DEF 14A 1 d112470ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

L-3 COMMUNICATIONS HOLDINGS, INC.

(Name of Registrant as Specified in Its Charter)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  1. Title of each class of securities to which transaction applies:
  2. Aggregate number of securities to which transaction applies:
  3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
  4. Proposed maximum aggregate value of transaction:
  5. Total fee paid:

 

  ¨ Fee paid previously with preliminary materials:
  ¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  1. Amount Previously Paid:
  2. Form, Schedule or Registration Statement No.:
  3. Filing Party:
  4. Date Filed:


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2016  

Notice of

Annual Meeting

of Shareholders

and Proxy

Statement

 

 

 

 

LOGO   L-3 Communications


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LOGO   L-3 Communications

600 Third Avenue

New York, NY 10016

 

Dear Fellow Shareholder:

 

 

On behalf of the Board of Directors, I cordially invite you to attend the Annual Meeting of Shareholders of L-3 Communications Holdings, Inc., to be held at 2:30 p.m., Eastern Daylight Time, on Tuesday, May 3, 2016, at The Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York 10004. The notice and proxy statement for the Annual Meeting are attached to this letter and describe the business to be conducted at the Annual Meeting.

 

At this year’s meeting, we will vote on the election of 10 directors, the ratification of the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm, the approval, in a non-binding, advisory vote, of the compensation paid to our named executive officers, the approval of an amendment and restatement to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan, the adoption of a merger agreement to eliminate our holding company structure, and, if properly presented, one shareholder proposal. There also will be a report on the Company’s business, and shareholders will have an opportunity to ask questions.

 

 

LOGO

In accordance with the rules of the Securities and Exchange Commission, we sent a Notice of Internet Availability of Proxy Materials on or about March 23, 2016 to our shareholders of record as of the close of business on March 7, 2016. We also provided access to our proxy materials over the Internet beginning on that date. If you received a Notice of Internet Availability of Proxy Materials by mail and did not receive, but would like to receive, a printed copy of our proxy materials, you should follow the instructions for requesting such materials included on page 6 of this proxy statement or in the Notice of Internet Availability of Proxy Materials.

To have your vote recorded, you should vote over the Internet or by telephone. In addition, if you have requested or received a paper copy of the proxy materials, you may vote by signing, dating and returning the proxy card sent to you in the envelope accompanying the proxy materials sent to you. We encourage you to vote by any of these methods even if you currently plan to attend the Annual Meeting. By doing so, you will ensure that your shares are represented and voted at the Annual Meeting. If you decide to attend, you can still vote your shares in person if you wish. If you wish to attend the Annual Meeting in person, you will need to register and request an admission ticket in advance. You can register and request a ticket by following the instructions set forth on page 10 of this proxy statement.

On behalf of the Board of Directors, I thank you for your cooperation and look forward to seeing you on May 3, 2016.

March 23, 2016

Very truly yours,

 

LOGO

Michael T. Strianese

Chairman and Chief Executive Officer


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LOGO   L-3 Communications

 

NOTICE OF 2016 ANNUAL MEETING OF

SHAREHOLDERS OF L-3 COMMUNICATIONS HOLDINGS, INC.

 

DATE AND TIME:

Tuesday, May 3, 2016 at 2:30 p.m., Eastern Time

 

PLACE:

The Ritz-Carlton New York, Battery Park

Two West Street

New York, New York 10004

 

ITEMS OF BUSINESS:

1)   To elect the 10 Directors listed in the accompanying proxy statement (the “Proxy Statement”);

 

  2)   To ratify the appointment of our independent registered public accounting firm for 2016 (the “Auditor Ratification Proposal”);

 

  3)   To approve, in a non-binding, advisory vote, the compensation paid to our named executive officers as described herein (the “Say-on-Pay Proposal”);

 

  4)   To approve an amendment to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan (the “Amended and Restated Plan Proposal”);

 

  5)   To adopt an Agreement and Plan of Merger effecting the elimination of our holding company structure as described herein (the “Merger Proposal”);

 

  6)   To consider a shareholder proposal to amend and restate the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) to permit shareholders to take action by written consent (the “Shareholder Written Consent Proposal”); and

 

  7)   To transact such other business as may properly come before the Annual Meeting and any adjournments or postponements thereof.

 

WHO CAN VOTE:

You are entitled to vote if you were a shareholder of record at the close of business on Monday, March 7, 2016 (the “Record Date”).

 

VOTING:

We urge you to participate in the meeting, either by attending and voting in person or by voting through other acceptable means as promptly as possible. You may vote by telephone, through the Internet or by mailing your completed and signed proxy card (or voting instruction form, if you hold your shares through a broker, bank or other nominee). Each share is entitled to one vote on each matter to be voted upon at the annual meeting. Your vote is important and we urge you to vote.

 

MEETING ADMISSION:

If you plan to attend the meeting, you must request an admission ticket in advance. To request an admission ticket, please follow the instructions on page 10 in response to Question 16 of the accompanying Proxy Statement.

 

2015 ANNUAL REPORT:

A copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 accompanies this Proxy Statement.

 

DATE OF DISTRIBUTION:

This Notice, the Proxy Statement and proxy card are first being made available or mailed to shareholders on or about March 23, 2016.

 

   By Order of the Board of Directors
  

 

LOGO

   Steven M. Post

March 23, 2016

New York, New York

  

Senior Vice President, General Counsel and

Corporate Secretary

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on May 3, 2016.

The following proxy materials are available for you to view online at http://www.L-3com.com: (1) this Proxy Statement (including all attachments, if any); (2) our Summary Annual Report and Annual Report on Form 10-K, in each case for the year ended December 31, 2015 (which is not deemed to be part of the official proxy soliciting materials); and (3) any amendments to the foregoing materials that are required to be furnished to shareholders. In addition, if you have not received a copy of our proxy materials and would like one, you may download an electronic copy of our proxy materials or request a paper copy at http://www.L-3com.com. You will also have the opportunity to request paper or email copies of our proxy materials for all future Annual Meetings.


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PROXY STATEMENT – TABLE OF CONTENTS

 

NOTICE OF 2016 ANNUAL MEETING OF SHAREHOLDERS OF L-3 COMMUNICATIONS HOLDINGS, INC.

 

        

PROXY STATEMENT SUMMARY

 

    

 

1

 

  

 

QUESTIONS AND ANSWERS ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

    

 

6

 

  

 

PROPOSALS REQUIRING YOUR VOTE      11   

Proposal 1 – Election of Directors

     11   

Proposal 2 – Selection of Independent Registered Public Accounting Firm

     17   

Proposal 3 – Advisory (Non-Binding) Vote on Executive Compensation

     18   

Proposal 4 – Approval of the Amendment to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan

     20   

Proposal 5 – Adoption of Agreement and Plan of Merger Effecting the Elimination of the Company’s Holding Company Structure

     28   

Proposal 6 – Shareholder Proposal to Amend the Company’s Certificate of Incorporation to Permit Shareholders to Take Action by Written Consent

 

    

 

33

 

  

 

THE BOARD OF DIRECTORS AND CERTAIN GOVERNANCE MATTERS      34   

Leadership Structure

     34   

Independence

     35   

Board of Directors Composition

     36   

Committees of the Board of Directors

     37   

Compensation Committee Use of Consultants

     40   

Oversight of Risk Management

     41   
   

EXECUTIVES AND CERTAIN OTHER OFFICERS OF THE COMPANY

 

    

 

42

 

  

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

    

 

45

 

  

 

SECURITY OWNERSHIP OF MANAGEMENT

 

    

 

46

 

  

 

COMPENSATION DISCUSSION AND ANALYSIS      47   

Company Background, 2015 Operating Environment and 2015 Performance Results

     47   

Compensation Philosophy, 2015 Target Pay and 2015 Incentive Plan Payouts

     48   

2015 Shareholder Advisory Vote on Executive Compensation (“Say-On-Pay”)

     49   

Sound Pay Practices

     49   

Program Overview

     50   

Determining Executive Compensation

     50   

Mix of Pay

     51   

Use of Market Data and Competitive Compensation Positioning

     52   

Elements of 2015 Target Pay

     53   

 

L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement    i


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Payment of Performance Awards for the 2013-2015 Award Cycle

     63   

Executive Benefits and Perquisites

     63   

Stock Ownership Guidelines and Retention Requirements

     64   

Compensation Clawback Policy

     65   

Anti-Hedging and Anti-Pledging Policies

     65   

Compensation Risk Assessment

     65   

Tax Considerations

     65   

Equity Grant Timing

 

     66   

REPORT OF THE COMPENSATION COMMITTEE

 

    

 

67

 

  

 

TABULAR EXECUTIVE COMPENSATION DISCLOSURE

 

    

 

68

 

  

 

COMPENSATION OF DIRECTORS

 

    

 

86

 

  

 

REPORT OF THE AUDIT COMMITTEE

 

    

 

88

 

  

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES

 

    

 

89

 

  

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

    

 

90

 

  

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

    

 

91

 

  

 

EQUITY COMPENSATION PLAN INFORMATION

 

    

 

92

 

  

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

    

 

93

 

  

 

QUESTIONS AND ANSWERS ABOUT BOARD COMMUNICATIONS, COMPANY DOCUMENTS AND SHAREHOLDER PROPOSALS

 

    

 

94

 

  

 

GENERAL AND OTHER MATTERS

 

    

 

96

 

  

 

ANNEX A—AMENDED AND RESTATED 2008 LONG TERM PERFORMANCE PLAN

 

    

 

A-1

 

  

 

ANNEX B—AGREEMENT AND PLAN OF MERGER

 

    

 

B-1

 

  

 

 

ii    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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PROXY STATEMENT SUMMARY

This summary highlights information about L-3 Communications Holdings, Inc. (the “Company,” “L-3,” “we,” “our” or “us”) and certain information contained elsewhere in this Proxy Statement for L-3’s 2016 Annual Meeting of Shareholders (the “Annual Meeting” or the “meeting”). This summary does not contain all of the information that you should consider in voting your shares of L-3 common stock, par value $0.01 per share (the “Common Stock”). You should read the entire Proxy Statement carefully before voting.

VOTING MATTERS AND BOARD RECOMMENDATIONS

 

 Proposal        

Board Vote

Recommendation

  

Page

Reference

Proposal 1 –

  Election of Directors    FOR    11

Proposal 2 –

  Auditor Ratification Proposal    FOR    17

Proposal 3 –

  Say-on-Pay Proposal    FOR    18

Proposal 4 –

  Amended and Restated Plan Proposal    FOR    20

Proposal 5 –

  Merger Proposal    FOR    28

Proposal 6 –

  Shareholder Written Consent Proposal    NONE    33

CASTING YOUR VOTE

 

     How to Vote   

Shareholders of Record

(Shares registered in your name with

L-3’s transfer agent, Computershare)

  

Street Name Holders

(Shares held through a Broker,

Bank or Other Nominee)

and 401(k) Participants

LOGO

   Mobile Device

  Scan the QR Code to vote using your mobile device:   

LOGO

 

  

Refer to voting

instruction form.

 

LOGO

   Internet

  Visit the applicable voting website:    www.proxyvote.com    www.proxyvote.com

LOGO

   Telephone

  Within the United States, U.S. Territories and Canada, call toll-free:    1-800-690-6903   

Refer to voting

instruction form.

LOGO

   Mail

  Complete, sign and mail your proxy card or voting instruction form in the self-addressed envelope provided to you, following your request, if any.

LOGO

   In Person

  For instructions on attending the 2016 Annual Meeting in person, please see Question 16 on page 10.

 



 

L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement    1


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PROXY STATEMENT SUMMARY

 

BOARD NOMINEES

You are being asked to vote on the following ten nominees for director. All directors are elected annually by a majority of the votes cast. Information about each director’s experiences, qualifications, attributes and skills can be found beginning on page 11.

 

Name

  Age  

Director

Since

  Principal Occupation   Independent   

Board

Committee

Membership*

Claude R. Canizares

  70   2003   Vice President and Bruno Rossi Professor of Physics, Massachusetts Institute of Technology   Yes    AC

Thomas A. Corcoran

  71   1997  

Senior Advisor, The Carlyle Group and

President, Corcoran Enterprises, LLC

  Yes    AC

Ann E. Dunwoody

  63   2013   General (Ret.), U.S. Army   Yes    NC

Lewis Kramer

  68   2009   Retired Partner, Ernst & Young LLP   Yes    AC, CC, EC

Robert B. Millard

  65   1997   Chairman, Massachusetts Institute of Technology Corporation   Yes    CC, EC

Lloyd W. Newton

  73   2012   General (Ret.), U.S. Air Force and Retired Executive Vice President, Pratt & Whitney Military Engines.   Yes    CC

Vincent Pagano, Jr.

  65   2013   Retired Partner, Simpson Thacher & Bartlett LLP   Yes    AC, NC, EC

H. Hugh Shelton

  74   2011   General (Ret.), U.S. Army   Yes    NC

Arthur L. Simon

  84   2001   Retired Partner, Coopers & Lybrand LLP   Yes    AC, NC

Michael T. Strianese

  60   2006   Chairman and CEO, L-3   No    EC

 

* AC    Audit Committee

   CC    Compensation Committee

   

NC    Nominating/Corporate Governance Committee

EC    Executive Committee

CORPORATE GOVERNANCE HIGHLIGHTS

 

     

¡   Annual election of directors

 

¡   Directors elected by majority voting

 

¡   9 of our 10 director nominees are independent

 

¡   Independent lead director

 

¡   All NYSE-required Board committees consist solely of independent directors

 

¡   Regular executive sessions of independent directors

 

  

¡   Shareholder right to call special meetings

 

¡   Over 75% average Board and Committee meeting attendance for each director in 2015

 

¡   Annual Board and Committee self-evaluations

 

¡   Comprehensive code of ethics and business conduct and corporate governance guidelines

 

¡   No shareholder rights plan or “poison pill”

  

¡   Strong pay-for-performance philosophy

 

¡   Comprehensive political contributions disclosure policy and compliance program

 

¡   Board participation in executive succession planning

 

¡   Stock ownership guidelines for directors and executive officers

 

¡   Policy prohibiting hedging or pledging

 

¡   Compensation “clawback” policy

 

 



 

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PROXY STATEMENT SUMMARY

 

SHAREHOLDER ENGAGEMENT

In recent years, the Company has made a concerted effort to engage with its shareholders both during and outside the proxy season. In 2015, these outreach efforts resulted in dialogue with shareholders representing over 52% of the Company’s outstanding Common Stock to solicit their input on a wide range of topics, including executive compensation, business strategy, portfolio shaping, capital allocation and financing strategy, and other strategic, financial, and governance-related matters. In addition, during 2015, our Lead Independent Director, Robert B. Millard, met with some of our largest shareholders.

In 2015, a shareholder proposal recommending that we amend our Amended and Restated Bylaws (the “Bylaws”) to permit shareholders owning 20% or more of the Company’s outstanding Common Stock to call a special meeting of shareholders (the “Proposal”) received support from 61% of the shares voted on the Proposal. Following its initial review of the vote on the Proposal, the Board concluded that it would be appropriate to amend the Bylaws to enable shareholders representing at least 20% of the outstanding Common Stock to call a special meeting. The Board determined, however, that although the Proposal was silent as to any required holding period, it would also be appropriate to include a one-year holding period to ensure that this important right could only be exercised by shareholders with the long-term best interests of the Company in mind.

The Board then directed management to reach out to its top 50 shareholders representing approximately 64% of the Company’s outstanding Common Stock to solicit their input with regard to the implementation of this proposed bylaw amendment, particularly with respect to the ownership threshold and a required holding period. We spoke to our top ten shareholders representing approximately 40% of the Company’s outstanding Common Stock. Eight of our top ten shareholders, representing 37% of our outstanding Common Stock, were comfortable with a 20% threshold and also supported the Board’s views that a one-year holding period was in the best interest of the Company and its shareholders. As a matter of policy, two of our top ten shareholders stated the they could not express a definitive view with respect to the Company’s approach. Out of the top 50 shareholders that we were able to speak to, only one (representing less than 1% of our outstanding Common Stock) expressed a view against a one-year holding period. Of the eight of our top ten shareholders that supported the Company’s proposed response to the Proposal, at the 2015 Annual Meeting, five voted in favor of the Proposal, one represented a fund complex where certain funds voted for the Proposal and certain funds voted against the Proposal and two voted against the Proposal.

After considering the results of the outreach program, the Board determined to amend the Bylaws to permit shareholders owning at least 20% of our outstanding Common Stock to call a special meeting, provided they meet the one-year holding period requirement.

Our Investor Relations department is the contact point for shareholder interaction with the Company. Shareholders may also access investor information about the Company through our website at www.L-3com.com/investor-relations.

SUMMARY OF 2015 BUSINESS PERFORMANCE

 

  ¡   Our electronic systems and communication systems segments achieved solid operational and financial performance that exceeded their segment plans. However, our overall performance was adversely affected by losses on Head-of-State aircraft modification contracts in our aerospace systems segment, and sales and margin declines in our national security solutions and logistics solutions businesses. Accordingly, our diluted earnings per share and free cash flow performance fell below our annual incentive plan targets by 5% and 3%, respectively, and we further incurred substantial non-cash goodwill impairment charges.

 

  ¡   We undertook significant strategic actions to reshape our business portfolio for future success. In December 2015, we agreed to sell our national security solutions segment for approximately $550 million, and completed the sale in February 2016. We also completed three acquisitions and four divestitures in 2015, including the sale of Marine Systems International for approximately €295 million. We believe these actions sharpen our focus on L-3’s core businesses, improve our competitive position, and strengthen our ability to achieve future sales growth and margin expansion.

 

  ¡   We repurchased $740 million of our Common Stock and paid dividends of $214 million following our 11th consecutive annual dividend increase, returning over $950 million of cash to our shareholders in 2015. We also repaid approximately $300 million of our outstanding debt.

 



 

L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement    3


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PROXY STATEMENT SUMMARY

 

 

  ¡   We strengthened the Company’s senior executive management team by appointing Christopher E. Kubasik to the new position of President and Chief Operating Officer, and Mark Von Schwarz as President of our aerospace systems segment.

 

  ¡   We remediated the Company’s material weaknesses in its internal controls over financial reporting, which were identified in 2014 following an internal review of financial reporting matters at our aerospace systems segment discussed in last year’s proxy statement.

 

  ¡   Our total shareholder return (“TSR”) for the three years ended December 31, 2015 was 67%, which fell below the minimum TSR-based performance goal relative to our peer companies under our long-term incentive plan, but compares favorably to the 53% TSR of the S&P 500 Index for this period.

For more information regarding L-3’s 2015 performance, please review our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

EXECUTIVE COMPENSATION PROGRAM SUMMARY

2015 Target Pay and Incentive Plan Payouts

 

  ¡   We target base salaries and annual and long-term incentive opportunities for our executive officers named in the “Summary Compensation Table” on page 68 (“named executive officers” or “NEOs”) to approximate market median compensation levels, subject to adjustments based on experience, performance, other individual factors and as otherwise appropriate. For 2015, the target pay for each of our NEOs was within a competitive range that approximates 85% to 115% of market median.

 

  ¡   Calculated annual incentive plan payouts for 2015 reflect our 2015 business performance, and were below target for our corporate NEOs, but above target for our group NEOs who serve as the presidents of our segments that exceeded their respective financial plans for the year. Notwithstanding the formula-based calculation of these payouts, after considering all aspects of the Company’s financial performance for 2015 including the non-cash goodwill impairment charges described above, management recommended and the Committee agreed that the calculated payouts should be reduced substantially for the corporate NEOs, and to a lesser degree for the group NEOs. Similarly, payouts under our long-term performance awards were substantially below target.

 



 

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PROXY STATEMENT SUMMARY

 

Key Governance Features of Our Executive Compensation Program

At the 2015 Annual Meeting, more than 92% of the votes cast approved, on a non-binding advisory basis, the compensation of our NEOs, demonstrating the effectiveness of the substantive changes made to our compensation program over the past several years in response to shareholder feedback. The following summary highlights our commitment to executive compensation practices that reinforce our pay-for-performance culture and includes corporate governance practices that are considered by investors to reflect market “best practices:”

 

What We Do        What We Don’t Do

 

ü

  Pay-for-Performance – Emphasis on long-term, performance-based compensation and meaningful stock ownership guidelines to align executive and shareholder interests    

 

û

  No Employment Agreements – All of our NEOs are employed on an at-will basis

 

ü

  Formula-Based Incentive Plans – Transparent, formulaic incentive plans designed to promote short- and long-term business success    

 

û

  No Tax Gross-ups – No excise tax gross-ups on severance or change in control payments

 

ü

  Enhanced CEO Performance Conditions – Chief Executive Officer’s stock options are subject to performance conditions based on consolidated EPS and FCF    

 

û

  No Repricing – No repricing of stock options or other equity-based awards without shareholder approval

 

ü

  “Clawback” Provisions – Clawback policy that applies to all incentive compensation, including equity-based awards    

 

û

  No Pension Plan/SERP Credit – No pension plan/SERP credit for years not worked with L-3 or its predecessor companies

 

ü

 

Double Trigger for Severance – Double trigger provisions for severance payable in the event of a change in control, and no excessive severance or change in control provisions

   

 

û

  No Excessive Perquisites – Perquisites are modest and consistent with competitive practices

 

ü

  Annual Risk Assessment – Annual compensation risk assessment to ensure program does not encourage excessive risk-taking    

 

û

  No Dividends on Stock Options – No payment of dividends on stock options or on other equity-based awards prior to vesting

 

ü

  Tally Sheets – Tally sheet analysis to better understand current and accumulated compensation and benefits      

 

û

  No Hedging or Pledging – No hedging or pledging of L-3 stock by executives, employees and non-employee directors

 



 

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QUESTIONS AND ANSWERS ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

 

QUESTIONS AND ANSWERS

ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

1. WHY DID I RECEIVE THESE PROXY MATERIALS?

 

 

On or about March 23, 2016, we either mailed you a notice (the “Notice”) notifying you how to vote online and how to electronically access a copy of this Proxy Statement, our Summary Annual Report and our Annual Report on Form 10-K for the year ended December 31, 2015 (together referred to as the “Proxy Materials”) or mailed you a complete set of the Proxy Materials. If you have not received but would like to receive printed copies of these documents, including a proxy card in paper format, you should follow the instructions for requesting such materials contained in the Notice.

This Proxy Statement is being made available to the holders of our Common Stock in connection with the solicitation of proxies for use at the Annual Meeting to be held at The Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York 10004 at 2:30 p.m., Eastern Daylight Time, on Tuesday, May 3, 2016. The proxies are solicited by our Board of Directors on our behalf for use at the Annual Meeting and any adjournments or postponements of the Annual Meeting.

 

 

2. WHAT IS A PROXY?

 

 

Shareholders not attending our Annual Meeting may choose to vote their shares of Common Stock by allowing someone else to cast votes on their behalf. We are soliciting your voting instructions (that is, your proxy) on behalf of our Board of Directors for use at the Annual Meeting and any adjournments or postponements of the Annual Meeting. The proxies we are soliciting designate Michael T. Strianese, Christopher E. Kubasik, Ralph G. D’Ambrosio and Steven M. Post (the “Proxyholders”) as the persons who would individually be authorized to vote your shares in accordance with your instructions. Alternatively, if you own your shares of our

Common Stock directly in your name in our stock records (a “shareholder of record”) maintained by Computershare Trust Company, N.A. (“Computershare”), you may appoint a person (who need not be a shareholder), other than the Proxyholders, to represent you at the Annual Meeting by completing another proper proxy. Such completed proxy should be returned in the envelope provided to you for that purpose (if you have requested or received a paper copy of the Proxy Materials).

 

 

3. WHAT IS THE RECORD DATE AND WHAT DOES IT MEAN?

 

 

Our Board of Directors has fixed the close of business on March 7, 2016 as the Record Date for the Annual Meeting. Only shareholders of record at the Record Date are entitled to notice of, and to vote at, the Annual Meeting or at any adjournments or postponements thereof, in person or by proxy.

At the Record Date, there were 77,522,193 shares of our Common Stock outstanding and entitled to vote at the Annual Meeting. Each holder of Common Stock is entitled to one vote for each share of our Common Stock held by such holder.

 

 

4. WHAT ARE THE DIFFERENT METHODS THAT I CAN USE TO VOTE MY SHARES OF COMMON STOCK?

 

By Internet: If you hold your shares of our Common Stock through a bank or brokerage firm (i.e., in “street name,” as you are not a registered holder), or if you own shares of Common Stock through L-3’s 401(k) plan, you can vote at www.proxyvote.com, 24 hours a day, seven days a week. You will need the 16-digit Control Number included on your Notice or your paper voting instruction form (if you received a paper copy of the Proxy Materials).

If you are a shareholder of record, you can vote at www.proxyvote.com, 24 hours a day, seven days a week. You will need the 16-digit Control Number included on your Annual Meeting Notice card.

By Telephone: If you hold your shares in street name, you can vote using a touch-tone telephone by calling the toll-free number included on your Notice or paper voting instruction form (if you received a paper copy of the Proxy Materials), 24 hours a day, seven days a week. You will need the 16-digit Control Number included on your Notice or paper voting instruction form.

If you are a shareholder of record, or if you own shares of Common Stock through L-3’s 401(k) plan, you can vote using a touch-tone telephone by calling 1-800-690-6903,

24 hours a day, seven days a week. You will need the 16-digit Control Number included on your Annual Meeting Notice card or your paper voting instruction form (if you received a paper copy of the Proxy Materials).

 

 

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QUESTIONS AND ANSWERS ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

 

 

By Mail: If you have received a paper copy of the Proxy Materials by mail, you may complete, sign, date and return by mail the paper proxy card or voting instruction form sent to you in the envelope provided to you with your Proxy Materials or voting instruction form.

In Person: All shareholders of record may vote in person at the meeting. Street name holders must obtain a legal proxy from their broker, bank or other nominee and bring the legal proxy to the meeting in order to vote in person at the meeting. For more detail, please see Question 16.

The Internet and telephone voting procedures, which comply with Delaware law and the Securities and Exchange

Commission (the “SEC”) rules, are designed to authenticate shareholders’ identities, to allow shareholders to vote their shares and to confirm that their instructions have been properly recorded.

Through your Bank, Broker or Other Nominee: If you hold your shares in street name, you may also submit voting instructions to your bank, broker or other nominee. In most instances, you will be able to do this over the Internet, by telephone, or by mail. Please refer to the information from your bank, broker or other nominee on how to submit voting instructions.

See also “Proxy Statement Summary – Casting Your Vote” on page 1.

 

 

5. WHAT IS THE DEADLINE FOR SUBMITTING VOTES?

 

If you are a shareholder of record, proxies submitted over the Internet or by telephone as described above must be received by 11:59 p.m., Eastern Daylight Time, on May 2, 2016.

If you own your shares of our Common Stock through L-3’s 401(k) plan, proxies submitted over the Internet or by telephone as described above must be received by 11:59 p.m., Eastern Daylight Time, on April 29, 2016.

If you hold your shares in street name, proxies submitted over the Internet or by telephone as described above must be received by 11:59 p.m., Eastern Daylight Time, on May 2, 2016.

 

Proxies submitted by mail, as described above, must be received no later than 11:59 p.m., Eastern Daylight Time, on May 2, 2016, if you are a shareholder of record, or by 8:00 a.m., Eastern Daylight Time, on April 29, 2016, if you own your shares through L-3’s 401(k) plan.

Notwithstanding the above, if you hold your shares in street name and you submit voting instructions to your bank, broker or other nominee, your instructions must be received by the bank, broker or other nominee prior to the deadline set forth in the information from your bank, broker or other nominee on how to submit voting instructions.

 

 

6. HOW MANY VOTES MUST BE PRESENT TO HOLD THE 2016 ANNUAL MEETING?

 

In order for us to conduct the meeting, the holders of a majority of the outstanding shares of our Common Stock represented in person or by proxy shall constitute a quorum at the Annual Meeting.

Your shares are counted as present at the meeting if you attend the meeting and vote in person or if you properly return a proxy by Internet, telephone or mail.

Abstentions and instances where brokers are prohibited from exercising discretionary authority for beneficial owners who have not returned a proxy (so-called “broker non-votes”) will be counted for purposes of determining a quorum.

 

 

7. WILL MY SHARES BE VOTED IF I DO NOT PROVIDE MY PROXY?

 

Shareholders of Record: If you are a shareholder of record (see Question 3), your shares will not be voted if you do not provide your proxy unless you vote in person at the meeting. It is important that you vote your shares.

Holders of Common Stock through L-3’s 401(k) plan: If you own shares of our Common Stock through L-3’s 401(k) plan and you do not provide voting instructions, the shares in your 401(k) plan account will be voted by the trustee of the 401(k) plan in the same proportion as the shares of Common Stock held by the 401(k) plan for which voting instructions have been received from other participants in the plan, except as otherwise required by law. It is, therefore, important that you vote your shares.

Street Name Holders: If your shares are held in street name (see Question 4) and you do not provide voting instructions, your shares may be voted by your broker, bank or other nominee but only under certain circumstances. Specifically, under New York Stock Exchange (“NYSE”) rules, shares held in the name of your broker, bank or other nominee may be voted by your broker, bank or other nominee on certain “routine” matters if you do not provide voting instructions. Only the Auditor Ratification Proposal is considered a “routine” matter for which brokers, banks or other nominees may vote uninstructed shares. The other proposals to be voted on at the meeting (specifically, the election of director nominees, the Say-on-Pay Proposal, the Amended and Restated Plan Proposal, the Merger Proposal and the Written

 

 

L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement    7


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QUESTIONS AND ANSWERS ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

 

Consent Proposal) are not considered “routine” under NYSE rules, so the broker, bank or other nominee cannot vote your shares on any of these proposals unless you provide voting instructions for each of these matters. If you do not provide

voting instructions on a “non-routine” matter, your shares will not be voted on that matter, which is referred to as a “broker non-vote.” It is, therefore, important that you vote your shares.

 

 

8. WHAT IF I DO NOT SPECIFY A CHOICE FOR A MATTER WHEN RETURNING A PROXY?

 

 

If a shareholder delivers a proxy pursuant to this solicitation but does not specify a choice with respect to any proposal set forth in this Proxy Statement, the underlying shares will be voted on that proposal in accordance with the recommendation of our Board of Directors or, in the case of the Shareholder Written Consent Proposal, in the same

proportion as the shares of Common Stock for which votes have been cast on the proposal. With respect to any other matters that may properly come before the Annual Meeting, or any adjournment or postponement thereof, the underlying shares will be voted in accordance with the discretion of the Proxyholders.

 

 

9. HOW CAN I REVOKE A PROXY OR CHANGE MY VOTE?

 

Any proxy delivered pursuant to this solicitation is revocable at the option of the person(s) executing the proxy upon our receipt, prior to the time the proxy is voted, of a duly executed instrument revoking it, or of a duly executed proxy bearing a later date, or by such person(s) voting in person at the Annual Meeting. Unless revoked, all proxies representing shares entitled to vote that are delivered pursuant to this solicitation will be voted at the Annual Meeting and, where a choice has been specified on the proxy card, will be voted in accordance with such specification.

To revoke a proxy previously submitted over the Internet, by telephone or by mail, you may simply vote again at a later date, using the same procedures, in which case your later submitted vote will be recorded and your earlier vote revoked. You may also attend the Annual Meeting and vote in person.

If your shares are held in street name and you previously provided voting instructions to your broker, bank or other nominee, you should follow the instructions provided by your broker, bank or other nominee to revoke or change your voting instructions.

 

 

10. WHAT ITEMS WILL BE VOTED ON AT THE 2016 ANNUAL MEETING AND WHAT IS THE VOTE REQUIRED?

 

The vote required to approve all of the proposals listed herein assumes the presence of a quorum.

 

 

¡       Proposal 1 – Election of the 10 Directors listed herein: A majority of the votes cast at the Annual Meeting is required for the election of each nominee for director. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal.

 

¡        The Board recommends a vote “FOR” each of the nominees named in the Proxy Statement.

 

 

¡        Proposal 2 – Auditor Ratification Proposal: A majority of the votes cast at the Annual Meeting is required for the Auditor Ratification Proposal. Abstentions will have no effect on the outcome of this proposal. Your broker will have discretion to vote your uninstructed shares on this proposal.

 

¡        The Board recommends a vote “FOR” this proposal.

 

 

¡        Proposal 3 – Say-on-Pay Proposal: A majority of the votes cast at the Annual Meeting is required to approve the Say-on-Pay Proposal. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal.

 

¡       The Board recommends a vote “FOR” this proposal.

 

 

¡        Proposal 4 – Amended and Restated Plan Proposal: A majority of the votes cast at the Annual Meeting is required to approve the Amended and Restated Plan Proposal. Abstentions will be counted as a vote “against” the Amended and Restated Plan Proposal and “broker non-votes” will have no effect on the outcome of this proposal.

 

¡        The Board recommends a vote “FOR” this proposal.

 

 

¡        Proposal 5 – Merger Proposal: A majority of the Company’s outstanding shares of Common Stock is required to approve the Merger Proposal. Abstentions and “broker non-votes” will be counted as a vote “against” this proposal.

 

¡        The Board recommends a vote “FOR” this proposal.

 

 

¡        Proposal 6 – Shareholder Written Consent Proposal: The affirmative vote of all of the outstanding Common Stock of the Company is required to approve the Shareholder Written Consent Proposal. Abstentions and “broker non-votes” will have the same effect as votes “against” this proposal.

 

¡       The Board makes no recommendation regarding this proposal.

 

 

8    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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QUESTIONS AND ANSWERS ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

 

 

11. WHAT IS THE PURPOSE OF THE AMENDED AND RESTATED PLAN PROPOSAL?

 

 

The principal purpose of the amendment to the L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan is to (i) increase the number of shares authorized for issuance under the plan by 6,800,000 shares, (ii) modify the way that shares issued under “full value” awards granted under the plan on or after February 23, 2016 are counted for purposes of calculating the number of

authorized shares that have been issued and (iii) allow the Compensation Committee of the Company’s Board of Directors to make awards that may satisfy the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time (the “Internal Revenue Code”) with respect to certain performance-based awards that may be granted under the plan.

 

 

12. WHY ARE WE VOTING ON THE MERGER PROPOSAL?

 

The Company was organized in 1997 as a holding company for L-3 Communications Corporation (the “Subsidiary”), and its sole asset is the stock of the Subsidiary. Management of the Company believes that the holding company structure is no longer necessary and that its elimination will result in cost savings and administrative efficiencies. Therefore, management has proposed that the Company be merged with and into the Subsidiary (the “Merger”) such that, immediately following the effective time of the Merger (the “Effective Time”), the Company’s separate corporate

existence will cease and the Subsidiary will continue as the surviving corporation (the “Surviving Corporation”). The Board of Directors, having reviewed and considered management’s proposal, has determined that the proposed Merger is in the best interests of the Company and its shareholders, and has accordingly approved the Merger Agreement and declared it advisable, and recommends that shareholders vote “FOR” the proposal to adopt the Merger Agreement.

 

 

13. HOW WILL THE MERGER IMPACT OUR SHAREHOLDERS?

 

Shareholders’ legal rights and economic interest in L-3’s consolidated assets, will remain unchanged by the Merger. As a result of the Merger:

 

  ¡   The outstanding shares of common stock of the Surviving Corporation will be owned directly by the Company’s shareholders in the same proportion as their ownership of shares of the Company’s Common Stock immediately prior to the Merger;

 

  ¡   The Certificate of Incorporation of the Subsidiary will be amended and restated in its entirety to be substantially in the form of the Amended and Restated Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time, except that the provisions related to the classification of the Company’s Board of Directors, which has been phased out, will be eliminated;

 

  ¡   The bylaws of the Subsidiary will be amended and restated in their entirety to be substantially in the form of the Bylaws of the Company as in effect immediately prior to the Effective Time;

 

  ¡   The Surviving Corporation will have the same authorized capital stock, with the same rights, powers and privileges as the capital stock of the Company immediately prior to the Effective Time;

 

  ¡   The Surviving Corporation will have the same consolidated assets, liabilities and shareholders’ equity as the Company immediately prior to the Effective Time;

 

  ¡   The directors of the Company as of immediately prior to the Effective Time will become the directors of the Surviving Corporation and the officers of the Company as of immediately prior to the Effective Time will become the officers of the Surviving Corporation, with each officer having the same title, powers and duties that he or she possessed as of immediately prior to the Effective Time; and

 

  ¡   The Surviving Corporation will be a publicly traded company with reporting obligations under the Securities Exchange Act of 1934 (the “Exchange Act”). The Surviving Corporation’s common stock will be listed on the NYSE under the same ticker symbol used by the Company today, “LLL.”

 

14. WHAT DOES IT MEAN IF I RECEIVE MULTIPLE COPIES OF THE NOTICE OR PROXY MATERIALS?

 

 

Please note that you may receive multiple copies of the Notice or Proxy Materials (electronically and/or by mail). These materials may not be duplicates as you may receive separate copies of the Notice or Proxy Materials for each type of account in which you hold shares of our Common

Stock. Please be sure to vote all of your shares in each of your accounts in accordance with the directions on the proxy card(s) and/or voting instruction form(s) that you receive. In the case of duplicate votes for shares in a particular account, your last vote is the one that counts.

 

 

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QUESTIONS AND ANSWERS ABOUT THE 2016 ANNUAL MEETING AND VOTING

 

 

 

15. WHO WILL PAY THE COST OF THIS PROXY SOLICITATION?

 

 

The cost of this solicitation of proxies will be paid by the Company. The solicitation will be made primarily via the Internet and by mail, but our officers and regular employees may also solicit proxies by telephone, telegraph, facsimile,

or in person. We also have retained Georgeson Inc. to assist in soliciting proxies. We expect to pay Georgeson Inc. approximately $10,000 plus expenses in connection with its solicitation of proxies.

 

 

16. HOW DO I OBTAIN ADMISSION TO THE 2016 ANNUAL MEETING?

 

If you wish to attend the Annual Meeting and vote in person, you must be a shareholder on the Record Date and you must register and request an admission ticket in advance.

Tickets will be issued to registered and beneficial owners. If you hold your shares of our Common Stock through a bank or brokerage firm (i.e., you are not a registered holder), you may register and request an admission ticket by visiting www.proxyvote.com and following the instructions provided (you will need the 16-digit Control Number included on your Notice or your paper voting instruction form (if you received a paper copy of the Proxy Materials)). If you own your shares of our Common Stock directly in your name in our stock records maintained by Computershare, you may register and request an admission ticket by visiting www.proxyvote.com and following the instructions provided (you will need the 16-digit Control Number included on your Annual Meeting Notice card).

Requests for admission tickets will be processed in the order in which they are received and must be requested no later than May 2, 2016. Please note that seating is limited and

admission to the meeting will be on a first-come, first-served basis. On the day of the meeting, each shareholder will be required to present valid picture identification such as a driver’s license or passport with their admission ticket. Seating will begin at 2:00 p.m. and the meeting will begin at 2:30 p.m. Cameras (including cell phones with photographic capabilities), recording devices and other electronic devices will not be permitted at the Annual Meeting. You will be required to enter through a security check point before being granted access to the Annual Meeting.

Even if you plan to attend the Annual Meeting, we encourage you to vote in advance by Internet, telephone or (if you received a paper copy of the Proxy Materials) by mail so that your vote will be counted even if you later decide not to attend the Annual Meeting. Voting your proxy by the Internet, telephone or mail will not limit your right to vote at the Annual Meeting if you later decide to attend in person. If you own your shares of our Common Stock in street name and wish to vote in person at the Annual Meeting, you must request a legal proxy from your bank or broker or obtain a proxy from the record holder.

 

 

10    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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PROPOSALS REQUIRING YOUR VOTE

 

 

PROPOSALS REQUIRING YOUR VOTE

PROPOSAL 1 – ELECTION OF DIRECTORS

The full Board of Directors has considered and nominated the following slate of nominees for a one-year term expiring in 2017: Claude R. Canizares, Thomas A. Corcoran, Ann E. Dunwoody, Lewis Kramer, Robert B. Millard, Lloyd W. Newton, Vincent Pagano, Jr., H. Hugh Shelton, Arthur L. Simon and Michael T. Strianese. Action will be taken at the Annual Meeting for the election of these 10 nominees.

It is intended that the proxies delivered pursuant to this solicitation will be voted in favor of the election of each of Claude R. Canizares, Thomas A. Corcoran, Ann E. Dunwoody, Lewis Kramer, Robert B. Millard, Lloyd W. Newton, Vincent Pagano, Jr., H. Hugh Shelton, Arthur L. Simon and Michael T. Strianese except in cases of proxies bearing contrary instructions. In the event that these nominees should become unavailable for election due to any presently unforeseen reason, the persons named in the proxy will have the right to use their discretion to vote for a substitute.

Nominees for Election to the Board of Directors in 2016

The following information describes the offices held and other business directorships of each nominee. Beneficial ownership of equity securities of the nominees is described in “Security Ownership of Management” on page 46.

The particular experiences, qualifications, attributes or skills of each nominee that the Nominating/Corporate Governance Committee believes will advance the Company’s goals are included in the individual biographies below. The Nominating/Corporate Governance Committee and the Board believe that each of the nominees for election at the 2016 Annual Meeting possesses a strong and unique set of attributes. The Nominating/Corporate Governance Committee and the Board believe that, as a group, these nominees provide the Board with an optimal balance of experience, leadership, competencies, qualifications and skills.

 

 

     LOGO                     

 

Director Since: 2003

 

Board Committees:

  Audit

 

Age: 70

     CLAUDE R. CANIZARES
    

 

Position, Principal Occupation and Professional Experience:

Vice President, and Bruno Rossi Professor of Physics, Massachusetts Institute of Technology. Since 1971, Professor Canizares has been at MIT. He currently serves as Vice President and is the Bruno Rossi Professor of Physics. In addition, he is a principal investigator on NASA’s Chandra X-ray observatory and Associate Director of its science center.

 

Other Directorships, Trusteeships and Memberships: Member of the National Academy of Sciences and the International Academy of Astronautics; Fellow of the American Academy of Arts and Sciences, the American Physical Society and the American Association for the Advancement of Science. Professor Canizares serves on the Department of Commerce’s Emerging Technology and Research Advisory Committee and the National Research Council’s (NRC) Committee on Science, Technology and the Law. He also serves on the Auditing Committee of the National Academy of Sciences. Professor Canizares has served on the Air Force Scientific Advisory Board, the NASA Advisory Council, and the Council of the National Academy of Sciences.

 

Director Qualifications:

The Board of Directors considered Professor Canizares’ distinguished career as a tenured professor at MIT including his current responsibility for over 20 research laboratories with an aggregate annual research budget of $1.5 billion, as well as his extensive knowledge of the aerospace industry.

 

L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement    11


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PROPOSALS REQUIRING YOUR VOTE

 

 

 

     LOGO                     

 

Director Since: 1997

 

Board Committees:

  Audit

 

Age: 71

     THOMAS A. CORCORAN
    

 

Position, Principal Occupation and Professional Experience:

Senior Advisor, The Carlyle Group and President, Corcoran Enterprises, LLC. Mr. Corcoran has been a Senior Advisor of The Carlyle Group, a private equity investment firm, and the President of Corcoran Enterprises, LLC, a private management consulting firm, since 2001. From March 2001 to April 2004, Mr. Corcoran was the President and Chief Executive Officer of Gemini Air Cargo. Mr. Corcoran was the President and Chief Executive Officer of Allegheny Teledyne Incorporated from October 1999 to December 2000. From April 1993 to September 1999, he was the President and Chief Operating Officer of the Electronic Systems Sector and Space & Strategic Missiles Sector of Lockheed Martin Corporation. Prior to that he worked for General Electric for 26 years and held various management positions with GE Aerospace.

 

Other Current Public Directorships: Aerojet Rocketdyne Holdings, Inc. (Director, Member of the Organization & Compensation and Corporate Governance & Nominating Committees)

 

Prior Public Company Directorships (within the last five years): ARINC (until December 2013), La Barge Inc. (until June 2011), Serco Ltd (until January 2011), and Force Protection, Inc. (until December 2011)

 

Director Qualifications:

The Board of Directors considered Mr. Corcoran’s business operations background, including his service as the chief executive officer of a number of businesses, and his expertise in the aerospace and defense industries.

 

    

 

     LOGO                     

 

Director Since: 2013

 

Board Committees:

  Nominating/Corporate
    Governance

 

Age: 63

 

     ANN E. DUNWOODY
    

 

Position, Principal Occupation and Professional Experience:

General (U.S. Army – Ret). General Dunwoody was the first woman in U.S. military history to achieve the rank of four-star general. From 2008 until her retirement in 2012, she led and ran the largest global logistics command in the Army comprising 69,000 military and civilian individuals, located in all 50 states and over 140 countries with a budget of $60 billion dollars. General (Ret.) Dunwoody also served as a strategic planner for the Chief of Staff of the Army. During her 38-year military career, she was decorated for distinguished service and has received many major military and honorary awards.

 

Other Current Public Directorships: Republic Services, Inc. (Director and Member of the Audit Committee)

 

Other Directorships, Trusteeships and Memberships: Council of Trustees, The Association of the United States Army

 

Director Qualifications:

The Board of Directors considered General (Ret.) Dunwoody’s distinguished career in the United States Army and her extensive knowledge of the defense industry.

 

 

12    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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PROPOSALS REQUIRING YOUR VOTE

 

 

 

 

     LOGO                     

 

Director Since: 2009

 

Board Committees:

  Audit (Chair)

  Compensation

  Executive

 

Age: 68

 

     LEWIS KRAMER
    

 

Position, Principal Occupation and Professional Experience:

Retired Partner, Ernst & Young LLP. Mr. Kramer was a partner at Ernst & Young from 1981 until he retired in June 2009 after a nearly 40-year career at Ernst & Young. At the time of his retirement, Mr. Kramer served as the Global Client Service Partner for worldwide external audit and all other services for major clients, and served on the firm’s United States Executive Board. He previously served as Ernst & Young’s National Director of Audit Services.

 

Director Qualifications:

The Board of Directors considered Mr. Kramer’s significant experience, expertise and background with regard to accounting and internal control matters as well as the breadth of his business knowledge gained while serving as an independent auditor for numerous organizations across many industries.

 

    
    
    
    

 

 

     LOGO                     

 

Director Since: 1997

  Lead Independent Director

 

Board Committees:

  Compensation (Chair)

  Executive (Chair)

 

Age: 65

 

     ROBERT B. MILLARD
    

 

Position, Principal Occupation and Professional Experience:

Chairman, Massachusetts Institute of Technology Corporation. Mr. Millard has been the Chairman of the Massachusetts Institute of Technology Corporation since 2014. Prior to becoming Chairman of MIT, Mr. Millard held various positions in business, including Managing Director at Lehman Brothers and its predecessors from 1976 to 2008 and Chairman of Realm Partners L.L.C.

 

Other Current Public Directorships: Evercore Partners Inc.

 

Prior Public Company Directorships (within the last five years): Gulfmark Offshore, Inc. (until June 2013)

 

Other Directorships, Trusteeships and Memberships: Member, Council on Foreign Relations

 

Director Qualifications:

The Board of Directors considered Mr. Millard’s extensive financial background.

 

 

L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement    13


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PROPOSALS REQUIRING YOUR VOTE

 

 

 

 

     LOGO                     

 

Director Since: 2012

 

Board Committees:

  Compensation

 

Age: 73

     LLOYD W. NEWTON
    

 

Position, Principal Occupation and Professional Experience:

General (U.S. Air Force – Ret). General Newton was a four-star General and Commander of the Air Force, Air Education and Training Command, where he was responsible for the recruiting, training and education of all Air Force personnel from 1997 until his retirement in 2000. Following his retirement from the Air Force, General (Ret.) Newton was Executive Vice President of Pratt & Whitney Military Engines until 2006. During his 34 year military career, General (Ret.) Newton also served as an Air Force congressional liaison officer with the U.S. House of Representatives and was a member of the Air Force’s Air Demonstration Squadron, the Thunderbirds.

 

Other Current Public Directorships: Torchmark Corporation (Lead Director, Member of the Compensation Committee)

 

Prior Public Company Directorships (within the last five years): Sunoco Products Co. (until December 2014) and Goodrich Corporation (until August 2012)

 

Director Qualifications:

The Board of Directors considered General (Ret.) Newton’s distinguished career in the Air Force, his experience as an Executive Vice President of Pratt & Whitney Military Engines and his knowledge as a director of public companies.

 

    

 

     LOGO                     

 

Director Since: 2013

 

Board Committees:

  Audit

  Nominating/Corporate
    Governance (Chair)

  Executive

 

Age: 65

 

     VINCENT PAGANO, JR.
    

 

Position, Principal Occupation and Professional Experience:

Retired Partner, Simpson Thacher & Bartlett LLP. Mr. Pagano was a partner at Simpson Thacher & Bartlett LLP until his retirement at the end of 2012. He was the head of the firm’s capital markets practice from 1999 to 2012 and, before that, administrative partner of the firm from 1996 to 1999. He was a member of the firm’s executive committee during substantially all of the 1996-2012 period.

 

Other Current Public Directorships: Cheniere Energy Partners GP, LLC, the general partner of Cheniere Energy Partners, L.P. (Director and Member of the Audit and Conflicts Committees) and Hovnanian Enterprises, Inc. (Director and Member of the Audit and Corporate Governance and Nominating Committees)

 

Other Directorships, Trusteeships and Memberships: Engineering Advisory Council of Lehigh University

 

Director Qualifications:

The Board of Directors considered Mr. Pagano’s significant experience, expertise and background with regard to legal, capital markets and corporate governance matters, including his broad perspective brought by his experience advising clients in many diverse industries.

 

 

14    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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PROPOSALS REQUIRING YOUR VOTE

 

 

 

 

     LOGO                     

 

Director Since: 2011

 

Board Committees:

  Nominating/Corporate
    Governance

 

Age: 74

     H. HUGH SHELTON
    

 

Position, Principal Occupation and Professional Experience:

General (U.S. Army-Ret). General Shelton 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 when he served as the fourteenth Chairman of the Joint Chiefs of Staff from 1997 until his retirement in 2001. He had previously served as Commander-in-Chief of U.S. Special Operations Command (SOCOM). From January 2002 until April 2006, General (Ret.) Shelton served as the President, International Sales of M.I.C. Industries, an international manufacturing company. General (Ret.) Shelton was knighted by Queen Elizabeth II in 2001 and awarded the Congressional Gold Medal in 2002.

 

Other Current Public Directorships: Red Hat, Inc. (Chairman and Member of the Compensation Committee)

 

Other Directorships, Trusteeships and Memberships: Executive Director of the General H. Hugh Shelton Leadership Center at North Carolina State University, National Association of Corporate Directors (NACD) Fellow

 

Director Qualifications:

The Board of Directors considered General (Ret.) Shelton’s distinguished career as the Chairman of the Joint Chiefs of Staff, Department of Defense and as the Commander in Chief of U.S. Special Operations Command (SOCOM) and his extensive knowledge of the defense industry.

 

 

 

     LOGO                     

 

Director Since: 2001

 

Board Committees:

  Audit

  Nominating/Corporate
    Governance

 

Age: 84

 

     ARTHUR L. SIMON
    

 

Position, Principal Occupation and Professional Experience:

Retired Partner, Coopers & Lybrand LLP. Before his retirement, Mr. Simon was a partner at Coopers & Lybrand LLP, Certified Public Accountants, from 1968 to 1994 and was the co-founder of the firm’s Defense Contracting Industry Group.

 

Other Current Public Directorships: Loral Space & Communications Inc. (Chairman and Member of the Audit Committee)

 

Director Qualifications:

The Board of Directors considered Mr. Simon’s significant experience, expertise and background with regard to accounting and internal control matters and the breadth of his business knowledge gained while serving as an independent auditor for numerous organizations across many industries and as the Chair of the Audit Committee of Loral Space & Communications Inc.

 

    
    
    

 

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PROPOSALS REQUIRING YOUR VOTE

 

 

 

 

     LOGO                     

 

Director Since: 2006

  Chairman

  CEO

 

Board Committees:

  Executive

 

Age: 60

 

     MICHAEL T. STRIANESE
    

 

Position, Principal Occupation and Professional Experience:

Chairman and Chief Executive Officer, L-3. Mr. Strianese became Chairman on October 7, 2008 and has served as Chief Executive Officer since October 2006. He also served as President from October 2006 until October 2015. Until February 2007, Mr. Strianese was also our Corporate Ethics Officer. He was our interim Chief Executive Officer and Chief Financial Officer from June 2006. Mr. Strianese became Chief Financial Officer in March 2005. From March 2001 to March 2005 he was our Senior Vice President – Finance. He joined us in April 1997 as Vice President – Finance and Controller and was our Controller until July 2000.

 

Director Qualifications:

The Board of Directors considered Mr. Strianese’s position as Chief Executive Officer and his expertise and experience in the aerospace and defense industries.

 

    
    
    

 

The Board of Directors recommends a vote FOR each of the proposed nominees listed above for election to the Board of Directors.

 

16    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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PROPOSALS REQUIRING YOUR VOTE

 

 

PROPOSAL 2 – SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit the Company’s financial statements. Following its annual evaluation of its independent registered public accounting firm, the Audit Committee considered whether there should be a rotation of such a firm and decided to select PricewaterhouseCoopers LLP (“PwC”) to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2016. PwC has continuously been retained as our independent registered public accounting firm since our formation in 1997, and the Audit Committee and the Board of Directors believe that the continued retention of PwC to serve as the Company’s independent registered public accounting firm is in the best interests of the Company and its shareholders. In conjunction with the mandated rotation of the independent registered public accounting firm’s lead engagement partner, the Audit Committee and its chairperson have been directly involved in the selection of PwC’s lead engagement partner. Representatives of PwC will be present at the Annual Meeting. These representatives will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

Although ratification is not required by our Bylaws or otherwise, the Board of Directors is submitting the selection of PwC to our shareholders for ratification because the Audit Committee and the Board value our shareholders’ views on the Company’s independent registered public accounting firm. If the foregoing proposal is not approved by the holders of a majority of the votes cast, it will be considered as notice to the Board of Directors and the Audit Committee to consider the selection of a different firm. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our shareholders.

 

The Board of Directors recommends a vote FOR ratification of the appointment of

PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm.

 

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PROPOSAL 3 – ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION

We are asking our shareholders to approve, in a non-binding, advisory vote, the compensation paid to our named executive officers as disclosed beginning on page 68 of this Proxy Statement. In connection with this vote, shareholders may also wish to consider the discussion appearing under “The Board of Directors and Certain Governance Matters — Committees of the Board of Directors” beginning on page 37. While the results of this vote are advisory, our Compensation Committee intends to consider the results of this vote when making future compensation decisions. The following is a summary of key points that shareholders may wish to consider in connection with their voting decision.

Our compensation program emphasizes our pay-for-performance philosophy and reflects our commitment to compensation best practices. Our compensation program highlights include:

 

  ¡   Formula-Based Bonus Plan. We apply a formula-based approach for determining annual incentive awards that uses pre-established goals to assess financial and individual performance achievements.

 

  ¡   Emphasis on performance-based variable pay. In 2015, 68% of our Chief Executive Officer’s target pay was in the form of performance-based annual and long-term incentives, including:

 

  ¡   29% of target pay in the form of performance awards that will be forfeited unless our company’s performance during fiscal 2015-2017 meets pre-established goals for cumulative diluted earnings per share and relative total shareholder return.

 

  ¡   22% of target pay in the form of stock options that have value only based on, and to the extent of, future increases in our stock price. In addition, these options are forfeited if vesting conditions based on 2015 financial performance are not satisfied.

 

  ¡   17% of target pay under our formula-based bonus plan described above.

Our executives are subject to meaningful stock ownership and retention guidelines that align their interests with those of our shareholders. Under our policies:

 

  ¡   Our Chief Executive Officer is required to hold L-3 stock worth at least 6 times his base salary, while our other executives have ownership requirements ranging from 1.5 to 3 times base salary.

 

  ¡   Executives must retain 75% of their net after-tax shares earned from equity awards until their ownership requirement is met.

 

  ¡   Stock options, including vested stock options, do not count towards satisfying the ownership requirement.

 

  ¡   Executives are prohibited from reducing their economic exposure to L-3 stock through hedging or pledging transactions, regardless of whether they own more than their ownership requirement.

Our compensation program reflects sound pay practices. In addition to the practices described above, our compensation program reflects the following:

 

  ¡   Our perquisites are modest.

 

  ¡   We do not provide any tax reimbursements or “gross-ups” on severance or change in control payments.

 

  ¡   Our equity plans prohibit repricings of stock options or other equity-based awards without shareholder approval.

 

  ¡   We do not pay dividends on stock options or on other equity-based awards prior to vesting.

 

  ¡   Our retirement plans only provide age or service credit for years worked with L-3 and its predecessor companies.

 

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We believe that the information disclosed in this Proxy Statement demonstrates that our executive compensation program is well-designed and is working as intended. In accordance with the requirements of Section 14A of the Exchange Act and the related rules of the SEC, we are submitting for shareholder consideration the following resolution to approve, in a non-binding, advisory vote, the compensation paid to our named executive officers for fiscal 2015 as disclosed beginning on page 68 of this Proxy Statement:

“RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed in this Proxy Statement pursuant to the rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and any related narrative discussion, is hereby APPROVED.”

 

The Board of Directors recommends a vote FOR approval of

the compensation paid to our named executive officers.

 

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PROPOSAL 4 –   APPROVAL OF THE AMENDMENT TO THE L-3 COMMUNICATIONS HOLDINGS, INC. AMENDED AND RESTATED 2008 LONG TERM PERFORMANCE PLAN

The L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan was originally adopted effective April 29, 2008 and has been amended from time to time prior to March 2016 (as amended, the “2008 Plan”). In March 2016, the Board of Directors authorized and approved an additional amendment to the 2008 Plan (as amended, the “Amended and Restated Plan”), which approval is subject to shareholders approving this Proposal 4. The principal purpose of the amendment is to (i) increase the number of shares authorized for issuance under the 2008 Plan by 6,800,000 shares and (ii) modify the way that shares issued under “full value” awards granted under the 2008 Plan are counted for purposes of calculating the number of authorized shares that have been issued, as further described below. In addition, the amendment to the 2008 Plan is intended to allow the Committee to make awards that may satisfy the requirements of Section 162(m) of the Internal Revenue Code (“Section 162(m)”) with respect to certain performance-based awards that may be granted under the 2008 Plan. The Company is not seeking to make any other material changes to the terms of the 2008 Plan at this time. If the Amended and Restated Plan is approved by shareholders at the 2016 Annual Meeting, it will become immediately effective as of the date of the 2016 Annual Meeting. If shareholders do not approve the Amended and Restated Plan, the 2008 Plan will continue in effect until April 2023.

Besides the 2008 Plan, the only equity compensation plan maintained by the Company under which future awards are authorized for issuance is the L-3 Communications Corporation 2009 Employee Stock Purchase Plan (the “2009 ESPP”). For additional information concerning the terms under which shares can be purchased under the 2009 ESPP and the number of shares available for future issuance under the 2009 ESPP, see Note 17 to the audited consolidated financial statements included in L-3’s 2015 Annual Report on Form 10-K.

The purpose of the Amended and Restated Plan is to benefit the Company’s shareholders by encouraging high levels of performance by individuals who contribute to the success of the Company and its subsidiaries and to enable the Company and its subsidiaries to attract, motivate, retain and reward talented and experienced individuals. This purpose is to be accomplished by providing eligible individuals with an opportunity to obtain or increase a proprietary interest in the Company and/or by providing eligible individuals with additional incentives to join or remain with the Company and its subsidiaries. A copy of the Amended and Restated Plan, which is marked to show the changes made to the 2008 Plan, is attached hereto as Annex A.

As of February 22, 2016, a total of 19,213,817 shares were authorized for issuance under the 2008 Plan, of which 2,250,555 shares remained available for issuance under future awards. If shareholders approve the Amended and Restated Plan, the total number of shares authorized for issuance under the 2008 Plan would be increased by 6,800,000 shares. As a result, 26,013,817 shares would be authorized for issuance under the Amended and Restated Plan, of which 9,050,555 shares would be available for issuance under future awards. This amount excludes any shares that would become available again under the Amended and Restated Plan in connection with expired, cancelled, terminated or forfeited awards on or after February 23, 2016. We expect that if the Amended and Restated Plan is approved by our shareholders, the additional shares would be sufficient to allow us to make equity awards in the amounts we believe are necessary to attract, motivate, retain and reward talented and experienced individuals for the next two to three years. Unless terminated earlier or otherwise amended by the Company’s Board of Directors, the Amended and Restated Plan would terminate on March 1, 2026.

Under the 2008 Plan, shares issued under “full value” awards (i.e., all awards other than stock options or stock appreciation rights (“SARs”)) granted on or after February 26, 2013 count as 3.69 shares for purposes of calculating the number of shares that remain available for future awards under the plan. As of February 22, 2016, a maximum of 609,906 shares were available for issuance under full value awards to be granted in the future. If shareholders approve the Amended and Restated Plan, shares issued under full value awards granted on or after February 23, 2016 would count as 4.26 shares against the remaining share reserve. Accordingly, if shareholders approve the Amended and Restated Plan, of the 9,050,555 shares that would be available for issuance under future awards, a maximum of 2,124,543 shares would be available for issuance under full value awards. This amount excludes the effect of any shares that would become available again under the Amended and Restated Plan in connection with expired, cancelled, terminated or forfeited awards on or after February 23, 2016.

On February 16, 2016, we granted equity awards under which a total of 1,096,337 shares may be issued under the 2008 Plan to employees, including 487,477 shares that may be issued under full value awards (of which 383,693 shares are issuable in respect of restricted stock units, and 103,784 shares are issuable in respect of performance units based on the assumption that

 

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the maximum levels of performance applicable to the performance units will be achieved). We have not granted, nor do we currently expect to grant, any other equity awards to employees in 2016 (excluding shares purchased or available for purchase under the 2009 ESPP). Based on our current projections, without shareholder approval of the Amended and Restated Plan, we will likely not be able to grant the full number of equity awards in 2017 that we believe is necessary to continue to attract, motivate, retain and reward talented and experienced employees.

We have not granted, nor do we currently expect to grant, equity awards to any other persons in 2016, except to our non-employee directors as compensation for their board service or as dividend equivalents on their outstanding awards. We granted 549 restricted stock units to non-employee directors on February 9, 2016, and currently expect to grant approximately 14,000 restricted stock units to non-employee directors for the remainder of 2016 assuming the per share closing price of L-3’s Common Stock is $117.50 on the applicable grant dates, including 440 restricted stock units expected to be granted prior to the date of the 2016 Annual Meeting.

As of February 22, 2016, a total of 4,864,645 shares were issuable in respect of outstanding awards under all equity compensation plans maintained by the Company, including the 2008 LTPP and other equity compensation plans under which no new awards are authorized for issuance (the “Prior Plans”). Of these shares, a total of 3,490,359 shares were issuable in respect of stock options with a weighted average exercise price of $96.71 and a weighted average remaining contractual term of 6.17 years. The remaining 1,374,286 shares were issuable in respect of full value awards (including 1,099,714 shares in respect of restricted stock units, and 274,572 shares in respect of performance units based on the assumption that the maximum levels of performance applicable to the performance units will be achieved).

The total number of shares issuable under awards we have granted under the 2008 Plan and the Prior Plans as a percentage of our annual weighted average common shares outstanding (commonly referred to as the “burn rate”) has been on average 1.33% over the last three completed fiscal years and 1.42% over the last five completed fiscal years. This calculation is based on the amounts of shares issuable under awards as of the dates they were granted, and not as adjusted, in the case of awards outstanding as of July 17, 2012, to reflect the effect of the Company’s spin-off of Engility Holdings, Inc. as described in Note 1 to the “Stock-Based Awards Previously Granted Under the 2008 Long Term Performance Plan” table beginning on page 27.

Over the last five completed fiscal years, we have repurchased substantially more shares than we have issued, with the net impact being an average annual reduction of 5.71% and 6.71% in our weighted average common shares outstanding over the last three and five completed fiscal years, respectively.

The Amended and Restated Plan is hereby proposed for approval by the shareholders. The affirmative vote of a majority of the votes cast at the Annual Meeting is required to approve the Amended and Restated Plan. Abstentions will be counted as a vote “against” this proposal and “broker non-votes” will have no effect on the outcome of this proposal.

Description of the Amended and Restated Plan

Eligibility

Awards under the Amended and Restated Plan may be granted to any employee, including any officer, of the Company or any of its subsidiaries, or to any non-employee director or other individual who provides services to or on behalf of the Company or any of its subsidiaries, subject to the discretion of the Committee to determine the particular employees, non-employee directors and other individuals who, from time to time, will be selected to receive awards. As of December 31, 2015, we employed approximately 38,000 full-time and part-time employees, and nine non-employee directors served on our Board of Directors.

Types of Awards

Awards under the Amended and Restated Plan may be in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and other share-based awards, such as performance-based awards. Awards may be granted singly or in combination with other awards, consistent with the terms of the Amended and Restated Plan. Each award will be evidenced by an award agreement entered into between the Company and the recipient setting forth the specific terms

 

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and conditions applicable to that award. Awards under the Amended and Restated Plan generally will be non-transferable by a holder (other than by will or the laws of descent and distribution) and rights thereunder generally will be exercisable during the holder’s lifetime only by the holder. The maximum term of any unvested or unexercised non-qualified stock options, incentive stock options or SARs under the Amended and Restated Plan is ten years from the initial grant date.

Stock options authorized under the Amended and Restated Plan are rights to purchase a specified number of shares of the Common Stock at an exercise price of not less than the fair market value of the Common Stock on the grant date during the period set forth in the individual participant’s award agreement. The fair market value of the underlying shares of Common Stock as of March 7, 2016 was $118.01 per share. Dividends and dividend equivalents may not be paid on unissued shares underlying option awards. Stock options that are granted as incentive stock options will be granted with such additional terms as are necessary to satisfy the applicable requirements of Section 422 of the Internal Revenue Code. The fair market value of the Common Stock for which incentive stock options are exercisable for the first time by an optionee during any calendar year cannot exceed $100,000 (measured as of the grant date) under current tax laws. Other awards are not limited in this manner.

SARs may be granted on a freestanding basis, in relation to a stock option or in “tandem” with a stock option, such that the exercise of either the option or the SAR cancels the recipient’s rights under the tandem award with respect to the number of shares so exercised. SARs entitle the recipient to receive, upon exercise of the SAR, an amount (payable in cash and/or Common Stock or other property) equal to the amount of the excess, if any, of the fair market value of a share of the Common Stock on the date the SAR is exercised (or some lesser ceiling amount) over the base price of the SAR (or the exercise price of an option, if the SAR is granted in tandem with an option), which cannot be less than the fair market value of a share of the Common Stock on the date the SAR was awarded (or the exercise price of a related stock option). Dividends and dividend equivalents may not be paid on unissued shares underlying SARs.

Restricted stock is Common Stock issued to the recipient, typically for minimal lawful consideration and subject to certain risks of forfeiture and restrictions and limitations on transfer, the vesting of which may depend on individual or corporate performance, continued service or other criteria.

Other incentive awards might include minimum ownership stock, phantom stock or units, performance stock or units, bonus stock or units, dividend equivalent units, similar securities or rights and other awards payable in or with a value derived from or a price related to the fair market value of the Common Stock, payable in Common Stock and/or cash, all on such terms as the Committee may approve. Such awards may be granted, become vested or be payable based upon the continued employment of a participant, or upon the attainment of specified corporate or individual performance goals (as in the case of performance stock or units).

Under Section 162(m) of the Internal Revenue Code, the Company may not deduct certain compensation over $1,000,000 in any year to the Chief Executive Officer or any of the three other most highly compensated executive officers of the Company, other than the Chief Financial Officer, unless, among other things, this compensation qualifies as “performance-based compensation” under Section 162(m), and the material terms of the plan for such compensation are approved by shareholders. With reference to awards intended to qualify as performance-based compensation under Section 162(m), the material terms of the Amended and Restated Plan include the eligible class of participants, the performance goal or goals and the maximum annual amount payable thereunder to any individual participant. The Committee may also approve compensation that does not qualify for a deduction under Section 162(m) if it determines that it is appropriate to do so in light of other competing interests and goals, such as the attraction and retention of key executives.

The eligible class of persons for performance-based awards under the Amended and Restated Plan is all employees of the Company and its subsidiaries. Awards that are intended to qualify as performance-based awards under the Amended and Restated Plan (other than stock options and SARs) may be granted only in accordance with the performance-based requirements of Section 162(m), as set forth below.

The performance goals for performance-based awards under the Amended and Restated Plan are any one or a combination of the following: (i) consolidated income before or after taxes (including income before interest, taxes, depreciation and amortization); (ii) EBIT or EBITDA; (iii) operating income or operating margin; (iv) book value per share of Common Stock; (v) expense management (including without limitation, total general and administrative expense percentages); (vi) improvements in capital structure; (vii) profitability of an identifiable business unit or product; (viii) maintenance or

 

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improvement of profit margins; (ix) stock price; (x) market share; (xi) revenue or sales (including, without limitation, net loans charged off and average finance receivables); (xii) costs (including, without limitation, total general and administrative expense percentage); (xiii) orders; (xiv) working capital; (xv) total debt (including, without limitation, total debt as a multiple of EBIT or EBITDA); (xvi) cash flow or net funds provided; (xvii) net income or earnings per share; (xviii) return on equity; (xix) return on investment or invested capital; and (xx) total shareholder return or any other performance goal that the Committee in its sole discretion establishes in accordance with the requirements of Section 162(m). Specific performance periods (which may overlap with performance periods under outstanding performance-based awards), weightings of more than one performance goal and target levels of performance upon which actual payments will be based, as well as the award levels payable upon achievement of specified levels of performance, will be determined by the Committee not later than the applicable deadline under Section 162(m) and in any event at a time when achievement of such targets is substantially uncertain. These variables may change from award to award. To the extent set forth in an individual participant’s award agreement, appropriate adjustments to the performance goals and targets in respect of performance-based awards may be made by the Committee based upon objective criteria in the case of (i) a change in corporate capitalization, a corporate transaction or a complete or partial corporate liquidation, (ii) any extraordinary gain or loss under generally accepted accounting principles or (iii) any material change in accounting policies or practices affecting the Company and/or the performance goals or targets.

The Committee must certify the achievement of the applicable performance goals and the actual amount payable to each participant under the performance-based awards prior to payment. The Committee may retain discretion to reduce, but not increase, the amount payable under a performance-based award to any participant, notwithstanding the achievement of targeted performance goals. Awards may be accelerated in the event of the employee’s death or permanent disability, or in the event of a Change in Control of the Company as described below.

The Committee also has the authority to grant awards under the Amended and Restated Plan in substitution for or as the result of the assumption of stock incentive awards held by employees of other entities who become employees of the Company or a subsidiary as a result of a merger or acquisition of the entity.

Awards may be granted in connection with the surrender or cancellation of previously granted awards, or may be amended, under such terms and conditions, including numbers of shares and exercise price, exercisability or termination, that are the same as or different from the existing awards, all as the Committee may approve, except that no such grant or amendment may effect a repricing of the original award.

Administration; Change in Control

The Amended and Restated Plan provides that it shall be administered by the Committee (or subcommittee thereof), another committee of the Board of Directors or the full Board of Directors. With respect to awards granted to persons who are subject to the reporting requirements of Section 16(a) of the Exchange Act and/or who are “covered employees” under Section 162(m), as applicable, the Amended and Restated Plan provides that the Committee shall be constituted so as to permit awards under the Amended and Restated Plan to comply with the “non-employee director” provisions of Rule 16b-3 under the Exchange Act and/or the “outside director” requirements of Section 162(m), respectively. The Committee has the authority within the terms and limitations of the Amended and Restated Plan to designate recipients of awards, determine or modify (so long as it does not effect a repricing of the original award) the form, amount, terms, conditions, restrictions, and limitations of awards, including vesting provisions (subject to applicable limitations described below with respect to restricted stock), terms of exercise of an award, expiration dates and the treatment of an award in the event of the retirement, disability, death or other termination of a participant’s employment with the Company, and to construe and interpret the Amended and Restated Plan. Such authority includes (subject to the limitations of the Amended and Restated Plan) the discretion to accelerate vesting, extend the term or waive termination provisions or other restrictive conditions of outstanding awards.

The Committee is authorized to include specific provisions in award agreements relating to the treatment of awards in the event of a “Change in Control” of the Company and is authorized to take certain other actions in such an event. Change in Control under the Amended and Restated Plan is defined generally to include: (i) a change in ownership involving a majority of the outstanding voting securities of the Company, (ii) a sale of all or substantially all of the assets of the Company or L-3 Communications Corporation or any successor thereto, (iii) the consummation of a merger, combination, consolidation, recapitalization, or other reorganization of the Company with one or more other entities that are not subsidiaries, if as a result of such reorganization, less than 50 percent of the outstanding voting securities of the surviving or resulting corporation are

 

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beneficially owned by the shareholders of the Company immediately prior to such event; (iv) certain changes, during any period of 24 months or less, of 50 percent or more of the members of its Board of Directors, or (v) in the Committee’s sole discretion on a case-by-case basis with respect to outstanding awards to affected employees, the sale of a subsidiary, division or business unit.

The Committee may delegate to the officers or employees of the Company the authority to execute and deliver such instruments and documents and to take actions necessary, advisable or convenient for the effective administration of the Amended and Restated Plan. It is intended generally that the awards under the Amended and Restated Plan and the Amended and Restated Plan itself comply with and be interpreted in a manner that, in the case of participants who are subject to Section 16 of the Exchange Act and for whom (or whose awards) the benefits of Rule 16b-3 are intended, satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under that Section. Similarly and as described further below, it is intended generally that the awards under the Amended and Restated Plan will not be granted, deferred, accelerated, extended, modified or paid in a manner that would result in the participant incurring any tax liability under Section 409A of the Code. The Amended and Restated Plan provides that neither the Company nor any member of the Board of Directors or of the Committee shall have any liability to any person for any action taken or not taken in good faith under the Amended and Restated Plan.

Amendment and Termination

The Board of Directors has the authority to amend, suspend or discontinue the Amended and Restated Plan at any time, subject to any shareholder approval that may be required under applicable law and provided that no such action will affect any outstanding award in any manner adverse to the participant without the consent of the participant. Notwithstanding the foregoing, any amendment to the Amended and Restated Plan that would (i) materially increase the benefits accruing to any participant, (ii) materially increase the aggregate number of shares of Common Stock or other equity interests that may be issued under the Amended and Restated Plan, or (iii) materially modify the requirements as to eligibility for participation in this Amended and Restated Plan, shall be subject to shareholder approval. In addition, shareholder approval may be required to satisfy tax rules applicable to performance-based compensation under Section 162(m) or to subsequent grants of incentive stock options, or to satisfy other applicable legal requirements. Because the Committee retains the discretion to set and change the specific targets for each performance period under a performance-based award intended to be exempt from Section 162(m), shareholder ratification of the performance goals will be required, in any event, at five-year intervals in the future to exempt awards granted under the Amended and Restated Plan from the limitations on deductibility thereunder.

Authorized Shares; Other Provisions; Non-Exclusivity

If the Amended and Restated Plan is approved by shareholders, the maximum number of shares of Common Stock that may be issued in respect of awards under the Amended and Restated Plan may not exceed 26,013,817 shares. For purposes of this share limit, each share of Common Stock issued pursuant to “full value” awards (i.e., all awards other than stock options or SARs) granted from March 1, 2010 through February 25, 2013 will be counted as 2.60 shares; each share of Common Stock that may be issued pursuant to full value awards granted from February 26, 2013 through February 22, 2016 will be counted as 3.69 shares; and each share of Common Stock that may be issued pursuant to full value awards granted on or after February 23, 2016 will be counted as 4.26 shares. In addition, (i) the maximum number of shares of Common Stock that may be issued pursuant to all awards of incentive stock options (i.e., stock options granted in accordance with Section 422 of the Internal Revenue Code) is 3,000,000, (ii) the maximum number of shares of Common Stock that may be issuable (or payable in cash by reference to such shares) under stock options or SARs granted during a calendar year to any employee shall be 750,000 and (iii) the maximum number of shares of Common Stock that may be issuable (or payable in cash by reference to such shares) under other performance based-awards granted during a calendar year to any employee shall be 300,000. For non-employee directors, the maximum number of shares of Common Stock that may be issuable (or payable in cash by reference to such shares) subject to awards granted during a calendar year, together with any cash fees paid to such non-employee director, shall not exceed $525,000 in total value (which shall be calculated for awards granted under the Amended and Restated Plan based on the grant date fair value of such awards for financial reporting purposes and excluding the value of any dividends or dividend equivalents on unissued shares of Common Stock (or on unpaid amounts payable in cash by reference to such shares) underlying any such awards).

 

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The number and kind of shares available for grant and the shares subject to outstanding awards (as well as individual share limits on awards and exercise prices of awards) shall be adjusted to reflect the effect of a stock dividend, stock split, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, extraordinary dividend or other distribution or other similar transaction. Any unexercised or undistributed portion of any expired, cancelled, terminated or forfeited award, or any alternative form of consideration under an award that is not paid in connection with the settlement of any portion of an award, will again be available for award under the Amended and Restated Plan, whether or not the participant has received benefits of ownership (such as dividends or dividend equivalents or voting rights) during the period in which the participant’s ownership was restricted or otherwise not vested. However, the following shares of Common Stock shall not become available for reissuance under the Amended and Restated Plan: (i) shares tendered by participants as full or partial payment to the Company upon exercise of stock options or other awards granted under the Amended and Restated Plan; (ii) shares of Common Stock reserved for issuance upon the grant of SARs, to the extent the number of reserved shares exceeds the number of shares actually issued upon exercise of the SARs; (iii) shares withheld by, or otherwise remitted to, the Company to satisfy a participant’s tax withholding obligations upon the lapse of restrictions on restricted stock or the exercise of stock options or SARs or upon any other payment or issuance of shares under any other award granted under the Amended and Restated Plan; and (iv) shares of Common Stock acquired by the Company in connection with the Amended and Restated Plan or the satisfaction of an award granted under the Amended and Restated Plan. With respect to the individual share limits on performance-based awards, awards that are cancelled will be counted against the applicable limits to the extent required by Section 162(m).

UPON APPROVAL OF THE AMENDED AND RESTATED PLAN BY THE SHAREHOLDERS, THE COMPANY INTENDS TO REGISTER UNDER THE SECURITIES ACT OF 1933 THE ADDITIONAL 6,800,000 SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE UNDER THE AMENDED AND RESTATED PLAN.

Full payment for shares purchased on exercise of any option or received under any other award, along with payment of any required tax withholding, must be made in cash prior to the delivery of the underlying shares or, if permitted by the Committee, in shares of Common Stock delivered by the participant or withheld from an award, or any combination thereof, or pursuant to such “cashless exercise” procedures as may be permitted by the Committee.

Except as specifically provided under an individual participant’s award agreement approved by the Committee, the minimum vesting period for awards of restricted stock is three years from the grant date (or one year in the case of restricted stock awards that are performance-based awards) and may not be accelerated to an earlier date except in the event of the participant’s death, permanent disability or retirement or in the event of a Change in Control. The Amended and Restated Plan does not impose any minimum vesting periods on other types of awards, and the Committee may establish the vesting requirements (if any) for such awards in its sole discretion.

The Amended and Restated Plan is not exclusive and does not limit the authority of the Company, the Board of Directors or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority.

Federal Income Tax Consequences

The following is a general description of federal income tax consequences to participants and the Company relating to nonqualified and incentive stock options and certain other awards that may be granted under the Amended and Restated Plan. This discussion does not purport to cover all tax consequences relating to stock options and other awards.

An optionee will not recognize income upon the grant of a nonqualified stock option to purchase shares of Common Stock. Upon exercise of the option, the optionee will recognize ordinary compensation income equal to the excess of the fair market value of the Common Stock on the date the option is exercised over the option price for such Common Stock. The tax basis of the Common Stock acquired by exercising an option in the hands of the optionee will equal the option price for the Common Stock plus the amount of ordinary compensation income the optionee recognizes upon exercise of the option, and the holding period for the Common Stock will commence on the day the option is exercised. An optionee who sells Common Stock acquired by exercising an option will recognize capital gain or loss measured by the difference between the tax basis of the Common Stock and the amount realized on the sale. Such gain or loss will be long-term if the Common Stock is held for more than 12 months after exercise, and short-term if held for 12 months or less after exercise. The Company or a subsidiary will be entitled to a deduction equal to the amount of ordinary compensation income recognized by the optionee. The deduction will be allowed at the same time the optionee recognizes the income.

 

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An optionee will not recognize income upon the grant of an incentive stock option to purchase shares of Common Stock, and will not recognize income upon exercise of the option, provided such optionee was an employee of the Company or a subsidiary at all times from the grant date until three months prior to exercise (or one year prior to exercise in the event of disability). Generally, the amount by which the fair market value of the Common Stock on the date of exercise exceeds the option price will be includable in alternative minimum taxable income for purposes of determining alternative minimum tax and such amount will be added to the tax basis of such Common Stock for purposes of determining alternative minimum taxable income in the year the Common Stock is sold. Where an optionee who has exercised an incentive stock option sells the shares acquired upon exercise more than two years after the grant date and more than one year after exercise, long-term capital gain or loss will be recognized equal to the difference between the sales price and the option price. An optionee who sells such shares within two years after the grant date or within one year after exercise will recognize ordinary compensation income in an amount equal to the lesser of (i) the difference between the fair market value of the shares on the date of exercise and the amount paid for the shares, or (ii) the excess of the amount realized on the sale over the adjusted basis in the shares. Any remaining gain or loss will be treated as a capital gain or loss. The Company or a subsidiary will be entitled to a deduction equal to the amount of ordinary compensation income recognized by the optionee in this case. The deduction will be allowable at the same time the optionee recognizes the income.

The current federal income tax consequences of other awards authorized under the Amended and Restated Plan generally follow certain basic patterns: SARs are taxed to the individuals and deductible by the Company in substantially the same manner as nonqualified stock options; and nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value of the Common Stock over the purchase price (if any) at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the grant date); in each of the foregoing cases, the Company will generally have (at the time the participant recognizes income) a corresponding deduction.

If, as a result of a Change in Control event, a participant’s stock options or SARs or other rights become immediately exercisable, or restrictions immediately lapse on an award, or cash, shares or other benefits covered by another type of award are immediately vested or issued, the additional economic value, if any, attributable to the acceleration or issuance may be deemed a “parachute payment” under Section 280G of the Internal Revenue Code. In such case, the participant may be subject to a 20% non-deductible excise tax as to all or a portion of such economic value, in addition to any income tax payable. The Company will not be entitled to a deduction for that portion of any parachute payment that is subject to the excise tax.

Notwithstanding any of the foregoing discussions with respect to the deductibility of compensation under the Amended and Restated Plan, Section 162(m) would render non-deductible to the Company certain compensation in excess of $1,000,000 in any year to the Named Executive Officers (other than the Chief Financial Officer), unless such excess compensation is “performance-based” (as defined in Section 162(m)) or is otherwise exempt from Section 162(m). The applicable conditions of an exemption for a performance-based compensation plan include, among others, a requirement that the shareholders approve the material terms of the plan. Stock options, SARs and certain (but not all) other types of awards may be granted to qualify for the exemption for performance-based compensation under Section 162(m).

Section 409A of the Internal Revenue Code generally establishes rules that must be followed with respect to covered deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) on the service provider who is entitled to receive the deferred compensation. Certain awards that may be granted under the Amended and Restated Plan may constitute “deferred compensation” within the meaning of and subject to Section 409A. The Amended and Restated Plan and award agreements entered into under the Amended and Restated Plan are intended to be interpreted and operated in accordance with Section 409A, including any regulations or guidance issued by the Treasury Department, and contain a number of provisions intended to avoid the imposition of additional tax on the Amended and Restated Plan participants under Section 409A (though each participant is solely responsible and liable for the satisfaction of all taxes and penalties in respect of any payments or benefits delivered in connection with the Amended and Restated Plan, including taxes and penalties under Section 409A). The Board of Directors may amend the Amended and Restated Plan, and the Committee may amend outstanding awards thereunder, while preserving the intended benefits of awards granted under the Amended and Restated Plan to avoid the imposition of an additional tax under Section 409A. In addition, it is intended under the Amended and Restated Plan that no award be granted, deferred, accelerated, extended, paid out or modified under the Amended and Restated Plan, and no award agreement be interpreted, in a manner that would result in the imposition of an additional tax under Section 409A on a participant. If it is reasonably determined that a payment with respect to an award would result in tax liability to a participant under 409A, the Company will not make the payment when otherwise required and instead will make the payment on the first day that payment would not result in the tax liability.

 

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STOCK-BASED AWARDS PREVIOUSLY GRANTED UNDER THE 2008 LONG TERM

PERFORMANCE PLAN AS OF FEBRUARY 22, 2016

 

     Number of Shares Covered(1)  
Name and Position   Stock Option
Grants
    Restricted Stock
Unit Grants
    EPS Performance
Unit Grants(2)
    TSR Performance
Unit Grants(3)
    Total of All
Columns in Table
 
Michael T. Strianese     1,815,650        280,509        165,884        63,369        2,325,412   

(Chairman and Chief Executive Officer and Director)

         
Ralph G. D’Ambrosio     379,632        59,056        35,856        10,547        485,091   

(Senior Vice President and Chief Financial Officer)

         
Curtis Brunson     387,059        60,163        36,519        10,772        494,513   

(Executive Vice President of Corporate Strategy and Development)

         
Steve Kantor     241,180        37,484        22,648        7,025        308,337   

(Senior Vice President and President of Electronic Systems Group)

         
John S. Mega     127,828        19,812        11,929        3,840        163,409   

(Senior Vice President and President of Communication Systems Group)

         
All Current Executive Officers as a Group     3,398,087        559,622        306,475        103,318        4,367,502   
All Current Directors who are not Executive Officers as a Group            28,590                      28,590   
All Employees, including all Current Officers who are not Executive Officers as a Group     2,459,521        4,417,260        104,625        41,629        7,023,035   
All Employees     5,857,608        4,976,882        411,100        144,947        11,390,537   

 

(1) The number of shares or units reported in this table reflects the terms of the awards on the date they were granted and does not reflect any subsequent adjustments made in connection with our spin-off of Engility Holdings, Inc. on July 17, 2012. In connection with the spin-off, the number of shares subject to then outstanding option and stock awards, and the exercise price for the option awards, were adjusted to maintain the intrinsic value of each award as required pursuant to the terms of the 2008 Plan.

 

(2) Reflects the number of shares of our Common Stock issuable assuming achievement of the Target level of performance in respect of performance units whose performance targets are based on earnings per share. The number of shares ultimately issued can range from 0% to 200% of the original award based upon the level of performance actually achieved.

 

(3) Reflects the number of shares of our Common Stock payable in cash (based on the closing price of our Common Stock at the end of the applicable performance periods) assuming achievement of the Target level of performance in respect of performance units whose performance targets are based on total shareholder return. The number of shares underlying the amount of cash ultimately paid can range from 0% to 200% of the original award based upon the level of performance actually achieved.

The Amendment to the 2008 Plan is hereby proposed for approval by the shareholders. The affirmative vote of a majority of the votes cast at the Annual Meeting is required for approval of the Amendment to the 2008 Plan, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal.

 

The Board of Directors recommends a vote FOR the proposal to approve the amendment to the L-3 Communications Holdings Inc. Amended and Restated 2008 Long Term Performance Plan.

 

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PROPOSAL 5 – ADOPTION OF AGREEMENT AND PLAN OF MERGER EFFECTING THE ELIMINATION OF THE COMPANY’S HOLDING COMPANY STRUCTURE

What is the purpose of the Merger?

The Company was organized in 1997 as a holding company for L-3 Communications Corporation (the “Subsidiary”), and its sole asset is the stock of the Subsidiary. Management of the Company believes that the holding company structure is no longer necessary, and that its elimination will result in cost savings and administrative efficiencies. Therefore, management has proposed that the Company be merged with and into the Subsidiary (the “Merger”) such that, immediately following the effective time of the Merger (the “Effective Time”), the Company’s separate corporate existence will cease and the Subsidiary will continue as the surviving corporation (the “Surviving Corporation”). The Board of Directors, having reviewed and considered management’s proposal, has determined that the proposed Merger is in the best interests of the Company and its shareholders, and has accordingly approved the Agreement and Plan of Merger, dated as of March 4, 2016 (a copy of which is attached hereto as Annex B, the “Merger Agreement”), and declared it advisable, and recommends that shareholders vote “FOR” the proposal to adopt the Merger Agreement.

Immediately following the Merger, the outstanding shares of common stock of the Surviving Corporation will be owned directly by the Company’s shareholders in the same proportion as their ownership of shares of the Company’s Common Stock immediately prior to the Merger. At this time, the Company has no shares of preferred stock issued and outstanding. The rights and privileges of the shareholders and the terms and provisions of the capital stock of the Surviving Corporation after the Merger will be identical to those of the shareholders and capital stock of the Company immediately prior to the Effective Time of the Merger.

What are the material terms of the Merger?

The following is a summary of the material terms of the Merger:

 

   
Companies    The Company is a Delaware corporation that was incorporated in 1997. The Subsidiary is a Delaware corporation and wholly-owned subsidiary of the Company. The Subsidiary was also incorporated in 1997.
Transaction Structure    Subject to the terms and conditions of the Merger Agreement, the Company will merge with and into the Subsidiary. Immediately after the Effective Time, the Company’s separate corporate existence will cease and the Subsidiary will continue as the Surviving Corporation.
Effect on Capital Stock    At the Effective Time, each share of common stock, par value $0.01 per share, of the Company (the “Company Common Stock”) issued and outstanding or held in treasury immediately prior to the Effective Time will automatically be converted into one share of common stock, par value $0.01 per share, of the Surviving Corporation (the “Surviving Corporation Common Stock”), without any further action by the shareholders of the Company or the Subsidiary. At the Effective Time, each share of common stock, par value $0.01 per share, of the Subsidiary issued and outstanding immediately prior to Effective Time (all of which shall be owned by the Company) will automatically be cancelled for no consideration.
Stock Certificates    Upon consummation of the Merger, each stock certificate that, immediately prior to the Effective Time, represented shares of Company Common Stock will be deemed to represent an identical number of shares of Surviving Corporation Common Stock, unless and until the same are surrendered for exchange. No surrender or exchange of stock certificates formerly representing shares of Company Common Stock will be required in connection with the Merger.
State of Incorporation    There will be no change in the state of incorporation as a result of the Merger. The Company is a Delaware corporation, and the Subsidiary is a Delaware corporation.

 

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Further Effects of the Merger   

As a result of the Merger, the Certificate of Incorporation of the Subsidiary will be amended and restated in its entirety to be substantially in the form of the Amended and Restated Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time, except that the provisions related to the classification of the Company’s Board of Directors, which has been phased out, will be eliminated. In connection with the Merger, the bylaws of the Subsidiary will be amended and restated in their entirety to be substantially in the form of the Bylaws of the Company as in effect immediately prior to the Effective Time. Therefore, immediately after the Effective Time, the Surviving Corporation will have the same authorized capital stock, with the same rights, powers and privileges as the capital stock of the Company immediately prior to the Effective Time.

 

Immediately after the Effective Time, the Surviving Corporation will have the same consolidated assets, liabilities and shareholders’ equity as the Company immediately prior to the Effective Time.

 

At the Effective Time, the directors of the Company as of immediately prior to the Effective Time will become the directors of the Surviving Corporation, each to hold office until the next annual meeting of shareholders of the Surviving Corporation and until his or her successor is duly elected and qualified, or until his or her earlier death, resignation or removal. At the Effective Time, the officers of the Company as of immediately prior to the Effective Time will become the officers of the Surviving Corporation, with each officer having the same title, powers and duties that he or she possessed as of immediately prior to the Effective Time and each serving until his or her successor is duly appointed and qualified or until his or her earlier death, resignation or removal.

 

Following the Merger, the Surviving Corporation will be a publicly traded company with reporting obligations under the Exchange Act. The Surviving Corporation’s common stock will be listed on the NYSE under the same ticker symbol used by the Company today, “LLL.”

Tax Consequences    It is intended that the Merger will be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, with the result that shareholders will not recognize gain or loss as a result of the Merger.
Termination    Pursuant to its terms, at any time prior to the Effective Time, the Merger Agreement may be terminated and the Merger abandoned by unilateral action by the Board of Directors of the Company, regardless of whether the Merger Agreement has been adopted by shareholders.
Timing    The Merger will become effective upon the filing of the certificate of merger with the Delaware Secretary of State, or such later date and time as is specified in the certificate of merger in accordance with Delaware law. The Merger is currently expected to be effective as of the close of business on December 31, 2016.
Corporate Office    The Surviving Corporation will have the same address and executive office as the Company: 600 Third Avenue, New York, New York 10016.

What are the conditions to the Merger?

The Merger is subject to the following conditions:

 

  ¡   The adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s Common Stock entitled to vote thereon and by the Company, as sole shareholder of the Subsidiary;

 

  ¡   Approval for listing on the NYSE of the Subsidiary’s common stock to be issued in the Merger;

 

  ¡   Absence of a determination by the Board of Directors of the Company or the Subsidiary that the Merger is not in the best interests of the Company or the Subsidiary, respectively;

 

  ¡   Absence of a temporary restraining order, preliminary or permanent injunction or other order or decree issued by any governmental entity of competent jurisdiction enjoining or otherwise preventing the consummation of the Merger; and

 

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  ¡   Receipt of all consents, approvals and authorizations deemed necessary or advisable to be obtained prior to the consummation of the Merger, other than those the failure of which to be obtained, individually or in the aggregate, would not reasonably be expected to have a material adverse effect on the Company or the Subsidiary.

Are there any regulatory requirements that apply to the Merger?

In connection with the consummation of the Merger, the Subsidiary will file a certificate of merger with the Secretary of State of the State of Delaware, and the Company and the Subsidiary will comply with any obligations to make filings with the SEC under the Exchange Act.

What are the key terms of the capital stock of the Company and the Surviving Corporation?

The following description of the capital stock of the Company is a summary of certain provisions of the Company’s Amended and Restated Certificate of Incorporation. As a result of the Merger, the Certificate of Incorporation of the Surviving Corporation will be amended and restated in its entirety to be substantially in the form of the Amended and Restated Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time of the Merger. In addition, in connection with the Merger, the bylaws of the Surviving Corporation will be amended and restated in their entirety to be substantially in the form of the Bylaws of the Company as in effect immediately prior to the Effective Time, except that the provisions related to the classification of the Company’s Board of Directors, which has been phased out, will be eliminated. Therefore, there will be no changes to the rights, powers and privileges of shareholders before and after the Merger. The authorized number of shares of capital stock of the Company, and the par value thereof per share, are as follows: 300,000,000 shares of Company Common Stock and 50,000,000 shares of preferred stock, par value $0.01 per share (the “Company Preferred Stock”). The terms and provisions of the capital stock of the Surviving Corporation immediately after the Effective Time will be identical to those of the capital stock of the Company immediately prior to the Effective Time.

Company Preferred Stock

The Company’s Amended and Restated Certificate of Incorporation authorizes the Board of Directors to issue, without further vote or action by holders of Company Common Stock, up to 50,000,000 shares of Company Preferred Stock from time to time in one or more series with such designations, voting rights, preferences as to dividends and in liquidation, conversion and other rights, qualifications, limitations and restrictions as may be provided for the issue of such series by resolution and adopted by the Board of Directors and the filing of a certificate of designation setting forth such resolution with the Delaware Secretary of State. This generally is referred to as “blank check” preferred stock. Any series of Company Preferred Stock so designated could have priority over Company Common Stock as to dividends and as to the distribution of our assets upon any liquidation, dissolution or winding up of the Company. At this time, there are no shares of Company Preferred Stock issued and outstanding.

Company Common Stock

Subject to the rights of the holders of any shares of any series of Company Preferred Stock that may be outstanding from time to time, holders of Company Common Stock are entitled to (1) vote on all matters submitted to a vote of shareholders except as otherwise required by law; (2) receive dividends out of funds legally available for distribution when and if declared by the Company’s Board of Directors; and (3) receive the remaining assets of the Company available for distribution to shareholders in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation.

Under the Company’s Amended and Restated Certificate of Incorporation, holders of Company Common Stock do not have any preemptive rights to purchase or otherwise acquire any shares of any class or series of capital stock of the Company, or any options or rights to purchase or acquire shares of any class or series of capital stock of the Company, or any other securities of the Company convertible into or exchangeable or exercisable for shares of any class or series of capital stock of the Company, whether now or hereafter authorized. In addition, holders of Company Common Stock do not have the right to cumulate their votes with respect to the election of directors or any other matters.

 

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Will the Surviving Corporation keep the same stock exchange listing?

The Surviving Corporation Common Stock will be listed on NYSE under the same symbol as the Company, “LLL.” The Surviving Corporation will be a publicly-traded company with reporting obligations under the Exchange Act.

Will the Surviving Corporation have the same dividend policy?

It is expected that the Surviving Corporation will follow the Company’s dividend policy at the time of the Merger. The payment of any future cash dividends following the Merger will be determined by the Surviving Corporation’s Board of Directors in light of conditions then existing, including the Surviving Corporation’s earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions, certain corporate law requirements and other factors.

Will the Surviving Corporation have the same management?

In connection with the Merger, the directors of the Company as of immediately prior to the Effective Time will become the directors of the Surviving Corporation, each to serve until the next annual meeting of the Surviving Corporation and until his or her successor is duly elected and qualified, or until his or her earlier death, resignation removal or retirement. In addition, in connection with the Merger, the officers of the Company as of immediately prior to the Effective Time will become the officers of the Surviving Corporation, each having the same title, powers and duties he or she possessed as of immediately prior to the Effective Time and each serving until his or her successor is duly appointed and qualified or until his or her earlier death, resignation or removal.

Will shareholders have the right to seek appraisal?

Under the Delaware General Corporation Law, shareholders are not entitled to appraisal rights in connection with the Merger.

What will the Surviving Corporation’s debt structure be after the Merger?

The Subsidiary is currently the borrower under the Amended and Restated Revolving Credit Facility (the “Credit Facility”), which as of December 31, 2015, has no borrowings outstanding. As of December 31, 2015, the Subsidiary has issued and outstanding $500 million aggregate principal amount of 3.95% senior notes due 2016, $350 million aggregate principal amount of 1.50% senior notes due 2017, $1.0 billion aggregate principal amount of 5.20% senior notes due 2019, $800 million aggregate principal amount of 4.75% senior notes due 2020, $650 million aggregate principal amount of 4.95% senior notes due 2021, and $350 million aggregate principal amount of 3.95% senior notes due 2024 (collectively, the “Senior Notes”). The Merger is permitted under the terms of the Credit Facility and the Senior Notes. Following the Merger, the Surviving Corporation will continue to be the borrower under the Credit Facility and the issuer of the Senior Notes.

Will the Surviving Corporation continue the Company’s stock, incentive and other benefit plans?

As a result of the Merger, the Surviving Corporation will assume and continue all of the Company’s stock and other compensation, benefit and incentive plans (such as the 2008 Plan, as the same may be amended prior to the Effective Time, including pursuant to Proposal 4) and will assume all outstanding stock options, stock appreciation rights, nonvested stock, restricted stock units, other share-based awards and performance awards previously granted or incurred under such plans. In connection with the Merger, each of the Company’s outstanding stock options, stock appreciation rights, nonvested stock, restricted stock, restricted stock units, other share-based awards and performance awards will be converted into a stock option, stock appreciation right, nonvested stock, restricted stock, restricted stock unit, other share-based award or performance award, respectively, covering the same number of shares of Surviving Corporation Common Stock, and with the same terms and conditions, including the same vesting and other restrictions, which will not be affected by the Merger.

What are the material U.S. federal income tax consequences of the Merger?

The following discussion summarizes the material U.S. federal income tax considerations of the Merger. The following discussion is based upon the current provisions of the Code, its legislative history, administrative pronouncements, judicial decisions and Treasury regulations, all of which are subject to change, possibly with retroactive effect. The following discussion does not purport to be a complete discussion of all U.S. federal income tax considerations. The following discussion

 

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does not address the tax consequences of the Merger under state, local or non-U.S. tax laws. In addition, the following discussion may not apply, in whole or in part, to particular categories of shareholders, such as dealers in securities, insurance companies, foreign persons, financial institutions and tax-exempt organizations. Finally, a tax ruling from the Internal Revenue Service has not been requested. THE FOLLOWING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY. ALL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING ANY STATE, LOCAL OR NON-U.S. TAX CONSEQUENCES.

It is intended that the Merger will be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. As such, in general:

 

  ¡   No gain or loss will be recognized for U.S. federal income tax purposes by the Company or the Subsidiary; and

 

  ¡   Shareholders will recognize no gain or loss upon the conversion of shares of Company Common Stock into shares of Surviving Corporation Common Stock.

What will happen if this proposal is not approved by shareholders?

The proposal to adopt the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of the Company’s Common Stock entitled to vote thereon. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If the shareholders do not approve this proposal, the Company will not effect the Merger this year. The Company expects that it would continue to operate using its current holding company structure, rather than the simpler, more cost-efficient structure that is being proposed.

 

The Board of Directors unanimously recommends that shareholders

vote FOR the proposal to adopt the Merger Agreement.

 

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PROPOSAL 6 – SHAREHOLDER PROPOSAL TO AMEND THE COMPANY’S CERTIFICATE OF INCORPORATION TO PERMIT SHAREHOLDERS TO TAKE ACTION BY WRITTEN CONSENT

Set forth below is a shareholder proposal that we have been advised will be presented at the Annual Meeting by John Chevedden, 2215 Nelson Ave., No. 205 Redondo Beach, CA 90278, beneficial owner of at least $2,000 in market value of our Common Stock.

We are not responsible for the contents of the proposal. The Board makes no recommendation regarding this proposal.

*            *             *            *

Proposal 6 – Simple Majority Vote

RESOLVED, Shareholders request that our board take the steps necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. If necessary this means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws.

This includes the provision in our certificate of incorporation which states:

“TENTH: Notwithstanding the provisions of Section 228 of the General Corporation Law of the State of Delaware, the stockholders of the Corporation may take action by written consent only if all of the stockholders entitled to vote on the matter sign such consent. This Article TENTH may not be amended without the unanimous consent of all stockholders entitled to vote on the matter.”

Shareowners are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements, the target of this proposal, have been found to be one of 6 entrenching mechanisms that are negatively related to company performance according to “What Matters in Corporate Governance” by Lucien Bebchuk, Alma Cohen and Allen Ferrell of the Harvard Law School. Supermajority requirements are used to block initiatives supported by most shareowners but opposed by a status quo management.

This proposal topic won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. Currently less than a 1%-minority can frustrate the will of our 99%-shareholder majority. In other words a 1%-minority could have the power to prevent shareholders from improving our corporate governance.

Please vote to enhance shareholder value:

Simple Majority Vote – Proposal 6

*            *             *            *

 

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BOARD AND GOVERNANCE MATTERS

 

 

THE BOARD OF DIRECTORS AND CERTAIN GOVERNANCE MATTERS

Our Board of Directors oversees the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the Board of Directors and four standing committees: Audit, Compensation, Nominating/Corporate Governance and Executive Committees. 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.

LEADERSHIP STRUCTURE

The Board of Directors determined that combining the Chief Executive Officer and Chairman positions is the appropriate leadership structure for L-3 at this time. The Board of Directors believes that “one-size” does not fit all, and the decision of whether to combine or separate the positions of Chief Executive Officer and Chairman will vary company to company and depend upon a company’s particular circumstances at a given point in time. Accordingly, the Board of Directors carefully considers from time to time whether the Chief Executive Officer and Chairman positions should be combined based on what the Board of Directors believes is best for the Company and its shareholders.

Board structures vary greatly among U.S. public corporations, with 52% of S&P 500 companies combining the positions of Chief Executive Officer and Chairman and only 29% of the S&P 500 having an independent chairman, according to a recent survey. The Board of Directors does not believe that the evidence demonstrates that any one leadership structure is more effective at creating long-term shareholder value. The Board of Directors believes that an effective leadership structure could be achieved either by combining or separating the Chief Executive Officer and Chairman positions, if the structure encourages the free and open dialogue of competing views and provides for strong checks and balances. Specifically, an effective governance structure must balance the powers of the Chief Executive Officer and the independent directors and ensure that the independent directors are fully informed, able to discuss and debate the issues that they deem important, and able to provide effective oversight of management.

The Board of Directors believes that if the positions of Chief Executive Officer and Chairman are combined, then appointing a lead independent director is necessary for effective governance. Accordingly, the Company’s Corporate Governance Guidelines provide that, in the event the Chief Executive Officer and Chairman positions are combined, the independent members of the Board of Directors will elect a “Lead Independent Director.” In addition to presiding at executive sessions of the independent directors, the responsibilities of the Lead Independent Director, which are clearly set forth in the Company’s Corporate Governance Guidelines, also include:

 

  ¡   presiding at all meetings of the Board of Directors at which the Chairman is not present;

 

  ¡   approving schedules for Board of Directors meetings;

 

  ¡   approving the agendas for meetings of the Board of Directors;

 

  ¡   approving the information sent to the Board of Directors for meetings of the Board of Directors;

 

  ¡   authority to call meetings of the independent directors;

 

  ¡   specifically requesting the inclusion of certain materials for Board of Directors meetings, when appropriate;

 

  ¡   being available for consultation and direct communication with major shareholders, if requested;

 

  ¡   recommending, as appropriate, that the Board of Directors retain consultants who will report directly to the Board of Directors; and

 

  ¡   acting as a liaison between the independent directors and the Chairman.

The Board of Directors believes that the responsibilities delegated to the Lead Independent Director are substantially similar to many of the functions typically fulfilled by a board chairman. The Board of Directors believes that its Lead Independent Director position balances the need for effective and independent oversight of management with the need for strong, unified leadership. The Board of Directors believes that one of the key elements of effective, independent oversight is that the independent directors meet in executive session on a regular basis without the presence of management. Accordingly, in 2015, the independent directors met in executive session eight times with the Lead Independent Director presiding at such meetings.

 

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While L-3’s approach regarding its leadership structure has varied depending on what was best for L-3 at a particular point in time, the Board of Directors believes that its current structure of combining the roles of Chairman and Chief Executive Officer and electing a strong independent Lead Director is in the best interest of L-3 at this time as it allows for a balance of power between the Chief Executive Officer and the independent directors and provides an environment in which its independent directors are fully informed, have significant input into the content of Board meeting agendas and are able to provide objective and thoughtful oversight of management. The Board also believes that L-3’s current leadership structure does not affect the Board’s role in risk oversight of the Company. In addition, the Board of Directors also believes that combining the roles of Chairman and Chief Executive Officer gives L-3 the best chance to continue its strong performance over the long term. With the competitive environment as challenging as it is, it continues to be more important for L-3 to increasingly seek out business opportunities in the international community. In L-3’s industry, the Board of Directors believes that access to decision-makers in foreign countries is made easier when the roles of Chairman and Chief Executive Officer are combined as their customs often dictate having comparable titles when conducting negotiations. Moreover, since most of L-3’s industry peers have combined the roles of Chairman and Chief Executive Officer, L-3 believes that separating such roles would put us at a significant competitive disadvantage.

INDEPENDENCE

The Board of Directors has affirmatively determined that no director nominees other than Mr. Strianese, including those who serve on the Audit, Compensation and Nominating/Corporate Governance Committees of the Board of Directors, has a material relationship with us, either directly or as a partner, shareholder or officer of an organization that has a relationship with us. Therefore, all of our director nominees, other than Mr. Strianese, are “independent” under all applicable standards. In connection with its determination that Mr. Millard and Professor Canizares are independent directors, the Board of Directors considered the fact that we conducted business: (1) with MIT where Mr. Millard is chair of the MIT Corporation and Professor Canizares is employed as a full time professor, and (2) with Sandia National Laboratories, where Professor Canizares is a consultant. Payments made to or received from MIT and Sandia National Laboratories, as applicable, were less than 1% of their respective annual consolidated gross revenues for their last completed fiscal years. Mr. Millard and Professor Canizares did not have any interest in these transactions and were not involved in decisions regarding L-3 with respect to these transactions.

General (Ret.) Dunwoody serves as a director (but not as an executive officer or employee) for a non-profit organization to which we have made charitable contributions. Contributions to this organization did not exceed either $120,000 or 1% of the organization’s annual consolidated gross revenues during its last completed fiscal year and was below the thresholds set forth under our categorical standards of director independence.

In addition, the Board of Directors has determined that Professor Canizares and Messrs. Corcoran, Kramer, Pagano and Simon, members of the Audit Committee, and Messrs. Millard and Kramer and General (Ret.) Newton, members of the Compensation Committee, are “independent” in accordance with the NYSE standards applicable to members of the Audit Committee and Compensation Committee, respectively.

The Board of Directors has adopted Corporate Governance Guidelines that meet the independence standards of the NYSE. Also, as part of our Corporate Governance Guidelines, the Board of Directors has adopted categorical standards to assist it in evaluating the independence of each of its directors. The categorical standards are intended to assist the Board of Directors in determining whether or not certain relationships between our directors and us, either directly or as a partner, shareholder or officer of an organization that has a relationship with us, are “material relationships” for purposes of the NYSE independence standards. The categorical standards establish thresholds at which such relationships are deemed not to be material. Our Corporate Governance Guidelines, which include our categorical standards of independence, can be obtained through our website at http://www.L-3com.com.

Directors are expected to attend board meetings and meetings of the committees on which they serve, to spend the time needed, and to meet as frequently as necessary, in order to properly discharge their responsibilities. In addition, to the extent reasonably practicable, directors are expected to attend shareholder meetings. During the fiscal year ended December 31, 2015, the Board of Directors held ten meetings. Each director attended at least 75% of the combined number of meetings of the Board of Directors and meetings of committees on which he or she served during the period in 2015 in which he or she served as a director or member of such committee, as applicable. All of our directors attended the 2015 Annual Meeting in person. In accordance with applicable NYSE listing requirements, our independent directors hold regular executive sessions at which management, including the Chairman and Chief Executive Officer, is not present. Mr. Millard, our Lead Independent Director of the Board of Directors, presides at the regularly held executive sessions of the independent directors.

 

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BOARD OF DIRECTORS COMPOSITION

The Board and the Nominating/Corporate Governance Committee takes a long-term approach to the composition of the Board of Directors. Since 2011, four new directors have joined the Board. We believe that our Board’s blend of tenure strikes a balance that provides superior Company, regulatory and industry knowledge, while executing effective oversight and independence in the best interests of our shareholders.

 

 

LOGO

The Board of Directors seeks to ensure that the Board is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. In that regard, the Nominating/Corporate Governance Committee is responsible for recommending candidates for all directorships to be filled by the Board of Directors or by the shareholders at an annual or special meeting. In identifying candidates for membership on the Board of Directors, the Nominating/Corporate Governance Committee takes into account (1) minimum individual qualifications, such as strength of character, mature judgment, industry knowledge or experience and an ability to work collegially with the other members of the Board of Directors and (2) all other factors it considers appropriate. In addition, although the Board of Directors does not have a policy with regard to the consideration of diversity in identifying director nominees, among the many factors that the Nominating/Corporate Governance Committee carefully considers are the benefits to the Company of diversity, including gender and racial diversity, in board composition.

As part of its recurring activities, the Nominating/Corporate Governance Committee seeks to identify qualified candidates to sit on the Board of Directors. To identify and recruit qualified candidates for the Board, the Nominating/Corporate Governance Committee has previously utilized the services of professional search firms and has also sought referrals from other members of the Board, management, shareholders and other sources. After conducting an initial evaluation of a candidate, one or more members of the Nominating/Corporate Governance Committee will interview that candidate if the Nominating/Corporate Governance Committee believes the candidate might be suitable to be a director and may also ask the candidate to meet with other directors and management. If the Nominating/Corporate Governance Committee believes a candidate would be a valuable addition to the Board of Directors, it will recommend to the full Board of Directors that candidate’s election.

Each year, the Nominating/Corporate Governance Committee evaluates each director to obtain his or her assessment of the effectiveness of the Board and committees, as well as the director performance and Board dynamics, and then summarizes this evaluation for discussion with the Board and committees. The Nominating/Corporate Governance Committee also performs an annual assessment to see that the directors have the skills and experience to effectively oversee the Company.

The Nominating/Corporate Governance Committee will consider candidates for nomination as a director recommended by shareholders, directors, officers, third party search firms and other sources.

The Nominating/Corporate Governance Committee will review all candidates for director in the same manner, regardless of the source of the recommendation. Individuals recommended by shareholders for nomination as a director will be considered in accordance with the procedures described under “Questions and Answers About Board Communications, Company Documents and Shareholder Proposals” on page 94 of this Proxy Statement.

When considering whether the Board’s directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of L-3’s business and structure, the Board of Directors focused primarily on results of the annual Board and committee evaluations and on the information discussed in each of the Board members’ or nominees’ biographical information set forth on pages 11-16. In addition, in connection with the nominations of the current slate of director nominees, the Board of Directors considered their valuable contributions to L-3’s success during their years of Board service.

 

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COMMITTEES OF THE BOARD OF DIRECTORS

The Board has established various committees to assist it with the performance of its responsibilities. The Board designates the members of these committees and the committee chairs based on the recommendations of the Nominating/Corporate Governance Committee. The chair of each committee develops the agenda for its committee and each committee regularly provides a full report to the Board.

The Board has adopted written charters for each of the Audit, Compensation and Nominating/Corporate Governance Committees. These charters are available on the Company’s website at www.L-3com.com/investor-relations/corporate-governance. The following table summarizes the primary responsibilities of the committees:

 

Committee

   Primary Responsibilities

Audit

  

The Audit Committee is generally responsible for, among other things:

 

•      selecting, appointing, compensating, retaining and terminating our independent registered public accounting firm;

•      overseeing the auditing work of any independent registered public accounting firm employed by us, including the resolution of any disagreements, if any, between management and the independent registered public accounting firm regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services;

•      pre-approving audit, other audit, audit-related and permitted non-audit services to be performed by the independent registered public accounting firm and related fees;

•      meeting with our independent registered public accounting firm to review the proposed scope of the annual audit of our financial statements and to discuss such other matters that it deems appropriate;

•      reviewing the findings of the independent registered public accounting firm with respect to the annual audit;

•      meeting to review and discuss with management and the independent registered public accounting firm our periodic financial reports prior to our filing them with the SEC and reporting annually to the Board of Directors with respect to such matters;

•      reviewing with our financial and accounting management, the independent registered public accounting firm and internal auditor the adequacy and effectiveness of our internal control over financial reporting, financial reporting procedures and disclosure controls and procedures;

•      reviewing the internal audit function; and

•      reporting to the Board of Directors regarding matters covered at each committee meeting on a timely basis.

 

In 2015, the Audit Committee held 10 meetings. During 2015, among other things, the Audit Committee:

 

•      met with the senior members of the Company’s financial management team at each regularly scheduled meeting;

•      met in executive session with each of the independent auditor, Vice President of Internal Audit and Corporate Ethics Officer;

•      regularly met with various members of the Company’s ethics organization, including the Corporate Ethics Officer to (i) discuss the effectiveness of the Company’s ethics program and (ii) receive updates on the management training program for supervisors;

•      received periodic updates on management’s evaluation and compliance with, the Company’s system of internal control over financial reporting, remediation activities to address material weaknesses and significant deficiencies and management’s conclusions on the effectiveness of the Company’s internal control over financial reporting;

•      reviewed and discussed with management and the independent auditors the Company’s earnings releases and quarterly reports on Form 10-Q and annual reports on Form 10-K prior to filing with the SEC;

 

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Committee

   Primary Responsibilities
  

•      met with the independent auditors and management to review and approve the scope of the audit proposed for 2015 and the audit procedures to be utilized and any subsequent changes to such scope and/or procedures; and

•      discussed with management the guidelines and policies with respect to risk assessment and risk management including major financial risk exposure, the steps taken to monitor and control such risks and material changes to the Company’s Enterprise Risk Management since they last met.

Compensation

  

The Compensation Committee is generally responsible for, among other things:

 

•      reviewing and approving corporate goals and objectives relevant to the Chief Executive Officer’s compensation;

•      evaluating the performance of the Chief Executive Officer in light of these corporate goals and objectives and, either as a committee or together with other independent directors (as directed by the Board of Directors), determining and approving the annual salary, bonus, equity and equity-based incentives and other benefits, direct and indirect, of the Chief Executive Officer based on such evaluation;

•      reviewing and approving the annual salary, bonus, equity and equity-based incentives and other benefits, direct and indirect, of the other executive officers;

•      discussing the results of the shareholder advisory vote on the compensation paid to our named executive officers;

•      reviewing and making recommendations to the Board of Directors with respect to director compensation;

•      reviewing and recommending to the Board of Directors, or approving, all equity-based awards, including pursuant to the Company’s equity-based plans;

•      reviewing and approving, or making recommendations to the Board of Directors with respect to, the Company’s equity-based plans and executive officer incentive compensation plans, and overseeing the activities of the individuals responsible for administering those plans;

•      reviewing and discussing with management, on at least an annual basis, management’s assessment of whether risks arising from the Company’s compensation policies and practices for all employees, including non-executive officers, are reasonably likely to have a material adverse effect on the Company;

•      reviewing and discussing the “Compensation Discussion and Analysis” section contained in this Proxy Statement;

•      retaining or terminating, as necessary or appropriate, and approving the fees and any other retention terms for, compensation and benefits consultants and other outside consultants, legal counsels or advisors hired to provide independent advice to the Committee;

•      evaluating on at least an annual basis whether any work provided by a compensation consultant retained by the Committee raised any conflict of interest; and

•      reporting to Board of Directors regarding matters covered at each committee meeting on a timely basis.

 

In 2015, the Compensation Committee held 7 meetings. During 2015, among other things, the Compensation Committee:

 

•      reviewed and approved all elements of target pay for senior executives, including the terms and performance goals for new annual and long-term incentive awards;

•      assessed historical performance achievements under annual and long-term incentive plans, and reviewed and approved related performance-based payouts to senior executives;

•      approved equity-based awards for non-executive employees, and evaluated equity plan share usage and share dilution;

•      evaluated the suitability of the Company’s compensation peer group used to benchmark the Company’s pay programs;

•      evaluated the Company’s executive and non-employee director compensation programs as compared to peer company pay practices and pay levels;

•      reviewed current and accumulated compensation for named executive officers using tally sheets;

 

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Committee

   Primary Responsibilities
  

•      reviewed executive and non-employee director compliance with stock ownership guidelines;

•      reviewed and discussed the 2015 compensation risk assessment with management; and

•      reviewed and discussed the executive compensation disclosures to be included in our 2015 Proxy Statement, including the Compensation Discussion and Analysis.

 

In fulfilling its responsibilities, the Compensation Committee can delegate any or all of its responsibilities to a subcommittee of the committee consisting of two or more members. For a discussion concerning the processes and procedures for considering and determining executive and director compensation and the role of executive officers and compensation consultants in determining or recommending the amount or form of executive and director compensation, see “Compensation Discussion and Analysis” beginning on page 47 and “Compensation of Directors” beginning on page 86.

Nominating/

Corporate

Governance

  

The Nominating/Corporate Governance Committee is generally responsible for, among other things:

 

•      developing, recommending and monitoring corporate governance policies and procedures for the Company and the Board of Directors;

•      recommending to the Board of Directors criteria for the selection of new directors;

•      identifying and recommending to the Board of Directors individuals to be nominated as directors;

•      evaluating candidates recommended by shareholders in a timely manner;

•      conducting all necessary and appropriate inquiries into the backgrounds and qualifications of possible candidates;

•      the evaluation of the Board of Directors and management;

•      approving the management continuity planning process; and

•      reporting to Board of Directors regarding matters covered at each committee meeting on a timely basis.

 

In 2015, the Nominating/Corporate Governance Committee held 4 meetings. During 2015, among other things, the Nominating/Corporate Governance Committee:

 

•      reviewed changes to the governance landscape;

•      assessed the independence of the non-management directors;

•      recommended changes to the Company’s Certificate of Incorporation and Bylaws;

•      reviewed and evaluated the succession plans relating to the Chief Executive Officer and other executive officer positions;

•      discussed the Company’s investor outreach efforts;

•      considered the proposals submitted by shareholders;

•      evaluated changes to the Committee’s charter and Company’s Governance Guidelines;

•      discussed the composition of the Board of Directors, the nomination process and potential candidates for the Board of Directors;

•      monitored directors’ ongoing continuing education activities and engaged outside experts to provide continuing director education for the Board of Directors;

•      discussed the results of Board and Committee self-evaluations; and

•      reviewed the process for conducting Board and Committee self-evaluations and any recommendations for improvements to the self-evaluation process.

Executive

   The Executive Committee may exercise most board powers during periods between board meetings. The Executive Committee did not meet during 2015.

 

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COMPENSATION COMMITTEE USE OF CONSULTANTS

As set forth in its charter, the Compensation Committee has the sole authority to retain or terminate, as necessary or appropriate, outside consultants to provide advice to the Compensation Committee in connection with its fulfillment of its responsibilities. The Compensation Committee engages Frederic W. Cook (“FW Cook”) to serve as the Compensation Committee’s independent consultant. FW Cook and its affiliates do not provide any services to the Company or any of the Company’s affiliates other than advising the Compensation Committee on director and executive officer compensation. In 2015, the Compensation Committee requested that FW Cook advise it directly on a variety of compensation-related matters, including:

 

  ¡   validating the compensation peer group to be used for competitive benchmarking;

 

  ¡   preparing analyses and recommendations of senior executive compensation levels as compared to the compensation peer group and published compensation surveys;

 

  ¡   assessing the pay recommendations that the Chief Executive Officer developed for senior executives, including the named executive officers;

 

  ¡   developing pay recommendations for the Chief Executive Officer;

 

  ¡   assessing the alignment of senior executive pay and company performance;

 

  ¡   preparing analyses and recommendations of non-employee director pay levels as compared to the peer group;

 

  ¡   preparing analyses of equity plan share usage and share dilution as compared to the peer group;

 

  ¡   assessing performance measures and targets for annual and long-term incentive awards;

 

  ¡   updating the Compensation Committee on executive compensation trends; and

 

  ¡   recommending executive compensation program changes in response to executive compensation trends and shareholder concerns identified through investor engagement efforts or otherwise.

In the course of conducting its activities, FW Cook attended meetings of the Compensation Committee and presented its findings and recommendations to the Compensation Committee for discussion. During 2015, FW Cook also met with management to obtain and validate data, and review materials. In March of 2016, the Compensation Committee evaluated whether any work performed by FW Cook raised any conflict of interest and determined that it did not.

 

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The following table sets forth the current members of each of the Committees and the number of meetings held during 2015:

 

Name   Audit(1)    Compensation(2)   Nominating/
Corporate
Governance(3)
  Executive
Claude R. Canizares*   LOGO         
         
Thomas A. Corcoran*   LOGO         
         
Ann E. Dunwoody*        LOGO    
         
Lewis Kramer*   LOGO      LOGO       LOGO  
         
Robert B. Millard*(4)      LOGO       LOGO  
         
Lloyd W. Newton*      LOGO      
         
Vincent Pagano, Jr.*   LOGO        LOGO     LOGO  
         
H. Hugh Shelton*        LOGO    
         
Arthur L. Simon*   LOGO        LOGO    
         
Michael T. Strianese          LOGO  
2015 Meetings   10    7   4   0

 

* Independent Director.

 

(1) The Audit Committee consists entirely of non-management directors all of whom the Board has determined are independent within the meaning of the listing standards of the NYSE and Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board has determined that all members of the Audit Committee are financially literate and that Messrs. Kramer and Simon are both “audit committee financial experts” within the meaning set forth in the regulations of the SEC.

 

(2) The Compensation Committee consists entirely of non-management directors all of whom the Board has determined are independent within the meaning of the listing standards of the NYSE; are non-employee directors for the purposes of Rule 16b-3 of the Exchange Act; and satisfy the requirements of Internal Revenue Code Section 162(m) for outside directors.

 

(3) The Nominating/Corporate Governance Committee consists entirely of non-management directors all of whom the Board has determined are independent within the meaning of the listing standards of the NYSE and our standards of independence.

 

(4) Lead Independent Director.

OVERSIGHT OF RISK MANAGEMENT

L-3 is exposed to various risks including, but not limited to, strategic, operational, financial, liquidity and reputational, and also risks relating to reporting, pending and threatened litigation, and regulatory and legal compliance. L-3’s enterprise risk profile is also affected by changes in the yearly budget and spending levels, priorities and procurement practices, and also the fiscal situations and general economic conditions affecting our major customers, especially the U.S. Department of Defense. L-3’s management designed the Company’s enterprise risk management process to identify, monitor and evaluate these risks, and develop an approach to address each identified risk. L-3’s enterprise risk management process is a company-wide initiative and involves each of our operating segments and business units. The Company takes a multi-disciplinary approach to risk.

L-3’s Chief Financial Officer, at the direction of the Chief Executive Officer, is responsible for overseeing the Company’s enterprise risk management process and periodically reports enterprise risk information to each of the Chief Executive Officer, the Audit Committee and the Board of Directors. In fulfilling his risk management responsibilities, the Chief Financial Officer works closely with members of the senior management team, including the Company’s Chief Operating Officer, General Counsel, the Executive Vice President of Corporate Strategy and Development, the Vice President, Controller and Principal Accounting Officer, the Vice President — Planning, and each of the business unit group presidents and group chief financial officers.

On behalf of the Board of Directors, the Audit Committee plays a key role in the oversight of the Company’s enterprise risk management function. In this regard, the Audit Committee discusses policies with respect to risk assessment and risk management, and the Company’s Chief Financial Officer meets with the Audit Committee at least five times per year to specifically discuss the enterprise risks facing the Company, highlighting any new risks that may have arisen since they last met. Additionally, at each Board of Directors meeting, the Chief Executive Officer and Chief Financial Officer report information about major risks facing the company. Finally, the Chief Financial Officer reports directly to the Board of Directors at least once per year to apprise it directly of the Company’s enterprise risk management process.

 

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EXECUTIVES AND CERTAIN OTHER OFFICERS OF THE COMPANY

 

 

 

EXECUTIVES AND CERTAIN OTHER OFFICERS OF THE COMPANY

Set forth below is certain information regarding each of our current executives, other than Mr. Strianese who is presented under “Proposals Requiring Your Vote – Proposal 1 – Election of Directors – Nominees For Election to the Board of Directors in 2016,” and certain of our other officers.

 

     CHRISTOPHER E. KUBASIK        

 

     President and Chief Operating

     Officer

 

     Age 54

   

 

Principal Occupation And Other Information

Mr. Kubasik became our President and Chief Operating Officer in October 2015. From March 2014 to October 2015, Mr. Kubasik served as President and Chief Executive Officer of the Seabury Advisory Group. From 2013 to 2014, Mr. Kubasik served as President and Chief Executive Officer of Ackuity Advisors, Inc. Prior to that, Mr. Kubasik held various executive positions with Lockheed Martin Corporation including Vice Chairman, President and Chief Operating Officer from 2010 to 2012; Executive Vice President of Electronic Systems division from 2007 to 2009; and Executive Vice President and Chief Financial Officer from 2001 to 2007. In 1983, Mr. Kubasik began his career in public accounting at Ernst & Young, LLP, and served in a number of increasingly responsible positions until becoming a partner in 1996. He currently serves as a director of Spirit AeroSystems Holding, Inc. and will continue to serve in such capacity until their 2016 annual meeting of shareholders. Mr. Kubasik graduated magna cum laude from the University of Maryland School of Business and received his Certificate of Engineering from Carnegie Mellon University.

   
     CURTIS BRUNSON        

 

     Executive Vice President of

     Corporate Strategy and

     Development

 

     Age 68

 

   

 

Principal Occupation And Other Information

Mr. Brunson became an Executive Vice President in February 2009 and is responsible for leading the execution of L-3’s business strategy, including customer relationships, technical development and business development. Prior to that, he was a Senior Vice President. Mr. Brunson began his career in 1972 with Sperry Systems Management Division, prior to its merger into Unisys Government Services. At Unisys for over 20 years, he held several management positions of increasing responsibility. When Loral acquired Unisys Communication Systems in Salt Lake City, he was General Manager. That division became part of L-3 during L-3’s formation in 1997, with Mr. Brunson becoming President at that time. Mr. Brunson holds a Bachelor of Science degree in Computer Science from the New York Institute of Technology and a Master’s of Science degree in Computer Science from Polytechnic Institute of New York University.

   
     RALPH G. D’AMBROSIO        

 

     Senior Vice President and Chief

     Financial Officer

 

     Age 48

 

   

 

Principal Occupation And Other Information

Mr. D’Ambrosio became our Chief Financial Officer in January 2007 and a Senior Vice President in April 2010. From March 2005 to January 2007, he was Vice President – Finance and Principal Accounting Officer and he continued to be our Principal Accounting Officer until April 2008. He became Controller in August 2000 and a Vice President in July 2001 and was Vice President and Controller until March 2005. He joined L-3 in August 1997 and was Assistant Controller until July 2000. Prior to joining L-3, he was a senior manager at Coopers & Lybrand LLP, where he held a number of positions since 1989. Mr. D’Ambrosio holds a Bachelor’s degree, summa cum laude, in Business Administration from Iona College and a Master’s degree, with honors, in Business Administration from the Stern School of Business at New York University.

 

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     STEVEN M. POST        

 

     Senior Vice President, General

     Counsel and Corporate

     Secretary

 

     Age 63

 

   

 

Principal Occupation And Other Information

Mr. Post became Senior Vice President, General Counsel and Corporate Secretary in May 2008. Prior to that, Mr. Post held several positions at L-3 and its predecessor companies, including, most recently, Senior Vice President and General Counsel of the Integrated Systems Group and prior to that, group counsel and associate counsel positions. Prior to joining L-3, Mr. Post was an instructor in the Contract Law department at the Judge Advocate General’s School in Charlottesville, Virginia. He began his legal and military career at the Office of the Staff Judge Advocate in Fort Dix, New Jersey, as the contract and fiscal law advisor and as senior trial counsel. Following that assignment, Mr. Post served as a trial attorney in the litigation division for the Judge Advocate General at the Pentagon. Mr. Post earned his law degree with honors from Indiana University and his undergraduate degree from the University of Dayton.

   
     RICHARD A. CODY        

 

     Senior Vice President of

     Washington Operations

 

     Age 65

 

   

 

Principal Occupation And Other Information

General Cody (U.S. Army – Ret.) joined L-3 in October 2008 and serves as a corporate Senior Vice President. Prior to joining L-3, General (Ret.) Cody served as the 31st Vice Chief of Staff, U.S. Army, a position he held from 2004 until his retirement from the U.S. Army in August 2008. With more than 36 years of service, General (Ret.) Cody has served in command and staff positions throughout the Army in the U.S. and overseas. He has also received major military awards and decorations, including the Defense Distinguished Service Medal and the Distinguished Flying Cross. A graduate of the U.S. Military Academy, General (Ret.) Cody is also a Master Aviator with more than 5,000 hours of flight time and was inducted into the Army Aviation Hall of Fame in 2009.

   
     DAN AZMON        

 

     Vice President, Controller and      Principal Accounting Officer

 

     Age 52

 

   

 

Principal Occupation And Other Information

Mr. Azmon has been our Principal Accounting Officer since April 2008 and our Controller since January 2005. Mr. Azmon joined L-3 in October 2000 and was our Assistant Controller until December 2004. Prior to joining L-3, Mr. Azmon held a number of financial management and financial reporting positions at ASARCO Incorporated and Salomon Brothers, Inc., and was a manager in the audit practice at Coopers & Lybrand LLP. He holds a Master of Business Administration degree from St. John’s University in accounting and a Bachelor of Business Administration degree in finance from Hofstra University. Mr. Azmon is also a certified public accountant.

 

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     STEVE KANTOR        

 

     Senior Vice President and      President of Electronic      Systems

 

     Age 71

 

   

 

Principal Occupation And Other Information

Mr. Kantor has been our Senior Vice President and President of Electronic Systems since August 2012. Prior to that, he was Senior Vice President and President of L-3 Services Group from June 2010 to August 2012 and, prior to that, from 2005 until 2010, Mr. Kantor was President of L-3’s Power & Controls Systems Group which was later renamed Marine & Power Systems Group. Mr. Kantor joined L-3 in 2003 and has over 35 years of experience in the defense electronics industry, serving the U.S. Department of Defense, prime contractors and original equipment manufacturers, and foreign allies. Previously, Mr. Kantor served as president of BAE Systems’ Reconnaissance and Surveillance Systems, a position he held since 1998. Prior to that, Mr. Kantor held various executive positions at Lockheed Martin, Loral and United Technologies. Mr. Kantor holds a Bachelor of Science degree in electrical engineering from the New York Institute of Technology.

   
     JOHN S. MEGA        

 

     Senior Vice President and      President of Communication      Systems

 

     Age 63

 

   

 

Principal Occupation And Other Information

Mr. Mega has been our Senior Vice President and President of Communication Systems since its formation in March 2014. Prior to that, Mr. Mega was President of the Microwave Group since he joined L-3 in 1997. Having started his career at Raytheon and held executive positions at Loral, Lockheed Martin and, since its inception, L-3 Communications, Mr. Mega has worked his entire career in the defense electronics industry. He received his Bachelor of Science degree, magna cum laude, from Boston College and is a member of American Mensa.

   
     MARK VON SCHWARZ        

 

     Senior Vice President and      President of Aerospace      Systems

 

     Age 56

 

   

 

Principal Occupation And Other Information

Mr. Von Schwarz was appointed to Senior Vice President and President of Aerospace Systems in June 2015. Prior to that, he was Sector President for Intelligence, Reconnaissance and Surveillance (ISR) and Aircraft Systems for Aerospace Systems, from 2012 to 2015, and President of L-3 Mission Integration, from 2008 to 2015. Before serving as President of L-3 Mission Integration, Mr. Von Schwarz served as President of L-3 ComCept, from 2003 to 2008, and Chief of Operations, from 2001 to 2003. Prior to joining L-3, Mr. Von Schwarz served as Vice President of Engineering for Raytheon’s Aircraft Integration Systems. Mr. Von Schwarz also served as an Electronic Warfare Specialist in the Army Security Agency. Mr. Von Schwarz holds a Bachelor of Science degree with Academic Distinction in Physics and Mathematics from Texas A&M University-Commerce and graduated with honors from the U.S. Army Intelligence Schools.

 

44    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Based on information available to us as of March 7, 2016, the Record Date, we know of no person who beneficially owned more than five percent of the Common Stock, except as set forth below.

 

Name and Address of Beneficial Owner      Amount and Nature of  
  Beneficial Ownership  
  Percent of Class
ClearBridge Investments, LLC
620 8th Avenue
New York, NY 10018(1)
   6,604,853(1)   8.4%(1)
The Vanguard Group, Inc.
100 Vanguard Blvd.
Malvern, PA 19355(2)
   6,565,250(2)   8.4%(2)
Putnam Investments, LLC
One Post Office Square
Boston, MA 02109(3)
   6,266,113(3)   8.0%(3)
BlackRock, Inc.
55 East 52nd Street
New York, NY 10055(4)
   4,729,280(4)   6.0%(4)

 

(1) Information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on February 16, 2016 in which ClearBridge Investments, LLC reported that it has sole dispositive power over 6,604,853 shares of Common Stock and sole voting power over 6,409,675 shares of Common Stock.

 

(2) Information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on February 10, 2016, in which The Vanguard Group, Inc. reported that it has sole dispositive power over 6,408,151 shares of Common Stock, shared dispositive power over 157,099 shares of Common Stock and sole voting power over 149,340 shares of Common Stock. The Vanguard Group, Inc. reported that Vanguard Fiduciary Trust Company and Vanguard Investments Australia, Ltd., wholly-owned subsidiaries of The Vanguard Group, Inc., are the beneficial owners of 122,299 shares or 0.15% and 61,841 shares or 0.07%, respectively, of the Common Stock outstanding as a result of its serving as investment manager of collective trust accounts.

 

(3) Information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on February 16, 2016 in which Putnam Investments, LLC reported that it has sole dispositive power over 6,266,113 shares of Common Stock and sole voting power over 296,195 shares of Common Stock. Putnam Investments, LLC reported that Putnam Investment Management, LLC and The Putnam Advisory Company, LLC, wholly-owned subsidiaries of Putnam Investments, LLC, are the beneficial owners of 6,028,733 shares or 7.7% and 237,380 shares or 0.3%, respectively, of the Common Stock outstanding as a result of its serving as investment manager of collective trust funds.

 

(4) Information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on January 26, 2016 in which BlackRock, Inc. reported that it has sole dispositive power over 4,729,280 shares of Common Stock and sole voting power over 4,086,845 shares of Common Stock.

 

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SECURITY OWNERSHIP OF MANAGEMENT

 

 

SECURITY OWNERSHIP OF MANAGEMENT

As of March 7, 2016, the Record Date, there were 77,522,193 shares of our Common Stock outstanding. The following table shows the amount of Common Stock beneficially owned (unless otherwise indicated) by our named executive officers, our directors, and by all of our current executive officers and directors as a group.

Except as otherwise indicated, all information listed below is as of March 7, 2016.

 

Name of Beneficial Owner    Common
Stock
Beneficially
Owned
Directly or
Indirectly(1)
     Common
Stock
Acquirable
Within
60 Days(2)
     Total
Common
Stock
Beneficially
Owned
     Percentage of
Shares of
Common Stock
Outstanding(3)
 
Directors and Named Executive Officers:            
Michael T. Strianese      85,190         1,391,253         1,476,443         1.9
Ralph G. D’Ambrosio      30,718         236,706         267,424         *   
Curtis Brunson      65,319         100,541         165,860         *   
Steve Kantor      26,771         39,590         66,361         *   
John S. Mega      12,787         28,960         41,747         *   
Claude R. Canizares      3,850         16,322         20,172         *   
Thomas A. Corcoran      1,614         18,931         20,545         *   
Ann E. Dunwoody              5,388         5,388         *   
Lewis Kramer      1,300         9,640         10,940         *   
Robert B. Millard(4)      336,148         21,473         357,621         *   
Lloyd W. Newton              4,876         4,876         *   
Vincent Pagano, Jr.              4,259         4,259         *   
H. Hugh Shelton              7,136         7,136         *   
Arthur L. Simon      3,600         10,009         13,609         *   
Directors and Executive Officers as a Group (19 persons)      587,904         1,974,274         2,562,178         3.3

 

(1) The number of shares shown includes shares that are individually or jointly owned and over which the individual has either sole or shared investment or voting authority. The shares of our Common Stock directly owned include the number of shares allocated to the accounts of executive officers under our savings plan as follows: Mr. Strianese, 3,477 shares; Mr. D’Ambrosio, 2,560 shares; Mr. Brunson, 4,885 shares; Mr. Kantor, 1,203 shares; Mr. Mega, 729 shares; and 17,749 shares held by the executive officers as a group.

 

(2) Shares that are deemed to be beneficially owned by the individual either by virtue of the individual’s right to acquire the shares upon the exercise of outstanding stock options within 60 days from March 7, 2016 and, in the case of non-employee directors, by virtue of the fact that shares issuable upon termination of board service under outstanding restricted stock unit awards have vested or will vest within 60 days of March 7, 2016.

 

(3) In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of the acquisition rights described above. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of Common Stock actually outstanding at March 7, 2016.

 

(4) Includes 96,770 shares owned by a charitable foundation of which Mr. Millard and his wife are the sole trustees, and as to which Mr. Millard disclaims beneficial ownership.

 

* Share ownership does not exceed one percent, including stock options exercisable within 60 days of March 7, 2016 and, in the case of non-employee directors, shares issuable upon termination of board service under outstanding restricted stock units that have vested or will vest within 60 days of March 7, 2016.

 

46    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

 

COMPENSATION DISCUSSION AND ANALYSIS

The Compensation Discussion and Analysis describes L-3’s executive compensation program related to the year ended December 31, 2015 (our 2015 fiscal year). This section details the compensation framework applied by the Compensation Committee of our Board of Directors (the “Committee”) in determining the pay levels and programs available to our named executive officers for whom compensation is disclosed in the compensation tables included in the Tabular Executive Compensation Disclosure section of this proxy statement beginning on page 68. Our named executive officers for the 2015 fiscal year are:

 

  ¡   Michael T. Strianese, Chairman and Chief Executive Officer

 

  ¡   Ralph G. D’Ambrosio, Senior Vice President and Chief Financial Officer

 

  ¡   Curtis Brunson, Executive Vice President of Corporate Strategy and Development

 

  ¡   Steve Kantor, Senior Vice President and President of Electronic Systems Group

 

  ¡   John S. Mega, Senior Vice President and President of Communication Systems Group

COMPANY BACKGROUND, 2015 OPERATING ENVIRONMENT AND 2015 PERFORMANCE RESULTS

Company Background. L-3 is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications, logistics and maintenance), simulation and training, night vision and image intensification equipment, and security and detection systems. L-3 is also a leading provider of a broad range of communication and electronic systems and products used on military and commercial platforms. Approximately 67% of our consolidated net sales for 2015 were made to the U.S. Department of Defense (the “DoD”). Accordingly, our sales, results of operations and cash flows are highly correlated to DoD budget and spending levels. Additionally, most of our businesses are short-cycle in nature, with programs or contracts that have performance periods of a year or less, and, consequently, changes in business trends rapidly affect our sales volume, results of operations and cash flows.

2015 Operating Environment. For the year ended December 31, 2015, L-3 continued to face a challenging business environment. Our performance in 2015 was influenced by the following factors:

 

  ¡   The total DoD budget for the U.S. Government fiscal year ended September 30, 2015 decreased by 4% from the prior fiscal year.

 

  ¡   The continuation of the DoD’s better buying power initiatives, which have resulted in increased competition and contract turnover, and lower profit margins, especially in our national security solutions segment and the logistics solutions sector of our aerospace systems segment. We sold national security solutions in 2016 as described below.

 

  ¡   The continuation of the U.S. military drawdown in Afghanistan.

2015 Performance Results. L-3’s key performance results for 2015 were as follows:

 

  ¡   Our electronic systems and communication systems segments achieved solid operational and financial performance that exceeded their segment plans. However, our overall performance was adversely affected by losses on Head-of-State aircraft modification contracts in our aerospace systems segment, and sales and margin declines in our national security solutions and logistics solutions businesses. Accordingly, our diluted earnings per share (“EPS”) and free cash flow (“FCF”) performance fell below our annual incentive plan targets by 5% and 3%, respectively, and we further incurred substantial non-cash goodwill impairment charges.

 

  ¡   We undertook significant strategic actions to reshape our business portfolio for future success. In December 2015, we agreed to sell our national securities solutions segment for approximately $550 million, and completed the sale in February 2016. We also completed three acquisitions and four divestitures in 2015, including the sale of Marine Systems International for approximately €295 million. We believe these actions sharpen our focus on L-3’s core businesses, improve our competitive position, and strengthen our ability to achieve future sales growth and margin expansion.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

 

  ¡   We repurchased $740 million of our Common Stock and paid dividends of $214 million following our 11th consecutive annual dividend increase, returning over $950 million of cash to our shareholders in 2015. We also repaid approximately $300 million of our outstanding debt.

 

  ¡   We strengthened the Company’s senior executive management team by appointing Christopher E. Kubasik to the new position of President and Chief Operating Officer, and Mark Von Schwarz as President of our aerospace systems segment.

 

  ¡   We remediated the Company’s material weaknesses in its internal controls over financial reporting, which were identified in 2014 following an internal review of financial reporting matters at our aerospace systems segment discussed in last year’s proxy statement.

 

  ¡   Our total shareholder return (“TSR”) for the three years ended December 31, 2015 was 67%, which fell below the minimum TSR-based performance goal relative to our peer companies under our long-term incentive plan, but compares favorably to the 53% TSR of the S&P 500 Index for this period.

COMPENSATION PHILOSOPHY, 2015 TARGET PAY AND 2015 INCENTIVE PLAN PAYOUTS

Compensation Philosophy. Our compensation philosophy supports a pay-for-performance culture. We target base salaries and annual and long-term incentive opportunities to approximate market median compensation levels, subject to adjustments based on experience, performance, the other individual factors as described in “– Use of Market Data and Competitive Compensation Positioning” beginning on page 52 and as otherwise appropriate. The majority of each executive’s target pay is in the form of incentive compensation, which is subject to future performance to have any realizable value. See the information in “– Mix of Pay” on page 51.

2015 Target Pay. The table below details each named executive officer’s 2015 base salary, target annual incentive opportunity (“target bonus”) and grant date target value of long-term incentive awards (collectively, “target pay”), and changes in target pay relative to 2014 levels.

 

      Salary     Target Bonus
as % of Salary
     Target Value of
Long-Term Incentives
    Target Pay  
      ($)      (% Change)     (%)     (Change)      ($)      (% Change)     ($)      (% Change)  
Michael T. Strianese      1,390,000         3.0     165             10,000,000                13,683,500         1
Ralph G. D’Ambrosio      695,000                90             2,500,000         -7     3,820,500         -5
Curtis Brunson      670,000         3.1     90             2,700,000                3,973,000         1
Steve Kantor      692,000         3.0     100             1,650,000                3,034,000         1
John S. Mega      541,000         3.0     100             900,000                1,982,000         2

For 2015, the Committee made no increases to the target pay of our named executive officers except for ordinary course increases in base salary. With respect to Mr. D’Ambrosio, the Committee made no change to his base salary, and reduced the target value of his long-term incentive awards by 7%, based on its belief that it was appropriate to take the results of the 2014 internal review discussed above into account when setting his 2015 target pay levels in light of his general responsibilities as the Company’s Chief Financial Officer. Following these pay adjustments, the target pay for each of our named executive officers in 2015 was within a competitive range that approximates 85% to 115% of market median. For a further discussion, see “– Use of Market Data and Competitive Compensation Positioning” beginning on page 52.

2015 Incentive Plan Payouts. Payouts under our annual incentive plan and our long-term incentive plan performance awards are subject to the achievement of pre-established targets.

With respect to our annual incentive plan, our overall 2015 corporate performance was below plan targets, which are based on consolidated EPS and FCF, while performance at our electronic systems and communication systems segments exceeded their respective targets under the annual incentive plan, which are based on segment operating income and FCF. Accordingly, calculated payouts under our annual incentive plan were below target for our corporate named executive officers (Messrs. Strianese, D’Ambrosio and Brunson), but above target for our group named executive officers (Messrs. Kantor and Mega)

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

who serve as the presidents of these segments. Notwithstanding the formula-based calculation of these payouts under our annual incentive plan, after considering all aspects of the Company’s financial performance for 2015 including the non-cash goodwill impairment charges, management recommended and the Committee agreed, that the calculated payouts for the corporate named executive officers be reduced by 50%, and that the corporate performance rating used in the calculation of payouts to the group named executive offices be reduced by 50%. For a further discussion, see “– Elements of 2015 Target Pay – Annual Incentives” beginning on page 54.

For our long-term performance awards that vested on December 31, 2015, our three-year performance was below target for EPS, resulting in a 54.84% payout for this measure, and was below the minimum performance requirement for relative TSR, resulting in no payout for this measure. Based on these performance award achievements, our named executive officers received performance award payouts that averaged 27% of their target awards for these performance measures. For a further discussion, see “– Payment of Performance Awards for the 2013-2015 Award Cycle” beginning on page 63.

2015 SHAREHOLDER ADVISORY VOTE ON EXECUTIVE COMPENSATION (“SAY-ON-PAY”)

At our 2015 annual shareholders meeting, more than 92% of the votes cast on our Say-On-Pay proposal were voted in favor of the compensation paid to our named executive officers for 2014. We believe that this strong level of shareholder support demonstrates, among other things, the effectiveness of the substantive changes made to our compensation program over the past several years in response to shareholder feedback. The Committee considers the outcome of Say-On-Pay votes and other shareholder input in making decisions regarding the executive compensation program.

SOUND PAY PRACTICES

The Committee has adopted a broad range of program changes in response to shareholder feedback that began in connection with our first Say-On-Pay vote in 2011. As a result of these changes and other actions taken by the Committee, the Committee believes L-3’s executive compensation program reinforces its pay-for-performance culture and includes corporate governance practices that are considered by investors to reflect market “best practices.” The table below highlights key features of our executive compensation program.

 

Executive Compensation Program Features
Executive Compensation
Program Includes
 

   

   Emphasis on long-term, performance-based compensation and meaningful stock ownership guidelines to align executive and shareholder interests
 

   

   Transparent, formulaic incentive plans designed to promote short- and long-term business success
 

   

   Performance conditions on the Chief Executive Officer’s stock options
 

   

   

  

Clawback policy that applies to all incentive compensation, including equity-based awards

Modest perquisites consistent with competitive practices

 

   

   

  

Double trigger provisions for severance payable in the event of a change in control

Annual compensation risk assessment to ensure program does not encourage excessive risk-taking

 

   

   Tally sheet analysis to better understand current and accumulated compensation and benefits

Executive Compensation

 

   

   Employment agreements

Program Does Not

 

   

   Excise tax gross-ups on severance/change in control payments
Include or Prohibits  

   

   Repricing of stock options or other equity-based awards without shareholder approval
 

   

   Pension plan/SERP credit for years not worked with L-3 or its predecessor companies
 

   

   Excessive severance or change in control provisions
 

   

   Payment of dividends on stock options, or on other equity-based awards prior to vesting
   

   

   Hedging or pledging of L-3 stock by executives, employees and non-employee directors

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

PROGRAM OVERVIEW

The table below outlines the principal elements of our executive compensation program. Detailed descriptions of each element of compensation and discussion of how the Committee determined compensation levels for 2015 can be found in the section “– Elements of 2015 Target Pay” beginning on page 53.

 

 

LOGO

DETERMINING EXECUTIVE COMPENSATION

Role of the Compensation Committee. L-3’s executive compensation program is administered by the Committee. The Committee is ultimately responsible for the review and approval of compensation for L-3’s Chief Executive Officer and all executives who directly report to him, including the other named executive officers. Key areas of responsibility for the Committee are described in “The Board of Directors and Certain Governance Matters – Committees of the Board of Directors” beginning on page 37.

Role of Management and the Chief Executive Officer. The Company’s human resources, finance and legal departments assist the Committee in the design and development of competitive compensation programs by providing data and analyses to the Committee and FW Cook, the Committee’s independent compensation consultant, in order to ensure that L-3’s programs and incentives align with and support the Company’s business strategy. Management also recommends incentive plan metrics, performance targets and other plan objectives to be achieved, based on expected Company performance and subject to Committee approval.

 

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On an annual basis, the Chief Executive Officer reviews the performance of those executives who report directly to him, including the other named executive officers, relative to their individual goals and Company performance and submits recommendations to the Committee for proposed base salary adjustments, target bonuses and personal ratings, and grant date target values for long-term incentive awards. The Chief Executive Officer also provides the Committee with an annual assessment of his own performance, but otherwise has no role in determining his own compensation. No other executive officer participates in the setting of compensation for himself or any other executive officer.

Role of Compensation Consultants. The Committee has the sole authority to select, retain, terminate and approve the fees payable to outside consultants to provide it with advice on various aspects of executive compensation design and delivery. The Committee retained FW Cook to advise the Committee on executive and non-employee director compensation generally. For a detailed description of FW Cook’s activities for the Committee, see “The Board of Directors and Certain Governance Matters – Compensation Committee Use of Consultants” on page 40.

MIX OF PAY

The Committee believes that L-3’s pay mix strongly supports the Company’s pay-for-performance culture. In 2015, 68% of the Chief Executive Officer’s 2015 target pay was “at risk” and subject to future performance to have any realizable value.

Base salary and restricted stock units (“RSUs”) are the only elements of 2015 target pay that are not contingent on future performance to have value (“fixed” pay). However, they both serve to attract and retain top executive talent, and the use of these pay elements is consistent with competitive market practices. As illustrated below, the mix of incentive compensation for our named executive officers is balanced to avoid the risk of emphasizing short-term gains at the expense of long-term performance. The emphasis on long-term incentives demonstrates our strong commitment to the alignment of management and shareholder interests over time.

 

2015 Target Pay Mix

 

 

LOGO

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

USE OF MARKET DATA AND COMPETITIVE COMPENSATION POSITIONING

Use of Market Data. The Committee believes that the success of our Company is dependent upon its ability to continue to attract and retain high-performing executives. To ensure the comparability of our executive compensation practices and pay levels, the Committee has historically monitored executive pay at leading defense, aerospace and other industrial companies (the “compensation peer group”) with whom L-3 competes for business, executive talent or investor capital. The table below shows the composition of our peer group used to benchmark target pay in 2015, which is identical to the peer group used to benchmark target pay in 2014, except for the addition of Huntington Ingalls Industries as described further below.

 

2015 Compensation Peer Group

Danaher Corporation

  Huntington Ingalls Industries, Inc. (added)   Parker Hannifin Corporation

Eaton Corporation

  Leidos Holdings, Inc.   Raytheon Company

General Dynamics Corporation

  Lockheed Martin Corporation   Rockwell Collins, Inc.

Harris Corporation

  Northrop Grumman Corporation   Textron, Inc.

Honeywell International, Inc.

       

The Committee evaluates each peer company on an annual basis to determine its continued suitability from a pay benchmarking perspective. The selection criteria examined include:

 

  ¡   Operational Fit: companies in the same or similar industries with a comparable business mix and client base, and diversified global operations. Due to the limited number of “pure defense” companies of comparable size, the Committee believes that it is appropriate to include other companies in L-3’s compensation peer group that are similar in size and compete with L-3 for executive talent or investor capital.

 

  ¡   Financial Scope: companies of similar size as measured by annual corporate revenues. Most of the peers fall within a range of one-third to three times the size of L-3, and L-3’s revenues are at or near the median of the compensation peer group. In limited circumstances, we have found it appropriate to include companies with revenues that fall both above and below this range if they are proven competitors for business, executive talent or investor capital.

In June of 2014, the Committee conducted its annual review of the suitability of the peer group companies, and determined to add Huntington Ingalls Industries to the peer group for use in benchmarking target pay levels beginning in 2015. Huntington Ingalls is a U.S.-based defense contractor that competes with L-3 for executive talent and investor capital, and has revenues that are smaller than L-3, but within the range of at least one-third of L-3’s revenues.

In reviewing competitive compensation levels, it is the Committee’s practice to consider compensation peer group data for all named executive officers, and, for those named executive officers who are group presidents (Messrs. Kantor and Mega), to also consider general industry compensation data included in third-party surveys because it believes that including a broader industry group more accurately reflects the labor market for these positions and ensures a meaningful sample size given the revenues of the groups they lead. With respect to compensation decisions made by the Committee for Mr. Kantor in 2015, the Committee considered competitive compensation levels based on the average of the compensation peer group data and survey data from the Towers Watson Executive Compensation Database General Industry survey. For Mr. Mega, the Committee only considered competitive compensation levels based on the survey data, as Mr. Mega was not a named executive officer at the time of the Committee’s review. The survey data is size-adjusted by FW Cook to reflect each group’s annual revenues, and is used to provide a supplemental market reference.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

Competitive Market Positioning. The Committee’s practice is to make pay decisions regarding the elements of compensation that compose each named executive officer’s target pay (base salary, target bonus and grant date target value of long-term incentives) in February of each fiscal year. As part of its decision-making process, the Committee compares each named executive officer’s target pay for the fiscal year against the market median; however, the Committee does not use market data in isolation in determining pay. Instead, competitive market data serves as one of many considerations used by the Committee in determining base salary adjustments and target pay opportunities for both annual and long-term incentives. The primary factors considered by the Committee in making its annual pay determinations is shown below.

 

Target Pay Determinants

    Positioning to competitive market median

  

    Long-term financial and individual performance

  

    Role and responsibilities relative to benchmark

    Competitive mix of fixed and at-risk pay

  

    Tenure and experience in role

  

    Internal pay equity

    Competitive mix of cash and equity

  

    Expected future contributions and market conditions

  

    Prior year’s compensation levels

For 2015, the target pay for each of our named executive officers was within a competitive range that approximates 85% to 115% of market median.

ELEMENTS OF 2015 TARGET PAY

Base Salary

Base salary serves as the foundation of an executive’s compensation and is an important component in L-3’s ability to attract and retain executive talent. On an individual basis, the Committee considers each executive’s role and responsibilities, experience, tenure, business results and individual performance, competitive market pay levels, and internal pay equity considerations in making base salary adjustments. In 2015, the Committee increased the Chief Executive Officer’s base salary by 3.0%. The Committee also approved base salary increases of 3.0% to 3.1% for Messrs. Brunson, Kantor, and Mega to maintain competitive positioning as compared to market levels. All base salary increases for 2015 were approved by the Committee on February 17, 2015 and made effective on April 1, 2015.

 

     

2015 Salary

(in thousands)

    

2014 Salary

(in thousands)

     Percent Change  
Michael T. Strianese    $    1,390       $    1,350         3.0
Ralph G. D’Ambrosio      695         695           
Curtis Brunson      670         650         3.1
Steve Kantor      692         672         3.0
John S. Mega      541         525         3.0

Note: Amounts reflect annualized base salary rates in effect at the end of the fiscal years indicated.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

Annual Incentives

The annual incentive plan provides senior executives with the opportunity to earn annual cash incentive awards based on corporate, group and individual performance relative to pre-established internal targets.

 

     Award Determination under Annual Incentive Plan

    

  Performance criteria defined at the beginning of the performance period

    

  Performance compared to pre-established goals

    

 

 

For corporate named executive officers, financial performance is based on consolidated EPS and FCF results

 

    

 

  For group presidents, financial performance is primarily based on the operating income (“OI”) and FCF results for their respective groups, with additional consideration given to consolidated EPS and FCF

    

  Individual performance measured based on pre-established goals and assigned specific weighting

    

 

Payouts can range from 0% to 225% of target bonus based on performance

 

¡     0% to 200% of target bonus can be earned by the CEO, and the other named executive officers who are not group presidents

 

¡     For group presidents, up to an additional 25% of the target bonus can be earned based on achievement of organic OI growth

The Committee established the 2015 corporate and group financial targets under the annual incentive plan, as well as individual performance goals and weightings, in February 2015. The corporate financial targets were based on management’s most recent consolidated internal financial plan presented to L-3’s Board of Directors (the “2015 Plan”), which formed the basis for L-3’s financial guidance for 2015 EPS and FCF disclosed to investors in January 2015. The individual group financial targets were based on internal group financial plans that were consistent with the 2015 Plan.

Based on L-3’s actual 2015 financial performance relative to plan and the Committee’s assessment of the named executive officers’ individual performance for 2015, the Committee approved 2015 annual incentive payouts for the named executive officers as detailed in the steps below.

STEP 1. Determine target bonus at beginning of fiscal year

Annual incentive plan (“AIP”) target bonuses are set as a percent of base salary in connection with the determination of target pay for each named executive officer. The 2015 target bonus for each of the named executive officers was held constant, as a percentage of their respective base salaries, from 2014 levels.

 

     

2015 Salary

(in thousands)

    

2015 AIP

Target Bonus (%)

   

2015 AIP

Target Bonus (in thousands)

 
Michael T. Strianese    $    1,390         165   $    2,294   
Ralph G. D’Ambrosio      695         90     626   
Curtis Brunson      670         90     603   
Steve Kantor      692         100     692   
John S. Mega      541         100     541   

 

54    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

 

STEP 2. Determine the financial rating based on performance for the fiscal year

Financial ratings are based on a weighted-average assessment of L-3’s consolidated performance (or, for group presidents, both L-3’s and their respective group’s performance) relative to pre-established targets for key financial measures. For corporate named executive officers, our annual incentive plan is focused on L-3’s consolidated EPS and FCF performance (with FCF calculated as net cash from operating activities from continuing operations, less capital expenditures, net of dispositions) because we believe that these metrics constitute two of the most important financial measures that create shareholder value. For group presidents, our plan emphasizes the respective group’s OI and FCF performance because we consider them to be important financial measures that group presidents can directly influence in order to increase L-3’s consolidated EPS and FCF. Our plan also takes into account L-3’s consolidated EPS and FCF results in evaluating group presidents’ financial ratings in order to provide a degree of alignment for group presidents with L-3’s overall performance. The table below provides the relative weightings of these performance measures that are utilized in evaluating each named executive officer’s financial rating. We believe that the weightings appropriately reflect the importance of these measures to our overall financial success.

 

Corporate Executives

        

Group Presidents

Financial Measure    Weight          Financial Measure    Weight (by measure)         

Weight

(corporate/group)

   Final Effective
Weighting
                    

Consolidated EPS

 

Consolidated FCF

  

80%

 

20%

     

Consolidated EPS

 

Consolidated FCF

  

80%

 

20%

  

 

}

   25%   

  20%

 

   5%

        

 

Group OI

 

Group FCF

  

 

80%

 

20%

  

 

}

   75%   

 

  60%

 

  15%

Total

   100%         Total                   100%

Pay-for-Performance: A financial rating of 100% indicates weighted-average performance at target levels (that is, at plan). Performance that exceeds plan by 15% (or by 25% for group presidents) results in a maximum financial rating of 200%. If performance is below plan by 15% (or by 25% for group presidents), this results in a threshold financial rating of 50%. If performance is below threshold, this results in a financial rating of zero. Performance is interpolated between these points. Based on the increased range of volatility for group-level financial results as compared to L-3’s consolidated financial results, we believe it is appropriate to consider a wider range of performance at the group level.

 

Performance Level    Corporate Executives
(% of Plan Performance)
   

Group Presidents

(% of Plan Performance)

     Financial
Rating
 
Maximum    ³ 115   ³ 125      200
Target        100       100      100
Threshold          85         75        50
Below Threshold    < 85   < 75          0

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

For purposes of calculating actual financial results under the annual incentive plan, the Committee excludes the effects of pre-established categories of items that it believes are not reflective of operating performance. These categories have not been modified since 2012. Accordingly, in February 2015, the Committee determined to exclude the following pre-established categories of adjustments in calculating L-3’s consolidated EPS and FCF under the plan for 2015, as applicable:

 

L-3 Consolidated EPS Adjustments   L-3 Consolidated FCF Adjustments

    Impairment losses on goodwill and other intangible assets, or on debt or equity investments

 

    Gains or losses on retirement of debt, or on asset dispositions

 

    Extraordinary gains and losses under U.S. generally accepted accounting principles (“GAAP”)

 

    Non-cash gains or losses on discontinued operations

 

    New accounting standards required to be adopted under GAAP or SEC rules

 

    Gains or losses on litigation matters at or exceeding $5 million individually or $25 million in the aggregate

 

    Gains or losses related to the resolution of income tax contingencies for business acquisitions which existed at the date of acquisition

 

    Discretionary contributions to pension plans that exceed the amount forecasted in L-3’s plan established in February of the fiscal year

 

    Premiums and other payments in excess of principal and interest associated with the retirement of debt, including income taxes incurred in connection with the debt retirement

 

    Tax payments or benefits associated with gains or losses on business divestitures in determining net cash from operating activities

The group OI and FCF performance targets are subject to adjustment based on acquisitions or dispositions that occur during the fiscal year, or to account for internal realignments that result in business units being transferred from one group to another group during the fiscal year. In addition, the group OI and FCF results reflect adjustments to account for the impact of non-operational items that were not anticipated at the time the group performance targets were established.

In connection with its evaluation of L-3’s performance under the annual incentive plan, the Committee also reviewed the impact of the Company’s share repurchase program on its actual consolidated EPS results for 2015, and concluded that no further adjustment to the Company’s actual EPS results for 2015 was warranted because the Company’s actual weighted average diluted shares outstanding for 2015 was materially consistent with the 2015 Plan assumptions.

Each named executive officer’s 2015 financial rating, based on actual performance relative to their performance targets, is set forth in the following table.

2015 Financial Performance Achieved Relative to Plan

 

                 Corporate Level Financial Performance                             Group Level Financial Performance                

 Financial 

Rating

 
  Earnings Per Share     Free Cash Flow
(in millions)
    Operating Income
(in millions)
    Free Cash Flow
(in millions)
   
  Actual(1)         Plan         Weight     Actual(1)       Plan       Weight     Actual(1)     Plan     Weight     Actual(1)       Plan       Weight    
Michael T. Strianese   $ 7.09      $ 7.50        80   $ 899      $ 925        20                                                 84
Ralph G. D’Ambrosio   $ 7.09      $ 7.50        80   $ 899      $ 925        20                                                 84
Curtis Brunson   $ 7.09      $ 7.50        80   $ 899      $ 925        20                                                 84
Steve Kantor   $ 7.09      $ 7.50        20   $ 899      $ 925        5   $ 535      $ 525        60   $ 503      $ 455        15     107
John S. Mega   $ 7.09      $ 7.50        20   $ 899      $ 925        5   $ 201      $ 178        60   $ 300      $ 225        15     147

 

(1) Actual results reflect the effects of the pre-established categories of adjustments described above.

 

56    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

 

STEP 3. Determine personal rating based on individual performance

Personal ratings are based on the assessment of an executive’s performance relative to pre-determined individual goals. The personal rating can range from 0% to 200% of target. The Chief Executive Officer provides individual performance assessments and recommends personal ratings for the Committee’s consideration for all executives who report directly to him, including the other named executive officers, based on the factors in the table below. The Chief Executive Officer also submits a self-assessment addressing factors listed for him, but makes no recommendation as to his own personal rating. The Committee determines the Chief Executive Officer’s performance rating based on the factors indicated below and following input from the other independent members of the Board of Directors.

 

Michael T. Strianese

(Chairman and
Chief Executive Officer)

 

Ralph G. D’Ambrosio

(Senior Vice President and
Chief Financial Officer)

 

Curtis Brunson

(Executive
Vice President of
Corporate Strategy and
Development)

 

Steve Kantor

(Senior Vice President and
President of Electronic
Systems Group)

 

John S. Mega

(Senior Vice President
and President of
Communication Systems
Group)

 Company financial performance

 

 Market positioning

 

 Optimizing operations

 

 Internal collaboration

 

 Leadership

 

 Enterprise risk management

 

 Corporate governance

 

 Strategic planning

 

 Succession planning

 

 Internal/external communications

 

 Board relations

 

 Timely and
accurate financial reporting and forecasting

 

 Management of capital structure, liquidity and capital allocation

 

 Internal management reporting and external financial reporting

 

 Internal controls over financial reporting

 

 Investor relations

 

 Enterprise risk management

 

 Mergers, acquisitions and divestitures

 

 Tax planning and strategies

 

 Business development

 

 Strategic customer relationships

 

 Guidance of strategic growth pursuits

 

 Development of products and services in international markets

 

 Research and development

 

 Customer service

 

 Leadership in engineering and technology initiatives

 

 Group financial performance

 

 Winning important re-competitions and new business contracts

 

 Market share gains

 

 Program performance

 

 Cost savings initiatives

 

 International expansion

 

 Internal collaboration

 

 Developing adjacent markets

 

 Research and development

 

 Group financial performance

 

 Winning important re-competitions and new business contracts

 

 Market share gains

 

 Program performance

 

 Cost savings initiatives

 

 International expansion

 

 Internal collaboration

 

 Developing adjacent markets

 

 Research and development

STEP 4. Determine total rating

Each executive’s total rating determines the potential payout under the annual incentive plan and is equal to the weight-adjusted sum of the financial and individual ratings.

 

      Corporate Executives
(weight)
   

 Group Presidents  

(weight)

 
  Financial Rating      80     67
  Personal Rating        20 %        33 % 
  Total Rating      100     100

 

    Annual Incentive Plan    

Payout Formula

   Total Rating = [Financial Rating x Weight] + [Personal Rating x Weight]
Potential Annual Incentive Plan Payout ($) = Target Bonus ($) x Total Rating

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

STEP 5. For Group Presidents, determine organic growth adjustment

 

For Group Presidents, the final annual incentive payout may be adjusted upwards by up to an additional 25% of their target bonus under the formulaic plan design. This performance modifier is intended to incentivize Group Presidents to drive organic growth in their respective groups as measured by OI. Organic OI growth of 5.0% or above triggers the maximum adjustment of 25% of target bonus. Payouts for organic growth between zero and the maximum level are adjusted based on the graduated scale in the table to the right, with performance interpolated between these points.

Organic Operating Income
Growth
 

Growth Adjustment

(% of Target Bonus)

0.0%   0.0%
0.6%   1.5%
1.3%   3.0%
1.9%   6.0%
2.5%   9.0%
3.1%   13.0%
3.8%   17.0%
4.4%   21.0%
          5.0% or above               25.0%
 

 

For 2015, Mr. Mega’s group, Communication Systems, achieved organic OI growth of 12.3%. Accordingly, Mr. Mega received 25.0% of his 2015 target bonus as part of his annual incentive award payout. Mr. Kantor’s group did not achieve organic OI growth for 2015, and, accordingly, he did not receive an OI growth-based adjustment to his annual incentive award payout.

STEP 6. Discretionary Adjustment

Notwithstanding the achievement of any of the aforementioned performance criteria, the Committee retains the ability to apply negative discretion to reduce awards that would otherwise be considered “earned” based on the formulaic plan design. For 2015, management believed that the corporate financial rating calculated under the annual incentive plan of 84%, while below target, did not sufficiently reflect all aspects of the Company’s performance for 2015, including non-cash goodwill impairment charges. While non-cash goodwill impairment charges are excluded from performance calculations under the annual incentive plan, management recognized that the amount of such charges incurred for 2015 was substantial, including with respect to our continuing operations and as compared to prior years. Therefore, prior to the Committee’s determination of the awards to be approved under the annual incentive plan for the named executive officers, Mr. Strianese recommended and the Committee agreed, that payouts for the corporate named executive officers be reduced by 50%, and that the corporate rating used in the calculation of payouts to the group named executive officers be reduced by 50%.

 

58    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

 

CEO ANNUAL INCENTIVE AWARD CALCULATION: Detailed below are the calculation steps used to determine the Chief Executive Officer’s 2015 annual incentive plan payout.

 

 

LOGO

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

2015 Annual Incentive Plan Payouts. The table below lists the final 2015 annual incentive plan payments to the named executive officers that were approved by the Committee. These payments represent substantial reductions from the amounts earned by the named executive officers under the annual incentive plan for 2014. For a further discussion, see Note 4 to the “Summary Compensation Table” beginning on page 69.

 

2015 Annual Incentive Plan Payouts

 
     

2015 AIP

Target
Step 1

     Total
Rating
Steps 2-4
    Organic Growth
Adjustment
Step 5
   

Formulaic

AIP Payout

Subtotal

    

Discretionary

Adjustment

Step 6

   

2015 AIP

Payout

Total

 
Michael T. Strianese    $   2,293,500         83     N/A      $   1,903,605       $ (951,805   $   951,800   
Ralph G. D’Ambrosio      625,500         83     N/A        519,165         (259,165     260,000   
Curtis Brunson      603,000         83     N/A        500,490         (250,490     250,000   
Steve Kantor      692,000         134     0.0     927,280         (47,280     880,000   
John S. Mega      541,000         140     25.0     892,650         (37,650     855,000   

Long-Term Incentives

Long-term incentives are intended to align the interests of the named executive officers with shareholders by linking a meaningful portion of executive pay to shareholder value creation over a multi-year period. Long-term incentives are also provided to drive the performance of our long-term business strategy, engage and retain our key executives, and facilitate ownership of our Common Stock. The table below details the long-term incentive vehicles granted in 2015, and their respective weights as a percentage of the total grant date target value of the long-term incentives awarded. The forms and weightings of the long-term incentives awarded in 2015 are substantially identical to those awarded in 2014.

 

Long-term Incentive    Weight    Rationale    Performance Criteria & Other Features

Stock Options

   30%   

•   Stock price appreciation

•   Stock ownership and capital accumulation

  

•    Ultimate value dependent on stock price appreciation

•    Vests in equal annual increments over three years and has a 10-year term

•    Exercise price equal to the closing price of our Common Stock on the date of grant

•   Grants to the Chief Executive Officer include additional performance vesting conditions as described below under “Stock Options”

RSUs

   30%   

•   Retention

•   Stock ownership and capital accumulation

  

•   Ultimate value dependent on stock price

•   Vest at the end of three years

Performance Awards

   40%   

•   Stock price appreciation

•   Stock ownership and capital accumulation for performance units

•   Motivates achievement of long-term business strategy

  

•    50% Performance Cash: vests at the end of a three-year period based on TSR relative to performance peer group and is paid in cash

•    50% Performance Units: vest at the end of a three-year period based on EPS performance and are paid in shares of Common Stock

•    The actual percentages of the awards that vest range from 0 to 200% of target, based on performance

For purposes of allocating the total grant date target value of long-term incentives approved by the Committee in accordance with the weightings listed above, stock options are valued based on their grant date fair value for financial reporting purposes, RSUs are valued based on the total number of units awarded multiplied by the closing price of our Common Stock on the grant date, performance cash is valued based on the target dollar value at the time the award is made, and performance units are valued based on the target number of units awarded multiplied by the closing price of our Common Stock on the grant date.

 

60    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

 

2015 Grant Date Target Values for Long-Term Incentive Awards. In connection with determining the total grant date target value of the long-term incentives awarded to each named executive officer, the Committee primarily considered the following factors:

 

  ¡   Competitive market median pay levels in the context of target pay as described in the section “Use of Market Data and Competitive Compensation Positioning” beginning on page 52;

 

  ¡   The grant date target value of the prior year’s long-term incentive awards;

 

  ¡   The long-term performance of the named executive officer;

 

  ¡   The scope of responsibility of the named executive officer relative to the other participants in the long-term incentive program; and

 

  ¡   In the case of the named executive officers other than Mr. Strianese, the long-term incentive award recommendation of Mr. Strianese.

 

  ¡   In the case of Mr. D’Ambrosio, the 2014 internal review discussed above.

 

      2015 Grant Date Target Value
(in thousands)
     2014 Grant Date Target Value
(in thousands)
    

    Percent        

    Change        

 
Michael T. Strianese    $   10,000       $   10,000           
Ralph G. D’Ambrosio      2,500         2,700         -7
Curtis Brunson      2,700         2,700           
Steve Kantor      1,650         1,650           
John S. Mega      900         900           

Stock Options. Stock options are a regular component of our long-term incentive program. Stock options directly align the long-term interests of our executives with those of shareholders because they provide value only if the price of our Common Stock increases after the options are granted. Stock options are granted with an exercise price equal to the closing price of our Common Stock on the date of grant, vest in equal annual increments over a three-year period and expire ten years from the grant date.

Consistent with the efforts undertaken by the Committee since 2012 to strengthen the performance-based orientation of our executive compensation programs, the Committee continued to include performance-based vesting conditions on the stock options granted to our Chief Executive Officer in 2015. As a result,

 

  ¡   50% of these stock options would vest only if L-3’s consolidated EPS for the fiscal year ended December 31, 2015 is at least $6.38; and

 

  ¡   50% of these stock options would vest only if L-3’s consolidated FCF for the fiscal year ended December 31, 2015 is at least $786 million.

In the event that one or both of the performance conditions were not satisfied, the stock options that fail to vest as a result would be forfeited.

Consistent with the terms of last year’s CEO stock option grant, the performance-based vesting requirements for EPS and FCF under the CEO stock options granted in 2015 represent a 15% reduction from the corporate financial targets for these measures for 2015 established by the Committee in February 2015 under the annual incentive plan.

For purposes of evaluating whether the performance conditions have been satisfied, L-3’s consolidated EPS and FCF results for 2015 are required to be calculated on the same basis as the methodology used to determine performance for these measures under L-3’s annual incentive plan. In February 2016, the Committee determined that both the EPS and FCF performance conditions of the stock options granted to Mr. Strianese in 2015 were satisfied.

Performance Awards. The performance awards granted by the Committee in 2015 were equally weighted between performance cash earned on the basis of relative TSR and performance units earned on the basis of cumulative EPS results, in each case for the three-year period ending December 31, 2017. The payout ultimately earned can range from zero to 200% of

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

the target amount of cash or stock, in each case based on actual performance relative to the pre-determined goals. The Committee chose relative TSR and cumulative EPS because it believes that they are aligned with shareholder value creation both directly (relative TSR) and indirectly (EPS).

 

Performance Cash: Relative TSR

(50% weighting; denominated and paid in cash)

 

            

Performance Units: EPS

(50% weighting; denominated and paid in stock)

 

      Level   Relative TSR    Payout*             Level    EPS    Payout*       
     Maximum   ³75th Percentile    200%          Maximum    ³$26.06      200    
     Target     50th Percentile    100%          Target      $24.24      100    
     Threshold     25th Percentile      25%          Threshold      $22.42      50    
     Below Threshold   <25th Percentile       0%          Below Threshold    <$22.42      0    
    

 

*Interim points are interpolated.

          

 

*Interim points are interpolated.

  

   

While the Committee has elected to use EPS as a performance measure for both the annual incentive plan and the long-term performance awards, the performance requirements under these plans are designed so that the resulting payouts under the plans reflect different and important aspects of Company performance that are not duplicative. Payouts under the annual incentive plan take into account EPS performance for a single fiscal year, while payouts under the long-term performance awards require EPS performance to be sustained and measured over a three-year period. The Committee believes it is appropriate to separately reward annual and long-term EPS performance achievements because of the importance of EPS in creating shareholder value.

With respect to the terms of the TSR-based performance awards granted in 2015, the Committee made incremental changes intended to reflect prevailing market practices. The performance range was revised to be symmetrical both above and below the Target (50th percentile) performance goal. Accordingly, the Threshold and Maximum performance goals were set at the 25th and 75th percentiles, respectively. In addition, the payout for performance at Threshold was reduced to be 25% of the target amount of cash underlying the award.

Relative Benchmark for the TSR-Based Performance Awards. In 2015, the Committee elected to use the same benchmark used in 2014 for assessing relative TSR performance. This benchmark consists of a custom peer group (the “performance peer group”) of 14 companies with a sales mix that is heavily weighted towards sales to the DoD and the defense industry, and which include the primary U.S. public company competitors for each of L-3’s reporting segments. The companies included in the performance peer group at the time of grant are listed below.

 

Performance Peer Group

BAE Systems

  Huntington Ingalls Industries, Inc.   Orbital ATK

CACI International Inc

  Leidos Holdings, Inc.   Raytheon Company

Exelis Inc.(1)

  Lockheed Martin Corporation   Rockwell Collins, Inc.

General Dynamics Corporation

  ManTech International Corporation   Textron Inc.

Harris Corporation

  Northrop Grumman Corporation    

 

(1) Exelis Inc. was removed from the peer group upon being acquired by Harris Corporation on May 29, 2015.

Targets for 2015 EPS-Based Performance Awards. The performance targets for the 2015 EPS-based performance awards are based on a three-year forecast presented by management to the Committee in February 2015. The forecast was based on the DoD base budget enacted by Congress for the U.S. Government fiscal year ended September 30, 2015 and an expectation that Congress would provide the DoD with approximately $15 billion per year in relief from the Budget Control Act sequester budget caps between fiscal years ended September 30, 2016 and September 30, 2018. The projected compound annual growth rate (“CAGR”) for these total DoD budgets was approximately -1.6% from the U.S. Government fiscal year ended September 30, 2014 to the U.S. Government fiscal year ended September 30, 2017.

 

62    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

 

Given the outlook described above, management’s three-year forecast for cumulative EPS was $24.24, which represents average annual forecasted EPS of $8.08 (or a CAGR of approximately 4.8% from 2014 to 2017). The forecast assumed a CAGR of -0.9% for L-3’s consolidated sales from 2014 to 2017 (which compares favorably to the CAGR of approximately -1.6% for the total DoD budget as described above), and average annual operating margin increases of 40 basis points. The Committee considered these assumptions to be meaningful and rigorous, and set the three-year cumulative EPS target for the 2015 EPS-based performance awards based on management’s forecast of $24.24. Consistent with the performance range for the 2014 EPS-based performance awards, the Committee set the threshold and maximum EPS performance goals under the 2015 performance unit awards based on a range of ±7.5% of the target three-year goal.

For purposes of calculating actual financial results for the performance units, EPS is required to be calculated on the same basis as the methodology used to determine EPS performance under L-3’s annual incentive plan.

RSUs. RSUs are a regular component of our long-term incentive program. The Committee believes that RSUs enhance retention of L-3’s senior executives. The Committee may also make these awards to recognize increased responsibilities or special contributions, to attract new executives, to retain executives or to recognize other special circumstances. RSU grants generally have the following characteristics:

 

  ¡   automatically convert into shares of our Common Stock on the vesting date;

 

  ¡   vest three years from the grant date; and

 

  ¡   accumulate cash dividend equivalents payable in a lump sum contingent upon vesting.

RSU grants to senior executives are also subject to performance-based forfeiture conditions intended to qualify the compensation paid under these awards as performance-based compensation under Section 162(m) of the Internal Revenue Code. For a further discussion, see “– Tax Considerations” on page 65 and Note 4 to the “2015 Grants of Plan Based Awards” table on page 72.

PAYMENT OF PERFORMANCE AWARDS FOR THE 2013-2015 AWARD CYCLE

At its February 16, 2016 meeting, the Committee reviewed and certified the results for the performance awards granted to named executive officers in 2013. Payouts under the 2013 performance awards were contingent upon L-3’s EPS and relative TSR achievements over the three-year performance period ending December 31, 2015. The Company achieved cumulative EPS of $23.07, resulting in the vesting of 54.84% of the target number of EPS-based performance units originally awarded in 2013. With respect to the performance cash awards based on relative TSR performance, L-3’s TSR was below the 40th percentile threshold requirement, and as a result, no payout was made with respect to these awards. The EPS-based performance units earned were paid in shares of Common Stock.

In connection with its evaluation of L-3’s actual results under the EPS-based performance units, the Committee considered the impact of the Company’s share repurchase program on the Company’s cumulative EPS for the three-year performance period ending December 31, 2015, and concluded that the Company’s actual weighted average diluted shares outstanding for each of the three years of the performance period was materially consistent with the forecast assumptions upon which the performance goals for the awards were based.

EXECUTIVE BENEFITS AND PERQUISITES

Retirement Plans. L-3 provides retirement benefits as part of a competitive compensation package to retain key employees. All of L-3’s named executive officers other than Mr. Mega participate in the L-3 Communications Corporation Pension Plan (the “Corporate Plan”), which is a tax-qualified defined benefit plan, and in a nonqualified supplemental executive retirement plan (the “Restoration SERP”). Mr. Mega participates in The Narda Microwave Pension Plan (the “Narda Plan”), which is also a tax-qualified defined benefit plan, and the Restoration SERP. The Restoration SERP fills the gap in benefits that are not accrued under the Corporate Plan or the Narda Plan due to limits imposed by the Internal Revenue Code. In the case of Mr. Mega, the Restoration SERP also takes into consideration eligible bonuses such as payouts under our annual incentive plan (which are included as earnings under the Corporate Plan, but are not included under the Narda Plan). These tax-qualified defined benefit plans and the Restoration SERP are designed such that a named executive officer with 30 years of employment by L-3 would receive a combined annual amount of up to approximately 45% to 55% of their final average cash compensation (base salary and annual incentive payouts). See “2015 Pension Benefits” beginning on page 76 for additional details.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

It is the Committee’s practice to periodically review the plan design and benefit levels of our retirement plans to ensure that they are consistent with the pay practices of our compensation peer group. The Committee most recently performed this review in 2014, and concluded that the benefits provided under these plans to our named executive officers were consistent with market median levels.

Deferred Compensation Plans. L-3 sponsors two nonqualified deferred compensation plans, the L-3 Communications Corporation Deferred Compensation Plan I and the L-3 Communications Corporation Deferred Compensation Plan II, to a select group of highly compensated executives, including our named executive officers, as a competitive practice. These plans allow for voluntary deferrals by executives, including the named executive officers, of up to 50% of base salary and 100% of annual incentive payouts into an unfunded, nonqualified account. There are no company contributions under these plans, and deferred amounts earn interest at the prime rate.

Employment, Severance and Change in Control Arrangements. L-3 does not have any employment agreements with its named executive officers nor do we have any severance arrangements other than in connection with a change in control. L-3’s named executive officers are covered under the L-3 Change in Control Severance Plan (the “Change in Control Severance Plan”), which provides for specified severance benefits in the event of termination by the Company without cause or by the employee for good reason following a change of control. The purpose of these arrangements is to preserve morale and productivity, and encourage retention, in the face of the disruptive impact of a change in control. Severance benefits under the Change in Control Severance Plan are market competitive and do not provide tax gross-ups. See “Potential Payments Upon Change in Control or Termination of Employment” beginning on page 81 for additional details.

Perquisites. L-3 provides the named executive officers with modest perquisites consistent with competitive practices. In 2015, the named executive officers were eligible for an annual executive physical, supplemental life insurance and participation in an executive medical plan. We provide our Chief Executive Officer with a car and security driver, and access to L-3’s fractionally-owned aircraft for occasional personal use. Our corporate aircraft policy requires that our Chief Executive Officer reimburse the Company for the incremental costs incurred in connection with his personal use of the aircraft. We also maintain a key employee relocation policy applicable to management employees generally.

STOCK OWNERSHIP GUIDELINES AND RETENTION REQUIREMENTS

L-3’s stock ownership guidelines reflect the Committee’s belief that executives should accumulate a meaningful level of ownership in Company stock to align their interests with those of our shareholders. The Chief Executive Officer is required to maintain a level of ownership that is equivalent in value to at least six times his base salary. Minimum ownership requirements for senior executives, other than the Chief Executive Officer, range from one and a half to three times base salary depending on roles and organizational levels. The Committee reviews progress towards guideline achievement annually. Each executive subject to stock ownership guidelines is required to retain 75% of net shares (after payment of fees, taxes and exercise prices, if applicable) acquired upon the vesting of stock awards or the exercise of stock options until the required multiple of base salary is met.

The stock ownership of our named executive officers as of December 31, 2015 as compared to our guideline and retention requirements is as follows:

 

     

Ownership Guideline

(multiple of salary)

  

Stock Ownership

(in dollars)

     Stock Ownership
(multiple of salary)
  

Subject to

Retention Ratio 

Michael T. Strianese    6.0    $   21,329,792       15.3    No
Ralph G. D’Ambrosio    3.0      5,514,459         7.9    No
Curtis Brunson    3.0      9,778,410       14.6    No
Steve Kantor    3.0      4,406,020         6.4    No
John S. Mega    3.0      2,147,551         4.0    No

“Stock ownership” is defined to include shares of Common Stock held outright, shares and share equivalents held in benefit plans, and unvested RSUs. Unvested performance units and unexercised stock options are not included in this calculation.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

COMPENSATION CLAWBACK POLICY

Under L-3’s clawback policy, the Company may recoup and/or cancel any incentive-based compensation, including equity-based compensation, awarded to executives on or after the effective date of the policy (January 1, 2012) under the following circumstances:

 

  ¡   The award was predicated upon the achievement of financial results that were subsequently the subject of a material restatement of L-3’s financial statements;

 

  ¡   The executive’s fraud or willful misconduct was a significant contributing cause to the need for the restatement; and

 

  ¡   A smaller award would have been earned under the restated financial results.

Subject to the discretion and approval of the Board of Directors, the Company will, to the extent permitted by law, seek to recover the amount of incentive compensation paid or payable to the executive in excess of the amount that would have been paid based on the financial restatement.

ANTI-HEDGING AND ANTI-PLEDGING POLICIES

Our policies prohibit the hedging or pledging of L-3 stock by all executives, employees and non-employee directors.

COMPENSATION RISK ASSESSMENT

The Committee reviews and discusses with management, on at least an annual basis, management’s assessment of whether risks arising from the Company’s compensation policies and practices for all employees, including executive officers, are reasonably likely to have a material adverse effect on the Company. As part of the 2015 assessment performed by L-3, the following were determined on a collective basis for L-3 and its subsidiaries:

 

  ¡   no business unit carries a significant portion of the Company’s risk profile;

 

  ¡   the Company’s compensation policies and practices are not structured differently from one business unit to another in any material respect;

 

  ¡   incentive compensation expense is not a significant percentage of the Company’s sales;

 

  ¡   the Company’s compensation programs do not vary significantly from the overall risk and reward structure of the Company;

 

  ¡   the Company’s long-term incentive awards are intended to align the interests of the Company’s executives and key employees with those of shareholders by linking a meaningful portion of their compensation to value creation over a multi-year period (and, with respect to senior executives, by utilizing overlapping performance periods and multiple performance measures such as relative TSR and cumulative EPS) to promote sustainable, long-term performance;

 

  ¡   the Company’s short-term incentive awards, capped at 200% of target for corporate executives and 225% for group presidents, are based upon a variety of financial and nonfinancial performance measures, which, in the Company’s view, reward performance without incentivizing inappropriate risk-taking; and

 

  ¡   the Company has policies and procedures that require compensation programs adopted at the subsidiary and business unit level to be reviewed and approved by senior corporate management to, among other things, ensure that none of the Company’s or its subsidiaries’ compensation programs encourage inappropriate risk-taking.

The Committee has also adopted stock ownership guidelines for our senior executives, including our named executive officers, which are intended to align their long-term interests with those of our shareholders and to encourage a long-term focus in managing the Company. For a further discussion, see “Stock Ownership Guidelines and Retention Requirements” on page 64.

TAX CONSIDERATIONS

Section 162(m) of the Internal Revenue Code generally limits tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year compensation becomes taxable to the executive, subject to an exception for performance-based compensation that meets specific requirements. The Committee considers the impact of this rule when developing and implementing its executive compensation programs; however, the Committee reserves the right to provide compensation that is not tax deductible if it believes the value in doing so outweighs the value of the lost tax deduction.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

We intend that the compensation paid under our annual incentive plan and under our long-term incentive awards qualifies as performance-based compensation under Section 162(m) of the Internal Revenue Code. With respect to our annual incentive plan, we established maximum payment levels under the program in February 2015 using an objective formula based on our 2015 operating income. Similarly, with respect to RSUs awarded to our named executive officers in 2015, we included forfeiture conditions that established maximum grant date fair values using an objective formula based on our 2015 free cash flow. These formulas do not establish any entitlement to payments or awards at the calculated levels. The actual payments under our annual incentive plan for 2015 and the actual grant date fair values of RSUs awarded to our named executive officers in 2015 were less than the amounts generated by the applicable formulas.

In 2015, the portion of the base salary paid to Chief Executive Officer in excess of $1 million does not qualify as tax deductible compensation under Section 162(m). However, the Committee believes that the base salary awarded to our Chief Executive Officer in 2015 is appropriate in light of competitive market practices.

EQUITY GRANT TIMING

The Committee approves all long-term incentive awards to the named executive officers at in-person or telephonic meetings on an annual basis. We do not time the grant of equity awards, including stock options, to precede the release of non-public information. The Committee makes grants on an annual basis at a scheduled meeting in February, and may also grant long-term incentive awards at Committee meetings held in connection with or following new hires or promotions. Under the terms of the Company’s long-term equity incentive plans, the exercise price of each stock option granted is equal to the fair market value of the underlying Common Stock on the date of grant. The Committee does not grant discounted stock options and the Company’s long-term equity incentive plans do not permit stock option repricing without shareholder approval.

 

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REPORT OF THE COMPENSATION COMMITTEE

 

 

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion with management, the Compensation Committee recommended to L-3’s Board of Directors that the Compensation Discussion and Analysis be included in L-3’s proxy statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

In 2015, Robert B. Millard (Chairman), Lewis Kramer and Lloyd W. Newton served as members of the Compensation Committee. In addition, Alan H. Washkowitz served as a member of the Compensation Committee until May 5, 2015, when he retired from the Board of Directors.

Robert B. Millard (Chairman)

Lewis Kramer

Lloyd W. Newton

 

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TABULAR EXECUTIVE COMPENSATION DISCLOSURE

 

 

TABULAR EXECUTIVE COMPENSATION DISCLOSURE

Summary Compensation Table

The following table provides summary information concerning compensation paid or accrued by us to or on behalf of our Chairman and Chief Executive Officer, our Senior Vice President and Chief Financial Officer, and each of our three other most highly compensated executive officers serving at fiscal year-end. These officers are collectively referred to as the named executive officers.

 

Name and Principal Position   Year     Salary
($)
    Stock
Awards(1)
($)
    Option
Awards(2)
($)
    Non-Equity
Incentive Plan
Compensation(3)(4)
($)
    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings(5)(6)
($)
    All Other
Compensation(7)
($)
    Total(8)
($)
 

Michael T. Strianese

(Chairman and Chief Executive Officer and Director)

    2015        1,378,923        5,000,030        3,000,004        951,800        180,986        102,304        10,614,047   
    2014        1,350,000        5,000,003        3,000,002        731,600        4,583,292        100,496        14,765,393   
    2013        1,311,538        4,999,995        2,999,996        2,713,500               99,583        12,124,612   

Ralph G. D’Ambrosio

(Senior Vice President and
Chief Financial Officer)

    2015        695,000        1,250,040        750,006        260,000               34,133        2,989,179   
    2014        689,539        1,350,058        809,990        212,300        1,033,645        34,262        4,129,794   
    2013        645,019        1,250,018        749,999        820,000               34,810        3,499,846   

Curtis Brunson

(Executive Vice President of Corporate Strategy and Development)

    2015        664,461        1,349,997        810,000        250,000        47,382        67,409        3,189,249   
    2014        643,173        1,350,058        809,990        333,900        603,652        64,682        3,805,455   
    2013        608,481        1,250,018        749,999        770,000        64,723        52,406        3,495,627   
               

Steve Kantor

(Senior Vice President and President of Electronic Systems)

    2015        686,461        824,998        495,001        880,000        172,222        81,053        3,139,735   
    2014        666,538        825,017        495,003        797,000        713,726        55,421        3,552,705   
    2013        634,712        700,007        419,997        850,000        261,404        42,238        2,908,358   

John S. Mega

(Senior Vice President and President of Communication Systems)(9)

    2015        546,927        449,999        269,993        855,000        461,724        42,134        2,625,777   
               
                                                               

 

(1) Represents the grant date fair values of RSUs and performance units, which are calculated in accordance with the accounting standards for share-based compensation using L-3’s stock price on the date of grant. For a discussion of the general terms of RSUs and performance units, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives” beginning on page 60.

RSUs are subject to forfeiture conditions based on L-3’s free cash flow for the fiscal year in which they were granted. For a further discussion of these conditions, see Note 4 to the “2015 Grants of Plan-Based Awards” table beginning on page 72.

The grant date fair value of the performance units assumes that the Target level of performance is achieved, which represents the probable outcome of the performance conditions of the awards on the date of grant. The following table provides the value of the performance units granted in 2015 as of their grant date assuming the Target and Maximum levels of performance are achieved:

 

Name    Target
($)
     Maximum
($)
 
Michael T. Strianese      2,000,038         4,000,076   
Ralph G. D’Ambrosio      500,042         1,000,084   
Curtis Brunson      539,999         1,079,998   
Steve Kantor      329,999         659,998   
John S. Mega      180,000         360,000   

 

(2)

Represents the grant date fair value of stock options, calculated in accordance with the accounting standards for share-based compensation. See Note 17 to the audited consolidated financial statements included in L-3’s 2015 Annual Report on Form 10-K for

 

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  a discussion of the assumptions used in calculating equity compensation expense in connection with stock options. For a discussion of the general terms of our stock options, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – Stock Options” beginning on page 61.

 

(3) Amounts reported in this column represent amounts earned under the annual incentive plan for each of the years indicated, although the actual payments were made in the following year. No amounts were earned under long-term performance cash awards whose performance period ended during any of the years indicated. For a further discussion of these awards, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Annual Incentives” beginning on page 54 and “Compensation Discussion and Analysis – Payment of Performance Awards for the 2013-2015 Award Cycle” on page 63.

 

(4) For 2014, the amounts reported in this column reflect the amounts earned under the annual incentive plan for 2014 performance, reduced by amounts attributable to the discretionary recalculation of prior payouts based on the revision of L-3’s financial statements for prior years as disclosed in last year’s proxy statement. The table below sets forth the amounts that would have appeared in this column if (a) the amounts reported for 2014 reflected only the amounts earned under the annual incentive plan for 2014 performance (prior to any reduction based on the revision of prior year results), and (b) the amounts reported for 2013 reflected the amounts that would have been earned under the annual incentive plan for 2013 performance had such performance been calculated based on 2013 revised results.

 

      Non-Equity Incentive Plan
Compensation
 
Name    2015
($)
     2014
($)
     2013
($)
 
Michael T. Strianese      951,800         1,871,100         2,409,750   
Ralph G. D’Ambrosio      260,000         500,000         722,800   
Curtis Brunson      250,000         608,000         680,000   
Steve Kantor      880,000         915,000         830,440   
John S. Mega      855,000                     

 

(5) Amounts reported in this column represent the increase in the actuarial value of defined benefit plans and also include above-market interest earned on deferred compensation balances. Actuarial value computations are based on assumptions discussed in Note 19 to the audited consolidated financial statements included in L-3’s 2015 Annual Report on Form 10-K.

None of the named executive officers earned above-market interest on deferred compensation balances for 2015 other than Mr. Brunson. The amount reported for Mr. Brunson for 2015 reflects an increase of $44,353 in the actuarial value of defined benefit plans, and $3,029 in above-market interest on deferred compensation balances.

Mr. D’Ambrosio experienced a loss in 2015 of $79,367 in the actuarial value of the defined benefit plans in which he participates. Accordingly, the increase in the actuarial value of defined benefit plans reported for him for 2015 as $0.

 

(6) The increases in the actuarial value of defined benefit plans included in this column are strongly correlated with changes in actuarial assumptions made since 2012 as required under GAAP. The table below sets forth the different actuarial assumptions used to calculate the change in pension value for the years indicated:

 

      Actuarial Assumptions
Year    Discount Rate     Post-Retirement Mortality
2015      4.70   RP-2014 Annuitant Mortality table (adjusted back to 2006), projected generationally with the 2014 Social Security Administration Intermediate-Cost Projections Scale
2014      4.20   RP-2014 Annuitant Mortality table (adjusted back to 2006), projected generationally with the 2014 Social Security Administration Intermediate-Cost Projections Scale
2013      5.10   RP-2000 Annuitant Mortality table, projected 7 years from valuation date
2012      4.20   RP-2000 Annuitant Mortality table, projected 7 years from valuation date

 

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TABULAR EXECUTIVE COMPENSATION DISCLOSURE

 

 

If no change had been made to the 2012 discount rate and mortality assumptions, the amounts that would have been reported in this column for the named executive officers for 2015, 2014 and 2013 would have been as follows:

 

      Change in Pension Value and
Nonqualified Deferred
Compensation
Earnings
 
Name    2015
($)
     2014
($)
     2013
($)
 
Michael T. Strianese      1,409,154         1,524,835         1,344,191   
Ralph G. D’Ambrosio      257,402         341,021         376,665   
Curtis Brunson      158,444         232,173         254,220   
Steve Kantor      264,884         336,613         428,598   
John S. Mega      710,569                     

 

(7) The following table describes each component of the All Other Compensation column in the Summary Compensation Table above for 2015.

 

Name    Employer
Contribution
to Employee
Savings Plan
($)
     Life
Insurance(a)
($)
     Medical
Insurance
Benefits(b)
($)
     Other
($)
    Total
($)
 
Michael T. Strianese(c)      16,600         28,380         9,491         47,833 (d)      102,304   
Ralph G. D’Ambrosio      10,600         12,144         11,389                34,133   
Curtis Brunson      16,600         26,318         9,491         15,000 (e)      67,409   
Steve Kantor      16,600         44,591         9,491         10,371 (f)      81,053   
John S. Mega      7,555         23,190         11,389                42,134   

 

 

  (a) Represents payments of premiums for executive and group term life insurance.

 

  (b) Represents payments of premiums for a Company-provided executive medical reimbursement plan.

 

  (c) Mr. Strianese has access to L-3’s fractionally-owned aircraft for occasional personal use. Mr. Strianese is required to and has reimbursed L-3 for all incremental costs incurred by L-3 in connection with his personal use of the aircraft.

 

  (d) Represents incremental costs of $27,833 associated with the use of a Company car, which include the monthly lease payments, maintenance, gas, tolls, parking and all other costs associated with the car, and payments of $20,000 for financial planning services.

 

  (e) Represents payments of $15,000 for financial planning services.

 

  (f) Represents payments of $9,411 for financial planning services and $960 for spousal travel to a Company-sponsored event.

 

(8) The amounts in this column include increases in the actuarial value of defined benefit plans reported for each year, which are strongly correlated with changes in actuarial assumptions described in Note 6 above. If no changes had been made to these actuarial assumptions, the amounts that would have been reported in this column for the named executive officers for 2015, 2014 and 2013 would have been as follows:

 

      Total  
Name    2015
($)
     2014
($)
     2013
($)
 
Michael T. Strianese      11,842,215         11,706,936         13,468,803   
Ralph G. D’Ambrosio      3,246,581         3,437,170         3,876,511   
Curtis Brunson      3,300,311         3,433,976         3,685,124   
Steve Kantor      3,232,397         3,175,592         3,075,552   
John S. Mega      2,874,622                     

 

(9) Mr. Mega was not considered a named executive officer prior to 2015.

 

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2015 Grants of Plan-Based Awards

The following table provides information regarding: (1) annual incentive plan awards and three-year performance cash awards under the L-3 Communications Holdings, Inc. 2012 Cash Incentive Plan, and (2) performance units, RSUs and stock options under the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan. Plan-based awards are generally granted to the named executive officers on an annual basis in February.

 

                

 

 

 

 

 

Estimated Future Payouts
Under Non-Equity Incentive

Plan Awards

    Estimated Future Payouts
Under Equity Incentive Plan
Awards
   

All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)

 

   

Exercise or
Base Price
of Option
Awards
($/Sh)

 

   

Grant
Date Fair
Value of
Stock and
Option
Awards
($)

 

 
   

Grant
Type

 

 

Grant
Date

 

   

Threshold
($)

 

   

Target
($)

 

   

Maximum
($)

 

   

Threshold
(#)

 

   

Target
(#)

 

   

Maximum
(#)

 

       
Michael T. Strianese   AIP(1)     2/17/15               2,293,500        4,587,000                                                   
  PCA(2)     2/17/15        1,000,000        2,000,000        4,000,000               
  PU(3)     2/17/15              7,734        15,467        30,934            2,000,038   
  RSU(4)     2/17/15                     23,200        23,200            2,999,992   
  Option(5)     2/17/15              73,458        146,915        146,915          129.31        3,000,004   
Ralph G. D’Ambrosio   AIP(1)     2/17/15               625,500        1,251,000               
  PCA(2)     2/17/15        250,000        500,000        1,000,000               
  PU(3)     2/17/15              1,934        3,867        7,734            500,042   
  RSU(4)     2/17/15                     5,800        5,800            749,998   
  Option(5)     2/17/15                    36,729        129.31        750,006   
Curtis Brunson   AIP(1)     2/17/15               603,000        1,206,000               
  PCA(2)     2/17/15        270,000        540,000        1,080,000               
  PU(3)     2/17/15              2,088        4,176        8,352            539,999   
  RSU(4)     2/17/15                     6,264        6,264            809,998   
  Option(5)     2/17/15                    39,667        129.31        810,000   
Steve Kantor   AIP(1)     2/17/15               692,000        1,557,000               
  PCA(2)     2/17/15        165,000        330,000        660,000               
  PU(3)     2/17/15              1,276        2,552        5,104            329,999   
  RSU(4)     2/17/15                     3,828        3,828            494,999   
  Option(5)     2/17/15                    24,241        129.31        495,001   
John S. Mega   AIP(1)     2/17/15               541,000        1,217,250               
  PCA(2)     2/17/15        90,000        180,000        360,000               
  PU(3)     2/17/15              696        1,392        2,784            180,000   
  RSU(4)     2/17/15                     2,088        2,088            269,999   
    Option(5)     2/17/15                                                        13,222        129.31        269,993   

 

(1) Represents the Threshold, Target and Maximum cash payout opportunities for fiscal 2015 under the annual incentive plan, which were established by the Compensation Committee in February of 2015. For a further discussion of the payout opportunities, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Annual Incentives” beginning on page 54.

 

(2) Represents long-term performance cash awards granted to the named executive officers. The final value of each award will vary based upon L-3’s relative TSR achieved over the three-year performance period beginning January 1, 2015 and ending December 31, 2017 in relation to performance goals established by the Compensation Committee in February 2015. The amounts disclosed in the Estimated Future Payouts Under Non-Equity Incentive Plan Awards columns represent the amounts of cash to be paid assuming achievement of the specific Threshold, Target or Maximum levels of performance established by the Compensation Committee for these awards over the performance period. See “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – Performance Awards” beginning on page 61 for a further discussion of the performance cash awards. See “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 82 for a discussion concerning the effect of a change in control or termination of employment on outstanding performance cash awards.

 

(3)

Represents performance units granted to the named executive officers, which are payable in shares of our Common Stock at the end of the performance period. The final number of shares of our Common Stock issuable for each unit will vary based upon L-3’s EPS achieved over the three-year performance period beginning January 1, 2015 and ending December 31, 2017 in relation to performance goals established by the Compensation Committee in February 2015. The amounts disclosed in the Estimated Future Payouts Under Equity Incentive Plan Awards columns represent the shares of our Common Stock issuable assuming achievement of

 

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  the specific Threshold, Target or Maximum levels of performance established by the Compensation Committee for these units over the performance period. See “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – Performance Awards” beginning on page 61 for a further discussion of the performance units. See “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 82 for a discussion concerning the effect of a change in control or termination of employment on outstanding performance units. The amounts disclosed in the Grant Date Fair Value of Stock and Option Awards column represent the grant date fair values of the performance unit awards assuming that the Target level of performance for the awards is achieved, as calculated in accordance with the accounting standards for share-based compensation.

 

(4) Represents RSUs granted to the named executive officers, which vest three years after the grant date and are subject to forfeiture conditions based on a grant date fair value limit equal to 0.5% of L-3’s 2015 free cash flow (or 1.0% of L-3’s 2015 free cash flow, in the case of the RSUs granted to Mr. Strianese). If the grant date fair value of an executive’s RSU award exceeds the applicable limit, then the portion of the executive’s award exceeding this limit is forfeited. The Threshold level of performance reported in table above assumes that L-3’s 2015 free cash flow is negative, resulting in the forfeiture of all RSUs. The Target and Maximum levels of performance reported in table above assume that L-3’s 2015 free cash flow is sufficient to avoid any forfeiture of the RSUs. The calculation of free cash flow under these awards is identical to the calculation of free cash flow under the annual incentive plan for fiscal 2015 performance. The amounts disclosed in the Grant Date Fair Value of Stock and Option Awards column represent the grant date fair values of the RSU awards assuming that L-3’s 2015 free cash flow is sufficient to avoid any forfeiture of the awards, as calculated in accordance with the accounting standards for share-based compensation. For a discussion of the free cash flow calculation, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Annual Incentives” beginning on page 54. For a further discussion of our RSUs, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – RSUs” on page 63. For a discussion concerning the effect of a change in control or termination of employment on outstanding RSUs, see “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 82.

 

(5) Represents stock options granted to the named executive officers. The awards had an exercise price equal to the closing price of our Common Stock on the grant date, and provide value to the recipient only if the price of our Common Stock increases after the grant date. Stock options have a term of ten years and vest in equal, annual increments over a three-year period starting with the first anniversary of the grant date and, in the case of the options granted to Mr. Strianese, are also subject to two separate vesting conditions based on L-3’s 2015 financial performance, which includes L-3 achieving consolidated EPS of at least $6.38 and consolidated FCF of at least $786 million. With regard to the options granted to Mr. Strianese, the Threshold level of performance reported in table above assumes the satisfaction of only one of the financial performance conditions, while the Target and Maximum levels of performance reported in table above assume the satisfaction of both financial performance conditions. The amounts disclosed in the Grant Date Fair Value of Stock and Option Awards column represent the grant date fair values of the option awards, as calculated in accordance with the accounting standards for share-based compensation. With regard to the options granted to Mr. Strianese, the amount disclosed in the Grant Date Fair Value of Stock and Option Awards column assumes that both of the financial performance conditions of his award are satisfied. For a further discussion of the stock options, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – Stock Options” beginning on page 61. For a discussion concerning the effect of a change in control or termination of employment on outstanding stock option awards, see “–Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 82.

 

72    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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Outstanding Equity Awards at Fiscal Year End 2015

The following table provides information with respect to holdings of exercisable and unexercisable stock options, and unvested and (as applicable) unearned RSUs and performance units held by the named executive officers at December 31, 2015.

 

            Option Awards     Stock Awards  
Name   Grant
Date
    Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable(1)(2)
    Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable(1)(2)
    Option
Exercise
Price(1)
($)
    Option
Expiration
Date
    Number of
Shares or
Units of
Stock
That Have
Not
Vested(3)
(#)
    Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested(4)
($)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested(5)
(#)
    Equity
Incentive
Plan
Awards:
Market
or Payout
Value Of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested(4)
($)
 
Michael T. Strianese     2/17/15               146,915        129.31        2/17/25        23,200        2,772,632        15,467        1,848,461   
    2/19/14        46,729        93,458        113.67        2/19/24        26,392        3,154,108        8,798        1,051,449   
    2/20/13        165,562        82,782        77.00        2/20/23        38,961        4,656,229       
    2/22/12        176,528               67.49        2/22/22           
    2/24/11        248,015               76.82        2/24/21           
    2/23/10        208,961               86.41        2/23/20           
    7/28/09        187,484               70.53        7/28/19           
    7/29/08        183,981               92.31        7/29/18           
    8/1/07        95,511               95.42        8/1/17           
Ralph G. D’Ambrosio     2/17/15               36,729        129.31        2/17/25        5,800        693,158        3,867        462,145   
    2/19/14        12,616        25,234        113.67        2/19/24        7,126        851,628        2,376        283,956   
    2/20/13        41,390        20,696        77.00        2/20/23        9,740        1,164,027       
    2/22/12        36,978               67.49        2/22/22           
    2/24/11        48,262               76.82        2/24/21           
    2/23/10        36,144               86.41        2/23/20           
    7/29/08        26,760               92.31        7/29/18           
    8/1/07        6,392               95.42        8/1/17           
Curtis Brunson     2/17/15               39,667        129.31        2/17/25        6,264        748,611        4,176        499,074   
    2/19/14        12,616        25,234        113.67        2/19/24            2,376        283,956   
    2/20/13        41,390        20,696        77.00        2/20/23           
Steve Kantor     2/17/15               24,241        129.31        2/17/25        3,828        457,484        2,552        304,990   
    2/19/14        7,710        15,421        113.67        2/19/24            1,452        173,529   
    2/20/13        4,500        11,590        77.00        2/20/23           
John S. Mega     2/17/15               13,222        129.31        2/17/25        2,088        249,537        1,392        166,358   
    2/19/14        4,205        8,412        113.67        2/19/24        2,375        283,836        792        94,652   
      2/20/13        10,761        5,381        77.00        2/20/23        2,532        302,599                   

 

(1) In connection with our spin-off of Engility Holdings, Inc. on July 17, 2012, the number of shares subject to then outstanding option awards, and the exercise price for the option awards, were adjusted to maintain the intrinsic value of each award as required pursuant to the terms of the stock-based compensation plans under which they were issued. The awards otherwise retained the original terms and conditions after adjustment, except in the case of financial performance conditions, which were also adjusted to reflect the spin-off.

 

(2)

Stock options vest in equal, annual increments over a three-year period starting with the first anniversary of the grant date and, in the case of the options granted to Mr. Strianese in 2011 and subsequent years, are also subject to performance-based vesting conditions that have been fully satisfied. For a further discussion, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – Stock Options” beginning on page 61. For a discussion concerning the effect of a change in control or

 

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  termination of employment on outstanding stock option awards, see “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long–Term Incentive Awards” beginning on page 82.

 

(3) Represents RSUs, which vest three years after the grant date and are subject to forfeiture conditions based on L-3’s free cash flow for the fiscal year in which they were granted. Our free cash flow for each of our three most recent completed fiscal years was sufficient to avoid any forfeiture of the RSUs. For a further discussion of the forfeiture conditions, see Note 4 to the “2015 Grants of Plan-Based Awards” table beginning on page 72. On the vesting date, each RSU automatically converts into the right to receive one share of our Common Stock. For a discussion concerning the effect of a change in control or termination of employment on outstanding RSU awards, see “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 82. For a further discussion concerning the effect of retirement eligibility on outstanding RSU awards, see Note 2 to the “2015 Option Exercises and Stock Vested” table on page 75.

 

(4) The market value is based on the closing price of our Common Stock on December 31, 2015, the last trading day of 2015, of $119.51, multiplied by the number of shares or units.

 

(5) Reflects the number of shares of our Common Stock issuable under performance units granted in 2015 and 2014 assuming achievement of the Target and Threshold levels of performance for these units, respectively. The Target level of performance is reported for the performance units granted in 2015 because the Company’s performance from the beginning of the applicable performance period (January 1, 2015) through December 31, 2015, measured against the applicable performance goals, exceeded the Threshold level of performance, but did not exceed the Target level of performance. The Threshold level of performance is reported for the performance units granted in 2014 because the Company’s performance from the beginning of the applicable performance period (January 1, 2014) through December 31, 2015, measured against the applicable performance goals, did not exceed the Threshold level of performance. For a further discussion of our performance units, see “Compensation Discussion and Analysis – Elements of 2015 Target Pay – Long-Term Incentives – Performance Awards” beginning on page 61. For a discussion concerning the effect of a change in control or termination of employment on performance unit awards, see “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 82.

 

74    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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2015 Option Exercises and Stock Vested

The following table provides information regarding the exercise of stock options and vesting of RSUs and performance units held by our named executive officers during the year ended December 31, 2015. The performance units vested on December 31, 2015 and the underlying shares were delivered in February 2016. For a further discussion, see “Compensation Discussion and Analysis – Payment of Performance Awards for the 2013-2015 Award Cycle” beginning on page 63.

 

      Option Awards      Stock Awards  
Name    Number of Shares
Acquired on
Exercise
(#)
     Value Realized on
Exercise(1)
($)
     Number of Shares
Acquired on
Vesting(2)
(#)
     Value Realized on
Vesting(3)
($)
 
Michael T. Strianese      80,000         5,079,992         55,365         7,166,064   
Ralph G. D’Ambrosio      40,755         2,260,253         12,452         1,606,959   
Curtis Brunson      106,409         5,782,050         10,687         1,372,444   
Steve Kantor      67,586         3,883,236         6,328         814,292   
John S. Mega      23,585         1,322,396         3,592         464,994   

 

(1) Value realized on exercise is based on the difference between the aggregate exercise price and the fair market value of the shares acquired at the time of exercise.

 

(2) The following table provides additional information regarding the Number of Shares Acquired on Vesting.

 

Name    Award Type    Vesting Date      Number of
Shares Acquired on
Vesting
(#)
 
Michael T. Strianese    Restricted Stock Units      2/22/15         41,121   
   Performance Units      12/31/15         14,244   
Ralph G. D’Ambrosio    Restricted Stock Units      2/22/15         8,891   
   Performance Units      12/31/15         3,561   
Curtis Brunson    Restricted Stock Units(a)      2/20/15         7,126   
   Performance Units      12/31/15         3,561   
Steve Kantor    Restricted Stock Units(a)      2/20/15         4,335   
   Performance Units      12/31/15         1,993   
John S. Mega    Restricted Stock Units      2/22/15         2,667   
     Performance Units      12/31/15         925   

 

  (a) On February 20, 2015, Messrs. Brunson and Kantor became eligible for qualified retirement under the terms of their RSUs granted on February 19, 2014. Accordingly, the shares underlying their RSU awards are deemed to have vested on February 20, 2015. However, in accordance with the terms of the RSUs, these shares will not be delivered until February 19, 2017, unless accelerated due to death, disability or a change in control. For a further discussion, see “– Potential Payments Upon Change in Control or Termination of Employment – Effect of Change of Control or Termination of Employment Upon Long–Term Incentive Awards” beginning on page 82. For information regarding shares delivered to Messrs. Brunson and Kantor in 2015 in respect of RSUs deemed to have vested in prior years, see “– 2015 Nonqualified Deferred Compensation” table on page 80.

 

(3) Value realized on vesting is based on the fair market value of the shares at the time of vesting and includes the value of payments in lieu of fractional shares. The amounts in this column do not include accrued cash dividends realized on vesting.

 

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2015 Pension Benefits

The following table provides information regarding the pension benefits for our named executive officers under L-3’s tax-qualified and supplemental plans. The named executive officers participate in multiple tax-qualified or supplemental pension plans. The purpose of each plan is to provide the named executive officers retirement benefits as part of their overall compensation package. The material terms of the plans are described following the table.

 

Name

 

  

Plan Name

 

  

Number of Years
Credited Service
(#)

 

   

Present Value of
Accumulated
Benefit(1)
($)

 

   

Payments During
Last Fiscal Year
($)

 

 
Michael T. Strianese(2)   

L-3 Communications

Corporation Pension Plan

     25.17 (3)      1,081,049 (4)        
  

L-3 Communications

Corporation Supplemental

Executive Retirement Plan

     25.17 (3)      16,816,097 (4)        
Ralph G. D’Ambrosio(5)   

L-3 Communications

Corporation Pension Plan

     18.42        469,864          
  

L-3 Communications

Corporation Supplemental

Executive Retirement Plan

     18.42        2,215,560          
Curtis Brunson(6)   

L-3 Communication

Systems – West

Retirement Plan

     31.58 (3)      561,024 (7)        
  

L-3 Communications

Corporation Pension Plan

     8.92        441,030          
  

L-3 Communications

Corporation Supplemental

Executive Retirement Plan

     40.50 (3)      2,268,805 (7)        
Steve Kantor(6)   

L-3 Communications

Corporation Pension Plan

     13.00        594,358          
  

L-3 Communications

Corporation Supplemental

Executive Retirement Plan

     13.00        2,846,039          
John S. Mega(2)   

The Narda Microwave

Pension Plan

     23.08 (3)      918,175 (8)        
    

L-3 Communications

Corporation Supplemental

Executive Retirement Plan

     23.08 (3)      4,264,035 (8)        

 

(1) The present values of the accumulated benefits in the table above were determined using the same assumptions that were used by L-3 as of December 31, 2015 for financial reporting purposes, including an effective discount rate of 4.7% and post-retirement mortality in accordance with the RP-2014 Annuitant Mortality table (adjusted back to 2006) projected generationally with the 2014 Social Security Administration Intermediate-Cost Projections Scale. We used age 65, the normal retirement age under the pension plans and the supplemental executive retirement plan (or current age, if greater), to determine the present value of the accumulated benefits in the table. For the other assumptions used in calculating the present value of the accumulated benefits, see Note 19 to the audited consolidated financial statements included in L-3’s 2015 Annual Report on Form 10-K.

 

(2) Messrs. Strianese and Mega are eligible for early retirement under the retirement plans in which they participate.

 

(3) L-3 was formed in 1997 through the acquisition of ten pre-existing business units from Lockheed Martin Corporation. In connection with the acquisition, L-3 hired the employees of these business units and acquired their associated pension plan assets, subject to the obligation to provide these employees with credit for the years of service that they had previously accrued under the pension plans. Accordingly, the years of credited service reflected for Messrs. Strianese, Brunson and Mega in the table above include 6.50, 21.75, and 4.42 years of service, respectively, that had been accrued by them as employees of these business units or their predecessors at the time of L-3’s formation.

 

76    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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(4) The present value of the benefits reported for Mr. Strianese that are attributable to his years of service to predecessors as described in Note 3 above is $279,174 with respect to the L-3 Communications Corporation Pension Plan and $4,342,655 with respect to the L-3 Communications Corporation Supplemental Executive Retirement Plan (the “Restoration SERP”).

 

(5) Mr. D’Ambrosio has not yet met the eligibility requirements for early retirement under the retirement plans in which he participates because he has not attained age 55.

 

(6) Messrs. Brunson and Kantor are eligible for retirement under the retirement plans in which they participate.

 

(7) The present value of the benefits reported for Mr. Brunson that are attributable to his years of service to predecessors as described in Note 3 above is $386,392 with respect to the L-3 Communication Systems – West Retirement Plan and $274,074 with respect to the Restoration SERP.

 

(8) The present value of the benefits reported for Mr. Mega that are attributable to his years of service to predecessors as described in Note 3 above is $175,838 with respect to The Narda Microwave Pension Plan and $816,596 with respect to the Restoration SERP.

The present value of the accumulated benefits for each of the named executives shown in the table above reflects the present value of the benefits earned under each of the pension plans as of December 31, 2015. The pension benefits that are the basis for the present values of the accumulated benefits shown are calculated based on all years of creditable service with L-3 and its predecessor companies under each of the plans as of December 31, 2015.

A more complete discussion of the material factors useful to an understanding of each plan is presented below.

Tax-Qualified Pension Plans

 

L-3 Communications Corporation Pension Plan

 

Eligibility    Employees were eligible to participate in the plan after one year of service and upon attaining 21 years of age. Employees hired on or after January 1, 2007 are not eligible to participate in the plan.
Vesting    Participants are fully vested after five years of service, and there is no partial vesting.

Availability of Early Retirement Benefits

   Participants are eligible for early retirement benefits after age 55, if they have ten years of eligibility service.
Earnings    Earnings are defined as base pay, overtime, commissions and performance-based cash bonuses (excluding long-term incentive awards payable in cash) and are limited to the IRS earnings limit of $265,000 in 2015 and in 2016.

Final Average Earnings (“FAE”)

   FAE is equal to the average of the participant’s earnings for the five calendar years during the ten calendar years prior to date of termination that result in the highest average earnings amount.
Social Security Wage Base    The wage level at which social security tax is applied for a given year.
Covered Compensation    Covered Compensation is equal to the average of the Social Security Wage Bases for 35 calendar years ending with the year the participant attains Social Security retirement age; however, upon separation from service, Covered Compensation is determined as of the date of separation.
Benefit Plan Formula    The annual pension benefit is equal to 1.5% of FAE up to Covered Compensation, plus 1.75% of FAE in excess of Covered Compensation, for each plan year (partial and completed months) of accrual service.

Early Retirement Reduction Factors

   For those participants who are eligible to retire early, the reduction factor is 1/180 for each of the first 60 months prior to age 65 and 1/360 for each of the next 60 months.
Payment Options    The plan provides for a number of payment options including a single life annuity (normal form for single participants), a qualified 50% joint and survivor annuity (normal form for married participants), other joint and survivor options, period-certain options and a level income option.

 

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L-3 Communication Systems – West Retirement Plan

 

Eligibility    Employees were eligible to participate in the plan if they were participants in the Lockheed Martin Tactical Defense Systems Retirement Plan on April 30, 1997 and became employees of L-3 Communication Systems-West on May 1, 1997.
Vesting    Participants are fully vested after five years of service, and there is no partial vesting.

Availability of Early Retirement Benefits

   Participants are eligible for early retirement benefits after age 55, if they have five years of eligibility service.
Earnings    Earnings are defined as regular pay plus overtime, commissions, performance-based cash bonuses (excluding long-term incentive awards payable in cash) and fringe benefits and are limited to the IRS earnings limit of $240,000 in 2015 and in 2016.

Final Average Earnings (“FAE”)

   FAE is used in calculating the benefit accrued prior to January 1, 1991 and is equal to the average of the participant’s earnings for the 60 consecutive months during the 120 consecutive months prior to January 1, 1991 that result in the highest average earnings amount.
Social Security Wage Base    The wage level at which social security tax is applied for a given year.

Final Average Social Security Wage Base (“FASS”)

   FASS is equal to the average of the Social Security Wage Bases (determined at the start of each plan year) for the last five consecutive years prior to termination; however, the FASS for the five years prior to January 1, 1991 is $46,020.
Benefit Plan Formula    The annual pension benefit is equal to the sum of (a)(1) 1% of pre-1991 FAE up to 50% of the pre-1991 FASS plus 1.35% of pre-1991 FAE in excess of the pre-1991 FASS, multiplied by (2) years of accrual service as of December 31, 1990, and (b) for each year of accrual service after January 1, 1991, 1% of earnings for the year up to 50% of the FASS for the year plus 1.35% of earnings for the year in excess of 50% of the FASS for the year.

Early Retirement Reduction Factors

   For those participants who are eligible to retire early, the reduction factor is 6% for each year prior to age 65, or age 62 for a participant with 20 years or more of vesting service.
Payment Options    The plan provides for a number of payment options including a single life annuity (normal form for single participants), a qualified 50% joint and survivor annuity (normal form for married participants), other joint and survivor options, period-certain options and a level income option.

The Narda Microwave Pension Plan

 

Eligibility    Regular employees were eligible to participate in the plan upon attaining 21 years of age. Employees hired on or after January 1, 2003 are not eligible to participate in the plan.
Vesting    Participants are fully vested after five years of vesting service or attainment of age 65, and there is no partial vesting.

Availability of Early Retirement Benefits

   Participants are eligible for early retirement benefits after age 55, if they have 15 years of eligibility service.
Earnings    Earnings are defined as base pay, which includes all pre-tax 401(k) plan and Section 125 plan contributions, and are limited to the IRS earnings limit of $265,000 in 2015 and in 2016.

Final Average Earnings (“FAE”)

   FAE is equal to the average of the participant’s earnings for the five consecutive years during the ten calendar years prior to date of termination that result in the highest average earnings amount.
Covered Compensation    Covered Compensation is equal to the average of the Social Security Wage Bases for the 35 calendar years ending with the year the participant attains Social Security retirement age.
Benefit Plan Formula    The annual pension benefit is equal to 0.95% of FAE up to Covered Compensation, plus 1.5% of FAE in excess of Covered Compensation, for each plan year (partial and completed months) of accrual service up to 30 years.

 

78    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


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Early Retirement Reduction

Factors

   For those participants who are eligible to retire early, the reduction factor is 0.4167% for each month (5% a year) prior to age 65.
Payment Options    The plan provides for a number of payment options including a single life annuity (normal form for single participants), a qualified 50% joint and survivor annuity (normal form for married participants), other joint and survivor options, and a 10-year certain option.

Supplemental Plan

The provisions of the L-3 Communications Corporation Supplemental Executive Retirement Plan (the “Restoration SERP”) are substantially identical to the provisions of the tax-qualified pension plans described above (the “Qualified Pension Plans”). However, the Restoration SERP takes into consideration earnings above the annual IRS earnings limit and provides a non-qualified benefit to participants based on earnings in excess of the IRS limit or the benefit limits under Section 415 of the Internal Revenue Code. With respect to participants in The Narda Microwave Pension Plan, the Restoration SERP also takes into consideration eligible bonuses (which do not constitute earnings in the Qualified Pension Plan).

 

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2015 Nonqualified Deferred Compensation

The following table provides information regarding: (1) contributions, earnings and balances for our named executive officers under the L-3 Deferred Compensation Plans and (2) shares and cash dividend equivalents underlying RSU awards deemed to have vested based on the retirement eligibility of our named executive officers (“Retirement Eligible RSU Awards”).

 

Name   Plan or Award   Executive
Contributions
in Last Fiscal
Year(1)
($)
    Registrant
Contributions
in Last Fiscal
Year(2)
($)
    Aggregate
Earnings
(Losses) in Last
Fiscal Year(3)(4)
($)
    Aggregate
Withdrawals/
Distributions(5)
($)
    Aggregate
Balance at Last
Fiscal Year
End(6)(7)
($)
 
Michael T. Strianese                                     
Ralph G. D’Ambrosio                                     
Curtis Brunson  

L-3 Deferred Compensation Plans(8)

    83,475               147,366               4,622,544   
 

Retirement Eligible RSU Awards(9)

           963,934        (57,395     (1,239,656     2,121,413   
Steve Kantor  

L-3 Deferred Compensation Plans(10)

                  19,910        (97,519     622,368   
 

Retirement Eligible RSU Awards(9)

           589,101        (30,744     (805,617     1,233,443   
John S. Mega                                     

 

(1) The amount in this column is included in the Non-Equity Incentive Plan Compensation column for 2014 in the “Summary Compensation Table” on page 68.

 

(2) Represents the value of Retirement Eligible RSU Awards deemed to have vested in 2015. The value reported is based on the sum of (a) the number of shares underlying the awards multiplied by the closing price of our Common Stock on the vesting date and (b) accrued cash dividend equivalents in respect of these awards as of the vesting date. The grant date fair value of these awards is included in the Stock Awards column for 2014 in the “Summary Compensation Table” on page 68. For further information concerning the Retirement Eligible RSU awards that vested in 2015 and their respective grant date fair values, see Note 9 below.

 

(3) Represents, in the case of L-3 Deferred Compensation Plans, aggregate earnings in the last fiscal year, which are based on the prime interest rate. The average interest rate for the year was 3.31%. The amounts reported include $3,029 of above-market interest for Mr. Brunson. The above-market interest is included in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column for 2015 in the “Summary Compensation Table” on page 68.

 

(4) Represents, in the case of each Retirement Eligible RSU Award, the sum of (a) the change in market value of the shares underlying such award during the period in 2015 for which the award was deemed to have been vested but the underlying shares remained undelivered and (b) the aggregate cash dividend equivalents that accrued in respect of such award during this period. These amounts are not considered above-market or preferential earnings and, accordingly, are not included in the “Summary Compensation Table” on page 68. For further information concerning the Retirement Eligible RSU Awards included in this column, see Note 9 below.

 

(5) Represents, in respect of Retirement Eligible RSU Awards, the value of the underlying shares delivered and cash dividend equivalents paid to the named executive officers during 2015. The value reported for each award is based on the sum of (a) the number of shares delivered multiplied by the closing price of our Common Stock as of the latest trading date on or prior to the date the shares became deliverable and (b) the amount of cash dividend equivalents paid in respect of the award. For further information concerning the Retirement Eligible RSU Awards included in this column, see Note 9 below.

 

(6) Includes, in the case of L-3 Deferred Compensation Plans, $2,190,308 and $451,822 in executive contributions from Messrs. Brunson and Kantor, respectively, that were reported in the Salary, Bonus and Non-Equity Incentive Plan Compensation columns of the Summary Compensation Tables for previous years.

 

(7) Represents, in the case of Retirement Eligible RSU Awards, the value of the underlying shares and cash dividend equivalents that were deemed to have vested but remained undelivered and unpaid, respectively, as of December 31, 2015. The value reported represents the sum of (a) the number of shares underlying the awards multiplied by $119.51, the closing price of our Common Stock on December 31, 2015, and (b) accrued cash dividend equivalents in respect of these awards as of December 31, 2015. The grant date fair value of each Retirement Eligible RSU Award included in this column is included in the Stock Awards column for 2014 or 2013, as applicable, in the “Summary Compensation Table” on page 68. For further information concerning the Retirement Eligible RSU Awards included in this column and their respective grant date fair values, see Note 9 below.

 

(8) Mr. Brunson maintained balances under two deferred compensation plans in the last fiscal year as follows:

 

      Plan I
($)
     Plan II
($)
 
Executive Contributions in Last Fiscal Year              83,475   
Aggregate Earnings in Last Fiscal Year      27,853         119,513   
Aggregate Balance at Last Fiscal Year End      871,102         3,751,442   

 

80    L-3 COMMUNICATIONS HOLDINGS, INC. – Proxy Statement


Table of Contents

TABULAR EXECUTIVE COMPENSATION DISCLOSURE

 

 

 

(9) The following table provides additional information regarding the Retirement Eligible RSU Awards held by our named executive officers during 2015.

 

Name    Grant Date