From time to time we are
involved in legal proceedings arising in the ordinary course of our
business or assumed in connection with business acquisitions. In
particular, at the time of the Titan acquisition, Titan had a number of
pending legal matters and governmental investigations as further
discussed in Note 12 to L-3's unaudited condensed consolidated
financial statements included elsewhere herein. We believe that we are
adequately reserved for these liabilities and that there is no
litigation that will have a material adverse effect on our consolidated
results of operations, financial condition or cash flows. However, we
are a party to a number of material litigations, including the matters
described below, for which an adverse determination could have a
material adverse effect on our consolidated financial position, results
of operations or cash flows.
U.S. Government Procurement
Regulations and Investigations.
A substantial majority
of our revenues are generated from providing products and services
under legally binding agreements, or contracts, with U.S. Government
customers. The U.S. Government contracts are subject to extensive legal
and regulatory requirements, and, from time to time, agencies of the
U.S. Government investigate whether such contracts were and are being
conducted in accordance with these requirements. We are currently
cooperating with the U.S. Government on several investigations,
including but not limited to, the investigation regarding L-3's
Combat Survivor/Evader Locator (CSEL) program discussed below. We do
not anticipate that any of these investigations will have a material
adverse effect on its consolidated financial position, results of
operations or cash flows. However, under U.S. Government procurement
regulations, an indictment of us by a federal grand jury could result
in us being suspended for a period of time from eligibility for awards
of new government contracts. A conviction could result in debarment
from contracting with the federal government for a specified term. In
addition, all of our U.S. Government contracts are subject to audit and
various pricing and cost controls, and include standard provisions for
termination for the convenience of the U.S. Government or for default
and are subject to cancellation if funds for contracts become
unavailable. Foreign government contracts generally include comparable
provisions relating to termination for the convenience of the relevant
foreign government or default.
Our Interstate Electronics
Corporation subsidiary (IEC) is under criminal investigation by the
United States Army Criminal Investigation Command. The investigation
relates to IEC's role on the CSEL program, on which IEC is a
subcontractor to The Boeing Company (Boeing). IEC provides the global
positioning system (GPS) modules to Boeing for the CSEL program. The
GPS module includes a complex printed wiring board (PWB) that IEC
purchased from two suppliers. The investigation appears to be focused
on alleged manufacturing deficiencies in the PWBs and IEC's
actions when it became aware of the suppliers potential manufacturing
problems. We have conducted an internal investigation of this matter
using outside counsel and currently believe that no criminal activity
occurred. We are cooperating fully with the investigation and have
voluntarily recalled all the PWBs and are repairing them as they are
received.
Litigation Matters
L-3 Integrated
Systems and its predecessors have been involved in a litigation with
Kalitta Air arising from a contract to convert Boeing 747 aircraft from
passenger configuration to cargo freighters. The lawsuit was brought in
the northern district of California on January 31, 1997. The aircraft
were modified using Supplemental Type Certificates (STCs) issued in
1988 by the Federal Aviation Administration (FAA) to Hayes
International, Inc. (Hayes/Pemco) as a subcontractor to GATX/Airlog
Company (GATX). Between 1988 and 1990, Hayes/Pemco modified five
aircraft as a subcontractor to GATX using the STCs. Between 1990 and
1994, Chrysler Technologies Airborne Systems, Inc. (CTAS), a
predecessor to L-3 Integrated Systems, performed as a subcontractor to
GATX and modified an additional five aircraft using the STCs. Two of
the aircraft modified by CTAS were owned by American International
Airways, the predecessor to Kalitta Air. In 1996, the FAA
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determined that the engineering data
provided by Hayes/Pemco supporting the STCs was inadequate and issued
an Airworthiness Directive that effectively grounded the ten modified
aircraft. The Kalitta Air aircraft have not been in revenue service
since that date. The matter was tried in January 2001 against GATX and
CTAS with the jury finding fault on the part of GATX but rendering a
unanimous defense verdict in favor of CTAS. Certain co-defendants had
settled prior to trial. The U.S. Ninth Circuit Court of Appeals
subsequently reversed and remanded the trial court's summary
judgment rulings in favor of CTAS regarding a negligence claim by
Kalitta Air, which asserts that CTAS as an expert in aircraft
modification should have known that the STCs were deficient, and
excluding certain evidence at trial. In preparation for retrial,
Kalitta Air submitted to us an expert report on damages that calculated
Kalitta Air's damages at either $232 million or $602 million,
depending on different factual assumptions. We retained experts whose
reports indicate that, even in the event of an adverse jury finding on
the liability issues at trial, Kalitta Air has already recovered
amounts from the other parties to the initial suit that the Company
believes more than fully compensated Kalitta Air for any damages it
incurred. CTAS' insurance carrier has accepted defense of the
matter with a reservation of its right to dispute its obligations under
the applicable insurance policy in the event of an adverse jury
finding. The retrial began on January 18, 2005 and ended on March 2,
2005 with a deadlocked jury and mistrial. At trial, Kalitta Air claimed
damages of $235 million. Although no date has been set for any further
proceedings, a second retrial may be necessary in this matter. By order
dated July 22, 2005, the Trial Court granted our motion for judgment as
a matter of law as to negligence dismissing that claim, denied our
motion for judgment as a matter of law as to negligent
misrepresentation, and certified the decision for interlocutory appeal
to the Ninth Circuit Court of Appeals. The Ninth Circuit has accepted
the appeals on all proceedings at the District Court and such
proceedings will be stayed pending resolution of the appeals. We
believe that we have meritorious defenses and intend to continue to
vigorously defend this matter. However, litigation is inherently
uncertain and it is possible that an adverse decision could be
rendered, which could have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
On November 18, 2002, we initiated a proceeding against
OSI Systems, Inc. (OSI) in the United States District Court sitting in
the Southern District of New York seeking, among other things, a
declaratory judgment that we had fulfilled all of our obligations under
a letter of intent with OSI (the "OSI Letter of
Intent"). Under the OSI Letter of Intent, we were to
negotiate definitive agreements with OSI for the sale of certain
businesses we acquired from PerkinElmer, Inc. on June 14, 2002. On
February 7, 2003, OSI filed an answer and counterclaims alleging, among
other things, that we defrauded OSI, breached obligations of fiduciary
duty to OSI and breached our obligations under the OSI Letter of
Intent. OSI has provided an expert report that calculated OSI's
damages in the case of approximately $49 million, not including
punitive damages and interest. Under the OSI Letter of Intent, we
proposed selling to OSI the conventional detection business and the
ARGUS business that the Company acquired from PerkinElmer, Inc.
Negotiations with OSI lasted for almost one year and ultimately broke
down over issues regarding, among other things, intellectual property,
product-line definitions, allocation of employees and due diligence. A
trial has been set for February 2006. We believe that the claims
asserted by OSI in its suit are without merit and intend to defend
against the OSI claims vigorously. However, litigation is inherently
uncertain and it is possible that an adverse decision could be
rendered, which could have a material adverse effect on our
consolidated financial position, results of operations and cash
flows.
On July 1, 2004, lawsuits were filed on behalf of the
estates of 31 Russian children in state courts of Washington, Arizona,
California, Florida, New York and New Jersey against Honeywell.
Honeywell TCAS, the Company, ACSS, Thales USA and Thales France. The
suits are based on facts arising out of the crash over southern Germany
of a Bashkirian Airways Tupelov TU 154M aircraft and a DHL Boeing 757
cargo aircraft. On-board the Tupelov aircraft were 12 crew members and
57 passengers, including 45 children. The Boeing aircraft carried a
crew of three. Both aircraft were equipped with Honeywell/ACSS Model
2000, Change 7 Traffic Collision and Avoidance Systems. Sensing the
other aircraft, the on-board DHL TCAS instructed the DHL pilot to
climb, and the Tupelov on-board TCAS instructed the Tupelov pilot to
descend. However, the Swiss air traffic controller ordered the Tupelov
pilot to climb. The Tupelov pilot disregarded the on-board TCAS and put
the Tupelov
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aircraft into climb striking the DHL
aircraft in midair at approximately 35,000 feet. All crew and
passengers of both planes were lost. Investigations by the NTSB after
the crash revealed that both TCAS units were performing as designed.
The suits allege negligence and strict product liability based upon the
design of the units and the training provided to resolve conflicting
commands and seek compensatory damages. Our insurers have accepted
defense of the matter and retained counsel. The matters were
consolidated in the Federal Court of New Jersey, which has dismissed
the actions on the basis of forum non conveniens.
On April 4,
2005, Lockheed Martin Corporation (Lockheed) filed a lawsuit against
L-3 Integrated Systems in the Federal District Court for the Northern
District of Georgia alleging misappropriation of proprietary
information and breach of a license agreement. The lawsuit arises out
of L-3 Integrated Systems' pursuit of the Republic of
Korea's P-3 Lot II Maritime Patrol Aircraft Program as a
subcontractor to Korean Airspace Industries. Lockheed claims that in
connection with this subcontracting effort, L-3 Integrated Systems will
use certain Lockheed proprietary information in violation of both a
prior settlement agreement between Lockheed and the U.S. Government,
and a license agreement between Lockheed and L-3 Integrated Systems
because L-3 Integrated Systems is acting as a subcontractor (as opposed
to a prime contractor) to the Republic of Korea. Lockheed is seeking an
injunction prohibiting L-3 Integrated Systems from using the
proprietary P-3 data in violation of the existing agreements and
unspecified money damages. We believe that the claims asserted by
Lockheed in its suit are without merit and intend to defend against the
Lockheed claims vigorously.
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