<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 333-31649
L-3 COMMUNICATIONS CORPORATION
SUPPLEMENT NO. 4 TO PROSPECTUS DATED MAY 22, 1998 FOR THE
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007
SUPPLEMENT NO. 1 TO PROSPECTUS DATED MAY 22, 1998 FOR THE
8 1/2% SENIOR SUBORDINATED NOTES DUE 2008
THE DATE OF THIS SUPPLEMENT IS SEPTEMBER 8, 1998
ON AUGUST 14, 1998, L-3 COMMUNICATIONS CORPORATION FILED THE ATTACHED QUARTERLY
REPORT ON FORM 10Q FOR THE QUARTER ENDED JUNE 30, 1998
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
600 THIRD AVENUE
NEW YORK, NY 10016
TELEPHONE: (212) 697-1111
STATE OF INCORPORATION: DELAWARE
IRS IDENTIFICATION NUMBER: 13-3937434
===============================================================================
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED JUNE 30, 1998
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 ...................................................... 1
Condensed Consolidated (Combined) Statements of Operations for the Three
and Six Months ended June 30, 1998 and June 30, 1997 ................... 2-3
Condensed Consolidated (Combined) Statements of Cash Flows for the Six
Months ended June 30, 1998 and June 30, 1997 ............................. 4
Notes to Condensed Consolidated (Combined) Financial Statements .......... 5-10
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ...................................................... 11-20
PART II -- OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K ......................................... 21
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $100,464 $ 77,474
Contracts in process ........................................... 266,340 167,202
Net assets held for sale ....................................... -- 6,653
Deferred income taxes .......................................... 8,630 13,298
Other current assets ........................................... 9,062 2,750
-------- --------
Total current assets ......................................... 384,496 267,377
-------- --------
Property, plant and equipment ................................... 122,838 95,034
Less, accumulated depreciation and amortization ................ 21,431 12,025
-------- --------
101,407 83,009
-------- --------
Intangibles, primarily cost in excess of net assets acquired, net
of amortization ................................................ 393,738 297,503
Deferred income taxes ........................................... 36,216 24,217
Other assets .................................................... 37,418 31,298
-------- --------
$953,275 $703,404
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ -- $ 5,000
Accounts payable, trade ........................................ 39,903 33,052
Accrued employment costs ....................................... 42,484 31,162
Customer advances .............................................. 55,073 15,989
Amounts in excess of costs incurred ............................ 20,404 18,469
Accrued interest ............................................... 5,635 4,419
Other current liabilities ...................................... 44,004 27,476
-------- --------
Total current liabilities .................................... 207,503 135,567
-------- --------
Pension and postretirement benefits ............................. 48,705 38,113
Other liabilities ............................................... 7,939 5,009
Long-term debt .................................................. 405,000 392,000
Commitments and contingencies
Common stock subject to repurchase agreement .................... -- 19,048
Shareholders' Equity:
Common Stock, $.01 par value; authorized 100,000,000 shares,
issued 27,357,142 and 17,056,000 shares ...................... 274 171
Capital surplus ................................................ 272,045 110,191
Retained earnings .............................................. 20,528 12,305
Equity adjustments ............................................. (8,719) (9,000)
-------- --------
Total shareholders' equity ..................................... 284,128 113,667
-------- --------
$953,275 $703,404
======== ========
</TABLE>
See notes to condensed consolidated (combined) financial statements.
1
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
Sales ..................................... $ 230,424 $168,030
Cost and expenses ......................... 210,966 157,319
--------- --------
Operating income .......................... 19,458 10,711
Interest income ........................... 780 109
Interest expense .......................... 11,041 10,079
--------- --------
Income before income taxes ................ 9,197 741
Income taxes .............................. 3,587 2,060
--------- --------
Net income (loss) ......................... $ 5,610 $ (1,319)
========= ========
Earnings per common share:
Basic .................................... $ 0.24 $ (0.07)
--------- --------
Diluted .................................. $ 0.23 $ (0.07)
--------- --------
Weighted average common shares outstanding:
Basic .................................... 23,718 20,000
--------- --------
Diluted .................................. 24,853 20,000
--------- --------
</TABLE>
See notes to condensed consolidated (combined) financial statements.
2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY COMPANY
CONSOLIDATED CONSOLIDATED COMBINED
--------------- --------------- ---------------
SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 MARCH 31, 1997
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales .............................. $416,988 $168,030 $158,873
Cost and expenses .................. 383,437 157,319 150,937
-------- -------- --------
Operating income ................... 33,551 10,711 7,936
Interest income .................... 1,576 109 --
Interest expense ................... 21,646 10,079 8,441
-------- -------- --------
Income before income taxes ......... 13,481 741 (505)
Income taxes ....................... 5,258 2,060 (247)
-------- -------- --------
Net income (loss) .................. $ 8,223 $ (1,319) $ (258)
======== ======== ========
Earnings per common share:
Basic ............................. $ 0.37 $ (0.07)
-------- --------
Diluted ........................... $ 0.36 $ (0.07)
-------- --------
Weighted average common shares
outstanding:
Basic ............................. 21,942 20,000
-------- --------
Diluted ........................... 22,961 20,000
-------- --------
</TABLE>
See notes to condensed consolidated (combined) financial statements.
3
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY COMPANY
CONSOLIDATED CONSOLIDATED COMBINED
--------------- --------------- ---------------
SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 MARCH 31, 1997
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................... $ 8,223 $ (1,319) $ (258)
Depreciation and amortization ....................... 16,112 6,676 7,790
Noncash compensation charge ......................... -- 4,410 --
Amortization of deferred debt issuance costs ........ 1,107 505 --
Deferred income taxes ............................... 5,133 2,060 --
Changes in operating assets and liabilities, net
of amounts acquired:
Contracts in process ............................... (7,067) 9,318 (17,475)
Accrued employment costs ........................... 4,274 6,783 (625)
Amounts in excess of costs incurred ................ 1,935 679 (3,037)
Accrued interest ................................... 1,213 6,341 --
Other current liabilities .......................... 3,825 (4,659) (1,867)
Other liabilities .................................. 1,581 2,626 (500)
All other operating activities ..................... (617) (499) (307)
---------- ---------- ---------
Net cash from (used in) operating activities ........ 35,719 32,921 (16,279)
---------- ---------- ---------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ..... (157,215) (470,700) --
Proceeds from assets held for sale .................. 6,653 -- --
Capital expenditures ................................ (6,317) (3,120) (4,300)
Disposition of property, plant and equipment ........ 381 211 --
---------- ---------- ---------
Net cash used in investing activities ............... (156,498) (473,609) (4,300)
---------- ---------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility .......... 67,800 175,000 --
Repayment of borrowings under revolving
credit facility .................................... (67,800) -- --
Proceeds from sale of 8 1/2% senior
subordinated notes ................................. 180,000 -- --
Proceeds from sale of 10 3/8% senior
subordinated notes ................................. -- 225,000 --
Proceeds from sale of common stock, net ............. 139,500 80,000 --
Debt issuance costs ................................. (6,689) (15,689) --
Payment of term loan facilities ..................... (172,000) (1,000) --
Exercise of stock options ........................... 2,958 -- --
Advances from Lockheed Martin ....................... -- -- 20,579
---------- ---------- ---------
Net cash from financing activities .................. 143,769 463,311 20,579
---------- ---------- ---------
Net increase in cash ................................ 22,990 22,623 --
Cash and cash equivalents, beginning of the
period ............................................. 77,474 -- --
---------- ---------- ---------
Cash and cash equivalents, end of the period ........ $ 100,464 $ 22,623 $ --
========== ========== =========
</TABLE>
See notes to condensed consolidated (combined) financial statements.
4
<PAGE>
L-3 COMMUNICATIONS HOLDINGS INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying condensed consolidated (combined) financial statements
include the assets, liabilities and results of operations of L-3 Communications
Holdings, Inc. ("Holdings", and together with its subsidiaries, "L-3" or the
"Company"), the successor company, following the change in ownership (see Note
2) effective as of April 1, 1997. Prior to April 1, 1997, the statements
comprise the operations of (i) nine business units previously purchased by
Lockheed Martin Corporation ("Lockheed Martin") as part of its acquisition of
Loral Corporation ("Loral") in April 1996 and (ii) one business unit,
Communication Systems-East purchased by Lockheed Martin as part of its
acquisition of the aerospace business of GE in April 1993 (collectively, the
"Business" or the "Predecessor Company"). The combined financial statements of
the Predecessor Company reflect the Businesses' results of operations and cash
flows included in Lockheed Martin's historical financial statements.
Significant intercompany and inter-business transactions and balances have been
eliminated.
The accompanying condensed consolidated (combined) financial statements
also include the financial statements of L-3 Communications Corporation ("L-3
Communications"), which is wholly owned by Holdings. Holdings owns all of the
100 shares of $0.01 par value authorized, issued and outstanding common stock
of L-3 Communications. Holdings has no assets or liabilities and conducts no
operations other than through its subsidiary, L-3 Communications Corporation.
The accompanying unaudited condensed consolidated (combined) financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulations S-X of the Securities and Exchange
Commission ("SEC"); accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. All significant intercompany balances and transactions
have been eliminated. The combined statement of operations for the three months
ended March 31, 1997 has been derived from the audited financial statements of
the Predecessor Company for such period. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of the results for the interim periods presented have been
included. The results of operations for the interim periods are not necessarily
indicative of results for the full year. For further information, the interim
financial statements should be read in conjunction with the notes to these
Unaudited Condensed Consolidated Financial Statements as of June 30, 1998 and
Company's Consolidated (Combined) Financial Statements as of December 31, 1997
and notes thereto.
The Company is a supplier of sophisticated secure communications systems
and specialized communication products including secure, high data rate
communication systems, microwave components, avionics and ocean systems,
telemetry, instrumentation and space products. The Company's customers include
the Department of Defense (the "DoD"), selected U.S. government intelligence
agencies, major aerospace/defense prime contractors and commercial customers.
The Company operates primarily in one industry segment, electronic components
and systems.
Substantially all the Company's products are sold to agencies of the U.S.
Government, primarily the Department of Defense, to foreign government agencies
or to prime contractors or subcontractors thereof. All domestic government
contracts and subcontracts of the Businesses are subject to audit and various
cost controls, and include standard provisions for termination for the
convenience of the U.S. Government. Multi-year U.S. Government contracts and
related orders are subject to cancellation if funds for contract performance
for any subsequent year become unavailable. Foreign government contracts
generally include comparable provisions relating to termination for the
convenience of the government.
2. CHANGE IN OWNERSHIP TRANSACTION
L-3 Communications was formed on April 8, 1997, and is wholly owned by
Holdings. Holdings and L-3 Communications were formed by Mr. Frank C. Lanza,
the former President and Chief Operating
5
<PAGE>
L-3 COMMUNICATIONS HOLDINGS INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Officer of Loral, Mr. Robert V. LaPenta, the former Senior Vice President and
Controller of Loral (collectively, the "Equity Executives"), Lehman Brothers
Capital Partners III, L.P. and its affiliates (the "Lehman Partnership") and
Lockheed Martin to acquire the Businesses. The Company was capitalized with an
equity contribution from Holdings of $125,000.
On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, Holdings, and
Lockheed Martin entered into a Transaction Agreement (the "L-3 Acquisition
Agreement") whereby Holdings would acquire the Businesses from Lockheed Martin
(the "L-3 Acquisition"). Pursuant to the L-3 Acquisition Agreement on April 30,
1997 (closing date), Holdings acquired the Businesses from Lockheed Martin for
$525,000, comprised of $458,779 of cash after a $21,221 reduction related to a
purchase price adjustment, and $45,000 of common equity, representing a 34.9%
interest in Holdings retained by Lockheed Martin at March 28, 1997, plus
acquisition costs of approximately $8,000. Also pursuant to the Transaction
Agreement, Lockheed Martin, on behalf and at the direction of Holdings,
transferred the Businesses to the Company. The L-3 Acquisition was financed
with the debt proceeds of $400,000 and capital contributions of $125,000 from
Holdings, including the $45,000 of an equity interest retained by Lockheed
Martin.
The Company and Lockheed Martin finalized the purchase price adjustment
pursuant to an amendment to the L-3 Acquisition Agreement dated November 5,
1997, which also included the assumption by the Company of Lockheed Martin's
rights and obligations under a contract for the production of mission
communication systems for track vehicles, for which the Company received a cash
payment of $12,176. The assets and liabilities recorded in connection with the
L-3 Acquisition purchase price allocation were $664,800 and $164,400,
respectively. The excess of the purchase price over the fair value of net
assets acquired of $303,200 was recorded as goodwill, and is being amortized on
a straight-line basis over a period of 40 years. As a result of the 34.9%
ownership interest retained by Lockheed Martin at March 28, 1997, the
provisions of EITF 88-16 were applied in connection with the purchase price
allocation, which resulted in recording net assets acquired at 34.9% of
Lockheed Martin's carrying values in the Businesses and 65.1% at fair value,
and the recognition of a deemed distribution of $9,000.
3. COMMON STOCK INITIAL PUBLIC OFFERING
On May 19, 1998, Holdings sold 6.9 million shares of its Common Stock in
an Initial Public Offering ("IPO") for $22 per share less underwriting
discounts and commissions of $1.54 per share, representing 25.2% of Holdings'
Common Stock. The net proceeds of the IPO amounted to $139,500. After the
completion of the IPO, Lockheed Martin owned 24.9% of the outstanding shares of
Holdings' Common Stock.
Immediately prior to the IPO, each authorized share of Holdings Class A
Common Stock, Class B Common Stock and Class C Common Stock was converted into
one class of common stock, the Common Stock. Each outstanding share of Class A
and Class B Common Stock was converted into one share of Holdings Common Stock.
There was no outstanding Class C Common Stock. The authorized Holdings Common
Stock was increased to 100,000,000 shares.
4. ACQUISITIONS
On March 30, 1998 the Company purchased the assets of the Ocean Systems
business ("Ocean Systems") of Allied Signal, Inc. for $67,500 of cash. On March
4, 1998, the Company purchased the assets of ILEX Systems ("ILEX") for $51,900
of cash, subject to adjustment based on closing net assets, and additional
consideration based on post-acquisition performance of ILEX. On February 5,
1998, the Company purchased the assets of Satellite Transmission Systems
division ("STS") of California
6
<PAGE>
L-3 COMMUNICATIONS HOLDINGS INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Microwave, Inc. for $27,000 in cash, subject to adjustment based upon closing
net assets. On January 13, 1998, the Company purchased all of the stock of
Southern California Microwave, Inc. ("SCM") for $4,600 subject to adjustment
based on closing net assets, and additional consideration based on
post-acquisition performance of SCM. The SCM acquisition is not expected to
have a material effect on the results of operations or financial position of
the Company.
The Company financed the acquisitions using its cash on hand and
available borrowings under its Revolving Credit Facility. The Ocean Systems,
ILEX and STS acquisitions have been accounted for as purchase business
combinations and are included in the Company's results of operation from their
effective dates of March 31, 1998, February 1, 1998 and February 1, 1998,
respectively.
The assets and liabilities recorded in connection with the purchase
price allocations for the acquisitions of Ocean Systems, ILEX and STS are based
upon preliminary estimates. Actual adjustments will be based on final
appraisals and other analyses of fair values which are in process and the final
purchase prices. Management does not expect that differences between the
preliminary and final allocations will have a material impact on the Company's
financial position or results of operations. The assets and liabilities
recorded in connection with the preliminary purchase price allocations for the
acquisitions of Ocean Systems, ILEX and STS were $136,113 and $68,000, $58,365
and $3,939, and $34,065 and $6,696, respectively.
Had the L-3 Acquisition and the Ocean Systems, ILEX and STS acquisitions
occurred on January 1, 1997, the unaudited pro forma sales, net income (loss),
and diluted earnings (loss) per share for the six months ended June 30, 1998
and 1997 would have been $437,700, $6,000, and $0.21, and $412,700, ($5,200),
and ($0.19), respectively. The pro forma results are based on various
assumptions and are not necessarily indicative of what would have occurred had
the acquisitions been consummated on January 1, 1997.
5. CONTRACTS IN PROGRESS
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, comprise the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Billed contract receivables .................... $ 51,029 $ 37,980
Unbilled contract receivables .................. 50,724 32,653
Other billed receivables, principally commercial
and affiliates ............................... 58,943 32,785
Inventoried costs .............................. 126,608 82,954
--------- ---------
287,304 186,372
Less, unliquidated progress payments ........... (20,964) (19,170)
--------- ---------
Net contracts in process ....................... $ 266,340 $ 167,202
========= =========
</TABLE>
7
<PAGE>
L-3 COMMUNICATIONS HOLDINGS INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Term Loan Facilities ................................ -- $172,000
10 3/8% Senior Subordinated Notes due 2007 .......... $225,000 225,000
8 1/2% Senior Subordinated Notes due 2008 ........... 180,000 --
-------- --------
Total debt ......................................... 405,000 397,000
Less current portion ................................ -- 5,000
-------- --------
Total long-term debt ............................... $405,000 $392,000
======== ========
</TABLE>
In connection with the L-3 Acquisition, L-3 Communications entered into
credit facilities (the "Senior Credit Facilities") with a syndicate of banks
and financial institutions for $275,000 consisting of $175,000 of term loans
(the "Term Loan Facilities") and a $100,000 revolving credit facility (the
"Revolving Credit Facility"). In February 1998, the Senior Credit Facilities
were amended to, among other things, increase the Revolving Credit Facility to
$200,000 and waive certain excess cash flow prepayments, as defined in the
Senior Credit Facilities. The Revolving Credit Facility expires in 2003 and is
available for ongoing working capital and letter of credit needs. Approximately
$176,179 of the Revolving Credit Facility is available at June 30, 1998, net of
letters of credit of $23,821 drawn against the Revolving Credit Facility.
In April 1997, L-3 Communications issued $225,000 of 10 3/8% senior
subordinated notes (the "1997 Notes") due May 1, 2007 with interest payable
semi-annually on May 1 and November 1 of each year, commencing November 1,
1997. On November 5, 1997, the Company completed its exchange offer relating to
the 1997 Notes and the holders of the 1997 Notes received registered securities
of L-3 Communications. The 1997 Notes are redeemable at the option of L-3
Communications, in whole or in part, at any time on or after May 1, 2002, at
various redemption prices plus accrued and unpaid interest to the applicable
redemption rate. In addition, prior to May 1, 2000, L-3 Communications may
redeem up to 35% of the aggregate principal amount of 1997 Notes at a
redemption price of 109.375% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date with the net cash proceeds of one or
more equity offerings by Holdings that are contributed to L-3 Communications as
common equity capital.
In May 1998, L-3 Communications issued $180,000 of 8 1/2% senior
subordinated notes (the "1998 Notes") due May 15, 2008 with interest payable
semi-annually on May 15 and November 15 of each year, commencing November 15,
1998. The 1998 Notes are redeemable at the option of L-3 Communications, in
whole or in part, at any time on or after May 15, 2003, at various redemption
prices plus accrued and unpaid interest to the applicable redemption date. In
addition, prior to May 15, 2001, L-3 Communications may redeem up to 35% of the
aggregate principal amount of 1998 Notes at a redemption price of 108.500% of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date with the net cash proceeds of one or more equity offerings by
Holdings that are contributed to L-3 Communications as common equity capital.
In May 1998, the Company repaid all of the outstanding borrowings under
the Revolving Credit Facility and prepaid all of the outstanding Term Loan
Facilities.
On August 13, 1998, the Senior Credit Facilities were amended to add
a revolving 364 day commitment credit line for $150,000 (the "Revolving 364 Day
Credit Facility"). The Revolving 364 Day Credit Facility expires 364 days after
the closing of the amendment, at which time the Company may (i) request that
the creditors extend it for one additional 364 day period or (ii) exercise an
option to convert any or all of the borrowings outstanding thereunder into term
loans which amortize over a two year period beginning March 31, 2001, and must
be paid in full no later than March 31, 2003.
8
<PAGE>
L-3 COMMUNICATIONS HOLDINGS INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Senior Credit Facilities, the 1997 Notes and the 1998 Notes agreements
contain financial and restrictive covenants that limit, among other things, the
ability of the Company to borrow additional funds, dispose of assets, or pay
cash dividends. At June 30, 1998, none of the Company's retained earnings were
available to pay dividends. The Senior Credit Facilities contain financial
covenants, which remain in effect so long as any amount is owed by the Company
thereunder. These financial covenants require that (i) the Company's debt
ratio, as defined, be less than or equal to 5.50 for the quarter ended June 30,
1998, and that the maximum allowable debt ratio, as defined therein, thereafter
be further reduced to less than or equal to 3.1 for the quarters ending after
June 30, 2002, and (ii) the Company's interest coverage ratio, as defined
therein, be at least 1.85 for the quarter ended June 30, 1998, and thereafter
increasing the interest coverage ratio, as defined therein, to at least 3.10
for any fiscal quarters ended after June 30, 2002. At June 30, 1998 the Company
was in compliance with these covenants.
The indebtedness under the Senior Credit Facilities is guaranteed by
Holdings and by certain of L-3 Communications' direct domestic subsidiaries.
The payment of principal, premium, if any, and interest on the 1997 Notes and
1998 Notes is unconditionally guaranteed, on an unsecured senior subordinated
basis, jointly and severally, by certain of L-3 Communications' domestic
subsidiaries, all of which are wholly-owned subsidiaries.
7. STOCK OPTIONS
On March 2, 1998, Messrs. Lanza and LaPenta each exercised options to
purchase 228,571 shares of Class A Common Stock. The options were granted on
April 30, 1997 at an exercise price of $6.47. The Company received aggregate
proceeds of $2,958 for such exercise and issued 457,124 shares of Class A
Common Stock.
On May 1, 1998, the Company granted options to certain employees other
than Messrs. Lanza and La Penta, to purchase 285,370 shares of Common Stock at
an exercise price of $22.00 per share and on terms substantially similar to the
1997 Options granted in 1997.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the Condensed Consolidated Statement of Cash
Flows follow:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash paid for interest ............. $18,626 $0
======= ==
Cash paid for income taxes ......... $ 125 $0
======= ==
</TABLE>
During the quarter ended March 31, 1998, the Company credited a current
income tax benefit of $451 directly to shareholders' equity related to a tax
benefit from the exercise of stock options.
Prior to the L-3 Acquisition, the Predecessor Company participated in the
Lockheed Martin cash management system, under which all cash was received and
all payments were made by Lockheed Martin. For purposes of the statement of
cash flows, all transactions with Lockheed Martin were deemed to have been
settled in cash at the time they were recorded by the Predecessor Company.
9. ACCOUNTING POLICIES
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
established standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. For the six months ended June 30, 1998,
comprehensive income was
9
<PAGE>
L-3 COMMUNICATIONS HOLDINGS INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
$8,504, and was comprised of net income of $8,223 and other comprehensive
income of $281 relating to foreign currency translations. For the six months
ended June 30, 1997, there were no differences between net income and
comprehensive income.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which
provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact, if any, of
SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently evaluating the
impact, if any, of SFAS No. 133 which is effective for all quarters of fiscal
years beginning after June 15, 1999.
10. CONTINGENCIES
Management is continually assessing the Company's obligations with respect
to applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments with
respect to those environmental loss contingencies of which management of the
Company is aware, the Company believes that even without considering potential
insurance recoveries, if any, there are no environmental loss contingencies
that, individually or in the aggregate, would be material to the Company's
result of operations. The Company accrues for these contingencies when it is
probable that a liability has been incurred and the amount of the loss can be
reasonably estimated.
The Company is engaged in providing products and services under contracts
with the U.S. Government and to a lesser degree, under foreign government
contracts, some of which are funded by the U.S. Government. All such contracts
are subject to extensive legal and regulatory requirements, and, periodically,
agencies of the U.S. Government investigate whether such contracts were and are
being conducted in accordance with these requirements. Under government
procurement regulations, an indictment of the Company by a Federal grand jury
could result in the Company 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.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities (including environmental matters) incidental
to its business. With respect to those investigative actions, items of
litigation, claims or assessments of which they are aware, management of the
Company believes that, after taking into account certain provisions that have
been made with respect to these matters, the ultimate resolution of any such
investigative actions, items of litigation, claims or assessments would not
have a material adverse effect on the financial position or result of
operations of the Company.
11. SUBSEQUENT EVENTS
Pursuant to a definitive agreement entered into on July 2, 1998, L-3
Communications acquired the stock of SPD Technologies, Inc. on August 13, 1998
for $230,000, subject to adjustment based on closing adjusted net assets, as
defined. The acquisition was financed with cash on hand and borrowings under
the Senior Credit Facilities.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products including secure,
high data rate communication systems, microwave components, avionics and ocean
systems, telemetry, instrumentation and space products. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. The Company's systems
and specialized products are used to connect a variety of airborne, space,
ground- and sea-based communication systems and are incorporated into the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. The Company's customers include the DoD, selected
Government intelligence agencies, major aerospace/defense prime contractors,
foreign governments and commercial customers. The Company operates primarily in
one industry segment, electronic components and systems.
All domestic government contracts and subcontracts of the Company are
subject to audit and various cost controls, and include standard provisions for
termination for the convenience of the Government. Multi-year Government
contracts and related orders are subject to cancellation if funds for contract
performance for any subsequent year become unavailable. Foreign government
contracts generally include comparable provisions relating to termination for
the convenience of the relevant foreign government.
The defense industry has recently undergone significant changes
precipitated by ongoing federal budget pressures and new roles and missions to
reflect changing strategic and tactical threats. Since the mid-1980's, the
overall U.S. defense budget has declined in real dollars. In response, the DoD
has focused its resources on enhancing its military readiness, joint operations
and digital command and control communications by incorporating advanced
electronics to improve the performance, reduce operating costs and extend the
life expectancy of its existing and future platforms. The emphasis on system
interoperability, force multipliers and providing battlefield commanders with
real-time data is increasing the electronics content of nearly all of the major
military procurement and research programs. As a result, the DoD's budget for
communications and defense electronics is expected to grow. According to
Federal Sources, an independent private consulting group, the defense budget
for command, control, communications and intelligence ("C3I") is expected to
increase from $31.0 billion in the fiscal year ended September 30, 1997 to
$42.0 billion in the fiscal year ended September 30, 2002, a compound annual
growth rate of 6.3%.
ACQUISITION HISTORY
The Company was formed to acquire substantially all of the assets of (i)
nine business units previously purchased by Lockheed Martin as part of its
acquisition of Loral in 1996 (the "Loral Acquired Businesses") which include
eight business units of Loral ("Specialized Communications products") and one
business unit purchased by Loral as part of its acquisition of the Defense
Systems business of Unisys Corporation in May 1995 ("Communication Systems --
West") and (ii) one business unit purchased by Lockheed Martin as part of its
acquisition of the aerospace business of General Electric Company in April 1993
("Communications Systems -- East"). Collectively, the Loral Acquired Businesses
and Communications Systems -- East comprise the "Predecessor Company" or
"Businesses".
During the first quarter of 1998, the Company acquired the assets and
liabilities of Ocean Systems, ILEX and STS.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated (Combined) Financial Statements and the notes thereto included
herein.
11
<PAGE>
The condensed consolidated financial statements reflect the Company's
results of operations from the effective date of the L-3 Acquisition, April 1,
1997, and also include the results of operations of Ocean Systems, ILEX and STS
(collectively, the "1998 Acquisitions") from the effective dates of such
acquisitions, which were March 31, 1998 for Ocean Systems, and February 1, 1998
for ILEX and STS. The results of operations presented below exclude the results
of operations of the 1998 Acquisitions for periods prior to their effective
dates.
The condensed consolidated (combined) financial statements also reflect
the results of operations of the Predecessor Company for the three months ended
March 31, 1997. Operating income of the Company and the Predecessor Company are
not directly comparable between the six month periods ended June 30, 1998 and
1997, because of the effects of valuation of assets and liabilities recorded in
accordance with Accounting Principles Board Opinion No. 16 ("APB 16") by the
Company in the purchase accounting for the L-3 Acquisition. Interest expense
and income taxes expense for the periods are also not comparable and their
impact on the Company is discussed below.
The results of operations of the Predecessor Company for the three months
ended March 31, 1997 include certain costs and expenses allocated by Lockheed
Martin for corporate office expenses based primarily on the allocation
methodology prescribed by government regulations pertaining to government
contractors. Interest expense was allocated based on Lockheed Martin's actual
weighted average consolidated interest rate applied to the portion of the
beginning of the year invested equity deemed to be financed by consolidated
debt based on Lockheed Martin's debt to equity ratio on such date. The
provision (benefit) for income taxes was allocated to the Predecessor Company
as if they were separate taxpayers, calculated by applying statutory rates to
reported pre-tax income after considering items that do not enter into the
determination of taxable income and tax credits related to the Predecessor
Company. Also pension and post employment benefit costs were allocated based on
employee headcount. Accordingly, the results of operations of the Predecessor
Company discussed herein may not be the same as would have occurred had the
Predecessor Company been an independent entity.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The following table sets forth the selected statement of operations data
for the Company for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(in millions, except per share amounts)
<S> <C> <C>
Sales ................................................................. $ 230.4 $ 168.0
------- -------
Operating income ...................................................... 19.5 10.7
Interest expense, net ................................................. 10.3 10.0
Income tax expense .................................................... 3.6 2.0
------- -------
Net income (loss) ..................................................... $ 5.6 $ (1.3)
======= =======
Earnings (loss) per share:
Basic ................................................................ $ 0.24 $ (0.07)
======= =======
Diluted .............................................................. $ 0.23 $ (0.07)
======= =======
Weighted average shares outstanding:
Basic ................................................................ 23.7 20.0
Diluted .............................................................. 24.9 20.0
Depreciation and amortization included in operating income(1) ......... $ 8.6 $ 11.1
EBITDA(1) ............................................................. $ 28.1 $ 21.8
</TABLE>
- ----------
(1) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs)
and the non-recurring, noncash compensation charge. EBITDA is not a
substitute for operating income, net income or cash flows from operating
activities as determined in accordance with generally accepted accounting
principles as a measure of profitability or liquidity. EBITDA is
presented as additional information because the Company believes it to be
a useful indicator of the Company's ability to meet debt service and
capital expenditure requirements.
12
<PAGE>
Sales increased to $230.4 million for the three months ended June 30, 1998
(the "1998 Second Quarter") from $168.0 million for the three months ended June
30, 1997 (the "1997 Second Quarter"). Operating income increased to $19.5
million in the 1998 Second Quarter from $10.7 million in the 1997 Second
Quarter. Net income increased to $5.6 million in the 1998 Second Quarter from a
net loss of $1.3 million in the 1997 Second Quarter. Basic earnings (loss) per
share and diluted earnings (loss) per share were $0.24 and $0.23 for the 1998
Second Quarter and ($0.07) and ($0.07) for the 1997 Second Quarter,
respectively.
Basic earnings per share for the 1998 Second Quarter is based on
23,718,000 weighted average shares outstanding, compared with 20,000,000 in the
1997 Second Quarter. Diluted earnings per share for the 1998 Second Quarter is
based on 24,853,000 weighted average shares outstanding, compared with
20,000,000 in the 1997 Second Quarter. The increases in basic and diluted
weighted average shares outstanding were attributable to the Holdings IPO and
the exercise of stock options (see "Liquidity and Capital Resources" below).
Diluted earnings per share gives effect to the Holdings stock options which
were granted to employees in 1997.
Sales increased by $62.4 million in the 1998 Second Quarter compared to
the 1997 Second Quarter. The Ocean Systems, ILEX and STS acquired businesses
contributed sales of $44.2 million. The remaining increase of $18.2 million was
primarily attributable to an increase in production and shipments on the CHBDL,
Raptor and UAV programs and increased sales volumes of aviation recorders, E2-C
and F-14 display systems and RF safety and monitoring products, partially
offset by lower sales volume on commercial telecommunications products.
Operating income increased by $8.8 million to $19.5 million in the 1998
Second Quarter from $10.7 million in the 1997 Second Quarter. Operating income
as a percentage of sales ("operating margin") was 8.5% for the 1998 Second
Quarter compared to 6.4% for the 1997 Second Quarter. The increase in operating
income is principally attributable to (i) improved margins on sales of space
communications and military communication systems, aviation recorders and
display systems and increased sales volume on higher margin RF safety and
monitoring products, partially offset by lower sales volume on commercial
telecommunications products, and (ii) the negative impact on operating income
for the 1997 Second Quarter from the non-recurring, noncash compensation charge
of $4.4 million or $0.22 per share recorded effective April 1, 1997, related to
the initial capitalization of the Company. Ocean Systems, ILEX and STS
contributed $0.3 million of operating income to the 1998 Second Quarter.
Excluding the non-recurring, noncash compensation charge, operating margin for
the 1997 Second Quarter was 9.0%. The decline in 1998 Second Quarter operating
margin to 8.5% was primarily attributable to lower margins of the acquired
Ocean Systems and STS businesses.
EBITDA for the 1998 Second Quarter increased by $6.3 million to $28.1
million from $21.8 million in the 1997 Second Quarter. EBITDA as a percentage
of sales ("EBITDA margin") decreased to 12.2% for the 1998 Second Quarter from
13.0% for the 1997 Second Quarter. The increase in EBITDA was attributable to
the items affecting the trends in operating income between the 1998 Second
Quarter and the 1997 Second Quarter discussed above, excluding the
non-recurring, noncash compensation charge which is not included in EBITDA. The
decrease in EBITDA margin was primarily attributable to lower margins of the
acquired Ocean Systems and STS businesses.
Interest expense, net for the 1998 Second Quarter was $10.3 million
compared to $10.0 million for the 1997 Second Quarter. The increase was
attributable to higher average outstanding debt balances during the 1998 Second
Quarter compared to the 1997 Second Quarter as a result of borrowings under the
Revolving Credit Facility primarily in connection with the Ocean Systems
acquisition and the issuance of the 1998 Notes in May 1998, partially offset by
higher interest income on available cash balances in the 1998 Second Quarter.
The effective income tax rate for the 1998 Second Quarter was 39%,
reflecting the estimated effective income tax rate for the year ending December
31, 1998. The effective income tax rate was 278% for the 1997 Second Quarter
reflecting the effects of the non-recurring, noncash compensation charge of
$4.4 million which was not deductible for income tax purposes. Excluding the
non-recurring, noncash compensation charge, the Company's effective income tax
rate for the 1997 Second Quarter would have been 39%.
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
As noted above, the Company's financial statements reflect its operations
since the effective date of the L-3 Acquisition, April 1, 1997, and the results
of operations for the three months ended March 31, 1997 represent the results
of operations of the Predecessor Company. Accordingly, changes between periods
for the six months ended June 30, 1998 (the "1998 First Half") and the six
months ended June 30, 1997 (the "1997 First Half") are affected by the timing
of the L-3 Acquisition. The results of operations for the 1997 First Half were
obtained by aggregating, without adjustment, the historical results of
operations of the Predecessor Company for the three months ended March 31, 1997
with the historical results of operations of the Company for the three months
period ended June 30, 1997.
The following table sets forth selected income statement data for the
Company and the Predecessor Company for the periods indicated.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY COMPANY
------------ --------------- ----------------
THREE MONTHS THREE MONTHS
1998 ENDED ENDED 1997
FIRST HALF JUNE 30, 1997 MARCH 31, 1997 FIRST HALF
------------ --------------- ---------------- -----------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales .................................... $ 417.0 $ 168.0 $ 158.9 $ 326.9
------- ------- ------- -------
Operating income ......................... 33.6 10.7 7.9 18.6
Interest expense, net .................... 20.1 10.0 8.4 18.4
Income tax expense (benefit) ............. 5.3 2.0 (0.2) 1.8
------- ------- ------- -------
Net income (loss) ........................ $ 8.2 ($ 1.3) ($ 0.3) ($ 1.6)
======= ======= ======= =======
Earnings per share:
Basic ................................... $ 0.37
=======
Diluted ................................. $ 0.36
=======
Weighted average shares
outstanding:
Basic ................................... 21.9
Diluted ................................. 23.0
Depreciation and amortization expenses
included in operating income(1) ......... $ 16.1 $ 11.1 $ 7.8 $ 18.9
EBITDA(1) ................................ $ 49.7 $ 21.8 $ 15.7 $ 37.5
</TABLE>
- ----------
(1) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs)
and the non-recurring noncash compensation charge. EBITDA is not a
substitute for operating income, net income or cash flows from operating
activities as determined in accordance with generally accepted accounting
principles as a measure of profitability or liquidity. EBITDA is
presented as additional information because the Company believes it to be
a useful indicator of the Company's ability to meet debt service and
capital expenditure requirements.
Sales for the 1998 First Half increased to $417.0 million from $326.9
million for the 1997 First Half. Operating income for the First Half increased
by $15.0 million to $33.6 million from $18.6 million in the 1997 First Half.
Net income increased to $8.2 million from a net loss of $1.6 million in the
1997 First Half. Basic earnings per share and diluted earnings per share for
the 1998 First Half were $0.37 and $0.36, respectively, based on weighted
average shares outstanding of 21.9 million and 23.0 million, respectively.
Sales increased by $90.1 million in the 1998 First Half compared to the
1997 First Half. The Ocean Systems, ILEX and STS acquired businesses
contributed sales of $60.5 million. The remaining increase of $29.6 million was
primarily attributable to an increase in production and shipments on the CHBDL,
Raptor and UAV programs and increased sales volumes of aviation recorders, E2-C
and F-14 display systems and RF safety and monitoring products, partially
offset by lower sales volume on commercial telecommunications products.
Operating income increased by $15.0 million to $33.6 million in the 1998
First Half from $18.6 million in the 1997 First Half. Operating margin
increased to 8.1% for the 1998 First Half compared to 5.7% for the 1997 First
Half. The increase in operating income for the 1998 First Half is principally
attributable to (i) improved margins on sales of space communications and
military communication systems, aviation recorders and display systems and
increased sales volume on higher margin RF safety and monitoring
14
<PAGE>
products, partially offset by lower sales volume on commercial
telecommunications products and (ii) the negative impact on operating income
for the 1997 First Half from the non-recurring, noncash compensation charge of
$4.4 million or $0.22 per share recorded effective April 1, 1997, related to
the initial capitalization of the Company and losses incurred on three programs
by Communication Systems -- East. Ocean Systems, ILEX and STS contributed $0.6
million of operating income to the 1998 First Half. Excluding the
non-recurring, noncash compensation charge, operating margin for the 1997 First
Half was 7.5%.
EBITDA for the 1998 First Half increased by $12.2 million to $49.7 million
from $37.5 million in the 1997 First Half. EBITDA margin increased to 11.9% for
the 1998 First Half from 11.5% for the 1997 First Half. The increases in EBITDA
and EBITDA margin were primarily attributable to the items affecting the trends
in operating income between the 1998 First Half and the 1997 First Half
discussed above, excluding the non-recurring, noncash compensation charge which
is not included in EBITDA.
Interest expense, net for the Company in the 1998 First Half was $20.1
million, compared to $18.4 million in the 1997 First Half for the Company and
Predecessor Company combined. The increase was attributable to higher average
outstanding debt balances in the 1998 First Half, partially offset by greater
interest income in the 1998 First Half.
The effective income tax rate of the Company for the 1998 First Half was
39%, reflecting the estimated effective income tax rate for the year ended
December 31, 1998. The effective tax rate for the 1997 First Half for the
Company and Predecessor Company combined was 768%, and was significantly
impacted by the $4.4 million non-recurring noncash compensation charge recorded
in April, 1998 and the Predecessor Company's amortization of costs in excess of
net assets acquired for the three months ended March 31, 1997 which were not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The increases in contracts in process, property, plant and equipment, net
of accumulated depreciation and amortization, intangibles, customer advances,
other current liabilities, and pension and post-retirement benefits of $99.1
million, $18.4 million, $96.2 million, $39.1 million, $16.5 million, and $10.6
million, respectively, from December 31, 1997 to June 30, 1998 are principally
related to the acquired Ocean Systems, ILEX and STS businesses which were
completed during the first quarter of 1998.
On May 19, 1998, Holdings sold 6.9 million shares of its Common Stock in
an Initial Public Offering ("IPO") for $22 per share less underwriting
discounts and commissions of $1.54 per share, representing 25.2% of Holdings'
Common Stock. The net proceeds from the IPO amounted to $139.5 million after
underwriting discounts and commissions and expenses of $12.3 million.
Concurrent with the IPO, L-3 Communications sold $180.0 million aggregate
principal amount of 8 1/2% Senior Subordinated Notes due May 15, 2008 (the
"1998 Notes"), whose net proceeds amounted to $173.8 million after debt
issuance costs of $6.2 million. The 1998 Notes are redeemable at the option of
L-3 Communications, in whole or in part, at any time on or after May 15, 2003,
at various redemption prices plus accrued and unpaid interest to the applicable
redemption date. In addition, prior to May 15, 2001, L-3 Communications may
redeem up to 35% of the aggregate principal amount of 1998 Notes at a
redemption price of 108.500% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date with the net cash proceeds of one or
more equity offerings by Holdings that are contributed to L-3 Communications as
common equity capital.
The combined net proceeds from the IPO and the 1998 Notes of $313.3
million were used to (i) prepay all $171.0 million of borrowings outstanding
under the Term Loan Facilities, and (ii) repay $67.8 million of borrowings
under the Revolving Credit Facility, and (iii) increase cash and cash
equivalents by $74.5 million. As a result of the debt repayments, there are no
borrowings outstanding under the Senior Credit Facilities at June 30, 1998.
On August 13, 1998, the Senior Credit Facilities were amended to add a
revolving 364 day commitment credit line for $150.0 million (the "Revolving 364
Day Credit Facility"). The Revolving 364 Day Credit Facility expires 364 days
after the closing of the amendment, at which time the Company may
15
<PAGE>
(i) request that the creditors extend it for one additional 364 day period or
(ii) exercise an option to convert any or all of the borrowings outstanding
thereunder into term loans which amortize over a two year period beginning
March 31, 2001, and must be paid in full no later than March 31, 2003.
The Revolving 364 Day Credit Facility together with the Company's
Revolving Credit Facility, increased borrowings available to the Company,
before reductions for outstanding letters of credit, to $350.0 million.
Outstanding letters of credit at June 30, 1998 were approximately
$23.8 million.
The Senior Credit Facilities, the 1998 Notes and the 1997 Notes contain
financial covenants, which remain in effect so long as any amount is owed
thereunder by L-3 Communications. The financial covenants under the Senior
Credit Facilities require that (i) L-3 Communications' debt ratio, as defined,
be less than or equal to 5.50 for the quarter ended June 30, 1998, and that the
maximum allowable debt ratio, as defined, thereafter be further reduced to less
than or equal to 3.1 for the quarters ending after June 30, 2002, and (ii) L-3
Communications' interest coverage ratio, as defined, be at least 1.85 for the
quarter ended June 30, 1998 and thereafter increasing the interest coverage
ratio, as defined, to at least 3.10 for any fiscal quarters ending after June
30, 2002. At June 30, 1998, L-3 Communications was and has been in compliance
with these covenants at all times.
The Company has a substantial amount of indebtedness. Based upon the
current level of operations, management believes that the Company's cash flow
from operations, together with available borrowings under the Revolving Credit
Facility, will be adequate to meet its anticipated requirements for working
capital, capital expenditures, research and development expenditures, program
and other discretionary investments, interest payments and scheduled principal
payments for the foreseeable future including at least the next three years.
There can be no assurance, however, that the Company's business will continue
to generate cash flow at or above current levels or that currently anticipated
improvements will be achieved. If the Company is unable to generate sufficient
cash flow from operations in the future to service its debt, it may be required
to sell assets, reduce capital expenditures, refinance all or a portion of its
existing debt or obtain additional financing. The Company's ability to make
scheduled principal payments, to pay interest on or to refinance its
indebtedness depends on its future performance and financial results, which, to
a certain extent, are subject to general conditions in or affecting the defense
industry and to general economic, political, financial, competitive,
legislative and regulatory factors beyond its control. There can be no
assurance that sufficient funds will be available to enable the Company to
service its indebtedness, including the 1997 Notes and 1998 Notes, or make
necessary capital expenditures and program and discretionary investments.
To mitigate risks associated with changing interest rates on certain of
its debt, the Company entered into the interest rate cap and floor contracts
(the "interest rate agreements"). The Company manages exposure to counterparty
credit risk by entering into the interest rate agreements only with major
financial institutions that are expected to perform fully under the terms of
such agreements. Cash payments to (from) the Company and the counterparties are
made at the end of the quarter to the extent due under the terms of the
interest rate agreements. Such payments are recorded as adjustments to interest
expense. The initial costs of the interest rate agreements are capitalized as
deferred debt issuance costs and amortized into interest expense. The impact of
the interest rate agreements on interest expense was not material for the six
months ended June 30, 1998.
1998 ACQUISITIONS
During the first quarter of 1998, the Company purchased the assets of
Ocean Systems for $67.5 million of cash, the assets of ILEX for $51.9 million
of cash, subject to adjustment based on closing net assets and additional
consideration based on post-acquisition performance of ILEX, and the assets of
STS for $27.0 million in cash, subject to adjustment based upon closing net
assets. The Company financed these acquisitions using cash on hand and
borrowings under the Revolving Credit Facility, which were subsequently repaid
with a portion of the net proceeds from the IPO and 1998 Notes.
Pursuant to a definitive agreement entered into on July 2, 1998, the
Company acquired the stock of SPD Technologies, Inc. ("SPD") on August 13, 1998
for $230.0 million in cash, subject to adjustment based on closing adjusted
net assets, as defined. The acquisition was financed with cash on hand and
borrowings under the Senior Credit Facilities.
16
<PAGE>
The Company considers and executes strategic acquisitions on an ongoing
basis and may be evaluating acquisitions or engaged in acquisition negotiations
at any given time. As of the date hereof, the Company has completed, has
reached agreement on or is in discussions regarding certain other acquisitions,
that are both individually and in the aggregate not significant to the results
of operations or financial position of the Company.
CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company for the Periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
------------------------------- ---------------
SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 MARCH 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net cash from (used in) operating activities ......... $ 35.7 $ 32.9 $ (16.3)
Net cash (used in) investing activities .............. (156.5) (473.6) ( 4.3)
Net cash from financing activities ................... 143.8 463.3 20.6
</TABLE>
NET CASH FROM (USED IN) OPERATING ACTIVITIES: Cash from operating
activities of the Company for the six months ended June 30, 1998 was $35.7
million. Earnings after adjustment for non-cash items provided $30.6 million,
and changes in operating assets and liabilities, net of amounts acquired
generated $5.1 million.
Net cash from operating activities for the three months ended June 30,
1997 was $32.9 million. Earnings after adjustment for noncash items provided
$12.3 million. Changes in operating assets and liabilities, excluding accrued
interest, consisting primarily of decreases in contracts in process of $9.3
million and increases in accrued employment costs of $6.8 million contributed
$14.3 million. Increases in accrued interest due to the timings of interest
payments contributed $6.3 million.
Net cash used in operating activities was $16.3 million for the three
months ended March 31, 1997. Earnings after adjustment for noncash items which
provided $7.5 million were offset by uses of cash for increases in contracts in
process of $17.5 million and changes in other operating assets and liabilities,
net of $6.3 million. Cash flows used by the Loral Acquired Businesses was $10.2
million. Cash used for operating activities by Communication Systems -- East
amounted to $6.1 million.
The Company's current ratio at June 30, 1998 decreased to 1.9:1 compared
with 2.0:1 at December 31, 1997.
NET CASH (USED IN) INVESTING ACTIVITIES: Cash used in investing activities
for the six months ended June 30, 1998 was $156.5 million and consisted
primarily of $157.2 million, net of cash acquired, paid by the Company for
acquisitions of businesses. The Company typically makes capital expenditures
related primarily to improvement of manufacturing facilities and equipment. The
Company expects that its capital expenditures for 1998 will be approximately
$27.0 million.
Cash used in investing activities for the three months ended June 30, 1997
was $473.6 million and consisted primarily of $470.7 million paid by the
Company for the L-3 Acquisition.
NET CASH FROM FINANCING ACTIVITIES: For the six months ended June 30,
1998, the Company's cash from financing activities was $143.8 million. Net
proceeds from the Holdings IPO were $139.5 million. Proceeds from the sale of
the 8 1/2% senior subordinated notes were $180.0 million before debt issuance
costs of $6.2 million. Additionally, the Company borrowed $67.8 million under
the Revolving Credit Facility primarily to finance the Ocean Systems
acquisition. The Company used a portion of the net proceeds from its IPO and
sale of 8 1/2% senior subordinated notes to repay the $67.8 million borrowings
under the Revolving Credit Facility and prepay all outstanding $171.0 million
of the Term Loan Facilities. Proceeds from the exercise of stock options on
March 2, 1998 by Mr. Lanza and Mr. LaPenta were $3.0 million.
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Cash from financing activities of the Company was $463.3 million for the
three months ended June 30, 1997, and was primarily due to the debt incurred
and proceeds from the issuance of common stock related to the initial
capitalization of the Company and the financing of the L-3 Acquisition.
Cash from financing activities for the three months ended March 31, 1997
consisted of $20.6 million of advances from Lockheed Martin to the Predecessor
Company. Prior to the L-3 Acquisition, the Predecessor Company participated in
the Lockheed Martin cash management system, under which all cash was received
and all payments were made by Lockheed Martin. For purposes of the statement of
cash flows, all transactions with Lockheed Martin were deemed to have been
settled in cash at the time they were recorded by the Predecessor Company.
CONTINGENCIES
See Note 10 to the Condensed Consolidated (Combined) Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
accounting standards for the way that public enterprises report information
about operating segments and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132
revises employers' disclosures about pension and other postretirement benefits
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirements
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87 "Employers' Accounting for Pensions", SFAS
No. 88 ("Employers' Accounting for Settlements and Curtailments of Defined
Benefit Plans and for Termination Benefits" and SFAS No. 106 "Employers
Accounting for Postretirement Benefits Other Than Pensions" were issued. SFAS
132 suggests combined formats form presentation of pension and other
postretirement benefits disclosures. The Company is currently evaluating the
impact, if any, of SFAS No. 131 and SFAS No. 132.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which
provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact, if any, of
SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently evaluating the
impact, if any, of SFAS No. 133 which is effective for all quarters of fiscal
years beginning after June 15, 1999.
YEAR 2000 CONVERSION
Under the Company's decentralized structure, each division maintains
and/or outsources its computer-based data processing functions. While each
division is responsible for its own computer-based functions, in late 1997 a
corporate-wide Year 2000 program (the "Program") was instituted for purposes of
overseeing Year 2000 compliance efforts. The Program's major phases include (i)
identification of areas requiring update, which began in late 1997; (ii)
assessment of required actions and related impacts, which was completed in the
second quarter of 1998; (iii) development of update schedule and cost
estimates, which was completed in the second quarter of 1998 and (iv)
implementation of such plan, including follow-up testing, which commenced
during the second quarter of 1998 and scheduled to be completed by
18
<PAGE>
mid-1999. Through June 30, 1998, the costs incurred in connection with the
Program were not material. Based upon the types of systems employed by the
Company, costs of the Program are not expected to be material to the results of
operations, liquidity or capital resources of the Company.
SAFE HARBOR STATEMENT under the Private Securities Litigation Reform Act
of 1995: Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements which involve
risks and uncertainties that could cause actual results to differ materially
from the Company's current expectations, including but not limited to economic,
competitive, leverage, and technological factors and risks inherent in
government contracts, affecting the Company's operations, markets, products,
services and prices, and other factors discussed in the Company's filings with
the Securities and Exchange Commission.
19
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K(A)
(a) Exhibits
Exhibit 11
L-3 Communications Holdings, Inc. Computation of Basic Earnings Per
Share and Diluted Earnings Per Share
(b) Reports on Form 8-K
Report filed on April 14, 1998 regarding the acquisition of the Ocean
Systems business of AlliedSignal, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L-3 Communications Holdings, Inc.
and
L-3 Communications Corporation
------------------------------------------
Registrants
Date: August 14, 1998 Robert V. LaPenta
------------------------------------------
President, Chief Financial Officer and
Director
Principal Financial Officer
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EXHIBIT 11
L-3 COMMUNICATIONS HOLDINGS, INC.
COMPUTATION OF BASIC EARNINGS PER SHARE
AND DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED
June 30,1998 June 30,1998 June 30,1997
------------ ------------ ------------
<S> <C> <C> <C>
BASIC:
Net income (loss) $ 5,610 $ 8,223 ($ 1,319)
======== ======== ========
Weighted average common share outstanding 23,718 21,942 20,000
======== ======== ========
Basic earnings (loss) per share $ 0.24 $ 0.37 $ 0.07
======== ======== ========
DILUTED:
Net income (loss) $ 5,610 $ 8,223 ($ 1,319)
======== ======== ========
Common and potential common shares:
Weighted average common shares outstanding 23,718 21,942 20,000
Assumed exercise of options 2,655 2,737 --
Assumed purchase of common shares for treasury (1,520) (1,718) --
-------- -------- --------
Common and potential common shares 24,853 22,961 20,000
======== ======== ========
Diluted earnings (loss) per share $ 0.23 $ 0.36 $ 0.07
======== ======== ========
</TABLE>
