<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, 1999
Commission file numbers 001-14141 and 333-46983
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
State of incorporation: Delaware
IRS identification numbers: 13-3937434 and 13-3937436
600 Third Avenue
New York, NY 10016
Telephone: (212) 697-1111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
There were 32,705,534 shares of L-3 Communications Holdings, Inc. common
stock with a par value of $0.01 outstanding as of the close of business on
August 9, 1999.
- --------------------------------------------------------------------------------
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED JUNE 30, 1999
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998 ......................................................................... 1
Condensed Consolidated Statements of Operations for the Three and Six
Months ended June 30, 1999 and June 30, 1998 ................................. 2-3
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 30, 1999 and June 30, 1998 .............................................. 4
Notes to Unaudited Condensed Consolidated Financial Statements ................ 5-10
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition .................................................................... 11-18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .................... 18
PART II -- OTHER INFORMATION:
ITEM 4. Submission of Matters to a Vote of Security Holders ........................... 19
ITEM 6. Exhibits and Reports on Form 8-K .............................................. 19
</TABLE>
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 46,757 $ 26,130
Contracts in process .............................................. 465,121 351,049
Deferred income taxes ............................................. 12,885 16,591
Other current assets .............................................. 7,908 11,597
---------- ----------
Total current assets ............................................ 532,671 405,367
---------- ----------
Property, plant and equipment ...................................... 182,813 155,712
Less, accumulated depreciation and amortization ................... 45,010 32,557
---------- ----------
137,803 123,155
---------- ----------
Intangibles, primarily cost in excess of net assets acquired, net of
amortization ...................................................... 769,354 669,362
Deferred income taxes .............................................. 65,322 39,139
Other assets ....................................................... 49,099 48,373
---------- ----------
Total assets .................................................... $1,554,249 $1,285,396
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ........................................... $ 75,710 $ 81,826
Accrued employment costs .......................................... 68,155 58,380
Accrued expenses .................................................. 28,240 18,241
Customer advances ................................................. 63,874 45,874
Accrued interest .................................................. 12,617 6,698
Other current liabilities ......................................... 44,439 36,515
---------- ----------
Total current liabilities ....................................... 293,035 247,534
---------- ----------
Pension and postretirement benefits ................................ 114,522 114,293
Other liabilities .................................................. 20,790 18,595
Long-term debt ..................................................... 605,000 605,000
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value; authorized 100,000,000 shares, issued
and outstanding 32,510,054 and 27,402,429 shares ................ 471,267 264,769
Retained earnings ................................................. 63,141 44,856
Equity adjustments ................................................ (13,506) (9,651)
---------- ----------
Total shareholders' equity ......................................... 520,902 299,974
---------- ----------
Total liabilities and shareholders' equity ...................... $1,554,249 $1,285,396
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Sales ..................................... $ 314,432 $ 230,424
Costs and expenses ........................ 283,283 210,966
--------- ---------
Operating income .......................... 31,149 19,458
Interest and other income ................. 1,815 780
Interest expense .......................... 14,939 11,041
--------- ---------
Income before income taxes ................ 18,025 9,197
Provision for income taxes ................ 6,939 3,587
--------- ---------
Net income ................................ $ 11,086 $ 5,610
========= =========
Earnings per common share:
Basic .................................... $ 0.34 $ 0.24
========= =========
Diluted .................................. $ 0.33 $ 0.23
========= =========
Weighted average common shares outstanding:
Basic .................................... 32,488 23,718
========= =========
Diluted .................................. 33,948 24,853
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Sales ..................................... $ 589,994 $ 416,988
Costs and expenses ........................ 532,678 383,437
--------- ---------
Operating income .......................... 57,316 33,551
Interest and other income ................. 2,829 1,576
Interest expense .......................... 30,414 21,646
--------- ---------
Income before income taxes ................ 29,731 13,481
Provision for income taxes ................ 11,446 5,258
--------- ---------
Net income ................................ $ 18,285 $ 8,223
========= =========
Earnings per common share:
Basic .................................... $ 0.58 $ 0.37
========= =========
Diluted .................................. $ 0.56 $ 0.36
========= =========
Weighted average common shares outstanding:
Basic .................................... 31,495 21,942
========= =========
Diluted .................................. 32,925 22,961
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................... $ 18,285 $ 8,223
Depreciation and amortization ............................................ 26,390 16,112
Amortization of deferred debt issue costs ................................ 1,957 1,107
Deferred income tax provision ............................................ 8,295 5,133
Other noncash items ...................................................... 3,767 --
Changes in operating assets and liabilities, net of amounts acquired .....
Contracts in process .................................................... (30,093) (5,288)
Other current assets .................................................... 2,896 704
Other assets ............................................................ (183) (81)
Accounts payable and accrued expenses ................................... (15,407) 4,913
Customer advances ....................................................... 16,308 1,712
Other current liabilities ............................................... (3,352) 2,084
Pension and postretirement benefits ..................................... 229 (367)
Other liabilities ....................................................... (1,377) 1,186
All other operating activities .......................................... (1,783) 281
---------- ----------
Net cash from operating activities ....................................... 25,932 35,719
---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired .......................... (205,003) (157,215)
Proceeds from net assets held for sale ................................... -- 6,653
Capital expenditures ..................................................... (10,993) (6,317)
Disposition of property, plant and equipment ............................. 5,273 381
Other investing activities ............................................... 5,007 --
---------- ----------
Net cash (used in) investing activities .................................. (205,716) (156,498)
---------- ----------
FINANCING ACTIVITIES:
Repayment of borrowings under term loan facilities ....................... -- (172,000)
Borrowings under revolving credit facility ............................... 74,700 67,800
Repayment of borrowings under revolving credit facility .................. (74,700) (67,800)
Proceeds from sale of 81/2% senior subordinated notes .................... -- 180,000
Proceeds from sale of common stock, net .................................. 201,582 139,500
Other financing activities ............................................... (1,171) (3,731)
---------- ----------
Net cash from financing activities ....................................... 200,411 143,769
---------- ----------
Net increase in cash ..................................................... 20,627 22,990
Cash and cash equivalents, beginning of the period ....................... 26,130 77,474
---------- ----------
Cash and cash equivalents, end of the period ............................. $ 46,757 $ 100,464
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
L-3 Communications Holdings, Inc. ("Holdings" or the "Company") is a
leading merchant supplier of sophisticated secure communication systems and
specialized communication products, which are critical elements of virtually
all major communication, command and control, intelligence gathering and space
systems. The Company's customers include the U.S. department of defense (the
"DoD"), certain U.S. government intelligence agencies, major aerospace and
defense contractors, foreign governments and commercial customers. The Company
has two reportable segments, Secure Communication Systems and Specialized
Communication Products.
Secure Communication Systems. This segment provides secure, high data rate
communications systems for military and other U.S. government reconnaissance
and surveillance applications. These operations are principally performed under
cost plus, sole source contracts supporting long-term programs for the U.S.
armed forces and classified customers. Major secure communications programs and
systems include: secure data links for airborne, satellite, ground and seabased
remote platforms for information collection, command and control and
dissemination to users in real-time; strategic and tactical signal intelligence
systems that detect, collect, identify, analyze and disseminate information and
related support contracts for military and intelligence efforts; secure
telephone, fax and network equipment and encryption management; communication
software support services to military and related government intelligence
markets; and communications systems for surface and undersea platforms and
manned space flights.
Specialized Communication Products. This segment includes three product
categories: microwave components, avionics and ocean products, and telemetry,
instrumentation and space products. Microwave Components includes commercial
off the shelf, high performance microwave components and frequency monitoring
equipment. Avionics and Ocean Products include aviation recorders, display
products, antenna products, acoustic undersea warfare systems and naval power
distribution, conditioning, switching and protection equipment for naval ships
and submarines. Telemetry, Instrumentation and Space Products include
commercial off the shelf real-time data collection and transmission products
and components for missile, aircraft and space based electronic systems. The
Specialized Communication Products segment provides products, systems and
services used in the satellite transmission of voice, video and data through
earth stations for uplink and downlink terminals. This segment also provides
commercial off the shelf satellite control software, telemetry, tracking and
control, mission processors, global positioning systems (GPS) and software
engineering services to the worldwide military, civilian and commercial
satellite markets.
The accompanying unaudited condensed consolidated financial statements
also include the financial statements of L-3 Communications Corporation ("L-3
Communications"), which is a wholly owned subsidiary of Holdings. Holdings owns
all of the authorized, issued and outstanding common stock, par value $0.01 per
share, of L-3 Communications. Holdings has no other assets or liabilities and
conducts no operations other than through its subsidiary, L-3 Communications.
The accompanying unaudited condensed consolidated 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 Regulation S-X of the Securities and Exchange Commission ("SEC");
accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for a complete set of financial
statements. 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 these interim periods are not necessarily indicative of results for the
full year. For further information, these interim
5
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
financial statements should be read in conjunction with the Consolidated
Financial Statements of Holdings and L-3 Communications for the fiscal year
ended December 31, 1998, included in the Annual Report on Form 10-K for fiscal
year ended December 31, 1998 of Holdings and L-3 Communications.
2. COMMON STOCK OFFERING
On February 4, 1999, Holdings sold 5.0 million shares of common stock in a
public offering for $42.00 per share (the "February 1999 Common Stock
Offering") representing 15.4% of Holdings outstanding common stock immediately
after the February 1999 Common Stock Offering. The net proceeds to Holdings
from the February 1999 Common Stock Offering amounted to $201.5 million and
were contributed to L-3 Communications. In addition, 6.5 million shares were
sold in the February 1999 Common Stock Offering by the Lehman Brothers Capital
Partners III, LLP and its affiliates ("the Lehman Partnership") and Lockheed
Martin Corporation ("Lockheed Martin"), after which the Lehman Partnership
owned 24.7% and Lockheed Martin owned 7.1% of the outstanding shares of
Holding's common stock.
3. ACQUISITIONS
On August 13, 1998, the Company purchased all of the outstanding stock of
SPD Technologies, Inc. ("SPD") for $238,241 of cash including expenses, net of
cash acquired. On February 5, 1998, March 4, 1998 and March 30, 1998 the
Company purchased the assets of the Satellite Transmission Systems division
("STS") of California Microwave, Inc. and ILEX Systems ("ILEX"), Ocean Systems
business ("Ocean Systems") of AlliedSignal, Inc. for cash of $26,517, $51,905
and $68,812, respectively. SPD, STS, ILEX and Ocean Systems, collectively
comprise the "1998 Acquisitions". All of the acquisitions have been accounted
for as purchase business combinations and are included in the Company's results
of operations from their effective dates.
On January 8, 1999 the Company acquired all of the outstanding common
stock of Microdyne Corporation ("Microdyne") for $94,228 in cash, including
expenses and the repayment of assumed debt, net of cash acquired. On April 16,
1999, the Company acquired all of the outstanding common stock of Aydin
Corporation ("Aydin") for $59,333 in cash, including expenses, net of cash
acquired. On June 30, 1999, the Company acquired all the outstanding common
stock of Interstate Electronics Corporation ("IEC") for $44,792 in cash
including expenses, subject to adjustment based on closing date net worth, as
defined. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise
the "1999 Acquisitions".
Had the 1999 Acquisitions and the related financing transactions, occurred
on January 1, 1999, the unaudited pro forma sales, operating income, net income
and diluted earnings per common share for the six months ended June 30, 1999
would have been $641,900, $60,800, $21,300 and $0.63, respectively. Had the 1998
Acquisitions and the 1999 Acquisitions and the related financing transactions
occurred on January 1, 1998, the unaudited pro forma sales, operating income,
net loss and diluted loss per share for the six months ended June 30, 1998 would
have been $646,700, $17,100, $(14,300) and $(0.44), respectively. The pro forma
results are based on various assumptions and are not necessarily indicative of
the result of operations that would have occurred had the 1998 Acquisitions and
the 1999 Acquisitions and the related financing transactions occurred on
January 1, 1998.
The assets and liabilities recorded in connection with the acquisitions of
Microdyne, Aydin and IEC were $113,383 and $95,268, $99,039 and $74,395, and
$52,875 and $43,998, respectively. The assets and liabilities recorded in
connection with the acquisitions of Microdyne, Aydin, and IEC are based upon
preliminary estimates of fair values for the valuation of contracts in process,
inventories and deferred taxes. Actual adjustments will be based on the final
purchase prices and the final appraisals and other analyses of fair values
which are in process. Management does not expect that differences between the
preliminary and final purchase price allocations will have a material impact on
the Company's financial position or results of operations.
6
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. CONTRACTS IN PROCESS
The components of contracts in process are presented below.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------- ------------------
<S> <C> <C>
Billed contract receivables ........................ $ 117,986 $ 100,234
Unbilled contract receivables ...................... 113,120 69,361
Other billed receivables, principally commercial and
affiliates ....................................... 101,718 81,372
Inventoried costs .................................. 182,876 130,350
--------- ---------
515,700 381,317
Less, unliquidated progress payments . ............. (50,579) (30,268)
--------- ---------
Contracts in process ............................. $ 465,121 $ 351,049
========= =========
</TABLE>
5. DEBT
Long term debts consist of:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------- ------------------
<S> <C> <C>
10 3/8% Senior Subordinated Notes due 2007 ......... $225,000 $225,000
8 1/2% Senior Subordinated Notes due 2008 .......... 180,000 180,000
8% Senior Subordinated Notes due 2008 .............. 200,000 200,000
-------- --------
Total debt ....................................... 605,000 605,000
Less current portion ............................... -- --
-------- --------
Long-term debt ................................... $605,000 $605,000
======== ========
</TABLE>
Available borrowings under the Revolving Credit Facility and the Revolving
364 Day Credit Facility at June 30, 1999 were $120,120 and $200,000,
respectively, after reductions for outstanding letters of credit of $79,880,
and $0, respectively. In July 1999, the Revolving 364-Day Credit Facility was
renewed for an additional 364 days and will expire on August 10, 2000, at which
time the Company may exercise an option to convert any or all of the borrowings
outstanding thereunder into term loans which fully amortize over a two year
period beginning March 31, 2001.
6. L-3 COMMUNICATIONS SHAREHOLDERS' EQUITY
Holdings has no other assets or liabilities and conducts all of its
operations through its wholly owned subsidiary, L-3 Communications. The table
below presents the components of the shareholders' equity of L-3
Communications.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------- ------------------
<S> <C> <C>
Common stock, $0.1 par value; 100 shares
authorized and outstanding ................. $ -- $ --
Additional paid in capital ................... 471,267 264,769
Retained earnings ............................ 63,141 44,856
Accumulated other comprehensive loss ......... (13,506) (9,651)
--------- --------
Total shareholders' equity ................. $ 520,902 $299,974
========= ========
</TABLE>
7
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The increase in additional paid-in capital at June 30, 1999 reflects the
contribution to L-3 Communications from Holdings of the $201,500 of net
proceeds from the February 1999 Common Stock Offering.
7. STOCK OPTIONS
On January 19, 1999, Holdings granted to certain of its employees options
to purchase 414,150 shares of its common stock at an exercise price of $40.50.
8. COMPREHENSIVE INCOME
For the six months ended June 30, 1999, comprehensive income was $14,430
and was comprised of net income of $18,285 and other comprehensive losses of
$1,783 and $2,072, respectively, relating to foreign currency translations and
unrealized losses on investments. For the six months ended June 30, 1998, net
comprehensive income was $8,504 and was comprised of net income of $8,223 and
other comprehensive income of $281 relating to foreign currency translations.
9. EARNINGS PER SHARE
Details of the computation of earnings per share are presented in the
table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE THREE MONTHS ENDED JUNE
30, 30,
------------------------ ------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Basic:
Net income .................................. $ 18,285 $ 8,223 $ 11,085 $ 5,610
Weighted average common share outstanding ... 31,495 21,942 32,488 23,718
--------- -------- --------- --------
Basic earnings per share .................... $ 0.58 $ 0.37 $ 0.34 $ 0.24
========= ======== ========= ========
Diluted:
Net income .................................. $ 18,285 $ 8,223 $ 11,085 $ 5,610
--------- -------- --------- --------
Common and potential common shares:
Weighted average common share outstanding 31,495 21,942 32,488 23,718
Assumed exercise of stock options ......... 3,233 2,737 3,266 2,655
Assumed purchase of common shares for
treasury ................................. (1,803) (1,718) (1,806) (1,520)
--------- -------- --------- --------
Common and potential common shares .......... 32,925 22,961 33,948 24,853
========= ======== ========= ========
Diluted earnings per share .................. $ 0.56 $ 0.36 $ 0.33 $ 0.23
========= ======== ========= ========
</TABLE>
10. CONTINGENCIES
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, from time to
time, 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.
8
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Management continually assesses 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 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 results 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 has been periodically subject to litigation, claims or
assessments and various contingent liabilities 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 is of the
opinion that the probability is remote 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 will have a material adverse effect on the financial position or
results of operations of the Company.
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest paid ................................. $22,322 $18,626
Income taxes paid ............................. 3,871 125
Noncash transactions:
Contribution in common stock to savings plan 3,767 --
</TABLE>
12. SEGMENT INFORMATION
The Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products. Secure Communication Systems consists of
secure, high data rate communications in support of military and other U.S.
government reconnaissance and surveillance applications. Specialized
Communication Products consists of the microwave components, avionics and ocean
products, and telemetry, instrumentation and space products operations of the
Company. See Note 1.
The Company evaluates the performance of its operating divisions and
reportable segments based on sales and operating income. The table below
presents sales and operating income by reportable segment for the six-month
periods ended June 30, 1999 and 1998 and assets by reportable segment as of
June 30, 1999 and December 31, 1998.
9
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SECURE SPECIALIZED ELIMINATION OF
COMMUNICATION COMMUNICATION INTERSEGMENT CONSOLIDATED
SYSTEMS PRODUCTS CORPORATE SALES TOTAL
--------------- --------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1999:
Sales ........................ $243,447 $ 348,623 $ (2,076) $ 589,994
Operating income ............. 21,411 35,905 57,316
Six Months Ended June 30, 1998:
Sales ........................ 223,218 197,013 (3,243) 416,988
Operating income ............. 18,702 14,849 33,551
Assets as of:
June 30, 1999 ................ 411,953 1,010,841 $131,455 1,554,249
December 31, 1998 ............ 368,891 797,469 119,036 1,285,396
</TABLE>
13. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
Reporting on the Costs of Startup Activities ("SOP 98-5"), which provides
guidance on the financial reporting of startup and organization costs,
including precontract costs. It requires costs of startup activities and
organization costs to be expensed as incurred. The impact of adopting SOP 98-5
was not material to the Company's results of operations or financial position.
In September 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), which 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 and is effective for all
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect SFAS 133 to have a material impact on its financial position.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
L-3 Communications Holdings, Inc. and its subsidiaries ("Holdings, "L-3"
or "the Company") is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. Holdings has no other
assets or liabilities and conducts no other operations other than through its
wholly owned subsidiary, L-3 Communications Corporation ("L-3 Communications").
The Company's customers include the DoD, certain U.S. government intelligence
agencies, major aerospace and defense contractors, foreign governments and
commercial customers. The Company has two reportable segments, Secure
Communication Systems and Specialized Communication Products.
The Secure Communication Systems segment provides secure, high data rate
communications systems for military and other U.S. government reconnaissance
and surveillance applications. These operations are principally performed under
cost plus, sole source contracts supporting long term programs for the U.S.
armed forces and classified customers. The Secure Communication Systems segment
also supplies communication software support services to military and related
government intelligence markets. The Specialized Communication Products segment
includes three product categories: microwave components, avionics and ocean
products, and telemetry, instrumentation and space products.
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 U.S. government. Multiyear 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 relevant foreign government.
The defense industry has undergone significant changes precipitated by
ongoing U.S. 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 the
value added capability of 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.
ACQUISITION HISTORY
1998 Acquisitions. On August 13, 1998, the Company purchased all of the
outstanding stock of SPD Technologies, Inc. ("SPD"). On March 30, 1998, March
4, 1998 and February 5, 1998, respectively, the Company acquired the assets of
the Ocean Systems business ("Ocean Systems") of AlliedSignal, Inc., ILEX
Systems ("ILEX") and Satellite Transmission Systems ("STS") of California
Microwave, Inc. Collectively, the acquisitions of SPD, Ocean Systems, ILEX and
STS comprise the "1998 Acquisitions". Additionally, during 1998, the Company
purchased several other operations and product lines, which individually and in
the aggregate were not material to the results of operations or financial
position of the Company.
1999 Acquisitions. On December 3, 1998 the Company signed an agreement to
acquire all of the outstanding common stock of Microdyne Corporation
("Microdyne") through a tender offer. The tender offer was completed in January
1999. The cost of the Microdyne acquisition was $94.2 million, paid in cash,
including the repayment of assumed debt and expenses, net of cash acquired. The
Company financed
11
<PAGE>
the Microdyne acquisition using cash on hand and borrowings under the Company's
Senior Credit Facilities, which were subsequently repaid during the first
quarter of 1999. On March 1, 1999, the Company signed an agreement to acquire
all of the outstanding common stock of Aydin Corporation ("Aydin") through a
tender offer. The Company completed the tender offer and the acquisition in
April 1999. The cost of this acquisition was $59.3 million, paid in cash,
including expenses, net of cash acquired. The Aydin acquisition was financed
using cash on hand. On April 19, 1999, the Company signed a definitive
agreement to acquire all of the outstanding common stock of Interstate
Electronics Corporation ("IEC"). The Company completed this acquisition in June
1999. The cost of this acquisition was $44.8 million, paid in cash, including
expenses, and is subject to adjustment based on closing date net worth, as
defined. The IEC acquisition was financed using cash on hand. Collectively, the
acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions."
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of June 30, 1999, which reflect the
results of operations of the Company's acquisitions from their respective
effective dates. Accordingly, the results of operations for the six months
ended June 30, 1999 and 1998 are significantly affected by the timing of those
acquisitions. The tables below provide selected statement of operations data
for the Company for the three-month period ended June 30, 1999 ("the 1999
Second Quarter") and the three-month period ended June 30, 1998 ("the 1998
Second Quarter") and for the six-month period ended June 30, 1999 ("the 1999
First Half") and six-month period ended June 30, 1998 ("the 1998 First Half").
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE
30,
-------------------------
1999 1998
----------- -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems .................... $ 125.6 $ 119.1
Specialized Communication Products .............. 188.8 111.3
-------- --------
Total ......................................... $ 314.4 $ 230.4
======== ========
Operating income:
Secure Communication Systems .................... $ 10.5 $ 10.4
Specialized Communication Products .............. 20.6 9.1
-------- --------
Total ......................................... $ 31.1 $ 19.5
======== ========
Depreciation and amortization expenses included in
operating income:
Secure Communication Systems .................... $ 4.8 $ 3.9
Specialized Communication Products .............. 8.9 4.7
-------- --------
Total ......................................... $ 13.7 $ 8.6
======== ========
EBITDA(2)
Secure Communication Systems .................... $ 15.3 $ 14.3
Specialized Communication Products .............. 29.5 13.8
-------- --------
Total ......................................... $ 44.8 $ 28.1
======== ========
</TABLE>
- ----------
(1) Sales are after intersegment eliminations. See Note 12 to the Unaudited
Condensed Consolidated Financial Statements.
(2) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs).
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
and may not be comparable to similar measures presented by other
entities. 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 $84.0 million to $314.4 million in the 1999 Second Quarter
compared with $230.4 million in the 1998 Second Quarter, and was comprised of
growth in sales of $6.5 million for the Secure Communication systems segment
and of $77.5 million for the Specialized Communication Products segment.
Operating income increased $11.6 million to $31.1 million, and operating income
as a percentage of sales ("operating margin") improved to 9.9% from 8.5% for
the reasons described below under the reportable segments discussion.
Depreciation and amortization expenses increased $5.1 million to $13.7 million,
reflecting increased goodwill amortization associated with acquisitions and
additional depreciation related to capital expenditures. EBITDA increased $16.7
million to $44.8 million. EBITDA as a percentage of sales ("EBITDA margin")
improved to 14.3% from 12.2%. Basic earnings per common share ("EPS") and
diluted EPS grew 41.7% to $0.34 and 43.5% to $0.33, respectively. Basic
weighted-average common shares outstanding and diluted weighted-average common
shares outstanding increased 37.0% and 36.6%, respectively, principally because
of the shares of common stock issued, and the timing thereof in connection with
the Company's Initial Public Offering in May 1998 (the "IPO") and the public
offering in February 1999 (the "February 1999 Common Stock Offering").
Sales of Secure Communication Systems segment increased $6.5 million or
5.5% to $125.6 million in 1999 Second Quarter compared with the 1998 Second
Quarter. Operating income increased $0.1 million to $10.5 million. Operating
margin declined to 8.4% from 8.7%. The increase in sales was primarily
attributable to the Microdyne acquisition and increased sales on the U-2 Support
Program and secure telephone equipment (STE), partially offset by lower sales of
communication subsystems for the International Space Station (ISS) consistent
with the scheduled phasedown of this program and lower sales of information
security systems. The decline in operating margin were principally attributable
to lower margins from the Microdyne acquired business and costs incurred for
network security systems. EBITDA increased $1.0 million to $15.3 million and
EBITDA margin improved to 12.2% from 12.0%. The increases in EBITDA and EBITDA
margin were primarily attributable to the items affecting operating income.
Sales of the Specialized Communication Products segment increased $77.5
million or 69.6% to $188.8 million in 1999 Second Quarter compared with the
1998 Second Quarter. Operating income increased $11.5 million to $20.6 million
and operating margin improved to 10.9% from 8.2%. The increase in sales was
principally attributable to the SPD and Aydin acquisitions and volume increases
on commercial aviation recorders partially offset by lower sales volume on
microwave components and decreased shipments of displays and antenna products.
The increase in operating margin was principally attributable to improved
margins on aviation recorders attributable to volume increases and cost
reductions and higher margins from the SPD acquired business which was not
included in the results of operations for the 1998 Second Quarter, partially
offset by lower margins on microwave components, antenna products attributable
to declines in sales. EBITDA increased $15.7 million to $29.5 million and
EBITDA margin improved to 15.6% from 12.4%. The increases in EBITDA and EBITDA
margin were primarily attributable to the items affecting the trends in
operating income.
Interest expense, net of interest and other income, increased $2.8 million
to $13.1 million in 1999 Second Quarter and was attributable to higher average
outstanding debt during 1999 Second Quarter compared with the 1998 Second
Quarter principally because of the $380.0 million of senior subordinated notes
sold by the Company in May 1998 and December 1998, partially offset by other
income of $0.5 million from a gain recognized on the sale of a business in June
1999. The income tax provision for the 1999 Second Quarter reflects the
Company's estimated effective income tax rate for 1999 of 38.5%, compared with
the effective tax rate of 39.0% for 1998 Second Quarter. The decrease in the
effective tax rate was principally attributable to additional research and
experimentation credits partially offset by an increase in amortization expense
for costs in excess of net assets acquired for certain acquisitions which were
not deductible for income tax purposes.
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
----------- -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 243.0 $ 223.2
Specialized Communication Products ................................ 347.0 193.8
-------- --------
Total ........................................................... $ 590.0 $ 417.0
======== ========
Operating income:
Secure Communication Systems ...................................... $ 21.4 $ 18.7
Specialized Communication Products ................................ 35.9 14.9
-------- --------
Total ........................................................... $ 57.3 $ 33.6
======== ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 9.5 $ 8.1
Specialized Communication Products ................................ 16.9 8.0
-------- --------
Total ........................................................... $ 26.4 $ 16.1
======== ========
EBITDA
Secure Communication Systems ...................................... $ 30.9 $ 26.8
Specialized Communication Products ................................ 52.8 22.9
-------- --------
Total ........................................................... $ 83.7 $ 49.7
======== ========
</TABLE>
- ----------
(1) Sales are after intersegment eliminations. See Note 12 to the Unaudited
Condensed Consolidated Financial Statements.
Sales increased $173.0 million to $590.0 million in 1999 First Half
compared with $417.0 million in the 1998 First Half comprised of growth in
sales of $19.8 million for the Secure Communication Systems segment and of
$153.2 million for the Specialized Communication Products segment. Operating
income increased $23.7 million to $57.3 million, and operating income as a
percentage of sales ("operating margin") improved to 9.7% from 8.1% for the
reasons described below under the reportable segments discussion. Depreciation
and amortization expenses increased $10.3 million to $26.4 million, reflecting
increased goodwill amortization associated with acquisitions and additional
depreciation related to capital expenditures. EBITDA increased $34.0 million to
$83.7 million. EBITDA as a percentage of sales ("EBITDA margin") improved to
14.2% from 11.9%. Basic earnings per common share ("EPS") and diluted EPS grew
56.8% to $0.58 and 55.6% to $0.56, respectively. Basic weighted-average common
shares outstanding and diluted weighted-average common shares outstanding
increased 43.5% and 43.4%, respectively, principally because of the shares of
common stock issued, and the timing thereof, in connection with the IPO in May
1998 and the February 1999 Common Stock Offering.
Sales of Secure Communication Systems segment increased $19.8 million or
0.9% to $243.0 million in 1999 First Half compared with the 1998 First Half.
Operating income increased $2.7 million to $21.4 million. Operating margin
increased to 8.8% from 8.4%. The increase in sales was primarily attributable to
the Microdyne acquisition and increased sales on the U-2 Support Program and
STE, partially offset by lower sales of communication subsystems for ISS
consistent with the scheduled phasedown of this program and lower sales of
information security systems. The increase in operating margin was principally
attributable to improved margins on military communication systems and high data
rate communication systems arising from cost reductions, partially offset by
costs incurred for network security systems. EBITDA increased $4.1 million to
$30.9 million and EBITDA margin improved to 12.7% from 12.0%. The increases in
EBITDA and EBITDA margin were primarily attributable to the items affecting the
trends in operating income.
14
<PAGE>
Sales of the Specialized Communication Products segment increased $153.2
million or 79.1% to $347.0 million in 1999 First Half compared with the 1998
First Half. Operating income increased $21.0 million to $35.9 million and
operating margin improved to 10.3% from 7.7%. The increase in sales was
principally attributable to the SPD, Aydin and Ocean acquisitions and volume
increases on commercial aviation recorders and satellite control products
partially offset by lower sales volume on microwave components and decreased
shipments of displays and antenna products. The increase in operating margin
was principally attributable to improved margins on aviation recorders
attributable to volume increases and cost reductions and higher margins from
the SPD acquired business which was not included in the results of operations
for the 1998 First Half, partially offset by lower margins on microwave
components, and antenna products attributable to declines in sales. EBITDA
increased $29.9 million to $52.8 million and EBITDA margin improved to 15.2%
from 11.8%. The increases in EBITDA and EBITDA margin were primarily
attributable to the items affecting the trends in operating income and
operating margin.
Interest expense, net of interest and other income, increased $7.5 million
to $27.6 million in 1999 First Half principally because of higher average
outstanding debt during 1999 First Half compared with the 1998 First Half. The
income tax provision for the 1999 First Half reflects the Company's estimated
effective income tax rate for 1999 of 38.5%, compared with the effective tax
rate of 39.0% for 1998 First Half. See discussion under "Three Months Ended
June 30, 1999 Compared to Three Months Ended June 30, 1998" above.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $114.1 million in the 1999 First Half, of
which $97.6 million of the balance at June 30, 1999 was related to businesses
acquired during the 1999 First Half, and $16.5 million was principally from (i)
increases in unbilled receivables arising from an increase in programs entering
the production phase wherein unbilled costs and profits generally exceed
progress payments received from the customers until contract shipments are
completed and (ii) increases in inventory because of production on certain
programs and products in advance of sales expected to occur in the second half
of 1999. The increase in intangibles was related to the acquired businesses.
The decrease in accounts payable was principally related to the timings of
deliveries from and payments to vendors.
Working capital, adjusted to exclude cash, and the current portion of long
term debt, increased $61.2 million to $192.9 million at June 30, 1999 from
$131.7 million at December 31, 1998. The working capital excluding cash at June
30, 1999 attributable to the acquired businesses was $57.5 million.
STATEMENT OF CASH FLOWS
The following table provides cash flow statement data for the Company for
1999 First Half and 1998 First Half:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
----------- -----------
(in millions)
<S> <C> <C>
Net cash from operating activities. ............. $ 25.9 $ 35.7
Net cash (used in) investing activities ......... (205.7) (156.5)
Net cash from financing activities .............. 200.4 143.8
</TABLE>
OPERATING ACTIVITIES
During the 1999 First Half, L-3 generated $25.9 million of cash from its
operating activities, a decrease of $9.8 million compared with the 1998 First
Half, principally as a result of increased working capital requirements. See
discussion under "Balance Sheet" above. The Company expects its rate of
investment in working capital to decline during the remainder of 1999.
15
<PAGE>
INVESTING ACTIVITIES
Since L-3's formation in April 1997, the Company has actively pursued its
acquisition strategy. In the 1999 First Half, the Company invested $205.0
million in acquisitions for Microdyne, Aydin and IEC and purchase price
adjustments related to closing date net assets for certain acquisitions
completed in 1998. The Company also received net proceeds of $4.8 million for
the sale of a business in June 1998.
The Company makes capital expenditures for improvement of manufacturing
facilities and equipment. The increase in capital expenditures for the 1999
First Half compared with the 1998 First Half was principally attributable to
the capital expenditures of business acquired after June 30, 1998. The Company
expects that its capital expenditures for 1999 will be approximately $37.0
million.
FINANCING ACTIVITIES
On February 4, 1999, Holdings sold 5.0 million shares of common stock in
an offering for $42.00 per share in the February 1999 Common Stock Offering
representing 15.4% of Holdings' common stock immediately after the offering. In
addition, 6.5 million shares were sold by the Lehman Brothers Capital Partners
III, LLP and its affiliates ("the Lehman Partnership") and Lockheed Martin
Corporation ("Lockheed Martin") in the February 1999 Common Stock Offering,
immediatley after which the Lehman Partnership owned 24.7% and Lockheed Martin
owned 7.1% of the outstanding shares of Holding's common stock. The net
proceeds to Holdings from the February 1999 Common Stock Offering amounted to
$201.5 million and were contributed to the Company. The net proceeds were
partially used to finance the acquisitions of Microdyne, Aydin and IEC.
On March 3, 1999, the Senior Credit Facilities were amended to increase
the Company's revolving credit facilities thereunder by $15.0 million to $400.0
million. At June 30, 1999, available borrowings under the revolving credit
facilities were $320.1 million after reductions for outstanding letters of
credit of $79.9 million. The Company's 364 Day Revolving Credit Facility for
$200.0 million was renewed for one additional 364-day period in July 1999 and
will expire on August 10, 2000 at which time the Company may request that the
exercise an option to convert any or all of the borrowings outstanding
thereunder into term loans which fully amortize over a two year period
beginning March 31, 2001.
The Senior Credit Facilities and the Senior Subordinated Notes contain
financial covenants which remain in effect so long as any amount is owed or any
commitment to lend exists thereunder by L-3 Communications. As of June 30,
1999, L-3 Communications had been in compliance with these covenants at all
times. The borrowings under the Senior Credit Facilities are guaranteed by
Holdings and by substantially all of the Company's subsidiaries. The payments
of principal and premium, if any, and interest on the Senior Subordinated Notes
are unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally, by substantially all of the Company's subsidiaries, all
of which are wholly owned.
Based upon the current level of operations, management believes that the
Company's cash from operating activities, together with available borrowings
under the Senior Credit Facilities, will be adequate to meet its anticipated
requirements for working capital, capital expenditures, research and
development expenditures, program and other discretionary investments, and
interest 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, or make necessary capital expenditures and program
and discretionary investments.
16
<PAGE>
CONTINGENCIES
See Note 10 to the Unaudited Condensed Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
Reporting on the Costs of Start Up Activities ("SOP 98-5"), which provides
guidance on the financial reporting of startup and organization costs,
including precontract costs. It requires costs of startup activities and
organization costs to be expensed as incurred. The impact of adopting SOP 98-5
was not material to the Company's results of operations or financial position.
In September 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 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 does not expect that the impact of
SFAS 133, which is effective for all quarters of fiscal years beginning after
June 15, 2000, will be material to the Company's financial position.
YEAR 2000
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Because the Company's business
units operate autonomously, each business unit has undertaken an effort to
identify and mitigate Year 2000 issues related to their information systems,
products, facilities, suppliers and customers. Therefore, the Company's Year
2000 effort is a composite of its business units' Year 2000 efforts,
coordinated through a Company wide program instituted to oversee, guide and
track business units' Year 2000 efforts and to facilitate Company-wide
communications regarding Year 2000 methods.
Each business unit has appointed a Year 2000 project manager who oversees
a team responsible for performing its Year 2000 efforts in four phases: (i)
define, identify and inventory possible sources of Year 2000 issues, including
internal systems and products and services sold to customers; (ii) analyze and
determine the nature and extent of Year 2000 issues and develop project plans
to address those issues; (iii) implement and execute project plans to remediate
or replace non-compliant items, as appropriate, based upon assessed risk and
priority; and (iv) commence and complete testing, continue monitoring readiness
and prepare necessary contingency plans. The progress of this program is
monitored at each business unit with oversight by management. This oversight
includes periodic reviews as well as visits to each business unit to monitor
progress with the plans.
The first three phases of the program have been completed for a majority
of critical systems within the Company. A limited number of systems are
currently in the final phase with completions targeted for the third quarter of
1999.
The business units of the Company's recently completed acquisitions
including Microdyne, Aydin and IEC have been integrated into the Company's Year
2000 efforts and these acquired business units are currently performing their
respective Year 2000 efforts at various stages within the four phases
enumerated above. The Company plans to have substantially all significant
information systems, products and facilities for these acquired businesses in
the final phase of the program by the end of the third quarter of 1999.
The total estimated costs associated with the Company's Year 2000 efforts
have been updated to reflect recently acquired business units and estimated
costs for calendar year 2000. The revised estimated cost are $19.8 million and
include $7.0 million of capitalizable costs, with the remaining costs to be
expensed as incurred. The Company has incurred approximately $15.0 million of
such costs to date. Substantially all of the remaining estimated costs are
expected to be incurred during the remainder of 1999.
17
<PAGE>
The Company believes that there is low risk with respect to its operations
that any internal critical system will not be Year 2000 compliant by the end of
1999. The Company's business operations are also dependent on the Year 2000
readiness of its customers and infrastructure suppliers in areas such as
utilities, communications, transportation and other services. In a "reasonably
likely worst case" scenario, there could be instances of failure that could
cause disruptions in business transaction processes of the Company. The
likelihood and effects of failures in infrastructure systems and in the
customer and supply chains cannot be estimated, but such a failure could
potentially result in a material adverse impact on results of operations,
liquidity or financial position of the Company. The Company continues to
attempt to assess the Year 2000 compliance and readiness of its material
third-party suppliers and customers. Such attempts include written inquiries as
to their Year 2000 certification of compliance. As indicated above, contingency
plans for suppliers, customers, critical systems and utilities impacted by Year
2000 issues have been developed except for these pertaining to recently
acquired businesses for which the anticipated completion is the fourth quarter
of 1999. It is anticipated that the contingency plans will be tested throughout
the remainder of 1999. These estimates and projections could change as the year
2000 efforts progress.
FORWARD LOOKING STATEMENTS
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance, and financial condition, including in
particular, the likelihood of our success in developing and expanding our
business and the realization of sales from backlog, include forward looking
statements within the meaning of section 27A of the Securities Act and Section
21E of the Exchange Act. Statements that are predictive in nature, that depend
upon or refer to future events or conditions or that include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates" and
similar expressions are forward looking statements. Although we believe that
these statements are based upon reasonable assumptions, including projections
of orders, sales, operating margins, earnings, cash flow, research and
development costs, working capital, capital expenditures and other projections,
they are subject to several risks and uncertainties, and therefore, we can give
no assurance that these statements will be achieved. Such statements will also
be influenced by factors such as our dependence on the defense industry and the
business risks peculiar to that industry including changing priorities or
reductions in the U.S. government defense budget; our reliance on contracts
with a limited number of agencies of, or contractors to, the U.S. government
and the possibility of termination of government contracts by unilateral
government action or for failure to perform; our extensive use of fixed price
contracts as compared to cost plus contracts; our ability to identify future
acquisition candidates or to integrate acquired operations; the rapid change of
technology in the communication equipment industry; the high level of
competition in the communications equipment industry; our introduction of new
products into commercial markets or our investments in commercial products; the
significant amount of our debt and the restrictions contained in our debt
agreements; Year 2000 issues; collective bargaining labor disputes; pension,
environmental or legal matters or proceedings and various other market,
competition and industry factors, many of which are beyond our control.
Investors are cautioned that any such statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward looking statements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Part II, Item 7, "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources--Market
Risks", of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 for a discussion of its exposure to market risks. There was
no significant change in the Company's market risks during the six months ended
June 30, 1999.
18
<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 1999, at the Company's annual meeting of Stockholders, the
following proposals were acted on:
(1) Four nominees for the Board of Directors were elected to three year terms
expiring in 2002, four nominees were elected to two year terms expiring
in 2001 and three nominees were elected to one year terms expiring in
2000. The votes were as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
------------ ---------
<S> <C> <C>
David J. Brand ................. 27,256,683 54,886
Thomas A. Corcoran ............. 27,013,498 298,071
Alberto M. Finali .............. 27,256,733 54,836
Eliot M. Fried ................. 27,256,633 54,936
Frank C. Lanza ................. 27,256,853 54,716
Robert V. LaPenta .............. 27,257,198 54,371
Frank H. Menaker, Jr. .......... 27,257,298 54,271
Robert M. Millard .............. 27,256,798 54,771
John E. Montague ............... 27,231,798 79,771
John M. Shalikashvili .......... 27,256,778 54,791
Alan H. Washkowitz ............. 27,256,798 54,771
</TABLE>
(2) The selection of PricewaterhouseCoopers LLP to serve as independent
auditors for 1999 was ratified. The votes were as follows:
<TABLE>
<S> <C>
For ...................... 27,256,555
Against .................. 16,450
Abstentions .............. 29,564
</TABLE>
(3) The 1999 Long Term Performance Plan was approved. The votes were as
follows:
<TABLE>
<S> <C>
For ...................... 21,447,451
Against .................. 5,683,277
Abstentions .............. 174,141
Broker non-votes ......... 6,700
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per
Share and Diluted Earnings Per Share
27 Financial Data Schedule
- ----------
* The information required on this exhibit is presented on Note 9 to the
Unaudited Condensed Consolidated Financial Statements as of June 30, 1999
in accordance with the provisions of SFAS No. 128, Earnings Per Share.
(b) Reports on Form 8-K
Report filed on May 3, 1999 regarding the acquisition of Aydin
Corporation.
Report filed on May 12, 1999 regarding the acquisition of Aydin
Corporation.
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
L-3 Communications Holdings, Inc. and
L-3 Communications Corporation
-----------------------------------
Registrants
Date: August 16, 1999
/s/ Robert V. LaPenta
-----------------------------------
Name: Robert V. LaPenta
Title: President and Chief Financial Officer
(Principal Financial Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001039101
<NAME> L-3 COMMUNICATIONS CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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0
0
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