Lockheed Martin 2003 Annual Report Download - page 27

remediation are allocated to our operations as general and adminis-
trative costs. Under existing government regulations, these and
other environmental expenditures relating to our U.S. Government
business, after deducting any recoveries received from insurance or
other PRPs, are allowable in establishing prices of our products and
services. As a result, a substantial amount of the expenditures we
incur are being included in our sales and cost of sales according to
U.S. Government agreement or regulation.
At the end of 2003 and 2002, the total amount of liabilities
recorded on our balance sheet for environmental matters was
approximately $425 million and $445 million, respectively. About
two-thirds of the liability recorded at the end of 2003 related to sites
in Redlands, Burbank and Glendale, California, and in Great Neck,
New York, mainly for remediation of soil and groundwater contam-
ination. The remainder of the liability related to other properties
(including current operating facilities and certain facilities operated
in prior years) for which the financial exposure can be estimated.
We have recorded an asset for the portion of environmental costs
that are probable of future recovery in pricing of our products and
services for U.S. Government businesses. The amount that is
expected to be allocated to our commercial businesses has been
expensed through cost of sales. Any recoveries we receive would
reduce the allocated amounts included in our future U.S.
Government sales and cost of sales.
ACQUISITION AND DIVESTITURE ACTIVITIES
In November 2003, we completed transactions resulting in our
acquisition of the majority of the federal government information
technology (IT) business of Affiliated Computer Services, Inc.
(ACS), and ACS’ concurrent acquisition of our commercial IT
business. The total purchase price related to our acquisition of ACS’
federal government IT business, including transaction-related costs,
was approximately $585 million. As part of our accounting for the
acquisition of the federal IT business, we recorded intangible assets
totaling about $112 million related to contracts acquired and a
covenant not to compete which will be amortized over 5 to 7 year
periods, and goodwill of about $460 million. This acquisition
expands our capabilities in business process outsourcing and man-
aged services, thereby enhancing our ability to support civil and
defense government agencies. The divestiture of our commercial IT
business to ACS resulted in a cash payment to us from ACS of
approximately $110 million and a gain, net of state income taxes, of
$15 million. The gain increased net earnings by approximately $8
million ($0.02 per diluted share). The operations of the business
acquired are included in the Information & Technology Services
(I&TS) business segment. The majority of the operations divested
had been included in the I&TS segment, with the remainder from
the Information Systems & Solutions business segment.
In September 2003, we announced that Lockheed Martin and
The Titan Corporation had entered into a merger agreement for
Lockheed Martin to acquire Titan. The announced value of the
transaction, including the assumption of Titan’s long-term debt, is
approximately $2.4 billion before accumulated tax benefits. Under
the merger agreement, stockholders of Titan may elect to receive
$22 per share in cash, an equivalent amount of Lockheed Martin
common stock based on an exchange rate or a combination of cash
and stock, subject to the allocation procedures set forth in the merg-
er agreement. The merger agreement provides that 50% of Titan’s
outstanding common stock must be exchanged for Lockheed
Martin common stock, and 50% of the Titan common stock must
be exchanged for cash. The exchange rate will be determined by
dividing $22 by the average trading price of Lockheed Martin com-
mon stock over a 10 day trading period, subject to upper and lower
limits, or “collars,” of $58 and $46 per share. Under certain cir-
cumstances, the exchange rate for the stock portion of the merger
consideration will be fixed based on the upper collar of $58 per
share or the lower collar of $46 per share. Upon consummation of
the merger, we would expect to issue between 16 and 22 million
shares of our common stock, depending on the exchange rate. We
plan to finance the cash portion of the transaction principally using
existing cash and short-term investment holdings.
On February 13, 2004, Lockheed Martin and Titan announced
that representatives of both companies had initiated meetings with
the Department of Justice and the SEC to advise of an internal
review relating to certain agreements between Titan and interna-
tional consultants and related payments in foreign countries. The
SEC informed Lockheed Martin and Titan that it has commenced
an investigation into whether payments by Titan were made in vio-
lation of applicable law. Lockheed Martin is independently review-
ing Titan’s payments to international consultants to assess whether
all conditions to the closing of the proposed merger will be satis-
fied. Lockheed Martin has requested that Titan afford it access to
all relevant information related to its relationships with internation-
al consultants so that the review may be completed in advance of the
Titan stockholders’ meeting. Titan is cooperating with this request,
as well as conducting its own review.
During the course of our review, we learned of allegations that
improper payments were made, or items of value were provided, by
Lockheed Martin Corporation
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