiliates of certain of the underwriters have provided and may continue to provide investment banking and other advisory services to us, The Carlyle Group or affiliates of The Carlyle Group for which they receive customary compensation. This prospectus is not, and under no circumstances is to be construed as, an advertisement or a public offering of shares in Canada or any province or territory thereof. Any offer or sale of shares in Canada will be made only under an exemption from the requirements to file a prospectus supplement or prospectus and an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Latham & Watkins, 555 Eleventh Street, N.W. Suite 1000, Washington, D.C. 20004. Various legal matters relating to this offering will be passed upon for the underwriters by Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, as set forth in their report. We have included our financial statements in the prospectus and registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. 68 INDEX TO FINANCIAL STATEMENTS
UNITED DEFENSE INDUSTRIES, INC. Report of Ernst & Young LLP, Independent Auditors.................................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 2000 and September 30, 2001 (unaudited)...... F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000 and the nine months ended September 30, 2000 and 2001 (unaudited).......................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1999 and 2000 and the nine months ended September 30, 2001 (unaudited).................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 and the nine months ended September 30, 2000 and 2001 (unaudited).......................................... F-6 Notes to Consolidated Financial Statements........................................................... F-7
F-1 Report of Ernst & Young LLP, Independent Auditors Board of Directors United Defense Industries, Inc. We have audited the accompanying consolidated balance sheets of United Defense Industries, Inc. (a subsidiary of Iron Horse Investors, L.L.C.) and subsidiaries as of December 31, 1999 and 2000 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Defense Industries, Inc. and subsidiaries at December 31, 1999 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP February 1, 2001 McLean, VA F-2 United Defense Industries, Inc. Consolidated Balance Sheets (In thousands)
Pro Forma December 31, December 31, September 30, September 30, 1999 2000 2001 2001 ------------ ------------ ------------- ------------- (Unaudited -- Note 1) Assets Current assets: Cash and cash equivalents........................ $ 94,325 $ 113,357 $ 120,240 $ 28,211 Trade receivables................................ 57,198 109,705 119,429 119,429 Long-term contract inventories................... 254,750 259,238 348,183 348,183 Other current assets............................. 4,056 13,083 12,686 12,686 --------- --------- ---------- ---------- Total current assets................................ 410,329 495,383 600,538 508,509 Property, plant and equipment, net.................. 84,693 80,775 76,120 76,120 Intangible assets, net.............................. 220,274 162,340 147,460 147,460 Prepaid pension and postretirement benefit cost..... 119,883 123,100 126,684 126,684 Restricted cash..................................... -- 23,528 14,623 14,623 Other assets........................................ 17,963 10,694 7,966 7,966 --------- --------- ---------- ---------- Total assets........................................ $ 853,142 $ 895,820 $ 973,391 $ 881,362 ========= ========= ========== ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of long-term debt................ $ 23,086 $ 23,086 $ 27,650 $ 27,650 Accounts payable, trade and other................ 64,639 86,117 87,012 87,012 Advanced payments................................ 303,065 342,394 395,969 395,969 Accrued and other liabilities.................... 91,340 104,168 94,899 94,899 --------- --------- ---------- ---------- Total current liabilities........................ 482,130 555,765 605,530 605,530 Long-term liabilities: Long-term debt, net of current portion........... 326,757 246,491 572,350 572,350 Accrued pension and postretirement benefit cost.. 5,075 28,515 21,939 21,939 Other liabilities................................ 16,013 23,148 20,994 20,994 --------- --------- ---------- ---------- Total liabilities................................... 829,975 853,919 1,220,813 1,220,813 Commitments and contingencies (Notes 8 & 9) Stockholders' Equity (Deficit): Common Stock $.01 par value, 45,000,000 shares authorized; 40,595,679 shares, 40,582,501 shares and 40,739,551 shares issued and outstanding at December 31, 1999 and 2000 and September 30, 2001, respectively................................ 406 406 407 407 Additional paid-in capital.......................... 180,019 179,805 -- -- Stockholders' loans................................. (1,339) (1,236) -- -- Retained deficit.................................... (155,919) (137,074) (243,494) (335,523) Accumulated other comprehensive loss................ -- -- (4,335) (4,335) --------- --------- ---------- ---------- Total stockholders' equity (deficit)................ 23,167 41,901 (247,422) (339,451) --------- --------- ---------- ---------- Total liabilities and stockholders' equity (deficit) $ 853,142 $ 895,820 $ 973,391 $ 881,362 ========= ========= ========== ==========
See accompanying notes. Amounts are as restated (Note 2). F-3 United Defense Industries, Inc. Consolidated Statements of Operations (In thousands, except per share data)
Nine Months Ended Year Ended December 31, September 30, ---------------------------------- ------------------ 1998 1999 2000 2000 2001 ---------- ---------- ---------- -------- -------- (Unaudited) Revenue: Sales..................................... $1,217,555 $1,213,526 $1,183,886 $867,426 $913,863 Costs and expenses: Cost of sales............................. 1,099,291 991,907 943,892 687,801 728,836 Selling, general and administrative expenses................................ 172,888 167,877 173,694 129,681 131,140 Research and development.................. 13,021 12,782 15,760 12,287 16,418 ---------- ---------- ---------- -------- -------- Total expenses........................ 1,285,200 1,172,566 1,133,346 829,769 876,394 ---------- ---------- ---------- -------- -------- (Loss) income from operations................ (67,645) 40,960 50,540 37,657 37,469 Other income (expense): Earnings (loss) related to investments in foreign affiliates...................... 1,647 1,639 (1,262) (460) 9,187 Interest income........................... 1,396 1,820 4,152 2,672 4,621 Interest expense.......................... (52,155) (38,835) (29,265) (23,163) (19,215) ---------- ---------- ---------- -------- -------- Total other expense.......................... (49,112) (35,376) (26,375) (20,951) (5,407) ---------- ---------- ---------- -------- -------- (Loss) income before income taxes and extraordinary item......................... (116,757) 5,584 24,165 16,706 32,062 Provision for income taxes................... 5,841 2,646 6,000 2,224 6,682 ---------- ---------- ---------- -------- -------- (Loss) income before extraordinary item...... (122,598) 2,938 18,165 14,482 25,380 Extraordinary item--net gain (loss) from extinguishment of debt..................... -- -- 680 680 (22,599) ---------- ---------- ---------- -------- -------- Net (loss) income............................ $ (122,598) $ 2,938 $ 18,845 $ 15,162 $ 2,781 ========== ========== ========== ======== ======== Earnings per common share--basic: (Loss) income before extraordinary item... $ (3.08) $ 0.07 $ 0.45 $ 0.36 $ 0.62 Extraordinary item........................ -- -- 0.01 0.01 (0.55) ---------- ---------- ---------- -------- -------- Net (loss) income......................... $ (3.08) $ 0.07 $ 0.46 $ 0.37 $ 0.07 ========== ========== ========== ======== ======== Earnings per common share--diluted: (Loss) income before extraordinary item... $ (3.08) $ 0.07 $ 0.43 $ 0.34 $ 0.59 Extraordinary item........................ -- -- 0.01 0.01 (0.53) ---------- ---------- ---------- -------- -------- Net (loss) income......................... $ (3.08) $ 0.07 $ 0.44 $ 0.35 $ 0.06 ========== ========== ========== ======== ======== Unaudited pro forma earnings per common share--diluted (Note 1): Net income (loss)......................... $ 0.36 $ 0.05 ========== ========
See accompanying notes. Amounts are as restated (Note 2). F-4 United Defense Industries, Inc. Consolidated Statements of Stockholders' Equity (Deficit) (In thousands)
Accumulated Additional other Common Paid-In Retained Comprehensive Stockholders' Stock Capital Deficit Loss Loans Total ------ ---------- --------- ------------- ------------- --------- Balance, December 31, 1997...... $390 $ 172,610 $ (36,259) $ -- $ -- $ 136,741 Issuance of Common Stock........ 16 7,380 -- -- (1,339) 6,057 Net loss for the year ended December 31, 1998....... -- -- (122,598) -- -- (122,598) ---- --------- --------- ------- ------- --------- Balance, December 31, 1998...... 406 179,990 (158,857) -- (1,339) 20,200 Issuance of Common Stock........ -- 29 -- -- -- 29 Net income for the year ended December 31, 1999....... -- -- 2,938 -- -- 2,938 ---- --------- --------- ------- ------- --------- Balance, December 31, 1999...... 406 180,019 (155,919) -- (1,339) 23,167 Issuance of Common Stock........ -- 45 -- -- 50 95 Repurchase of Common Stock...... -- (259) -- -- 53 (206) Net income for the year ended December 31, 2000....... -- -- 18,845 -- -- 18,845 ---- --------- --------- ------- ------- --------- Balance, December 31, 2000...... 406 179,805 (137,074) -- (1,236) 41,901 Issuance of Common Stock........ 1 697 -- -- -- 698 Payment of stockholders' loans.. -- -- -- -- 1,236 1,236 Cash dividends ($7.11 per share) -- (180,502) (109,201) -- -- (289,703) Net foreign currency translation adjustment.................... -- -- -- (2,108) -- (2,108) Cumulative effect of change in accounting principle-foreign currency hedges............... -- -- -- (951) -- (951) Change in fair value of foreign currency hedges............... -- -- -- (1,276) -- (1,276) Net income for the nine months ended September 30, 2001...... -- -- 2,781 -- -- 2,781 --------- Total comprehensive loss........ (1,554) ---- --------- --------- ------- ------- --------- Balance, September 30, 2001 (unaudited)................... $407 $ -- $(243,494) $(4,335) $ -- $(247,422) ==== ========= ========= ======= ======= =========
See accompanying notes. Amounts are as restated (Note 2). F-5 United Defense Industries, Inc. Consolidated Statements of Cash Flows (In thousands)
Nine Months Ended Years Ended December 31, September 30 ------------------------------ ------------------- 1998 1999 2000 2000 2001 --------- --------- -------- -------- --------- (Unaudited) Operating activities Net (loss) income....................................................... $(122,598) $ 2,938 $ 18,845 $ 15,162 $ 2,781 Adjustments to reconcile net (loss) income to cash provided by operating activities: Depreciation......................................................... 83,153 55,528 23,882 18,073 15,797 Amortization......................................................... 91,895 72,408 68,422 52,374 36,947 Amortization of financing costs...................................... 5,660 5,791 2,759 2,394 3,183 Net (gain) loss from early extinguishment of debt.................... -- -- (680) (680) 22,599 Other................................................................ 5,291 1,123 -- -- -- Changes in assets and liabilities: Trade receivables.................................................... 30,452 7,197 (35,954) (33,231) (9,724) Inventories.......................................................... 76,030 (407) 11,608 27,486 (88,945) Other assets......................................................... 1,478 1,195 4,881 4,892 3,695 Prepaid pension and postretirement benefit cost...................... 15,519 4,029 (3,217) (5,299) (3,584) Accounts payable, trade and other.................................... (5,144) (23,858) 9,525 (19,534) 895 Advanced payments.................................................... (3,006) 44,670 (9,522) (20,525) 53,575 Accrued and other liabilities........................................ 14,360 28,554 3,125 5,655 (13,981) Accrued pension and postretirement benefit cost...................... 4,212 (9,535) 1,672 (305) (6,576) --------- --------- -------- -------- --------- Cash provided by operating activities................................... 197,302 189,633 95,346 46,462 16,662 --------- --------- -------- -------- --------- Investing activities Capital spending..................................................... (24,020) (25,246) (19,721) (11,717) (13,318) Disposal of property, plant and equipment............................ 7,298 1,532 560 385 289 Adjustment to purchase price of business............................. 16,074 -- -- -- -- Purchase of Barnes & Reinecke, net of $1.2 million cash acquired..... -- -- (1,634) (1,634) -- Purchase of Bofors Weapon Systems, net of $45.6 million cash acquired............................................................ -- -- 23,663 14,007 -- --------- --------- -------- -------- --------- Cash (used in) provided by investing activities......................... (648) (23,714) 2,868 1,041 (13,029) --------- --------- -------- -------- --------- Financing activities Payments on long-term debt........................................... (152,814) (157,143) (79,071) (73,299) (269,577) Proceeds from senior secured credit facility......................... -- -- -- -- 600,000 Payment of premium on retirement of subordinated debt................ -- -- -- -- (18,074) Payment of stockholders' loans....................................... -- -- -- -- 1,236 Dividend payments.................................................... -- -- -- -- (289,703) Payments for financing costs......................................... -- -- -- -- (19,222) Proceeds from sale of common stock................................... 6,057 29 95 95 698 Repurchase of common stock........................................... -- -- (206) (205) -- --------- --------- -------- -------- --------- Cash (used in) provided by financing activities......................... (146,757) (157,114) (79,182) (73,409) 5,358 --------- --------- -------- -------- --------- Effect of exchange rate changes on cash................................. -- -- -- -- (2,108) --------- --------- -------- -------- --------- Increase (decrease) in cash and cash equivalents........................ 49,897 8,805 19,032 (25,906) 6,883 Cash and cash equivalents, beginning of period.......................... 35,623 85,520 94,325 94,325 113,357 --------- --------- -------- -------- --------- Cash and cash equivalents, end of period................................ $ 85,520 $ 94,325 $113,357 $ 68,419 $ 120,240 ========= ========= ======== ======== =========
See accompanying notes. Amounts are as restated (Note 2). F-6 United Defense Industries, Inc. Notes to Consolidated Financial Statements 1. Basis of Presentation and Recapitalization United Defense Industries, Inc. (the "Company") is a subsidiary of Iron Horse Investors, L.L.C. ("Iron Horse") and was formed for the primary purpose of facilitating the acquisition of United Defense, L.P. ("UDLP") by Iron Horse. Iron Horse is owned by an investment group led by The Carlyle Group ("Carlyle"). On October 6, 1997, the Company acquired 100% of the partnership interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation ("Harsco") (the "Sellers"). The Company's business is operated in a single reportable segment involving the design, development and production of combat vehicles, artillery, naval guns, missile launchers and precision munitions used by the U.S. Department of Defense and allied militaries around the world. The Company believes its operating results are driven principally by the business activities related to its major military programs. Currently the Company is the sole-source, prime contractor to the U.S. Department of Defense for many of these programs. The financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. In August 2001, the Company completed a recapitalization that included a refinancing of all of the existing indebtedness. In connection with the refinancing, the Company entered into a new senior secured credit facility consisting of $600 million term loans and a $200 million revolving credit facility (see Note 8). The Company used a portion of the proceeds from the term loans to pay a $289.7 million dividend to the holders of its common stock. In addition, a portion of the proceeds from the term loans was used to complete a tender offer for the remaining $182.8 million outstanding principal amount of the 8.75% senior subordinated notes due 2007. The extinguishment of the existing debt resulted in a net loss of $22.6 million, reported as an extraordinary item, which consisted of an $18.1 million tender premium paid to the debt holders and a write-off of $4.5 million in unamortized finance costs. The Company approved an additional dividend of approximately $92.0 million to the holders of common stock which was paid on November 26, 2001. The pro forma September 30, 2001 balance sheet takes into effect the dividend as if it was paid as of September 30, 2001 with the Company's existing cash at that date. In accordance with SEC Staff Accounting Bulletin No. 55, pro forma earnings per common share gives effect to the issuance of the shares sold by the Company in this offering as if those shares were issued on January 1, 2000 and used to fund a portion of the dividend paid in August 2001. On November 26, 2001, the Board of Directors approved a 2.25 to 1 stock dividend on the Company's common stock to be effective immediately prior to the completion of the Company's planned initial public offering. The impact of the stock dividend has been retroactively applied to all periods presented. Upon completion of the offering, the authorized capital stock will increase to 150,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company's financial position as of September 30, 2001, and the results of its operations and cash flows for the periods ended September 30, 2001 and 2000. The results of operations are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 2. Summary of Significant Accounting Policies Reclassifications and Restatement The Company's previously reported financial statements for 1998 through 2001 have been restated to account for the Company's investment in a Turkish joint venture under the equity method. F-7 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) The impact on operating results was as follows:.
Nine Months Ended Year Ended December 31, September 30, --------------------------- ----------------- 1998 1999 2000 2000 2001 --------- ------- --------- --------- ------- (in thousands, except per share data) (Decrease) increase Earnings related to investments in foreign affiliates............... $ (4,561) $ 1,106 $ (4,181) $ (3,136) $ 2,770 Net (loss) income.................. (2,591) 1,397 (2,800) (2,100) 4,446 Earnings per common share - basic Net (loss) income............... (0.07) 0.03 (0.07) (0.05) 0.11 Earnings per common share - diluted Net (loss) income............... (0.07) 0.03 (0.07) (0.05) 0.10
This change also resulted in certain reclassifications on the balance sheet and income statement. The Company had previously separately reported intangible assets related to the investment and an accrual related to a potential offset obligation (see Note 9), which are now included in the investment account within other assets on the balance sheet. On the income statement, certain amortization costs included in selling, general and administrative expenses related to the investment were reclassified to earnings related to investments in foreign affiliates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, in particular, estimates of contract cost and revenues used in the earnings recognition process. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of investments with initial maturities of three months or less. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is provided principally on the sum-of-the-years digits and straight-line methods over estimated useful lives of the assets (land improvements--twenty years; buildings--twenty to thirty-five years; and machinery and equipment--two to twelve years). Maintenance and repairs are expensed as incurred. Expenditures that extend the useful life of property, plant and equipment or increase its productivity are capitalized and depreciated. Long-lived Assets, Including Intangible Assets and Goodwill The Company evaluates on a quarterly basis its long-lived assets to be held and used, including certain identifiable intangible assets and goodwill, to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company would use an estimate of the undiscounted value of expected future operating cash flows to determine whether the asset is recoverable and measure the amount of any impairment as the difference between the carrying amount of the asset and its estimated fair value. F-8 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) Investments in Affiliated Companies The Company's investment in 51% owned foreign joint ventures in Turkey and Saudi Arabia are accounted for by using the equity method because the Company does not control the joint ventures although it has the ability to exercise significant influence over their operating and financial policies. Equity in earnings from these investments was $1.6 million, $1.6 million and $(1.3) million for the years ended December 31, 1998, 1999 and 2000, and $(.5) million and $9.2 million for the nine months ended September 30, 2000 and 2001. The following table summarizes financial information for these joint ventures (in thousands):
December 31, September 30, ----------------- ------------- 1999 2000 2001 - -------- -------- ------------- Current assets........ $ 81,910 $161,902 $140,307 Noncurrent assets..... 41,195 32,806 25,292 Current liabilities... 120,917 199,577 156,232 Long-term liabilities. 2,031 975 1,614
Nine months ended Year ended December 31, September 30, ------------------------- ----------------- 1998 1999 2000 2000 2001 - -------- -------- ------- ------- -------- Sales......... $131,531 $127,115 $76,735 $67,263 $ 54,365 Cost of sales. 92,364 89,447 61,053 53,037 34,512 Net income.... 17,627 16,490 (2,486) (902) 18,028
The difference between the carrying amounts of the joint ventures recorded by the Company and its proportionate share of the underlying equity in the net assets of the joint ventures was $7.2 million and $5.6 million as of December 31, 1999 and 2000, respectively. The difference relates to the step up in the carrying amount of the investments to their fair value in connection with the application of purchase accounting for the acquisition of UDLP in 1997, which is being amortized over a period of up to five years based on the earnings in the joint ventures recognized by the Company, consistent with the valuation method used to determine the purchase price adjustment. Restricted Cash Restricted cash consists mainly of cash held in escrow as required under the Bofors purchase agreement (See note 3). The restricted cash relates to certain letters of credit, and the restriction will expire upon release of the former owners of Bofors as guarantors under the letters of credit. Advanced Payments Advanced payments by customers for deposits on orders not yet billed and progress payments on contracts-in-progress are recorded as current liabilities. Revenue and Profit Recognition for Contracts-in-Progress The Company recognizes sales on most production contracts as deliveries are made or accepted. Gross margin on sales is based on the estimated margin to be realized over the life of the related contract. Sales under cost reimbursement contracts for research, engineering, prototypes, repair and maintenance and certain other contracts are recorded as costs are incurred and include estimated fees in the proportion that costs incurred to F-9 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) date bear to total estimated costs. Changes in estimates for sales and profits are recognized in the period in which they are determinable using the cumulative catch-up method. Claims are considered in the estimated contract performance at such time as realization is probable. Any anticipated losses on contracts (i.e., cost of sales exceeds sales) are charged to operations as soon as they are determinable. At December 31, 1999 and 2000, included in trade receivables are $8.1 million and $7.3 million related to contractual revenue that had not been billed to customers. These amounts are generally billable within the following year. Stock-Based Compensation Provided the option price is not less than fair value of the common stock as estimated by management at the date an option is granted, the Company records no compensation expense in its consolidated statements of operations. See Note 10 for the pro forma effect on operating results had the Company recorded compensation expense for the fair value of stock options. No compensation expense has been recognized related to stock option grants. Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws expected to be effective when these differences reverse. Changes in Accounting Principle Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The statement requires that an entity recognize all derivatives as either assets or liabilities. The Company's subsidiary Bofors had forward exchange contracts with a notional contract value of $14.4 million at December 31, 2000. These contracts which were designated as cash flow hedges were entered into to hedge firm commitments related to purchases or sales denominated in foreign currencies. The fair value of the contracts was a liability of $0.95 million at December 31, 2000. The transition adjustment to implement this new standard on January 1, 2001, which is presented as a cumulative effect of change in accounting principle, and the subsequent change in market value of $1.3 million for the nine months ended September 30, 2001 were charged to accumulated other comprehensive loss within stockholders' equity. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", (the "Statements") effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statements is expected to result in an increase in net income of approximately $4 million in 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. F-10 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) 3. Business Purchase On October 6, 1997, the Company acquired 100% of the partnership interests of UDLP and certain other related business assets of FMC. The purchase price including expenses was $864 million after an adjustment of $16 million agreed to during 1998. The Company financed the acquisition through a cash equity investment and debt. The excess purchase price over the book value of the net assets acquired in the amount of $733 million was allocated to inventory; property, plant and equipment; other tangible assets; and intangible assets based on management's estimate of their fair values. The excess purchase price over the fair value of the net assets acquired was allocated to goodwill. On March 6, 2000, the Company acquired all of the outstanding stock of Barnes & Reinecke, Inc. ("BRI"), a subsidiary of Allied Research Corporation ("ARC"), headquartered in Arlington Heights, Illinois. BRI specializes in providing systems technical support and performance upgrades of defense equipment for U.S. and foreign governments. BRI retained its current management structure and became a wholly owned subsidiary of the Company. As consideration for the purchase, the Company paid BRI's former owner, ARC, $3.7 million in cash and notes. The transaction was accounted for as a purchase. Accordingly, the financial statements reflect the results of operations of BRI since the date of acquisition. On September 6, 2000, the Company acquired all of the outstanding stock of Bofors Defence ("Bofors") through a newly-created wholly-owned Swedish subsidiary of the Company, Bofors Defense Holding AB. The acquisition was structured so that Bofors will be an indirectly wholly owned Swedish subsidiary of the Company. As consideration for the purchase, the Company paid Bofors' former owner, Celsius AB, 187.3 million Swedish Krona (approximately US $19.4 million), which was determined based on arm's length negotiation. The acquisition was accounted for as a purchase. Accordingly, the financial statements reflect the results of operations of Bofors since the date of acquisition. Bofors produces artillery systems, air defense and naval guns, combat vehicle turrets and smart munitions. Although the Swedish government is the primary customer, Bofors is dependent on exports for approximately half of its total sales. The unaudited pro forma results below assume the Bofors acquisition occurred at the beginning of each year presented (in thousands, except per share data).
1999 2000 ---------- ---------- Sales................................... $1,470,016 $1,270,904 Net income before extraordinary item.... 10,073 18,618 Net income.............................. 10,073 19,298 Basic earnings per share: Net income before extraordinary item. 0.25 0.46 Net income........................... 0.25 0.48 Diluted earnings per share: Net income before extraordinary item. 0.24 0.44 Net income........................... 0.24 0.45
The unaudited pro forma combined results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of the year indicated or of future operations under the ownership and management of the Company. 4. Inventories The majority of the Company's inventories are related to contracts in process and are recorded at cost determined on a LIFO basis. Inventory costs include manufacturing overhead. The current replacement cost of LIFO inventories exceeded their recorded values by approximately $5.2 million at December 31, 1998 and 1999, and $12.6 million at December 31, 2000. F-11 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) 5. Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands):
December 31 -------------------- 1999 2000 - --------- --------- Buildings.......................... $ 39,978 $ 42,413 Machinery and equipment............ 166,257 175,501 Land and improvements.............. 8,126 8,338 Construction in progress........... 7,754 7,848 --------- --------- 222,115 234,100 Less: accumulated depreciation..... (137,422) (153,325) --------- --------- Property, plant and equipment, net. $ 84,693 $ 80,775 ========= =========
6. Intangible Assets Intangible assets consist of the following (in thousands):
December 31 -------------------- 1999 2000 - --------- --------- Software and other intangibles..... $ 39,752 $ 42,065 Firm business and ongoing programs. 225,103 225,103 Goodwill........................... 115,662 123,796 --------- --------- 380,517 390,964 Less: accumulated amortization..... (160,243) (228,624) --------- --------- Net intangible assets.............. $ 220,274 $ 162,340 ========= =========
The Company's software and other intangibles are being amortized over their estimated useful lives on a straight-line basis over three to five years or using other methods based on revenues of related contracts or programs. The excess of purchase cost over the fair value of the net assets acquired (goodwill) that resulted from the application of purchase accounting for the acquisition of UDLP is being amortized over thirty years. 7. Pensions and Other Postretirement Benefits The majority of the Company's domestic employees are covered by retirement plans. Plans covering salaried employees provide pension benefits based on years of service and compensation. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The Company's funding policy is to make contributions based on the projected unit credit method and to limit contributions to amounts that are currently deductible for tax purposes. With the exception of Bofors, most of the Company's employees are also covered by postretirement health care and life insurance benefit programs. Employees generally become eligible to receive benefits under these plans after they retire when they meet minimum retirement age and service requirements. The cost of providing most of these benefits is shared with retirees. The Company has reserved the right to change or eliminate these benefit plans. Bofors has a statutory pension obligation of $23.0 million which is included in "accrued pension and postretirement benefit cost" on the consolidated balance sheet at December 31, 2000. Bofors pension obligation is administered by an agent of the Swedish government using methods and assumptions different from those used to determine domestic amounts. Accordingly, the following tables do not include this liability. F-12 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) The change in benefit obligation and plan assets of the plans and prepaid or accrued pension and postretirement costs recognized in the balance sheets at December 31, 1999 and 2000 are as follows (in thousands):
Pension Benefits Postretirement Benefits - -------------------- ---------------------- 1999 2000 1999 2000 - --------- --------- -------- -------- Change in benefit obligation Benefit obligation at beginning of year............ $ 442,651 $ 422,314 $ 54,795 $ 49,187 Service cost....................................... 13,747 14,256 1,489 1,260 Interest cost...................................... 27,982 32,847 3,420 3,565 Net benefits paid, including settlements........... (25,174) (22,895) (5,594) (4,486) Actuarial (gain) loss.............................. (38,130) 13,309 (4,923) (296) Plan amendments.................................... 1,238 11,803 -- -- --------- --------- -------- -------- Benefit obligation at end of year.................. 422,314 471,634 49,187 49,230 Change in plan assets Fair value of plan assets at beginning of year..... 548,003 537,769 60,412 51,828 Actual return on plan assets....................... 13,874 78,974 (6,558) 11,581 Employer contributions............................. 1,066 958 3,568 2,893 Net benefits paid, including settlements........... (25,174) (22,895) (5,594) (4,486) --------- --------- -------- -------- Fair value of plan assets at end of year........... 537,769 594,806 51,828 61,816 --------- --------- -------- -------- Funded status...................................... 115,455 123,945 2,641 12,586 Unrecognized actuarial (gain) loss................. (6,012) (25,029) (1,514) (8,418) Unrecognized prior service cost.................... 4,238 14,528 -- -- --------- --------- -------- -------- Net amount recognized.............................. $ 113,681 $ 113,444 $ 1,127 $ 4,168 ========= ========= ======== ======== Amounts recognized in the consolidated balance sheet consist of: Prepaid pension and postretirement benefit cost. $ 118,756 $ 118,932 $ 1,127 $ 4,168 Accrued pension and postretirement benefit cost. (5,075) (5,488) -- -- --------- --------- -------- -------- Net amount recognized.............................. $ 113,681 $ 113,444 $ 1,127 $ 4,168 ========= ========= ======== ========
The following table summarizes the assumptions used in the determination of net pension and postretirement benefit costs and benefit obligations for the years ended December 31, 1998, 1999 and 2000:
Year ended December 31, ---------------------- 1998 1999 2000 ---- ---- ---- Weighted-average assumptions Discount rate................. 6.50% 7.50% 7.50% Expected return on plan assets 9.00% 9.00% 9.00% Rate of compensation increase. 3.50% 5.00% 5.00%
F-13 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) The following tables show the components of the net periodic benefit cost (in thousands):
Year ended December 31, ---------------------------- 1998 1999 2000 Pension Benefits -------- -------- -------- Service cost................................. $ 11,751 $ 13,747 $ 14,256 Interest cost................................ 27,017 27,982 32,847 Expected return on plan assets............... (43,080) (45,213) (47,904) Net amortization and recognized losses....... 703 1,324 1,993 Special termination benefits and curtailments 27,500 650 -- -------- -------- -------- Net periodic benefit cost (income)........... $ 23,891 $ (1,510) $ 1,192 ======== ======== ======== Year ended December 31, ---------------------------- 1998 1999 2000 Postretirement benefits -------- -------- -------- Service cost................................. $ 1,382 $ 1,489 $ 1,260 Interest cost................................ 3,515 3,420 3,565 Expected return on plan assets............... (4,422) (4,797) (4,938) Net amortization and recognized losses....... -- -- (35) -------- -------- -------- Net periodic benefit cost(income)............ $ 475 $ 112 $ (148) ======== ======== ========
Pension special termination benefits and curtailments cost relates to various early retirement incentive and involuntary workforce reduction programs related to the Company's downsizing and consolidation of operations. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $6.7 million, $3.2 million and zero, respectively, at December 31, 1999 and $12.6 million, $6.8 million and zero, respectively, at December 31, 2000. For measurement purposes, a 4% annual rate of increase in the per capita cost of covered health care benefits is assumed for 2001 and future years. Assumed health care cost trend rates have an effect on the amounts reported for the postretirement health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
1% Increase 1% Decrease ----------- ----------- Effect on total of service and interest cost components $ 159 $ (132) Effect on the postretirement benefit obligation........ $1,296 $(1,097)
8. Long-term Debt Borrowings under long-term debt arrangements are as follows (in thousands):
December 31 September 30 ----------------- ------------ 1999 2000 2001 -------- -------- ------------ Senior secured credit facilities $149,843 $ 86,757 $600,000 Senior subordinated notes....... 200,000 182,820 -- -------- -------- -------- 349,843 269,577 600,000 Less: current portion........... 23,086 23,086 27,650 -------- -------- -------- $326,757 $246,491 $572,350 ======== ======== ========
F-14 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) Cash paid for interest was $45.4 million, $36.2 million and $26.5 million for the years ended December 31, 1998, 1999 and 2000. $725 Million Senior Secured Credit Facility through August 2001 In October 1997, the Company entered into a senior secured credit facility that included $495 million of term loan facilities and a $230 million revolving credit facility. Outstanding borrowings on the term loan were $149.8 million and $86.8 million at December 31, 1999 and 2000, respectively. The term loan facilities bear interest at variable rates with a weighted average rate of 8.82% and 7.91% at December 31, 1999 and 2000, respectively. These loans are due through 2006 and provide for quarterly principal payments. The revolving credit facility provides for loans and letters of credit and matures in 2003. The Company has outstanding letters of credit under the facility of $142 million at December 31, 2000. There was $88 million available under the revolving credit facility at December 31, 2000. The Company is obligated to pay a fee of 0.25% on the unused revolving credit facility. Amounts outstanding under the senior secured credit facility are secured by a lien on all the assets of the Company and its domestic subsidiaries. Mandatory prepayments and reductions of outstanding principal amounts are required upon the occurrence of certain events. The senior secured credit facility contains customary covenants restricting the incurrence of debt, encumbrances on and sales of assets, limitations on mergers and certain acquisitions, limitations on changes in control, provision for the maintenance of certain financial ratios, and various other financial covenants and restrictions. As described below, this credit facility was replaced with a new $800 million senior secured credit facility in August 2001. $200 Million Senior Subordinated Notes through August 2001 In October 1997, the Company issued $200 million of senior subordinated notes. The senior subordinated notes are unsecured, bear interest at 8.75% payable semiannually, and mature in 2007. The payment of principal and interest is subordinated in right of payment to all senior debt. The senior subordinated notes are not redeemable other than in connection with a public equity offering or a change in control prior to November 2002, at which time the notes may be redeemed at a premium, initially at 104.375% of the principal amount. The senior subordinated notes have customary covenants for subordinated debt facilities including the right to require repurchase upon a change in control, restrictions on payment of dividends, and restrictions on the acquisition of equity interests by the Company. The Company received authorization from its bank-lending group in February 1999 to purchase up to $50 million of the senior subordinated notes. During 2000 the Company purchased approximately $17 million of its senior subordinated notes in the open market. As described below, in August 2001, a portion of the proceeds from a new $800 million senior secured credit facility was used to complete a tender offer for the outstanding senior subordinated notes. The extinguishment of the F-15 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) debt resulted in a net loss of $22.6 million, reported as an extraordinary item, which consisted of an $18.1 million tender premium paid to the debt holders and a $4.5 million write-off of related unamortized financing costs. $800 Million Senior Secured Credit Facility In August 2001, the Company entered into a credit facility with various banks that included $600 million of term loan facilities and a $200 million revolving credit facility. Outstanding borrowings on the new term loan facilities were $600 million at September 30, 2001. The facilities bear interest at variable rates with a weighted average rate of 6.78% at September 30, 2001. These loans are due through 2009 and provide for quarterly principal and interest payments. The revolving credit facility provides for loans and letters of credit and matures in 2007. The Company has outstanding letters of credit under the facility of approximately $118 million at September 30, 2001, and there was $82 million available under the revolving credit facility at September 30, 2001. The Company is obligated to pay a fee of 0.50% on the unused revolving credit facility. Amounts outstanding under the senior secured credit facility are secured by a lien on all the assets of the Company and its domestic subsidiaries. Mandatory prepayments and reductions of outstanding principal amounts are required upon the occurrence of certain events, including the sale of common stock in an initial public offering. The senior secured credit facility contains customary covenants restricting the incurrence of debt, encumbrances on and sales of assets, limitations on mergers and certain acquisitions, limitations on changes in control, certain restrictions on payment of dividends, provision for the maintenance of certain financial ratios, and various other financial covenants and restrictions. In addition to amounts used to pay the $289.7 million dividend to holders of common stock and for the tender for the senior subordinated notes, the Company paid from the debt proceeds $19.2 million of financing costs which have been deferred and $18.6 million of performance bonuses, consulting and management fees which are included in costs and expenses for the nine months ended September 30, 2001. Under the terms of the agreement, subject to certain restrictions, the Company is permitted to pay up to an additional $100 million in dividends through February 28, 2002. Annual Maturities Annual maturities of long-term debt as of September 30, 2001 are as follows (in thousands):
2001................. $ 5,700 2002................. 32,600 2003................. 42,600 2004................. 42,600 2005................. 42,600 2006................. 42,600 Thereafter........... 391,300 -------- 600,000 Less: current portion 27,650 -------- $572,350 ========
F-16 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) 9. Commitments and Contingencies Operating Leases The Company leases office space, plants and facilities, and various types of manufacturing, data processing and transportation equipment. Rent expense for the years ended December 31, 1998, 1999, and 2000 was $13.5 million, $12.4 million and $14.2 million, respectively. Minimum future rentals under noncancellable leases are estimated to be $12.8 million in 2001, $13.0 million in 2002, $11.2 million in 2003, $10.6 million in 2004, $9.9 million in 2005 and $9.0 million thereafter. Legal Proceedings Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in connection with the M109A6 Paladin howitzer prime contract, filed a lawsuit against the Company and its prior owners in Minnesota state court. The lawsuit arose out of a U.S. Army-directed termination for convenience in 1996 of certain subcontract work under the program which, until the time of termination, had been performed by Alliant and was thereafter replaced by a subcontract which the Company awarded to another contractor, Sechan Electronics. The breach of contract litigation by Alliant against the Company was concluded by pretrial dismissal, without any judgment, damage award, or other adverse finding having been made against the Company. No settlement payment was made in connection with such dismissal. The Company was a defendant in a qui tam case filed jointly under the U.S. Civil False Claims Act (the "FCA") by one present and one former employee of ours in Fridley, Minnesota. The case, U.S. ex rel. Seman and Shukla v. United Defense, FMC Corp., and Harsco Corp., was filed against the Company and its prior owners on July 23, 1997 in the U.S. District Court for the District of Minnesota and primarily alleged that the Company improperly obtained payment under various of our government contracts by supplying components which did not comply with applicable technical specifications. The relators' complaint did not quantify the alleged damages, but sought the full range of treble damages, civil penalties, and attorney fees available under the FCA. A complete settlement of such action was negotiated by the parties, and consented to by the U.S. Government, under which the Company is to pay a total of $6 million to settle the case, divided into installments payable over a three-year period. The amount of the settlement had been fully accrued as of December 31, 2000 in accrued and other liabilities. No finding of wrongdoing was made against the Company, and no other administrative or legal action is to be taken against the Company in respect of matters alleged in the case. On March 9, 2001, the settlement was approved by the court, and has accordingly become final. The Company is also subject to other claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which the Company is party will not have a material adverse effect on the Company. Environmental Matters The Company spends certain amounts annually to maintain compliance with environmental laws and to remediate contamination. Operating and maintenance costs associated with environmental compliance and prevention of contamination at the Company's facilities are a normal, recurring part of operations, are not significant relative to total operating costs or cash flows, and are generally allowable as contract costs under the Company's contracts with the U.S. government (Allowable Costs). As with compliance costs, a significant portion of the Company's expenditures for remediation at its facilities consists of Allowable Costs. As of December 31, 2000 the Company has accrued $14 million to cover F-17 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) any remediation and compliance costs that may not be Allowable Costs under U.S. government contracts. The amount accrued is based on estimated liabilities for each site in which the Company is able to make reasonable estimates. The Company does not believe there are significant uncertainties affecting the estimated liabilities or amounts that will be paid in the near term. The most significant of the estimated liabilities is based on the Company's experience related to ongoing remediation efforts. In addition, pursuant to the terms of the acquisition of UDLP, the Sellers are required to reimburse the Company for 75% of certain remediation costs relating to operations prior to the acquisition that are Non-Allowable Costs. The Company has recorded a receivable for $1.8 million expected to be reimbursed by one of the Sellers under the terms of the acquisition agreement which it expects to realize over the next 7 years. Turkey Joint Venture Offset Obligation The Company's joint venture in Turkey is required by agreement with its customer to achieve a significant level of export sales by October 2002 (this commitment is commonly referred to as an "offset" obligation) or pay a penalty of 9% of the shortfall in required export sales which penalty could be as high as $40 million. There can be no assurances that the joint venture will be able to completely fulfill its offset obligation or renegotiate an acceptable alternative, in which case the Company may have to fund its 51% share of the joint venture's obligation through additional investments in the joint venture. At December 31, 2000, the Company's equity accounting for the joint venture assumed the joint venture would be obligated for approximately $30 million of the total penalty exposure of which the Company's 51% share would be approximately $15 million. The joint venture's accrual for this obligation was made prior to 1998. The Company's equity in earnings from the joint venture was not significantly affected by changes in the joint venture's offset obligation during 1998, 1999 and 2000. Export sales by the joint venture from a recently signed contract with the government of Malaysia are expected to satisfy a significant portion of this exposure. Consequently, the Company's equity in earnings was increased by approximately $8.6 million during the nine months ended September 30, 2001 as a result of a reduction in the joint venture's expected offset obligation. The reduction in the estimate of offset obligation resulted from significant progress during 2001 on execution of the contract with Malaysia and the receipt in September 2001 of written acknowledgement by the Turkish government that sales made under that contract will qualify for satisfaction of the offset obligation. At September 30, 2001, the Company's equity accounting for the joint venture assumed the joint venture would be obligated for approximately $3 million of the total penalty exposure of which the Company's 51% share would be approximately $2 million. The Company accounts for its 51% investment in the joint venture by using the equity method rather than consolidating it because the Company does not control the joint venture, although it does have the ability to exercise significant influence over the operating and financial policies of the joint venture. 10. Stockholders' Equity Common Stock Options During 1998, the Company adopted the 1998 Stock Option Plan (the "Option Plan") under which 1,492,600 shares of common stock were reserved for issuance at December 31, 2000. The options generally vest over a period of 10 years; however, vesting may be accelerated over 5 years if certain targets related to earnings and cash flow are met.
Year ended December 31, ---------------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise 1998 price 1999 price 2000 price --------- -------- --------- -------- --------- -------- Options outstanding, beginning of year -- $ -- 3,231,000 $4.44 3,280,275 $4.52 Options granted....................... 3,231,000 4.44 69,750 8.89 51,750 9.66 Options canceled...................... -- -- (13,950) 8.03 (90,000) 4.44 Options exercised..................... -- -- (6,525) 4.44 (10,125) 4.44 --------- --------- --------- Options outstanding end of year....... 3,231,000 4.44 3,280,275 4.52 3,231,900 4.61 ========= ========= ========= Options exercisable end of year....... -- -- 941,456 4.63 1,535,018 4.58 ========= ========= =========
F-18 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) The following table summarizes options data as of December 31, 2000:
Options Outstanding Options Exercisable ---------------------------------------------- ----------------------------- Number as of Weighted average Number as of December 31, Weighted average remaining December 31, Weighted average Range of exercise prices 2000 exercise price contractual life 2000 exercise price ------------------------ ------------ ---------------- ---------------- ------------ ---------------- $4.44............. 3,121,650 $4.44 7.6 1,487,543 $4.44 $8.89-$11.11...... 110,250 9.25 8.9 47,475 8.93 --------- --------- Total............. 3,231,900 4.61 7.6 1,535,018 4.58 ========= =========
Options granted in 1998 were at $4.44 per share and had an estimated grant date fair value of $2.00 per option. Options granted in 1999 were at $8.89 per share and had an estimated grant date fair value of $4.25 per option. Options were granted at $8.89 and $11.11 during the year ended December 31, 2000 and had an estimated weighted average fair value on the date of grant of $3.09. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, the Company's net loss in 1998 would have been approximately $123.2 million ($3.09 per basic and diluted share), the net income in 1999 would have been approximately $1.7 million ($0.04 per basic and diluted share), and the net income in 2000 would have been approximately $17.6 million ($0.43 and $0.41 per basic and diluted share, respectively). The effect of applying SFAS No. 123 on the net income as stated above is not necessarily representative of the effects on reported net income (loss) for future years due to, among other things, (1) the vesting period of the stock options and (2) additional stock options that may be granted in future years. The fair value of each option grant is estimated on the date of grant using the minimum value model with the following assumptions used for grants in 1998, 1999 and 2000: dividend yield of 0%; risk-free interest rate of 6%, 6.5% and 5.5%; and expected life of the option term of 10 years, 10 years and 7 years. Employee Stock Purchase Plan Under the Employee Stock Purchase Plan (the "ESPP"), certain employees are provided the opportunity to purchase shares of the Company's common stock at its estimated fair value. Certain of these purchases were eligible for financing provided by the Company. Related loans including interest at 7.5%, are due in five years. During 1998, 1,664,154 shares were sold at a price of $4.44 per share. 11. Income Taxes The provision for income taxes includes federal income taxes payable by the Company's Foreign Sales Corporation subsidiary amounting to $3.3 million, $1.7 million and $2.7 million during the years ended December 31, 1998, 1999 and 2000, respectively. For the year ended December 31, 1998, the provision for income taxes also includes foreign withholding taxes of $2.6 million. For the years ended December 31, 1999 and 2000, the provision for income taxes also includes alternative minimum tax currently payable by the Company of $1.2 million and $1.9 million, respectively. For the year ended December 31, 2000, the provision also includes foreign income taxes related to Bofors of $1.4 million on income before income taxes of approximately $3 million. All other pretax earnings for 1998 through 2000 were from domestic sources. F-19 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) The Company's effective tax rate differed from the statutory federal income tax rate because of the following differences:
1998 1999 2000 ------ ------ ------ Statutory federal tax rate....................... (35.0%) 35.0% 35.0% Effect of taxes on joint venture/foreign earnings 3.0% 103.9% 0.5% Foreign Sales Corporation/extraterritorial income exclusion benefit.............................. 1.8% (52.6%) (0.4%) Disallowed expenses and other.................... (5.8%) 30.5% 9.7% Change in valuation allowance.................... 41.0% (69.4%) (20.0%) ====== ====== ====== Effective tax rate............................... 5.0% 47.4% 24.8% ====== ====== ======
The components of the net deferred tax asset are as follows (in thousands):
December 31, ------------------ 1999 2000 -------- -------- Deferred tax assets: Accrued expenses............................... $ 43,113 $ 35,428 Net operating loss carryforwards............... 88,093 53,882 Depreciation................................... 13,701 11,369 Other.......................................... 2,954 1,633 -------- -------- 147,861 102,312 Deferred tax liabilities: Intangibles, accrued compensation, and benefits (84,994) (65,476) Other.......................................... -- 4,563 -------- -------- (84,994) (60,913) -------- -------- Net deferred tax asset......................... 62,867 41,399 Valuation allowance............................ (62,867) (41,399) -------- -------- Net deferred taxes on balance sheet............ $ -- $ -- ======== ========
Based on historical net operating losses in recent years, the net deferred tax asset at December 31, 1999 and 2000 has been offset by a valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible and subject to any limitations applied to the use of carryforward tax attributes. The Company has approximately $135 million in net operating loss carryforwards which expire at varying dates through 2018. F-20 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) 12. Fair Value of Financial Instruments The carrying amount of the Company's financial instruments included in current assets and current liabilities approximates their fair value due to their short-term nature. At December 31, 1999, the fair market value of the Company's long-term debt was estimated to be $149.8 million and $191.5 million for the senior credit facility and subordinated debt, respectively. At December 31, 2000, fair market value of the Company's long-term debt was estimated to be $86.6 million and $171.9 million for the senior credit facility and subordinated debt, respectively. The fair values of the senior credit facility represent management's best estimates based on other financial instruments with similar characteristics. Since the facility has variable rate debt, its fair value approximates its carrying amount. The fair values of the subordinated debt are based on quoted market prices. 13. Significant Customer and Export Sales Sales to various agencies of the U.S. Government aggregated $968.3 million, $995.0 million and $832.9 million during the years ended December 31, 1998, 1999 and 2000, respectively. At December 31, 1999 and 2000, trade accounts receivable from the U.S. Government totaled $29.8 million and $66.8 million, respectively. Export sales, including sales to foreign governments transacted through the U.S. Government, were $230.3 million, $218.6 million and $297.6 million during the years ended December 31, 1998, 1999 and 2000, respectively. In addition there were sales to foreign governments transacted by the Company's foreign subsidiary of $53.4 million during the year ended December 31, 2000. 14. Related Party Transactions During 1998, Carlyle provided consulting assistance in development of management operating policies and procedures, for which the Company incurred a charge to operations of $2.0 million. Additionally, the management agreement between the Company and Carlyle requires an annual fee of $2.0 million for various management services. During December 31, 1998, 1999 and 2000, the Company recorded charges of $2.0 million each year relating to these services. The Company incurred $18.6 million in expenses in connection with the August 2001 recapitalization (see Note 8), including performance bonuses of $11.1 paid to management and outside directors and consulting and management fees of $7.5 million which includes $2.3 million paid to Carlyle, which is included in selling, general and administrative expenses. Additionally, Carlyle was paid a fee of $1.2 million for investment banking services, which is included in deferred financing costs. The Company expects investment funds sponsored by Carlyle will continue to own a significant portion of its common shares after the planned initial public offering. Individuals affiliated with Carlyle are expected to continue to significantly influence the Company's operating and financial policies. The Company has entered into agreements with four affiliates of its principal stockholder whereby the Company has agreed to designate one nominee to the Company's board of directors on behalf of each of these entities. These agreements will remain in effect so long as Iron Horse owns greater than 20% of the Company's voting stock. One of the Company's directors was formerly affiliated with a law firm that provides services to the Company. Amounts paid to the law firm for such services were approximately $132,000, $51,000 and $138,000 for the years ended December 31, 1998, 1999 and 2000, respectively. F-21 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) 15. Restructuring During the third quarter of 1998, the Company approved a restructuring plan designed to rationalize production and lower costs at its Fridley, Minnesota facility. The plan called for shifting a significant portion of production and final assembly to other Company sites and outsourcing certain other operations. In 1998 the Company recorded a charge of $36.2 million for estimated employee termination expenses, acceleration of recognition for benefit costs that were curtailed, and charges for impaired assets. This charge did not significantly impact operating funds as it mostly represents either asset write-offs or costs that will be provided for out of an overfunded pension plan. Remaining accrued expenses are $1.1 million at December 31, 2000. 16. Employees' Thrift Plan Substantially all of the Company's domestic employees are eligible to participate in defined contribution savings plans designed to comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k) of the Internal Revenue Code. Charges against income for matching contributions to the plans were $8.1 million, $8.1 million, and $7.9 million in the years ended December 31, 1998, 1999 and 2000, respectively. 17. Earnings Per Share and Unaudited Pro Forma Earnings Per Share Basic and diluted earnings per share results for all periods presented were computed based on the net loss or net income for the respective periods. The weighted average number of common shares outstanding during the period was used in the calculation of basic earnings per share and for periods other than 1998, this number of shares was increased by the effects of dilutive stock options based on the treasury stock method in the calculation of diluted earnings per share. The diluted loss per share for 1998 was computed in the same manner as the basic loss per share, since adjustments related to the effects of 1,615,500 stock options would have been antidilutive. F-22 United Defense Industries, Inc. Notes to Consolidated Financial Statements (Continued) Unaudited pro forma diluted earnings per share are presented only for the year ended December 31, 2000 and the nine months ended September 30, 2001. In accordance with SEC Staff Accounting Bulletin No. 55, pro forma earnings per common share gives effect to the issuance of the shares sold by the Company in this offering as if those shares were issued on January 1, 2000 and used to fund a portion of the dividend paid in August 2001.
Nine months ended Year ended December 31, September 30, -------------------------- ---------------- 1998 1999 2000 2000 2001 (In thousands, except per share data) --------- ------- ------- ------- -------- (Unaudited) Net (loss) income: (Loss) income before extraordinary item............. $(122,598) $ 2,938 $18,165 $14,482 $ 25,380 Extraordinary item - net gain (loss) from extinguishment of debt............................ -- -- 680 680 (22,599) --------- ------- ------- ------- -------- Net (loss) income for basic and diluted computations.......................... $(122,598) $ 2,938 $18,845 $15,162 $ 2,781 ========= ======= ======= ======= ======== Average common shares outstanding: Average number of common shares outstanding for basic computations................................ 39,816 40,593 40,584 40,585 40,684 Dilutive stock options-based on the treasury stock method............................................ -- 1,459 1,835 1,817 1,979 --------- ------- ------- ------- -------- Average number of common shares outstanding for diluted computations.............................. 39,816 42,052 42,419 42,402 42,663 ========= ======= ======= Assumed issuance of common shares to fund portion of dividends......................................... 9,250 9,250 ------- -------- Average number of common shares outstanding for pro forma diluted computations........................ 51,669 51,913 ======= ======== (Loss) earnings per share: Earnings per share--basic: (Loss) income before extraordinary item.......... $ (3.08) $ 0.07 $ 0.45 $ 0.36 $ 0.62 Extraordinary item--net gain (loss) from extinguishment of debt......................... -- -- 0.01 0.01 (0.55) --------- ------- ------- ------- -------- Net (loss) income................................ $ (3.08) $ 0.07 $ 0.46 $ 0.37 $ 0.07 ========= ======= ======= ======= ======== Earnings per share--diluted: (Loss) income before extraordinary item.......... $ (3.08) $ 0.07 $ 0.43 $ 0.34 $ 0.59 Extraordinary item--net gain (loss) from extinguishment of debt......................... -- -- 0.01 0.01 (0.53) --------- ------- ------- ------- -------- Net (loss) income................................ $ (3.08) $ 0.07 $ 0.44 $ 0.35 $ 0.06 ========= ======= ======= ======= ======== Unaudited pro forma earnings per share--diluted: Net (loss) income................................ $ 0.36 $ 0.05 ======= ========
F-23 DESCRIPTION OF BACK PAGE: The United Defense logo is positioned in the bottom center of the back page below a gray graphic that borders the main, rectangle-shaped collage depicting some of our products. In the upper left hand corner of the main collage is a photograph of an individual at the controls of an Advanced Crew Station. To the right of this photograph is a computer- generated image of a future naval vessel utilizing the Advanced Gun System. Directly below this image is a graphic with a Future Scout and Calvary System in the foreground, an unmanned ground combat vehicle in the background and a Crusader on the horizon. In the bottom left, and in the foreground of the main graphic, is a depiction of a hybrid electric drive M113-based vehicle with band track. This main product collage is situated in the middle of a gray background graphic that contains repetitive wording, reading from left to right, describing some of our key technologies and developmental programs. The statement, "The Future of Defense...is changing," runs, in part, along the top left side of the main collage on the gray background while the rest of the statement continues along the bottom right side of the collage in the gray background. 21,100,000 Shares [GRAPHIC] United Defense UNITED DEFENSE INDUSTRIES, INC. Common Stock ------------------- PROSPECTUS December 13, 2001 ------------------- LEHMAN BROTHERS GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON