<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Date of report (Date of earliest event reported) April 15, 1999
---------------------
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
(Exact name of registrants as specified in their Charters)
DELAWARE
(State or Other Jurisdiction of Incorporation)
<TABLE>
<CAPTION>
<S> <C>
001-14141 13-1917434
333-46983 13-3937436
(Commission File Number) (IRS Employer Identification No.)
600 THIRD AVENUE, NEW YORK, NEW YORK 10016
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(212) 697-1111
(Telephone Number)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
a. Financial Statements
Aydin Corporation Consolidated Financial Statements as of December 31, 1998
and for the year ended December 31, 1998 .................................... A-1 to A-15
Consolidated Statement of Operations for the year ended December 31, 1998 ...
Consolidated Balance Sheet as of December 31, 1998 ..........................
Consolidated Statement of Cash Flows for the year ended December 31, 1998 ...
Notes to the Consolidated Financial Statements ..............................
Report of Grant Thornton LLP ................................................
b. Pro Forma Financial Information
L-3 Communications Holdings, Inc. and L-3 Communications Corporation
Unaudited Pro Forma Condensed Consolidated Financial Statements as of
December 31, 1998 and for the year ended December 31, 1998 .................. B-1 to B-9
c. Exhibits
23. Consent of Grant Thornton LLP ............................................
</TABLE>
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC
and
L-3 COMMUNICATIONS CORPORATION
---------------------------------------
Registrant
Date: May 12, 1999 By: /s/ Robert V. LaPenta
------------------------------------
President and Chief Financial
Officer
2
<PAGE>
a. Financial Statements
AYDIN CORPORATION
Consolidated Financial Statements as of and for the year ended
December 31, 1998
A-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Aydin Corporation
We have audited the consolidated balance sheet of Aydin Corporation and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Aydin
Corporation and subsidiaries as of December 31, 1998 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
February 19, 1999
Except for Note O as to
which the date is March 1, 1999
A-2
<PAGE>
AYDIN CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Net sales ................................................... $ 77,888,000
Costs and expenses
Cost of sales
Contract arbitration and related ......................... 19,814,000
Other .................................................... 59,724,000
Selling, general and administrative ........................ 21,496,000
Research and development ................................... 1,502,000
Interest income, net ....................................... (701,000)
Restructuring costs ........................................ 1,548,000
Environmental remediation costs ............................ 511,000
Gain on sale of divisions .................................. (5,608,000)
-------------
Total costs and expenses ................................... 98,286,000
Loss from continuing operations before income taxes ......... (20,398,000)
Income tax recovery ......................................... (750,000)
-------------
Loss from continuing operations ............................. (19,648,000)
Discontinued operations
Loss from operations of discontinued division .............. (4,069,000)
Loss on disposal of discontinued division .................. (2,590,000)
-------------
Total loss from discontinued operation ..................... (6,659,000)
-------------
Net loss .................................................... $ (26,307,000)
=============
Loss per common and common equivalent share --
Continuing operations --
Basic .................................................... $ (3.77)
=============
Fully diluted ............................................ $ (3.77)
=============
Discontinued operation --
Basic .................................................... $ (1.28)
=============
Fully diluted ............................................ $ (1.28)
=============
Net loss
Basic .................................................... $ (5.05)
=============
Fully diluted ............................................ $ (5.05)
=============
</TABLE>
See notes to consolidated financial statements
A-3
<PAGE>
AYDIN CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents ................................................ $ 5,861,000
Restricted cash and investment securities ................................ 3,589,000
Accounts receivable, net of allowances for doubtful accounts of $681,000 . 21,738,000
Unbilled revenue ......................................................... 26,128,000
Inventories, net of obsolesence allowances of $176,000 ................... 10,361,000
Prepaid expenses and other ............................................... 1,378,000
-----------
Total current assets ................................................... 69,055,000
Property, Plant and Equipment, at cost, net of accumulated depreciation and
amortization of $20,903,000 .............................................. 12,587,000
Other assets .............................................................. 483,000
-----------
Total assets ........................................................... $82,125,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term bank debt ..................................................... $ 133,000
Accounts payable ......................................................... 4,859,000
Accrued liabilities:
Compensation ........................................................... 3,370,000
Other .................................................................. 5,448,000
Contract billings in excess of recognized revenues ........................ 2,279,000
Accrued and deferred income taxes ......................................... 382,000
-----------
Total current liabilities ............................................... 16,471,000
-----------
Deferred Income Taxes ..................................................... 905,000
Other Liabilities ......................................................... 1,181,000
Stockholders' Equity:
Common stock, par value $1 -- authorized, 7,500,000 shares; issued and
outstanding, 1998 -- 5,220,900 shares .................................. 5,221,000
Additional paid-in capital ............................................... 3,243,000
Retained earnings ........................................................ 55,104,000
-----------
Total Stockholders' equity .............................................. 63,568,000
-----------
Total liabilities and stockholders' equity ................................ $82,125,000
===========
</TABLE>
See notes to consolidated financial statments.
A-4
<PAGE>
AYDIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Operating Activities:
Net loss ................................................................. $ (26,307,000)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Loss from discontinued operation ....................................... 4,069,000
Loss from disposal of discontinued operation ........................... 2,590,000
Gain on sale of divisions .............................................. (5,608,000)
Depreciation and amortization .......................................... 1,985,000
Deferred income taxes .................................................. 573,000
Changes in other operating assets and liabilities, net:
Accounts receivable .................................................... (1,506,000)
Unbilled revenue ....................................................... 12,490,000
Contract billings in excess of recognized revenues ..................... (183,000)
Inventories ............................................................ 1,503,000
Prepaid expenses and other ............................................. 3,983,000
Accounts payable ....................................................... (2,412,000)
Accrued liabilities .................................................... 3,730,000
Other long-term liabilities ............................................ 233,000
Accrued income taxes ................................................... (3,616,000)
Other .................................................................. (547,000)
--------------
Net cash used by continuing operations ................................. (9,023,000)
Net cash provided by discontinued operations ........................... 685,000
--------------
Cash used by operating activities ........................................ (8,338,000)
--------------
Investing Activities:
Proceeds from sale of divisions ........................................ 9,202,000
Purchase of property, plant, and equipment ............................. (1,410,000)
Equipment purchases of discontinued operation .......................... (36,000)
--------------
Cash provided by investing activities .................................. 7,756,000
--------------
Financing Activities:
Proceeds from exercise of stock options ................................ 114,000
Net short-term borrowings .............................................. (67,000)
--------------
Cash provided by financing activities .................................. 47,000
--------------
Decrease in cash and cash equivalents ..................................... (535,000)
Cash and cash equivalents at beginning of year ............................ 9,985,000
--------------
Cash and cash equivalents at end of year .................................. $ 9,450,000
==============
</TABLE>
See notes to consolidated financial statments
A-5
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Aydin Corporation ("Aydin")
include the accounts of Aydin and its wholly-owned subsidiaries. All
significant inter-company transactions and balances are eliminated in
consolidation.
CONTRACT ACCOUNTING
Revenue on long-term type contracts which are greater than $100,000 is
generally recorded on the percentage-of-completion method. For such contracts,
a portion of the total contract price is included in sales in the proportion
that costs incurred to date bear to total estimated costs at completion. The
impact of periodic revisions in costs and estimated profit is reflected in the
accounting period in which the facts become known.
For all other contracts, revenue is recognized upon completion of the
contract or upon shipment of identifiable units. The entire amount of ultimate
losses estimated to be incurred upon completion of contracts is charged to
income when such losses become known.
Contract progress billings are based upon contract provisions for customer
advance payments, contract costs incurred, and completion of specified contract
objectives. Progress billing balances at December 31, 1998 amounted to
$2,092,000. Progress billings are netted against unbilled revenue on the
consolidated balance sheet. Contracts may provide for customer retainage of a
portion of amounts billed until contract completion. All contract retainage of
$370,000 at December 31, 1998 matures in 1999. Contract retainage is included
on the consolidated balance sheet as part of accounts receivable. Substantially
all of the accounts receivable and unbilled revenue balances at December 31,
1998 are expected to be collected during 1999, although collection of the
unbilled revenue is dependent upon Aydin meeting performance milestones.
USE OF ESTIMATES
In preparing its financial statements in accordance with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expense during the reported periods. Actual results
could differ from those estimates. One such area where the use of estimates
could have a significant impact on future results is estimated costs at
completion and, in some cases, contract value on Aydin's larger long-term type
contracts. During 1998, changes to these estimates on Aydin's larger long-term
type contracts had no negative significant aggregate impact, except for a
contract with the Government of Turkey to develop a Turkish mobile radar
complex ("TMRC"). On the TMRC contract, there was a negative impact in 1998 of
approximately $21.5 million pre-tax resulting from increases of estimates of
costs to complete the contract. Of this amount, approximately $19.8 million
resulted from the arbitration award to Lockheed Martin Tactical Systems, Inc.
and other contract costs (described in Note B) booked in the first quarter and
$1.7 million related to subsequent increases to estimated costs at completion.
Other areas where use of estimates could have a significant impact on future
results are inventory obsolescence, accounts receivable bad debts, warranties,
claims and litigation.
CASH AND CASH EQUIVALENTS
Aydin considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalent balances
at December 31, 1998 amounted to $5,861,000. All of this cash and cash
equivalents is in high quality banks.
A-6
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted cash and investment securities at December 31, 1998 represents
interest bearing cash collateral required to be maintained against letters of
credit. Approximately $2.8 million of Aydin's total cash (restricted and
non-restricted) balances at December 31, 1998 were in foreign banks in Turkey.
Almost all of this cash in Turkey is in dollar denominated instruments. As a
result, there is no material effect of exchange rate changes on cash balances.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) and average cost method which approximates
FIFO.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Aydin's financial instruments include cash equivalents and receivables.
The carrying amounts of these instruments approximate their market value.
DEPRECIATION AND AMORTIZATION
Depreciation is provided by the straight-line method over the estimated
useful lives of the depreciable assets. Amortization of leasehold improvements
under operating leases is provided over the terms of the related leases or the
asset lives, if shorter. Buildings are depreciated over lives ranging up to 35
years. Machinery and equipment is depreciated over useful lives ranging from 3
to 5 years. Accelerated methods are used for tax purposes.
ADVERTISING, RESEARCH AND DEVELOPMENT COSTS AND INTEREST EXPENSE
Aydin expenses advertising costs and research and development costs as
incurred. Advertising costs were $333,000 for 1998. Interest expense for the
year 1998 amounted to $380,000. Interest paid for the year 1998 amounted to
$1,079,000.
INCOME TAXES
Aydin accounts for income taxes on the liability method in accordance with
Statement of Financial Accounting Standards (SAS) No. 109, "Accounting for
Income Taxes."
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Aydin's United Kingdom subsidiary (most of
which business was sold during 1998 as part of the discontinued Displays
Division described in Note C) were translated from the local currency into U.S.
dollars at year-end rates while income and expenses were translated at the
weighted average exchange rate for the year. The resulting unrealized net
translation losses were shown as a separate component of stockholders' equity
in years prior to 1998. These translation losses became realized in 1998 and
were written off as part of the loss on the sale of the discontinued operation.
The translation effects of the Turkish subsidiary are reflected in the
statements of operations because of the high inflation in the Turkish economy.
Pretax income includes foreign currency translation losses relating to the
Turkish subsidiary of $148,000 for 1998.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Aydin has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares
A-7
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
outstanding during the period. Diluted earnings per share takes into account
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. Weighted
average shares outstanding for 1998 were 5,215,331.
The number of shares to be purchased from outstanding stock options were
not included in the computation of 1998 diluted loss per share. The number of
shares and the corresponding weighted average exercise prices for each period
are shown in Note I. Also, warrants for 200,000 shares at a weighted exercise
price of $12.65 were not included in the computation of loss per share for
these periods.
WARRANTY COSTS
The usual warranty period on Aydin's contracts and products is one year,
which is provided for in warranty accruals.
LONG-LIVED ASSETS
Aydin continually reviews long-lived assets to assess recoverability from
future operations using undiscounted cash flows. Impairments would be
recognized in operating results if a permanent dimunition in value had
occurred.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
which Aydin adopted in 1998 with no resulting material impact on the financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which was adopted in 1998. See note N
for this disclosure.
NOTE B--CONTRACT ARBITRATION
As previously reported in 1998, Aydin previously submitted to arbitration
its dispute with a subcontractor (Lockheed Martin Tactical Systems, Inc.) on
the TMRC contract with the Government of Turkey. On April 10, 1998, the
arbitration panel awarded Lockheed $17,162,000 plus interest. As of December
31, 1998, the award and interest was paid in full. The consolidated statement
of operations caption "Cost of sales-contract arbitration and related" includes
this charge as well as other related costs on the TMRC contract aggregating
$19,814,000.
NOTE C--SALE OF DIVISIONS
In November 1998, Aydin sold its Displays Division business segment
pursuant to a plan adopted in the third quarter 1998. The current and prior
period results of the Displays Division are reported in the accompanying
financial statements in the discontinued operations categories. The Displays
Division was sold for a cash payment of approximately $6.4 million. The sale
resulted in a loss of $1,390,000, and an operating loss of $1,200,000 (pre-tax
and after tax) was incurred during the fourth quarter phase out period. These
losses included accruals of $570,000 at December 31, 1998 for estimated costs
in connection with the sale, including severance, employee incentives and legal
fees. The net assets sold consisted primarily of inventories and accounts
receivable. Summarized results of the Displays Division for the year ended
December 31, 1998 were as follows:
A-8
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Net sales ............................................. $ 13,326,000
Costs and expenses .................................... 17,395,000
------------
Loss before income taxes .............................. (4,069,000)
Provision (benefit) for income taxes .................. --
------------
Net loss from discontinued operations ................. (4,069,000)
Loss from sale of discontinued operations ............. (2,590,000)
------------
Total loss related to discontinued operations ......... $ (6,659,000)
============
</TABLE>
In October 1998, Aydin sold the West Coast Microwave Division component of
its Communications segment for a cash payment of approximately $8.8 million.
The sale resulted in a gain of $5.6 million (pre-tax and after tax) which is
reported in the accompanying statement of operations.
NOTE D--INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
<S> <C>
Raw materials ............ $ 4,810,000
Work in process .......... 4,593,000
Finished product ......... 958,000
-----------
$10,361,000
===========
</TABLE>
NOTE E--PROPERTY, PLANT, AND EQUIPMENT
Aydin's investment in property, plant, and equipment is shown below.
<TABLE>
<CAPTION>
<S> <C>
Land ................................................... $ 1,456,000
Buildings .............................................. 9,511,000
Machinery and equipment ................................ 22,523,000
-----------
33,490,000
Less accumulated depreciation and amortization ......... 20,903,000
-----------
$12,587,000
===========
</TABLE>
NOTE F--CREDIT ARRANGEMENT
At December 31, 1998, $7.2 million of letters of credit were outstanding
for various foreign contracts under a credit line which is renewable annually.
The letters of credit have been issued to foreign entities principally to
guarantee performance under contracts or the return of advance payments.
Aydin's real estate has been pledged as security against these letters of
credit which carry a commission rate of 1.5% annually. At December 31, 1998,
Aydin was in default of certain financial covenants against this agreement. The
bank has placed a prospective $5 million limit on Aydin's credit line. As a
result, new letters of credit cannot be issued until existing ones are
liquidated to bring the current balance under $5 million.
Also at December 31, 1998 there was a $7 million of letter of credit
balance open with a foreign bank for the completion of Aydin's TMRC contract
with the Government of Turkey. Cash collateral of $2.5 million was on deposit
with this bank at December 31, 1998 as security for this letter of credit which
carries a commission rate of .8%. This letter of credit was originally $49
million in 1990. The letter of credit has been liquidated in the past based on
collections against the contract. The customer is currently requesting that
further liquidation of the balance ($7 million) be based on progress by
A-9
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aydin in satisfying certain remaining contractual obligations rather than
collections against the contract. Aydin is currently seeking an appropriate
source to establish a replacement letter of credit along the lines requested by
the customer.
In addition, there was an outstanding letter of credit against a foreign
contract at December 31, 1998 for approximately $1 million which was 100%
secured with cash collateral.
The weighted average interest rates on short-term borrowings outstanding
at December 31, 1998 were 10%. Subsequent to year end, all short-term
borrowings were paid off.
NOTE G--ENVIRONMENTAL REMEDIATION
Aydin, along with others, was responsible for the costs of cleanup under
an order of the State of California at a site leased by Aydin prior to 1984.
Cleanup of the site was completed during 1996 and site monitoring over a thirty
(30) year period commenced in 1997. The estimated site monitoring costs to be
expended over the remaining 28 year period are $2.9 million, or approximately
$105,000 per year. The amount to be paid has been included in the accompanying
consolidated balance sheet as an other (non current) liability discounted at 7%
to the expected payment dates.
NOTE H--STOCKHOLDERS' EQUITY
The changes in common stock, additional paid-in capital, and retained
earnings during the year 1998 were as follows:
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN RETAINED
PAR $1 CAPITAL EARNINGS
------------- ------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1997
(5,208,800 common shares) .................................. $5,209,000 $3,141,000 $ 81,411,000
Issuance of 1,136 shares pursuant to a stock grant ........... 1,000 18,000 --
Issuance of 11,000 shares in payment of employee
bonuses .................................................... 11,000 84,000 --
Net loss ..................................................... -- -- (26,307,000)
---------- ---------- -------------
Balance, December 31, 1998 (5,220,936 common shares) ......... $5,221,000 $3,243,000 $ 55,104,000
========== ========== =============
</TABLE>
NOTE I--STOCK OPTIONS AND WARRANTS
Pursuant to stock option plans, Aydin has granted certain officers,
directors, and key employees options to purchase shares of its common stock.
Options granted under the plans must have an option price determined by the
Board of Directors, but in any event, not less than the fair market value of
the stock on the date of grant. Generally, options become exercisable
one-fourth annually beginning one year after grant, on a cumulative basis, and
expire ten years after grant.
A-10
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There is no charge to income with respect to stock options under the
plans. A summary of the changes in options during 1998 follows:
<TABLE>
<CAPTION>
SHARES
SHARES UNDER WEIGHTED AVERAGE AVAILABLE FOR
OPTION EXERCISE PRICE OPTION
-------------- ------------------ --------------
<S> <C> <C> <C>
At December 31, 1997 .................... 496,113 $ 10.89 245,797
Options granted:
Option plan ............................ 325,400 $ 9.25 (325,400)
Options cancelled ....................... (396,963) $ 10.85 396,963
Cancellations of authorizations ......... -- -- (9,322)
-------- ------- --------
At December 31, 1998 .................... 424,550 $ 9.67 308,038
======== ======= ========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
TOTAL SHARES UNDER OPTION SHARES EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------- ------------- -------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 8.00 -- $12.00 411,300 9.2 $ 9.54 30,431 $ 10.30
$12.01 -- $16.75 13,250 8.7 $ 13.59 8,770 $ 13.20
------- ------
424,550 39,201
======= ======
</TABLE>
Aydin has adopted only the disclosure provisions of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123). It
applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than
restricted stock. If Aydin had elected to recognize compensation expense based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed by FAS 123, Aydin's net income and earnings per
share would be reduced to the pro forma amounts indicated below :
<TABLE>
<CAPTION>
<S> <C> <C>
NET LOSS ............... As reported $ (26,307,000)
Pro-forma $ (27,366,000)
LOSS PER SHARE ......... As reported $ (5.05)
Pro-forma $ (5.25)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of each option grant is estimated on
the date of grant using the Black-Sholes options-pricing model with the
following weighted-average assumptions used for grants in 1998: dividend yield
of 0 percent for all years; expected volatility of 27.9 percent; risk-free
interest rates of 5.36 percent; and expected lives of 5 to 10 years.
In May 1997, Aydin issued warrants with three year expiration dates for
200,000 shares of its common stock at exercise prices of $12.10 and $13.20 per
share. These warrants remain outstanding and have had no impact on Aydin's
earnings per share calculations.
A-11
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--TAXES ON INCOME
The recovery of income taxes is shown below. The recovery represents tax
loss carrybacks to earlier years, utilization of foreign tax credits, and other
items.
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
---------------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Current ........... $ (693,000) 0 $516,000 $ (177,000)
Deferred .......... (573,000) 0 0 (573,000)
------------ ------- -------- ----------
$ (1,266,000) 0 $516,000 $ (750,000)
============ ======= ======== ==========
</TABLE>
The components of deferred income tax balances follow.
<TABLE>
<CAPTION>
<S> <C>
Federal net operating loss carryforward .............. $ 4,984,000
Valuation reserve against net operating loss ......... (4,984,000)
Contract accounting .................................. 835,000
Excess of tax over book depreciation ................. 1,306,000
Inventory valuation .................................. (163,000)
Environmental clean-up ............................... (402,000)
Other, net ........................................... (1,099,000)
------------
Total Deferred Liability ............................. $ 477,000
============
</TABLE>
A reconciliation between the federal statutory rate and the effective
income tax rate (computed by dividing income taxes by income before income
taxes) is as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal statutory rate ................................................. (34.0)%
Effects of higher foreign income taxes, including dividends of a foreign
subsidiary and foreign tax credits ................................... 13.6
Valuation allowance due to net operating loss .......................... 18.4
Other, net ............................................................. ( .8)
-----
Effective income tax rate .............................................. ( 2.8)%
=====
</TABLE>
Income tax refunds, net of payments, amounted to $1,802,000 in 1998.
At December 31, 1998 Aydin had available approximately $14.7 million of
unused net operating losses which expire in 20 years and approximately $2.1
million of unused foreign tax credits which expire in 2002. Pre-tax income from
foreign operations is shown under Note K below.
NOTE K--NATURE OF OPERATIONS, EXPORT SALES, MAJOR CUSTOMERS, AND
FOREIGN OPERATIONS
Aydin designs, engineers, manufactures, markets, distributes, and installs
technologically advanced communications products and systems which are sold
worldwide. Aydin generates approximately 30% of its sales from standard
products and systems and the balance of its sales from custom-designed systems
and equipment based on customers' specific requirements. Aydin offers a broad
range of products due to its ability to combine analog microwave engineering
methods with digital techniques and software.
A-12
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Export sales by geographic area are as follows:
<TABLE>
<CAPTION>
<S> <C>
Asia ....................... $ 3,075,000
Africa ..................... 3,235,000
Europe ..................... 15,425,000
North America .............. 1,982,000
South America .............. 1,116,000
Other ...................... 39,000
-----------
Total export sales ......... $24,872,000
===========
</TABLE>
The U.S. Government and the Government of Turkey were the only customers
to whom sales exceeded 10% of consolidated sales during any of the past three
years. Sales to U.S. Government agencies, principally the Department of
Defense, amounted to $26,567,000 in 1998. Sales to the Government of Turkey
amounted to $9,575,000 in 1998. Foreign assets included in the consolidated
balance sheet amounted to $10.9 million at December 31, 1998. Of $2.8 million
at December 31, 1998 are cash and short-term investments of the Company's
Turkish subsidiary consisting primarily of U.S. dollar denominated
interest-bearing time deposits. Foreign sales and pretax loss for 1998 were
$5.7 million and $7.4 million, respectively. Most of the loss was from
increases in estimated costs at completion on the TMRC contract with the
Government of Turkey at the Turkish subsidiary.
NOTE L--RESTRUCTURING COSTS
During the first quarter of 1998 Aydin recorded a restructuring charge of
$1.5 million as a result of a decision to close its Raytor Division ($961,000)
and downsize the corporate staff ($587,000) in line with expected declines in
backlog and sales levels. The restructuring was completed during the third
quarter. Of the total charge of $1.5 million, approximately $.6 million was for
cash outlays and $.9 million was for non-cash asset write-offs. The major
charges consisted of: severance benefits for 60 employees ($.6 million);
facility exit costs ($.2 million); and write-offs of inventory, equipment, and
receivables ($.7 million).
NOTE M--COMMITMENTS AND CONTINGENCIES
Aydin's contracts with the U.S. Government are subject to audit by the
government and price adjustment under certain circumstances. Aydin also has
receivables due from the U.S. Government on certain contracts whose
collectability is dependent on Aydin prevailing in its positions. Management
believes it has sufficient reserves to cover such matters. However, unfavorable
outcomes could have a material impact on future results of operations.
Future annual minimum rental payments required under operating leases that
have lease terms in excess of one year at December 31, 1998 are $45,000 for
each of the years 1999 through 2003.
NOTE N--SEGMENT REPORTING
Aydin adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about the operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Aydin's current chief operating decision maker is the President
and Chief Operating Officer, formerly it was the Chief Executive Officer. The
operating segments are managed separately by operating unit heads reporting to
the chief operating decision maker.
A-13
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aydin's reportable operating segments include the Telemetry Division, the
Communications Division and the Turkish Operations. The Telemetry segment
designs, manufactures and markets components and systems worldwide for flight
and ground testing for military and commercial applications. The Communications
segment designs, manufactures and markets data and voice communication systems
and products worldwide for commercial and military markets. The Turkish segment
consists of the 100% owned Turkish subsidiary (Aydin Yazilim) and includes a US
support program office. This segment designs, manufactures and markets a range
of communications products. This segments main area of business is the design
and manufacture of a command, control and communications system (the TMRC
program) for the Turkish military. The other segment manufactures and markets
printed circuit boards used in commercial products.
The accounting policies used for the operating segments are the same as
those described in the summary of significant accounting policies in Note A.
<TABLE>
<CAPTION>
COMMUNI- TURKISH
TELEMETRY CATIONS OPERATIONS OTHER TOTAL
-------------- -------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
1998
Net sales from external
customers ................. $43,818,000 $16,434,000 $ 9,575,000 $3,013,000 $ 72,840,000
Net sales-intersegment ...... -- 69,000 -- 1,014,000
Depreciation ................ 572,000 468,000 383,000 124,000 1,547,000
Interest income ............. -- -- 577,000 -- 577,000
Interest expense ............ -- -- -- -- 0
Pre-tax income (loss) ....... 1,460,000 (134,000) (22,122,000) 436,000 (20,360,000)
Segment assets .............. 33,531,000 20,003,000 19,252,000 2,018,000 74,804,000
Capital expenditures ........ 335,000 368,000 392,000 306,000 1,401,000
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable lines in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
DISPOSED DIVISIONS
-------------------------------
ACCOUNTED FOR
AS DISCONTINUED
REPORTABLE OPERATION ELIMINATIONS CONSOLIDATED
SEGMENT TOTAL TOTAL (A) & CORPORATE TOTAL
--------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1998
Net sales from external
customers ................... $ 72,840,000 $ 20,345,000 $ (13,326,000) $ (1,971,000) $ 77,888,000
Depreciation .................. 1,547,000 407,000 (174,000) 31,000 1,811,000
Interest income ............... 577,000 504,000 1,081,000
Interest expense .............. 0 380,000 380,000
Pre-tax income (loss) ......... (20,360,000) (6,718,000) 6,659,000 21,000 (20,398,000)
Segment assets ................ 74,804,000 846,000 6,475,000 82,125,000
Capital expenditures .......... 1,401,000 135,000 (36,000) (90,000) 1,410,000
</TABLE>
(A) Represents amount pertaining to the Displays Division sold in
November 1998. These amounts have been included in the discontinued
operations classifications in the financial statements.
A-14
<PAGE>
NOTE O--SUBSEQUENT EVENT
On March 1, 1999, Aydin entered into an Agreement and Plan of Merger among
Aydin, L-3 and Angel Acquisition Corporation, a wholly owned subsidiary of L-3
("Angel"), pursuant to which Angel launched a tender offer on March 5, 1999 to
acquire all the issued and outstanding common stock of Aydin for $13.50 per
share of common stock, L-3 and Angel expect to complete the tender offer and
acquisition in April 1999.
A-15
<PAGE>
b. Pro Forma Financial Information
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
Unaudited Pro Forma Condensed Consolidated Financial Statements
as of December 31, 1998 and for the year ended December 31, 1998
B-1
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma statement of operations data gives
effect to the following transactions (collectively, the "Transactions") as if
they had occurred on January 1, 1998: (i) the acquisition by L-3 Communications
Corporation (the "Company") of all of the outstanding common stock of Aydin
Corporation ("Aydin") which was completed in April 1999; (ii) the Company's
purchase of all of the outstanding stock of SPD Technologies, Inc. ("SPD") and
the acquisitions by the Company of the assets of the Ocean Systems business
("Ocean Systems") of Allied Signal, Inc., the assets of ILEX Systems, Inc.
("ILEX") and the assets of the Satellite Transmission Systems division ("STS")
of California Microwave, Inc. (collectively, the "1998 Acquisitions"); (iii)
the contribution by L-3 Communications Holdings, Inc. ("Holdings") to the
Company of the net proceeds from its common stock offering completed in
February 1999 which amounted to $201.5 million (the "February 1999 Common Stock
Offering"), the contribution by Holdings to the Company of the net proceeds
from Holdings' common stock initial public offering (the "IPO") completed in
May 1998 which amounted to $139.5 million, the sale by the Company of $200.0
million of 8% Senior Subordinated Notes due August 1, 2008 (the "December 1998
Notes"), the sale by the Company of $180.0 million of 81/2% Senior Subordinated
Notes due May 15, 2008 (the "May 1998 Notes"), the amendments of the Company's
Senior Credit Facilities to increase the available borrowings under the bank
credit facilities to 400.0 million, and the application of the net proceeds of
these financing transactions (collectively, the "Financing Transactions"). The
Company is a wholly owned subsidiary of Holdings, and Holdings has no assets or
liabilities and conducts no operations other than through the Company. The pro
forma balance sheet data gives effect to the February 1999 Common Stock
Offering and the Aydin acquisition as if they had occurred on December 31,
1998. The pro forma financial information is based on (i) the audited
consolidated financial statements of the Company as of December 31, 1998 and
for the year then ended, (ii) the audited consolidated financial statements of
Aydin as of December 31, 1998 and for the year then ended, and (iii) the
statements of operations of the 1998 Acquisitions for the periods from January
1, 1998 to each of their respective dates of acquisition, using the purchase
method of accounting and the assumptions and adjustments in the accompanying
notes to the unaudited pro forma condensed consolidated financial statements.
The pro forma results do not give effect to any of the Company's other
acquisitions, including the acquisition of Microdyne.
The pro forma adjustments are based upon preliminary estimates of purchase
prices and the related purchase price allocations for the acquisitions of Aydin
and SPD. Actual adjustments will be based on final appraisals and other
analyses of fair values which are in process. Management does not expect that
differences between the preliminary and final allocations will have a material
impact on the Company's pro forma financial position or results of operations.
The pro forma statement of operations does not reflect any cost savings that
management of the Company believes would have resulted had the Transactions
occurred on January 1, 1998. The pro forma financial information should be read
in conjunction with (i) the audited consolidated financial statements of the
Company as of December 31, 1998 and for the year then ended (ii) the audited
consolidated financial statements of Aydin as of December 31, 1998 and for the
year then ended, and (iii) the unaudited condensed consolidated statements of
operations of SPD for the six months ended June 30, 1998. The unaudited pro
forma condensed financial information may not be indicative of the financial
position and results of operations of the Company that actually would have
occurred had the Transactions been in effect on the dates indicated or the
financial position and results of operations that may be obtained in the
future.
B-2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
AYDIN
FEBRUARY 1999 ACQUISITION
COMMON STOCK PRO FORMA
COMPANY OFFERING(8) AYDIN ADJUSTMENTS(6) PRO FORMA
------------ --------------- --------- ---------------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
ASSETS
Currents assets:
Cash and cash equivalents ................. $ 26.1 $ 201.5 $ 9.5 $ (73.8) $ 163.3
Contracts in process ...................... 351.0 -- 58.1 ( 1.5) 407.6
Other current assets ...................... 28.2 -- 1.4 -- 29.6
--------- -------- ------ ------- ---------
Total current assets .................... 405.3 201.5 69.0 (75.3) 600.5
--------- -------- ------ ------- ---------
Property, plant and equipment, net ......... 123.1 -- 12.6 -- 135.7
Intangibles, primarily cost in excess of
net assets acquired, net of
amortization .............................. 669.4 -- -- 6.7 676.1
Other assets ............................... 87.6 -- 0.5 5.0 93.1
--------- -------- ------ ------- ---------
Total assets ............................. $ 1,285.4 $ 201.5 $ 82.1 $ (63.6) $ 1,505.4
========= ======== ====== ======= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ......... $ -- $ -- $ 0.1 $ (0.1) $ --
Accounts payable and accrued
expenses ................................ 165.1 -- 13.7 -- 178.8
Customer advances ......................... 45.9 -- 2.3 -- 48.2
-------
Other current liabilities ................. 36.5 -- 0.4 -- 36.9
--------- -------- ------ ------- ---------
Total current liabilities ............... 247.5 -- 16.5 ( 0.1) 263.9
--------- -------- ------ ------- ---------
Pension, postretirement benefits and
other liabilities ....................... 132.9 -- 2.1 -- 135.0
Long-term debt ............................ 605.0 -- -- -- 605.0
Shareholders' equity ...................... 300.0 201.5 63.5 (63.5) 501.5
--------- -------- ------ ------- ---------
Total liabilities and shareholders'
equity ................................. $ 1,285.4 $ 201.5 $ 82.1 $ (63.6) $ 1,505.4
========= ======== ====== ======= =========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
B-3
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMPANY
YEAR 1998
ENDED ACQUISITIONS
DECEMBER 31, 1998 PRO FORMA
1998 ACQUISITIONS(2) ADJUSTMENTS(1)(3)
-------------- ----------------- -------------------
(in millions)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $ 1,037.0 $ 126.2 $ --
Costs and expenses .............. 936.7 117.6 2.5
--------- -------- --------
Operating income (loss)........ 100.3 8.6 (2.5)
Interest and investment
income (expense) ............... 2.7 -- --
Interest expense ................ 49.5 5.1 --
--------- -------- --------
Income (loss) before
income taxes ................. 53.5 3.5 (2.5)
Income tax expense (benefit)..... 20.9 1.6 (1.0)(9)
--------- -------- --------
Net income (loss) ............. $ 32.6 $ 1.9 $ (1.5)
========= ======== ========
EARNINGS PER COMMON
SHARE(11):
Basic .......................... $ 1.32
==========
Diluted ........................ 1.26
----------
WEIGHTED AVERAGE COMMON
SHRES OUTSTANDING(11):
Basic .......................... 24.7
==========
Diluted ........................ 25.9
==========
<PAGE>
<CAPTION>
AYDIN
ACQUISITION
FINANCING PRO FORMA PRO
TRANSACTIONS(4) AYDIN(5) ADJUSTMENTS(6)(7) FORMA(11)
----------------- ---------------- ------------------- -------------
(in millions)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $ -- $ 77.9 $ (4.6) $ 1,236.5
Costs and expenses .............. -- 99.0 1.4 1,157.2
-------- --------- ------ ---------
Operating income (loss)........ -- (21.1) (6.0) 79.3
Interest and investment
income (expense) ............... -- 0.7 -- 3.4
Interest expense ................ 6.2 -- -- 60.8
-------- --------- ------ ---------
Income (loss) before
income taxes ................. (6.2) (20.4) (6.0) 21.9
Income tax expense (benefit)..... (2.4)(9) ( 0.8)(9) (0.2) 18.1
-------- --------- ------ ---------
Net income (loss) ............. $ (3.8) $ (19.6) $ (5.8) $ 3.8
======== ========= ====== =========
EARNINGS PER COMMON
SHARE(11):
Basic .......................... $ 0.12
==========
Diluted ........................ 0.11
==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(11):
Basic .......................... 7.6 32.3
======== ==========
Diluted ........................ 7.7 33.6
======== ==========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
B-4
<PAGE>
L-3 COMMUNICATIONS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following facts and assumptions were used in determining the pro forma
effect of the Transactions.
1. On August 13, 1998, the Company acquired 100% of the stock of SPD for $241.4
million of cash, including expenses net of cash acquired. On February 5,
1998, March 4, 1998 and March 31, 1998, the Company purchased the assets
of STS, ILEX and Ocean Systems for $27.0 million, $51.9 million and $68.8
million, respectively, of cash including expenses net of cash acquired.
The aggregate purchase prices including expenses, net of cash acquired,
for the 1998 Acquisitions of $388.6 million were financed with the net
proceeds from the Financing Transactions (see Note 4 below). The 1998
Acquisitions are all included in the Company's historical balance sheet as
of December 31, 1998.
2. The pro forma statement of operations for the year ended December 31, 1998
includes the following historical data for the 1998 Acquisitions.
<TABLE>
<CAPTION>
OCEAN 1998
SPD(a) STS(b) ILEX(b) SYSTEMS(c) ACQUISITIONS
----------- ---------- --------- ------------ -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales ........................................ $ 105.5 $ 2.3 $ 4.5 $ 13.9 $ 126.2
Costs and expenses ........................... 94.4 5.9 4.4 12.9 117.6
-------- ------ ------ ------- --------
Operating income (loss) ..................... 11.1 (3.6) 0.1 1.0 8.6
Interest and investment income ............... -- -- -- -- --
Interest expense ............................. 5.0 -- -- 0.1 5.1
-------- ------ ------ ------- --------
Income (loss) before income taxes . ......... 6.1 (3.6) 0.1 0.9 3.5
Income tax (benefit) provision . ............. 2.2 (1.0) -- 0.4 1.6
-------- ------ ------ ------- --------
Net income (loss) ........................... $ 3.9 $ (2.6) $ 0.1 $ 0.5 $ 1.9
======== ====== ====== ======= ========
</TABLE>
- ----------
(a) Represents historical results of operations for the six-month
period ended June 30, 1998. These results of operations exclude a
pre-tax nonrecurring noncash compensation charge of approximately
$22.1 million related to the acceleration of the vesting date for
all outstanding stock options of SPD caused by the Company's
acquistion of SPD.
(b) Represents historical results of operations for the one-month
period ended January 31, 1998.
(c) Represents historical results of operations for the three-month
period ended March 31, 1998.
3. The aggregate estimated excess of purchase price, including expenses, over
the estimated fair value of net assets acquired related to the 1998
Acquisitions of $339.3 million is comprised of $215.3 million, $5.5
million, $44.3 million and $74.2 million, respectively, for SPD, STS, ILEX
and Ocean Systems, and is being amortized over 40 years for SPD, ILEX and
Ocean Systems and 15 years for STS resulting in amortization expense of
$8.7 million per annum. The preliminary purchase price allocation for SPD
also includes an adjustment of $5.0 million to intangible assets to
reflect the estimated value of acquired identifiable intangibles which are
being amortized over 15 years resulting in amortization expense of $0.3
million per annum.
B-5
<PAGE>
L-3 COMMUNICATIONS, INC.
AND L-3 COMMUNICATIONS CORPORATION
Adjustments to costs and expenses in the pro forma statements of operations
relating to the 1998 Acquisitions were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
--------------
(in millions)
<S> <C>
(a) Amortization expense of estimated intangibles, primarily purchase cost in
excess of net assets acquired ................................................. $ 3.7
(b) Elimination of goodwill amortization expense included in the historical
financial statements for the 1998 Acquisitions ................................ (1.4)
(c) Estimated rent expense on the Sylmar facility of Ocean Systems which was not
acquired by L-3 Communications ................................................ 0.3
(d) Elimination of depreciation expense on buildings and improvements on the
Sylmar facility of Ocean Systems which was not acquired by L-3
Communications ................................................................ (0.1)
------
Total increase to costs and expenses ......................................... $ 2.5
======
</TABLE>
4. The Financing Transactions included (i) the contribution by Holdings to the
Company of the net proceeds from the sale by Holdings of 5.0 million
shares of its common stock in the February 1999 Common Stock Offering for
$42 per share, whose net proceeds amounted to $201.5 million, after
underwriting discounts and commissions and other expenses of $8.5 million,
(ii) the sale by the Company of the December 1998 Notes, which net
proceeds amounted to $192.8 million, after the bond discount of $0.6
million and underwriting discounts and commissions and other expenses of
$6.6 million, (iii) the contribution by Holdings to the Company of the net
proceeds from the sale by Holdings of 6.9 million shares of its common
stock in the IPO for $22 per share, which net proceeds amounted to $139.5
million, after underwriting discounts and commissions and other expenses
of $12.3 million, (iv) the sale by the Company of the May 1998 Notes,
which net proceeds amounted to $173.8 million, after underwriting
discounts and commissions and other expenses of $6.2 million and (v) the
amendments of the Company's Senior Credit Facilities to increase the
borrowings available thereunder to $400.0 million from $200.0 million.
The aggregate net proceeds from the Financing Transactions of $707.6
million have been assumed to be used to (i) prepay all $171.0 million of
borrowings outstanding under the term loan facilities under the Company's
Senior Credit Facilities prior to the amendments thereto, (ii) finance the
aggregate purchase price of the 1998 Acquisitions of $388.6 million (see
Note 1) and Aydin acquisition of $64.3 million (see Note 7) and (iii)
increase cash and cash equivalents by $83.7 million. The February 1999
Common Stock Offering was completed on February 10, 1999. The sale of the
December 1998 Notes was completed on December 11, 1998, and in February
1999, the Company exchanged all of the December 1998 Notes for notes
identical in all material respects to the December 1998 Notes, except that
the new notes are registered under the Securities Exchange Act of 1933. The
IPO and the sale of the May 1998 Notes were completed on May 22, 1998 and
the amendments to the Senior Credit Facilities were completed on August 19,
1998 and March 3, 1999. Except for the February 1999 Common Stock Offering,
the effects of the Financing Transactions are included in the Company's
historical balance sheet as of December 31, 1998.
B-6
<PAGE>
L-3 COMMUNICATIONS, INC.
AND L-3 COMMUNICATIONS CORPORATION
Assuming the Financing Transactions were completed on January 1, 1998, pro
forma interest expense for the year ended December 31, 1998 would have
increased by $11.3 million to $60.8 million. The details of interest
expense after the Financing Transactions follow:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Interest on the 1997 Notes (10.375% on
$225.0 million)............................................... $ 23.4
Interest on the May 1998 Notes (8.50% on
$180.0 million)............................................... 15.3
Interest on the December 1998 Notes (8.0% on
$200.0 million)............................................... 16.0
Commitment fee of 0.4% on unused portion of the Senior Credit
Facilities (0.4% on $298.4 million)........................... 1.2
Letter of credit fees ......................................... 1.0
Amortization of deferred debt issuance costs .................. 3.9
-------
Total pro forma interest expense .............................. $ 60.8
=======
</TABLE>
The pro forma statements of operations do not reflect interest income on
(i) the pro forma amount of net proceeds of $83.7 million that were assumed
to be invested in cash and cash equivalents, remaining after applying the
aggregate net proceeds from the Financing Transactions to finance the
purchase of the 1998 Acquisitions and Aydin acquisition and prepay the term
loan facilities or (ii) the $163.3 million cash balance on the pro forma
balance sheet as of December 31, 1998 after the February 1999 Common Stock
Offering and Aydin acquisition.
5. The pro forma statement of operations for the year ended December 31, 1998
includes the following historical data for the Aydin acquisition.
<TABLE>
<CAPTION>
AYDIN
--------------
(in millions)
<S> <C>
Sales ...................................... $ 77.9
Costs and expenses ......................... 99.0
-------
Operating income (loss) ................... (21.1)
Interest and investment income ............. 0.7
Interest expense ........................... --
-------
Income (loss) before income taxes ......... (20.4)
Income tax (benefit) provision ............. ( 0.8)
-------
Net income (loss) ......................... $ (19.6)
=======
</TABLE>
6. On April 16, 1999, the Company completed its acquisition of 100% of the
common stock of Aydin. The purchase price of $64.3 million including
estimated expenses net of cash acquired of $9.5 million (based on Aydin's
historical balance sheet as of December 31, 1998) was financed with a
portion of the net proceeds from the Financing Transactions (see Note 4).
The estimated purchase price in excess of the net assets acquired for
Aydin of $6.7 million is being amortized over 40 years resulting in a
charge of $0.2 million per annum. In addition, the pro forma balance sheet
as of December 31, 1998 includes the elimination of (i) $0.1 million of
Aydin debt which was repaid in connection with the acquisition and (ii)
$63.5 million of Aydin's historical shareholders' equity. The pro forma
balance sheet also reflects these adjustments related to preliminary
purchase price allocation:
(a) an estimated $1.8 million reduction to contracts in process resulting
from valuing acquired contracts in process at contract price, less the
estimated cost to complete and an allowance for
B-7
<PAGE>
L-3 COMMUNICATIONS, INC.
AND L-3 COMMUNICATIONS CORPORATION
normal profit margin on the Company's effort to complete such contracts,
and an estimated increase to contracts in process of $0.3 million related
to valuing work-in-process and finished goods inventory at their fair
values. The non-recurring charges to income resulting from these
adjustments are not material to the pro forma statement of operations;
and
(b) an increase in deferred tax assets of $5.0 million to reflect the
elimination of a valuation allowance of $5.0 million included in Aydin's
historical financial statements to reflect the Company's ability to
realize the acquired Aydin deferred tax assets on a consolidated basis.
7. The adjustments made to the pro forma statement of operations for the year
ended December 31, 1998 relating to the Aydin acquisition include (i) the
elimination of $4.6 million of sales and $4.4 million of costs and expenses
for the Microwave division included in Aydin's historical results of
operations which Aydin sold in October 1998 and is not part of the
continuining operations of Aydin that the Company acquired, (ii) the
elimination of the gain of $5.6 million (pre-tax and after tax) resulting
from Aydin's sale of its Microwave division and (iii) an increase to costs
and expenses of $0.2 million for the amortization expense for the Aydin
acquisition purchase cost in excess of net assets acquired (see Note 7
below). A statutory (federal, state and foreign) tax rate of 39.1% was
assumed on these pro forma adjustments, except for adjustment (b) because
Aydin recognized no income tax expense on that gain as a result of its tax
net operating losses.
8. The pro forma adjustments for the February 1999 Common Stock Offering to the
balance sheet as of December 31, 1998, include (i) an increase to cash and
cash equivalents of $201.5 million representing the net proceeds therefrom,
and (ii) a corresponding increase to common stock and additional paid-in
capital within shareholders' equity of $201.5 million for those net
proceeds.
9. The pro forma adjustments were tax-effected, as appropriate, using a
statutory (federal, state and foreign) tax rate of 39.1%.
10. Pro forma basic earnings per common share ("EPS") are computed based upon
the weighted-average shares of common stock outstanding. Pro forma diluted
EPS are computed based upon: (a) the weighted average shares of common
stock and potential common stock outstanding, to the extent the potential
common stock is not anti-dilutive; and (b) for the assumed purchase of
common shares for treasury, an assumed average market price of Holdings'
common stock of $27.90 per share for the year ended December 31, 1998
based on the IPO price of $22.00 for the period January 1, 1998 to May 19,
1998 (the date of the IPO) and actual average market prices of Holdings'
common stock for the period May 20, 1998 to December 31, 1998. The pro
forma weighted-average shares of common stock outstanding assume that the
6.9 million and 5.0 million shares issued in connection with the IPO and
February 1999 Common Stock Offering, respectively, were outstanding as of
January 1, 1998.
11. Aydin's historical statement of operations for the year ended December 31,
1998 include a non-recurring charge of $19.8 million in costs and expenses
related to a contract arbitration settlement. The pro forma statement of
operations for the year ended December 31, 1998 adjusted to exclude this
non-recurring charge and to adjust Aydin's benefit for income taxes to a
statutory (federal, state and foreign) tax rate of 39.1% that reflects a
tax provision related to recurring operations, would have been as follows:
B-8
<PAGE>
L-3 COMMUNICATIONS, INC.
AND L-3 COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
ADJUSTED
PRO FORMA
YEAR ENDED
DECEMBER 31, 1998
------------------
($ MILLIONS)
<S> <C>
Sales .................................. $ 1,236.5
Costs and expenses ..................... 1,137.4
---------
Operating income ...................... 99.1
Interest and investment income ......... 3.4
Interest expense ....................... 60.8
---------
Income before income taxes ............ 41.7
Income tax provision ................... 16.4
---------
Net income ............................ $ 25.3
=========
Earnings per common share:
Basic ................................. $ 0.78
=========
Diluted ............................... $ 0.75
=========
</TABLE>
B-9
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 19, 1999, accompanying the
consolidated financial statements included in the Annual Report of Aydin
Corporation and subsidiaries in this Form 8K/A for the year ended December 31,
1998. We hereby consent to the incorporation by reference of said reports in
the Registration Statement of L-3 Communications Holdings, Inc. on Form S-8
(File No. 333-64389 effective September 25, 1998 and File No. 333-59281
effective July 17, 1998.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
May 10, 1999
