<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 SEPTEMBER 30, 2000
Commission file numbers 001-14141 and 333-46983
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
600 Third Avenue
New York, NY 10016
Telephone: (212) 697-1111
State of incorporation: Delaware
IRS identification numbers: 13-3937434 and 13-3937436
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 preceeding 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. Yes X No
There were 33,524,934 shares of L-3 Communications Holdings, Inc. common
stock with a par value of $0.01 outstanding as of the close of business on
November 6, 2000.
================================================================================
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED SEPTEMBER 30, 2000
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 ....................................................... 1
Condensed Consolidated Statements of Operations for the Three and Nine
Months ended September 30, 2000 and September 30, 1999 .................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2000 and September 30, 1999 ......................... 4
Notes to Unaudited Condensed Consolidated Financial Statements ........... 5
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ..................................................... 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ............... 23
PART II -- OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K ......................................... 24
</TABLE>
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 30,219 $ 42,788
Contracts in process .............................................. 663,541 484,173
Deferred income taxes ............................................. 51,002 32,985
Other current assets .............................................. 16,117 7,761
---------- ----------
Total current assets ............................................ 760,879 567,707
---------- ----------
Property, plant and equipment, net ................................. 158,320 140,971
Intangibles, primarily cost in excess of net assets acquired, net of
amortization ...................................................... 1,308,874 821,552
Deferred income taxes .............................................. 86,328 56,858
Other assets ....................................................... 42,017 46,683
---------- ----------
Total assets .................................................... $2,356,418 $1,633,771
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under Senior Credit Facilities ......................... $ 237,000 $ --
Accounts payable, trade ........................................... 123,697 98,693
Accrued employment costs .......................................... 97,868 70,618
Accrued expenses .................................................. 47,315 27,931
Customer advances ................................................. 55,530 56,738
Accrued interest .................................................. 20,448 12,683
Income taxes ...................................................... -- 2,715
Other current liabilities ......................................... 81,440 48,928
---------- ----------
Total current liabilities ....................................... 663,298 318,306
---------- ----------
Pension and postretirement benefits ................................ 99,378 110,262
Other liabilities .................................................. 101,707 17,028
Long-term debt ..................................................... 836,500 605,000
Commitments and contingencies
Shareholders' equity:
Common stock of Holdings $.01 par value; authorized 100,000,000
shares, issued and outstanding 33,452,178 and 32,794,547 shares.. 508,537 483,694
Retained earnings ................................................. 155,049 103,545
Unearned compensation ............................................. (2,806) (1,661)
Accumulated other comprehensive loss .............................. (5,245) (2,403)
---------- ----------
Total shareholders' equity ......................................... 655,535 583,175
---------- ----------
Total liabilities and shareholders' equity ...................... $2,356,418 $1,633,771
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------------ ----------
<S> <C> <C>
Sales .............................................. $514,415 $382,356
Costs and expenses ................................. 451,600 339,516
-------- --------
Operating income ................................... 62,815 42,840
Interest and other income .......................... 904 636
Interest expense ................................... 24,831 15,266
-------- --------
Income before income taxes ......................... 38,888 28,210
Provision for income taxes ......................... 14,778 10,861
-------- --------
Net income ......................................... $ 24,110 $ 17,349
======== ========
Holdings earnings per common share:
Basic ............................................. $ 0.72 $ 0.53
======== ========
Diluted ........................................... $ 0.69 $ 0.51
======== ========
Holdings weighted average common shares outstanding:
Basic ............................................. 33,542 32,650
======== ========
Diluted ........................................... 35,166 34,222
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Sales .............................................. $1,352,443 $972,350
Costs and expenses ................................. 1,205,306 872,194
---------- --------
Operating income ................................... 147,137 100,156
Interest and other income .......................... 3,461 3,465
Interest expense ................................... 67,122 45,680
---------- --------
Income before income taxes ......................... 83,476 57,941
Provision for income taxes ......................... 31,972 22,307
---------- --------
Net income ......................................... $ 51,504 $ 35,634
========== ========
Holdings earnings per common share:
Basic ............................................. $ 1.55 $ 1.12
========== ========
Diluted ........................................... $ 1.48 $ 1.06
========== ========
Holdings weighted average common shares outstanding:
Basic ............................................. 33,288 31,885
========== ========
Diluted ........................................... 34,847 33,465
========== ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 51,504 $ 35,634
Depreciation and amortization ...................................... 53,186 40,380
Amortization of deferred debt issue costs .......................... 4,039 2,918
Deferred income taxes .............................................. 19,502 18,011
Other noncash items ................................................ 8,087 4,391
Changes in operating assets and liabilities, net of amounts acquired:
Contracts in process .............................................. (34,554) (54,910)
Other current assets .............................................. (8,619) 4,957
Other assets ...................................................... (3,572) (145)
Accounts payable and accrued expenses ............................. 32,172 2,185
Customer advances ................................................. (14,592) 7,412
Other current liabilities ......................................... (34,472) 559
Pension and postretirement benefits ............................... (8,917) 1,884
Other liabilities ................................................. 349 (1,344)
All other operating activities, net ................................ (1,441) (1,740)
---------- ----------
Net cash from operating activities ................................. 62,672 60,192
---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired .................... (532,873) (211,393)
Capital expenditures ............................................... (21,356) (15,758)
Disposition of property, plant and equipment ....................... 3,225 6,138
Other investing activities ......................................... 5,865 4,777
---------- ----------
Net cash (used in) investing activities ............................ (545,139) (216,236)
---------- ----------
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities ....................... 754,500 74,700
Repayment of borrowings under revolving credit facilities .......... (286,000) (74,700)
Proceeds from sale of Holdings common stock, net ................... -- 201,582
Other financing activities, net .................................... 1,398 (875)
---------- ----------
Net cash from financing activities ................................. 469,898 200,707
---------- ----------
Net (decrease) increase in cash .................................... (12,569) 44,663
Cash and cash equivalents, beginning of the period ................. 42,788 26,130
---------- ----------
Cash and cash equivalents, end of the period ....................... $ 30,219 $ 70,793
========== ==========
</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" and together with its
subsidiaries "L-3" or the "Company") is a leading merchant supplier of
sophisticated secure communication systems and specialized communication
products. The Company produces secure, high data rate communication systems,
avionics and ocean products, telemetry, instrumentation and space products,
microwave components and training and simulation systems. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. The Company's systems and
specialized products are used to connect a variety of airborne, space,
ground-and sea-based communication systems and are used in the transmission,
processing, recording, monitoring and dissemination functions of these
communication systems. The Company's customers include the U.S. Department of
Defense ("DoD"), certain U.S. Government intelligence agencies, major aerospace
and defense contractors, foreign governments and commercial customers. L-3's
business areas employ proprietary technologies and capabilities and have
leading positions in their respective primary markets. The Company has two
reportable segments, Secure Communication Systems and Specialized Communication
Products.
Secure Communication Systems. This segment provides secure, high data rate
communications for military and other U.S. Government reconnaissance and
surveillance applications. These operations are principally strategic,
long-term programs performed under cost plus, sole-source contracts supporting
the DoD and other government agencies. The major secure communication programs
and systems include:
o secure data links for airborne, satellite, ground-and sea-based remote
platforms for real time information collection and dissemination to
users;
o strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management;
o communication software support services; and
o communication systems for surface and undersea vessels and manned space
flights.
The Secure Communication Systems segment includes our Training and
Simulation business, which produces advanced simulation and training products,
with high-fidelity representations of cockpits and operator stations for
aircraft and vehicle system simulation which are principally performed under
long-term fixed price contracts. The training business also provides a full
range of teaching, training and logistic services and training device support
to domestic and international customers.
Specialized Communication Products. This segment includes products to
military and commercial customers, that focus on niche markets in which the
Company can achieve a market leadership position. This reportable segment
includes three product categories:
o avionics and ocean products including our aviation recorders, airborne
collision avoidance products, displays, antennas, acoustic undersea
warfare products and naval power distribution, conditioning, switching
and protection equipment;
o telemetry, instrumentation and space products including our commercial
off-the-shelf, real-time data collection and transmission products and
components for missile, aircraft and space-based electronic systems; and
o microwave components including our commercial off-the-shelf,
high-performance microwave components and frequency monitoring equipment.
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)
The accompanying unaudited condensed consolidated financial statements
also include those of L-3 Communications Corporation ("L-3 Communications"),
which is a wholly owned subsidiary of Holdings. Holdings has no other assets or
liabilities and conducts no operations other than through its wholly owned
subsidiary, L-3 Communications. Therefore, the consolidated financial
statements of Holdings and L-3 Communications reflect the same results of
operations, cash flows, assets, liabilities and shareholders' equity. L-3
Communications common stock consists of 100 shares authorized and outstanding
of $0.01 par value.
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. Certain reclassifications have been made to conform prior year
financial statements amounts to the current year presentation. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the results for the interim
periods presented have been included. The results of operations for the interim
periods are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 the reported amounts of sales and costs and expenses during the
reporting period. The most significant of these estimates and assumptions
relate to contract estimates of sales and costs, estimates of pension and
postretirement benefit obligations, recoverability of recorded amounts of fixed
assets and cost in excess of net assets acquired, income taxes, litigation and
environmental obligations. Actual results could differ from these estimates.
For further information, these interim 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, 1999, included in their
Annual Report on Form 10-K for fiscal year ended December 31, 1999.
2. ACQUISITIONS AND DIVESTITURES
On December 31, 1999, the Company acquired the assets of the Space and
Navigation Systems business ("SNS") of Honeywell International Inc.
("Honeywell") for $55,000 in cash, plus expenses, subject to adjustment based
on closing date net assets.
On February 10, 2000, the Company acquired the assets of the Training
Devices and Training Services ("TDTS") business of Raytheon Company for
$160,000 in cash plus expenses, subject to adjustment based on closing date net
working capital, as defined. Following the acquisition the Company changed the
name of TDTS to L-3 Communications Link Simulation and Training ("Link
Simulation and Training"). On February 14, 2000, the Company acquired the
assets of Trex Communications Corporation, ("TrexCom"), for $50,210 in cash,
plus expenses, subject to adjustment based on closing date net worth, as
defined. The acquisitions were financed using borrowings under the Company's
Senior Credit Facilities.
On April 28, 2000, the Company acquired the Traffic Alert and Collision
Avoidance System ("TCAS") product line from Honeywell for a purchase price of
$237,000 in cash, reflecting a price reduction of $17,000 based on the
preliminary closing date net assets which is subject to a final adjustment. The
TCAS acquisition was financed with borrowings under a new revolving 364 day
senior credit facility. In addition, in February 2000, the Company entered into
a Memorandum of Agreement ("MOA") with
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)
Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which
L-3 agreed to create a limited liability corporation for TCAS (the "TCAS LLC"),
contribute 100% of the TCAS assets acquired from Honeywell to the TCAS LLC, and
sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal
to 30% of the final purchase price paid by the Company for TCAS (which is
expected to be approximately $71,100 based on the preliminary closing date net
assets) (collectively, the "TCAS Minority Interest Transaction"). L-3 will
consolidate the TCAS LLC. The Company anticipates that it will complete the
definitive agreements regarding the TCAS Minority Interest Transaction with
Sextant in the fourth quarter of 2000. The TCAS Minority Interest Transaction
is subject to regulatory approval by United States agencies and the European
Union Commission and the execution of definitive agreements.
On June 30, 2000, the Company acquired all the outstanding stock of MPRI
for $34,500 in cash subject to adjustment based on closing date net assets,
plus additional consideration contingent upon the post-acquisition financial
performance of MPRI for the year ending June 30, 2001. The acquisition was
financed using borrowings under the Company's Senior Credit Facilities.
On July 11, 2000, the Company acquired 53.5% of the outstanding common
stock of LogiMetrics, Inc. ("LogiMetrics") for $15,000. The acquisition was
financed using borrowings under the Company's Senior Credit Facilities. The
Company also agreed to invest an additional $5,000 in LogiMetrics during 2001
for an additional equity interest, and will contribute to LogiMetrics certain
technologies, upon satisfaction of certain future conditions.
All of the Company's acquisitions have been accounted for as purchase
business combinations and are included in the Company's results of operations
from their respective effective dates. The assets and liabilities recorded in
connection with the purchase price allocations for the acquisitions of SNS,
TDTS, TrexCom and TCAS are based upon preliminary estimates of fair values for
acquired contracts in process including reserves for contract losses,
inventories, pension and postretirement benefit liabilities and deferred taxes.
Actual adjustments will be based on the final purchase prices and final
appraisals and other analyses of fair values which are in process. Except for
the TDTS acquisition, as discussed below, the Company does not expect the
differences between the preliminary and final purchase price allocations for
the acquisitions to be material.The preliminary assets and liabilities recorded
in connection with the acquisitions of SNS, TDTS, TrexCom, TCAS, MPRI and
LogiMetrics were $80,177 and $24,706; $262,068 and $101,141; $66,821 and
$15,905; $249,425 and $11,992; $41,713 and $6,628; and $20,126 and $11,209,
respectively. The Company has valued acquired contracts in process at contract
price, less the estimated costs to complete and an allowance for normal profit
on the Company's effort to complete such contracts. The excess of purchase
price over the fair value of net assets acquired is being amortized on a
straight-line basis over periods of 40 years for SNS, TDTS, TCAS and MPRI and
20 years for LogiMetrics and TrexCom.
The SEC requires that the Company file separate audited financial
statements of the most recent fiscal years for TDTS and TCAS prior to their
acquisition by L-3 with unaudited pro forma financial information. However,
audited financial statements for the TDTS and TCAS businesses are not readily
available, because prior to the acquisitions, TDTS and TCAS were not
stand-alone entities and their financial statements were not audited. These
financial statements are currently being audited, and upon their completion,
the Company will file the required TDTS and TCAS financial statements and pro
forma financial information with the SEC. However, based on the unaudited
preliminary data, sales and operating loss for the year ended December 31, 1999
for the TDTS business, including a loss provision for estimated costs in excess
of estimated billings to complete certain contracts in process, were $270,600
and $(36,900), respectively, and sales and operating income for the year ended
December 31, 1999 for the
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)
TCAS product line were $108,000 and $46,100, respectively. Actual results,
based upon completion of the audits, could differ materially from these
preliminary statements of operations data. Additionally, depending on the
December 31, 1999 audit results for TDTS, the final purchase allocation for
TDTS relating to loss reserves for estimated costs in excess of estimated
billings to complete certain acquired contracts in process could be materially
different than those recorded in the Company's preliminary purchase allocation
for the TDTS acquisition which is reflected on the Company's consolidated
balance sheet as of September 30, 2000.
Based on unaudited statements of operations data for TrexCom, TDTS and
TCAS, had these acquisitions occurred on January 1, 2000, pro forma sales, net
income and diluted earnings per share for the nine months ended September 30,
2000 would have been $1,404,000, $50,200 and $1.44, respectively. Based on
unaudited preliminary statements of operations for TDTS and TCAS and unaudited
statement of operations data for Aydin, IEC, SNS and TrexCom for the year ended
December 31, 1999, had these acquisitions occurred on January 1, 1999, pro
forma sales would have been $1,418,400 for the nine months ended September 30,
1999. Pro forma net income and earnings per share for the nine months ended
September 30, 1999 have not been provided because the required interim
historical financial information is not yet available. The pro forma data are
based on various assumptions and are not necessarily indicative of the results
that would have occurred had the acquisitions occurred on January 1, 1999, nor
do they purport to be indicative of future consolidated results.
In March 2000, the Company recognized an after-tax gain of $6,754 on the
sale of its interest in the Network Security business and recorded an unrelated
after-tax write down of $6,359 on the carrying value of certain investments. In
May 2000, the Company recognized an after-tax gain of $2,000 on the sale of its
interest in the Cardiovascular Computer Systems business and recognized an
unrelated after-tax write down of $1,215 on the carrying value of certain
investments. In September 2000, the Company sold a 60% interest in its Turkish
subsidiary which resulted in an after-tax gain of $373. As a result of these
non-recurring items which were all recorded in Interest and Other Income on the
Statement of Operations, the net earnings during the nine-month period ended
September 30, 2000 reflect a net after-tax gain of $1,553 ($0.04 per diluted
share) related to these transactions. The net proceeds from the sale of the
Network Security business and Cardiovascular Computer Systems business were
$13,443 and $5,594, respectively, and are included in Other Investing
Activities on the Statement of Cash Flows. The sales price of the Turkish
subsidiary consists of $2,000 in cash and $4,000 of retained receivables. The
cash sales proceeds are payable in three installments, $500 in the fourth
quarter of 2000, and $750 in each of April 2001 and October 2001.
3. CONTRACTS IN PROCESS
<TABLE>
<CAPTION>
Contracts in process consist of:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- ------------------
<S> <C> <C>
Billed receivables ......................................... $ 299,518 $ 258,054
--------- ---------
Unbilled contract receivables, gross ....................... 257,866 125,652
Less: unliquidated progress payments ....................... (73,905) (10,351)
--------- ---------
Unbilled contract receivables, net ........................ 183,961 115,301
--------- ---------
Inventories and inventoried contract costs, gross .......... 211,146 130,091
Less: unliquidated progress payments ....................... (31,084) (19,273)
--------- ---------
Inventories and inventoried contract costs, net ........... 180,062 110,818
--------- ---------
Total contracts in process ................................ $ 663,541 $ 484,173
========= =========
</TABLE>
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)
4. DEBT
<TABLE>
<CAPTION>
Debt consists of:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- ------------------
<S> <C> <C>
Borrowings under Senior Credit Facilities .......... $ 468,500 $ --
103/8% Senior Subordinated Notes due 2007 .......... 225,000 225,000
81/2% Senior Subordinated Notes due 2008 ........... 180,000 180,000
8% Senior Subordinated Notes due 2008 .............. 200,000 200,000
---------- --------
Total debt ........................................ 1,073,500 605,000
Less current portion of borrowings under Senior
Credit Facilities ............................... (237,000) --
---------- --------
Long-term debt .................................... $ 836,500 $605,000
========== ========
</TABLE>
On April 28, 2000, the Company entered into a new 364 day revolving credit
facility for $300,000 (the "New 364 Day Revolving Credit Facility") that expires
on April 27, 2001 and amended the Senior Credit Facilities to change the spreads
used to determine borrowing rates and commitment fees thereunder, as follows: on
"base rate" borrowings, ranging from 0.375% to 1.75%; on "LIBOR rate" borrowings
ranging from 1.25% to 2.75%; and, on commitment fees, ranging from 0.20% to
0.50%; in each case, depending on L-3 Communications' Debt to EBITDA Ratio at
the time of determination. The amendment also provided that from April 28, 2000
until the adjustment date for the quarter ending September 30, 2000, the spreads
will be no lower than 0.75% and 1.75%, respectively, on "base rate" borrowings
and "Eurodollar" borrowings. The spreads for the New 364 Day Revolving Credit
Facility are the same as those under the Senior Credit Facilities. The lenders
under the New 364 day Revolving Credit Facility rank pari passu with the lenders
under the other Senior Credit Facilities. The borrowings outstanding of $237,000
at September 30, 2000 under the New 364 Day Revolving Credit Facility are
classified under current liabilities on the balance sheet because the facility
expires in April 2001. The Company intends to either refinance the New 364 Day
Revolving Credit Facility or to restructure it together with the Company's other
existing revolving credit facilities by the end of the first quarter of 2001.
In August 2000 the Revolving 364-Day Credit Facility was renewed for an
additional 364 days and will expire on August 9, 2001, at which time the
Company may convert a portion of the borrowings outstanding thereunder into
term loans which fully amortize over an eighteen month period beginning
September 30, 2001.
Available borrowings under the Company's revolving credit facilities at
September 30, 2000 were $115,890, after reductions for outstanding borrowings
of $468,500 and letters of credit of $115,610.
5. COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Comprehensive income consists of:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Net income .................................................. $51,504 $35,634
Foreign currency translation losses ......................... (1,441) (1,740)
Unrealized gain (loss) on investments, net of taxes ......... (1,401) (2,144)
------- -------
Comprehensive income ........................................ $48,662 $31,750
======= =======
</TABLE>
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)
6. EARNINGS PER SHARE
Earnings per share data is not provided for L-3 Communications since it is
a wholly-owned subsidiary of Holdings. Weighted-average shares for Holdings
used in the computation of earnings per share are presented in the table below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Basic:
Net income .......................................... $24,110 $17,349 $51,504 $35,634
Weighted average common shares outstanding .......... 33,542 32,650 33,288 31,885
------- ------- ------- -------
Basic earnings per share ............................ $ 0.72 $ 0.53 $ 1.55 $ 1.12
======= ======= ======= =======
Diluted:
Net income .......................................... $24,110 $17,349 $51,504 $35,634
------- ------- ------- -------
Common and potential common shares:
Weighted average common shares outstanding ......... 33,542 32,650 33,288 31,885
Assumed exercise of stock options .................. 3,979 3,281 4,005 3,249
Assumed purchase of common shares for
treasury ......................................... (2,355) (1,709) (2,446) (1,669)
------- ------- ------- -------
Common and potential common shares .................. 35,166 34,222 34,847 33,465
======= ======= ======= =======
Diluted earnings per share .......................... $ 0.69 $ 0.51 $ 1.48 $ 1.06
======= ======= ======= =======
</TABLE>
7. 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.
Additionally, in the event that U.S. government expenditures for products and
services of the type manufactured and provided by the Company are reduced, and
not offset by greater commercial sales or other new programs or products, or
acquisitions, there may be a reduction in the volume of contracts or
subcontracts awarded to the Company.
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 financial
position or 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
10
<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)
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.
8. SEGMENT INFORMATION
The Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products which are described in 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, operating
income and assets by reportable segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------
2000 1999 2000 1999
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
SALES:
Secure Communication Systems ............... $233,747 $141,940 $ 598,967 $385,387
Specialized Communication Products ......... 284,126 242,625 760,759 591,248
Elimination of intersegment sales .......... (3,458) (2,209) (7,283) (4,285)
-------- -------- ---------- --------
Consolidated total ....................... $514,415 $382,356 $1,352,443 $972,350
======== ======== ========== ========
OPERATING INCOME:
Secure Communication Systems ............... $ 25,100 $ 11,697 $ 63,796 $ 33,525
Specialized Communication Products ......... 37,715 31,143 83,341 66,631
-------- -------- ---------- --------
Consolidated total ....................... $ 62,815 $ 42,840 $ 147,137 $100,156
======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- ------------------
<S> <C> <C>
ASSETS:
Secure Communication Systems ............... $ 736,661 $ 381,699
Specialized Communication Products ......... 1,558,258 1,123,487
Corporate .................................. 61,499 128,585
---------- ----------
Consolidated total ....................... $2,356,418 $1,633,771
========== ==========
</TABLE>
9. NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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 September 15,
2000. The Company does not expect SFAS 133 to have a material impact on its
results of operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. The SEC delayed the effective date
of this SAB in June 2000, so that the SAB
11
<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)
must now be adopted by December 31, 2000. The Company does not expect SAB No.
101 to have a material impact on its results of operations or financial
position.
10. UNAUDITED FINANCIAL INFORMATION OF L-3 COMMUNICATIONS SUBSIDIARY GUARANTORS
L-3 Communications is a wholly owned subsidiary of Holdings. The debt of
L-3 Communications, including the Senior Subordinated Notes and borrowings
under and amounts drawn against the Company's credit facilities are guaranteed,
on a joint and several, full and unconditional basis, by certain of its wholly
owned domestic subsidiaries (the "Guarantor Subsidiaries"). The foreign
subsidiaries and certain domestic subsidiaries of L-3 Communications (the
"Non-Guarantor Subsidiaries") do not guarantee the debt of L-3 Communications.
None of the debt of L-3 Communications has been issued by its subsidiaries.
There are no restrictions on the payment of dividends from the Guarantor
Subsidiaries to L-3 Communications.
In lieu of providing separate unaudited interim financial statements for
the Guarantor Subsidiaries, the Company has included the accompanying condensed
consolidating financial statement data based on the Company's understanding of
the SEC's Financial Reporting Release No. 55 which has amended Rule 3-10 of SEC
Regulation S-X and Staff Accounting Bulletin No. 53.
The following unaudited condensed consolidating financial information
present the results of operations, financial position and cash flows of (i) L-3
Communications excluding its consolidated subsidiaries (the "Parent") (ii) the
Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries and (iv) the
consolidating adjustments to arrive at the information for L-3 Communications
on a consolidated basis.
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS L-3 COMMUNICATIONS
------------- -------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING BALANCE
--------------------------------------------
SHEETS:
--------------------------------------------
AS OF SEPTEMBER 30, 2000
--------------------------------------------
Current assets:
Cash and cash equivalents ................. $ 24,764 $ 4,548 $ 907 $ -- $ 30,219
Contracts in process ...................... 403,575 202,758 57,208 -- 663,541
Other current assets ...................... 41,502 16,115 9,502 67,119
---------- -------- --------- ---------- ----------
Total current assets .................... 469,841 223,421 67,617 -- 760,879
---------- -------- --------- ---------- ----------
Property, plant and equipment, net ......... 121,130 25,338 11,852 -- 158,320
Intangibles, net ........................... 863,326 389,855 55,693 -- 1,308,874
Other assets ............................... 92,274 13,735 22,336 -- 128,345
Investment in and amounts due to and
from consolidated subsidiaries ............ 647,609 4,408 (37,051) (614,966) --
---------- -------- --------- ---------- ----------
Total assets ............................ $2,194,180 $656,757 $ 120,447 $ (614,966) $2,356,418
========== ======== ========= ========== ==========
Current liabilities:
Borrowings under Senior Credit
Facilities .............................. $ 237,000 $ -- $ -- $ -- $ 237,000
Accounts payable and accrued
expenses ................................ 208,326 58,258 22,744 -- 289,328
Customer advances ......................... 49,270 4,041 2,219 -- 55,530
Other current liabilities ................. 56,802 16,301 8,337 -- 81,440
---------- -------- --------- ---------- ----------
Total current liabilities ............... 551,398 78,600 33,300 -- 663,298
---------- -------- --------- ---------- ----------
Other liabilities .......................... 150,747 48,609 1,729 -- 201,085
Long-term debt ............................. 836,500 -- -- -- 836,500
Shareholders' equity ....................... 655,535 529,548 85,418 (614,966) 655,535
---------- -------- --------- ---------- ----------
Total liabilities and shareholders'
equity ................................. $2,194,180 $656,757 $ 120,447 $ (614,966) $2,356,418
========== ======== ========= ========== ==========
</TABLE>
12
<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>
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS L-3 COMMUNICATIONS
------------- -------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING BALANCE
-------------------------------
SHEETS:
-------
AS OF DECEMBER 31, 1999
-----------------------
Current assets:
Cash and cash equivalents ................... $ 34,037 $ 5,164 $ 3,587 $ -- $ 42,788
Contracts in process ........................ 264,658 162,088 57,427 -- 484,173
Other current assets ........................ 24,616 10,455 5,675 -- 40,746
---------- -------- --------- ---------- ----------
Total current assets ...................... 323,311 177,707 66,689 -- 567,707
---------- -------- --------- ---------- ----------
Property, plant and equipment, net ........... 104,087 25,005 11,879 -- 140,971
Intangibles, net ............................. 399,746 377,177 44,629 -- 821,552
Other assets ................................. 67,820 10,337 25,384 -- 103,541
Investment in and amounts due
to and from consolidated subsidiaries 644,560 23,591 (25,423) (642,728) --
---------- -------- --------- ---------- ----------
Total assets .............................. $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771
========== ======== ========= ========== ==========
Current liabilities:
Accounts payable and accrued
expenses .................................. $ 135,709 $ 57,924 $ 19,007 $ -- $ 212,640
Customer advances ........................... 53,345 543 2,850 -- 56,738
Other current liabilities ................... 24,798 17,230 6,900 -- 48,928
---------- -------- --------- ---------- ----------
Total current liabilities ................. 213,852 75,697 28,757 -- 318,306
---------- -------- --------- ---------- ----------
Other liabilities ............................ 79,234 47,961 95 -- 127,290
Long-term debt ............................... 605,000 -- -- -- 605,000
Shareholders' equity ......................... 641,438 490,159 94,306 (642,728) 583,175
---------- -------- --------- ---------- ----------
Total liabilities and shareholders'
equity ................................... $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771
========== ======== ========= ========== ==========
CONDENSED CONSOLIDATING STATEMENTS OF
-------------------------------------
OPERATIONS:
-----------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
Sales ........................................ $ 911,281 $318,347 $ 122,815 $ -- $1,352,443
---------- -------- --------- ---------- ----------
Operating income (loss)....................... 148,123 3,034 (4,020) -- 147,137
Interest and other income .................... 4,563 227 (1,329) -- 3,461
Interest expense ............................. 66,804 140 178 -- 67,122
Provision (benefit) for income taxes ......... 32,634 1,304 (1,966) -- 31,972
Equity in net income (loss) of
consolidated subsidiaries ................... (1,744) -- -- 1,744 --
---------- -------- --------- ---------- ----------
Net income (loss) ............................ $ 51,504 $ 1,817 $ (3,561) $ 1,744 $ 51,504
========== ======== ========= ========== ==========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Sales ........................................ $ 581,522 $303,478 $ 87,350 $ -- $ 972,350
---------- -------- --------- ---------- ----------
Operating income (loss) ...................... 69,732 35,921 (5,497) -- 100,156
Interest and other income .................... 2,986 210 269 -- 3,465
Interest expense ............................. 45,369 207 104 -- 45,680
Provision (benefit) for income taxes ......... 10,287 13,831 (1,811) -- 22,307
Equity in net income (loss) of
consolidated subsidiaries ................... 18,572 -- -- (18,572) --
---------- -------- --------- ---------- ----------
Net income (loss) ............................ $ 35,634 $ 22,093 $ (3,521) $ (18,572) $ 35,634
========== ======== ========= ========== ==========
</TABLE>
13
<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>
GUARANTOR
PARENT SUBSIDIARIES
------------- --------------
<S> <C> <C>
CONDENSED CONSOLIDATING STATEMENTS OF
-------------------------------------
CASH FLOWS:
-----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000:
---------------------------------------------
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 51,504 $ 1,817
Depreciation, amortization, deferred taxes and
noncash items .......................................... 67,859 13,310
Equity in net (income) loss of consolidated
subsidiaries ........................................... 1,744 --
Changes in operating assets and liabilities ............. (74,723) 3,305
----------- -----------
Net cash from (used in) operating activities ............ 46,384 18,432
----------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... (496,346) (26,416)
Investment in consolidated subsidiaries ................. (36,527) --
Capital expenditures, net of dispositions ............... (13,009) (3,973)
Other investing activities, net ......................... 5,865 --
----------- -----------
Net cash (used in) from investing activities ............ (540,017) (30,389)
----------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ 468,500 --
Intercompany financing activities, net .................. 14,462 11,341
Other financing activities, net ......................... 1,398 --
----------- -----------
Net cash from (used in) financing activities ............ 484,360 11,341
----------- -----------
Net (decrease) in cash .................................. (9,273) (616)
Cash and cash equivalents, beginning of period .......... 34,037 5,164
----------- -----------
Cash and cash equivalents, end of period ................ $ 24,764 $ 4,548
=========== ===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
---------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) ....................................... $ 35,634 $ 22,093
Depreciation, amortization, deferred taxes and
noncash items .......................................... 50,186 12,443
Equity in net (income) loss of consolidated
subsidiaries ........................................... (18,572) --
Changes in operating assets and liabilities ............. (18,828) (20,392)
----------- -----------
Net cash from (used in) operating activities ............ 48,420 14,144
----------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... -- (156,119)
Investment in consolidated subsidiaries ................. (211,393) --
Capital expenditures, net of dispositions ............... (10,606) 291
Other investing activities, net ......................... 4,777 --
----------- -----------
Net cash from (used in) investing activities ............ (217,222) (155,828)
----------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ -- --
Contribution from Holdings .............................. 201,582 --
Intercompany financing activities, net .................. 1,767 149,084
Other financing activities, net ......................... (875) --
----------- -----------
Net cash from (used in) financing activities ............ 202,474 149,084
----------- -----------
Net increase in cash .................................... 33,672 7,400
Cash and cash equivalents, beginning of period .......... 23,737 459
----------- -----------
Cash and cash equivalents, end of period ................ $ 57,409 $ 7,859
=========== ===========
<CAPTION>
NON-GUARANTOR CONSOLIDATING CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS L-3 COMMUNICATIONS
--------------- --------------- -------------------
<S> <C> <C> <C>
CONDENSED CONSOLIDATING STATEMENTS OF
-------------------------------------
CASH FLOWS:
-----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000:
---------------------------------------------
OPERATING ACTIVITIES:
Net income (loss)........................................ $ (3,561) $ 1,744 $ 51,504
Depreciation, amortization, deferred taxes and
noncash items .......................................... 3,645 -- 84,814
Equity in net (income) loss of consolidated
subsidiaries ........................................... -- (1,744) --
Changes in operating assets and liabilities ............. (2,228) -- (73,646)
--------- ---------- -----------
Net cash from (used in) operating activities ............ (2,144) -- 62,672
--------- ---------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... (10,111) -- (532,873)
Investment in consolidated subsidiaries ................. -- 36,527 --
Capital expenditures, net of dispositions ............... (1,149) -- (18,131)
Other investing activities, net ......................... -- 5,865
--------- ---------- -----------
Net cash (used in) from investing activities ............ (11,260) 36,527 (545,139)
--------- ---------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ -- -- 468,500
Intercompany financing activities, net .................. 10,724 (36,527) --
Other financing activities, net ......................... -- -- 1,398
--------- ---------- -----------
Net cash from (used in) financing activities ............ 10,724 (36,527) 469,898
--------- ---------- -----------
Net (decrease) in cash .................................. (2,680) -- (12,569)
Cash and cash equivalents, beginning of period .......... 3,587 -- 42,788
--------- ---------- -----------
Cash and cash equivalents, end of period ................ $ 907 $ -- $ 30,219
========= ========== ===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
---------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) ....................................... $ (3,521) $ (18,572) $ 35,634
Depreciation, amortization, deferred taxes and
noncash items .......................................... 3,071 -- 65,700
Equity in net (income) loss of consolidated
subsidiaries ........................................... -- 18,572 --
Changes in operating assets and liabilities ............. (1,922) -- (41,142)
--------- ---------- -----------
Net cash from (used in) operating activities ............ (2,372) -- 60,192
--------- ---------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... (55,274) -- (211,393)
Investment in consolidated subsidiaries ................. -- 211,393 --
Capital expenditures, net of dispositions ............... 695 -- (9,620)
Other investing activities, net ......................... -- -- 4,777
--------- ---------- -----------
Net cash from (used in) investing activities ............ (54,579) 211,393 (216,236)
--------- ---------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ -- -- --
Contribution from Holdings .............................. -- -- 201,582
Intercompany financing activities, net .................. 60,542 (211,393) --
Other financing activities, net ......................... -- -- (875)
--------- ---------- -----------
Net cash from (used in) financing activities ............ 60,542 (211,393) 200,707
--------- ---------- -----------
Net increase in cash .................................... 3,591 -- 44,663
Cash and cash equivalents, beginning of period .......... 1,934 -- 26,130
--------- ---------- -----------
Cash and cash equivalents, end of period ................ $ 5,525 $ -- $ 70,793
========= ========== ===========
</TABLE>
14
<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 U.S. Department of Defense ("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. The Secure Communication Systems segment also
includes our Training and Simulation business, which produces advanced
simulation and training products, and also provides a full range of teaching,
training and logistic services and training device support to domestic and
international customers. 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.
ACQUISITIONS
On January 8, 1999, the Company acquired all of the outstanding common
stock of Microdyne Corporation ("Microdyne"). On April 16, 1999, the Company
acquired all of the outstanding common stock of Aydin Corporation ("Aydin"). On
June 30, 1999, the Company acquired all of the outstanding common stock of
Interstate Electronics Corporation ("IEC") of Scott Technologies Inc.
Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999
Acquisitions". On December 31, 1999, the Company completed its acquisition of
the assets of the Space and Navigation business ("SNS") from Honeywell
International, Inc ("Honeywell"), for $55.0 million in cash plus expenses,
subject to adjustment based on closing date net assets.
On February 10, 2000, the Company acquired the assets of the Training
Devices and Training Services ("TDTS") business of the Raytheon Company for
$160.0 million in cash plus expenses, subject to adjustment based on closing
date net working capital, as defined. Following the acquisition the Company
changed the name of TDTS to L-3 Communications Link Simulation and Training. On
15
<PAGE>
February 14, 2000, the Company acquired the assets of Trex Communications
Corporation ("TrexCom") for $50.2 million in cash, plus expenses, subject to
adjustment based on closing date net worth, as defined. The acquisitions were
financed using borrowings under the Company's Senior Credit Facilities.
On April 28, 2000, the Company acquired the Traffic Alert and Collision
Avoidance System ("TCAS") product line from Honeywell for a purchase price of
$237.0 million in cash, reflecting a price reduction of $17.0 million based on
the preliminary closing date net assets, which is subject to a final
adjustment. The TCAS acquisition was financed with borrowings under a new
revolving 364 day senior credit facility. In addition, in February 2000, the
Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant
S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to create
a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of
the TCAS assets acquired from Honeywell to the TCAS LLC, and sell a 30%
interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of
the final purchase price paid by the Company for TCAS (which is expected to be
approximately $71.1 million based on the preliminary closing date net assets)
(collectively, the "TCAS Minority Interest Transaction"). L-3 will consolidate
the TCAS LLC. The Company anticipates that it will complete the definitive
agreements regarding the TCAS Minority Interest Transaction with Sextant in the
fourth quarter of 2000. The TCAS Minority Interest Transaction is subject to
regulatory approval by United States agencies and the European Union Commission
and the execution of definitive agreements.
On June 30, 2000, the Company acquired all the outstanding stock of MPRI
for $34.5 million in cash, subject to adjustment based on closing date net
assets, plus additional consideration contingent upon the post-acquisition
financial performance of MPRI for the year ending June 30, 2001. The
acquisition was financed using borrowings under the Company's Senior Credit
Facilities.
On July 11, 2000, the Company acquired 53.5% of the outstanding common
stock of LogiMetrics, Inc. ("LogiMetrics") for $15.0 million. The acquisition
was financed using borrowings under the Company's Senior Credit Facilities. The
Company also agreed to invest an additional $5.0 million in LogiMetrics during
2001 for an additional equity interest, and will contribute to LogiMetrics
certain technologies, upon satisfaction of certain future conditions.
All of the acquisitions have been accounted for as purchase business
combinations and are included in the Company's results of operations from their
respective effective dates.
The Securities and Exchange Commission ("SEC") requires that the Company
file separate audited financial statements of the most recent fiscal years for
TDTS and TCAS prior to their acquisition by L-3 with unaudited pro forma
financial information. However audited financial statements for the TDTS and
TCAS businesses are not readily available, because prior to the acquisitions,
TDTS and TCAS were not stand-alone entities and their financial statements were
not audited. These financial statements are currently being audited, and upon
their completion, the Company will file the required TDTS and TCAS financial
statements and pro forma financial information with the SEC. However, based on
the unaudited preliminary data, sales and operating loss for the year ended
December 31, 1999 for the TDTS business, including a loss provision for
estimated costs in excess of estimated billings to complete certain contracts in
process, were $270.6 million and $(36.9) million, respectively, and sales and
operating income for the year ended December 31, 1999 for the TCAS product line
were $108.0 million and $46.1 million, respectively. Actual results, based upon
completion of the aforementioned audits, could differ materially from these
statements of operations data. Additionally, depending on the December 31, 1999
audit results for TDTS, the final purchase allocation for TDTS relating to loss
reserves for estimated costs in excess of estimated billings to complete certain
acquired contracts in process could be materially different than those recorded
in the Company's preliminary purchase allocation for the TDTS acquisition which
is reflectd on the Company's consolidated balance sheet as of September 30,
2000.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of September 30, 2000, which reflect the
results of operations of the Company's acquisitions from their respective
effective dates. The results of operations for all periods presented are
significantly
16
<PAGE>
affected by the timing of the Company's acquisitions. The tables below provide
selected statement of operations data for the Company for the three-month period
ended September 30, 2000 (the "2000 Third Quarter") and the three-month period
ended September 30, 1999 (the "1999 Third Quarter") and for the nine-month
period ended September 30, 2000 ("the 2000 Nine Month Period") and nine-month
period ended September 30, 1999 ("the 1999 Nine Month Period"). Prior year
reported segment information has been restated to conform to the 2000
presentation of the Company's reportable segments.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
----------- -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 230.7 $ 141.4
Specialized Communication Products ................................ 283.7 241.0
-------- --------
Total ........................................................... $ 514.4 $ 382.4
======== ========
Operating income:
Secure Communication Systems ...................................... $ 25.1 $ 11.7
Specialized Communication Products ................................ 37.7 31.1
-------- --------
Total ........................................................... $ 62.8 $ 42.8
======== ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 6.8 $ 4.5
Specialized Communication Products ................................ 12.2 9.5
-------- --------
Total ........................................................... $ 19.0 $ 14.0
======== ========
EBITDA(2)
Secure Communication Systems ...................................... $ 31.9 $ 16.2
Specialized Communication Products ................................ 49.9 40.6
-------- --------
Total ........................................................... $ 81.8 $ 56.8
======== ========
</TABLE>
----------
(1) Sales are after intersegment eliminations. See Note 8 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. 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. EBITDA as defined
by the Company may differ from similarly named measures used by other
entities.
Sales increased $132.0 million to $514.4 million in 2000 Third Quarter
compared with $382.4 million in the 1999 Third Quarter, reflecting sales growth
of $89.3 million for the Secure Communication Systems segment and $42.7 million
for the Specialized Communication Products segment. Operating income increased
$20.0 million to $62.8 million, and operating income as a percentage of sales
("operating margin") increased to 12.2% from 11.2% for the reasons described
below under the reportable segments discussion. Depreciation and amortization
expenses in the 2000 Third Quarter increased $5.0 million to $19.0 million,
reflecting increased goodwill amortization associated with acquisitions and
additional depreciation related to acquisitions and capital expenditures.
EBITDA increased $25.0 million to $81.8 million. EBITDA as a percentage of
sales ("EBITDA margin") increased to 15.9% from 14.9%. Basic earnings per
common share ("EPS") and diluted EPS grew 35.8% to $0.72 and 35.3% to $0.69,
respectively. Basic weighted-average common shares outstanding and diluted
weighted-average common shares outstanding increased 2.7% and 2.8%,
respectively.
Interest expense, net of interest income increased $9.3 million to $23.9
million in the 2000 Third Quarter because of the higher average outstanding
debt, net of cash during the 2000 Third Quarter compared with the 1999 Third
Quarter attributable to borrowings made under the Senior Credit Facilities
17
<PAGE>
to finance acquisitions completed during the 2000 Nine Month Period. The income
tax provision for the 2000 Third Quarter reflects an estimated effective income
tax rate of 38.0%, compared with 38.5% for the 1999 Third Quarter.
Included in interest and other income for the 2000 Third Quarter is a
pre-tax gain of $0.6 million ($0.4 million after-tax or $0.01 per diluted
share) on the sale in a 60% interest in the Company's Turkish subsidiary.
Excluding this gain, diluted EPS was $0.68 per share, an increase of 33.3% over
1999 Third Quarter diluted EPS.
Sales of Secure Communication Systems segment increased $89.3 million or
63.2% to $230.7 million in 2000 Third Quarter compared with the 1999 Third
Quarter. Operating income increased $13.4 million to $25.1 million. Operating
margin increased to 10.9% from 8.3%. The increase in sales was primarily
attributable to the Link Simulation and Training and MPRI acquired businesses
and increased volume on, high data rate communications systems, communication
software support services and airport security equipment. 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 and improved operating efficiencies, partially offset by the
expected lower margins on the Link Training and Simulation acquired business.
EBITDA increased $15.7 million to $31.9 million in 2000 Third Quarter and
EBITDA margin improved to 13.8% from 11.5%. The increases in EBITDA and EBITDA
margin were primarily attributable to the items affecting the trends in
operating income.
Sales of the Specialized Communication Products segment increased $42.7
million or 17.7% to $283.7 million in 2000 Third Quarter compared with the 1999
Third Quarter. Operating income increased $6.6 million to $37.7 million and
operating margin increased to 13.3% from 12.9%. The increase in sales was
principally attributable to the TCAS, SNS and TrexCom acquired businesses and
volume increases on airborne dipping sonar systems, aviation recorders,
microwave products, antenna and display products, that were partially offset by
decreased shipments of naval power systems and telemetry products. The increase
in operating margin was principally attributable to improved margins on ocean
products, aviation recorders and antenna and display products arising from
sales volume increases and cost reductions and higher margins on the TCAS
acquired business. These margin improvements were partially offset by lower
margins on naval power systems and telemetry products attributable to reduced
shipments and the expected lower margins on the SNS and TrexCom acquired
businesses. EBITDA increased $9.3 million to $49.9 million and EBITDA margin
increased to 17.6% from 16.8%. The changes in EBITDA and EBITDA margin were
primarily attributable to the items affecting the trends in operating income.
18
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
------------ -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 593.1 $ 384.4
Specialized Communication Products ................................ 759.3 588.0
--------- --------
Total ............................................................ $ 1,352.4 $ 972.4
========= ========
Operating income:
Secure Communication Systems ...................................... $ 63.8 $ 33.5
Specialized Communication Products ................................ 83.3 66.6
--------- --------
Total ............................................................ $ 147.1 $ 100.1
========= ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 18.6 $ 13.7
Specialized Communication Products ................................ 34.5 26.7
--------- --------
Total ............................................................ $ 53.1 $ 40.4
========= ========
EBITDA
Secure Communication Systems ...................................... $ 82.4 $ 47.2
Specialized Communications Products ............................... 117.8 93.3
--------- --------
Total ............................................................ $ 200.2 $ 140.5
========= ========
</TABLE>
----------
(1) Sales are after intersegment eliminations. See Note 8 to the Unaudited
Condensed Consolidated Financial Statements.
Sales increased $380.0 million or 39.1% to $1,352.4 million in the 2000
Nine Month Period compared with $972.4 million in the 1999 Nine Month Period
comprised of growth in sales of $208.7 million for the Secure Communication
Systems segment and of $171.3 million for the Specialized Communication
Products segment. Operating income increased $47.0 million to $147.1 million,
and operating income as a percentage of sales ("operating margin") improved to
10.9% from 10.3% for the reasons described below under the reportable segments
discussion. Depreciation and amortization expenses increased $12.7 million to
$53.1 million, reflecting increased goodwill amortization associated with
acquisitions and additional depreciation related to capital expenditures.
EBITDA increased $59.7 million to $200.2 million. EBITDA as a percentage of
sales ("EBITDA margin") increased to 14.8% from 14.4%. Basic earnings per
common share ("EPS") and diluted EPS grew 38.4% to $1.55 and 39.6% to $1.48,
respectively. Basic weighted-average common shares outstanding increased 4.4%
and diluted weighted-average common shares outstanding increased 4.1%.
Interest expense, net of interest income, increased $21.5 million to $63.7
million in 2000 Nine Month Period principally because of higher average
outstanding debt, net of cash during 2000 Nine Month Period compared with the
1999 Nine Month Period. The income tax provision for the 2000 Nine Month Period
reflects the Company's estimated effective income tax rate for 2000 of 38.3%,
compared with an effective tax rate of 38.5% for 1999 Nine Month Period.
Included in interest and other income for the 2000 Nine Month Period are
net pre-tax gains of $14.9 million (after-tax gain of $9.2 million), consisting
of gains on the sale of the Company's interests in the Network Security and
Cardiovascular Computer Systems businesses and the divestiture of 60% of the
Company's Turkish subsidiary, which were largely offset by a pre-tax loss of
$12.4 million (after-tax loss of $7.6 million) on the write-down in the
carrying value of certain other investments recorded during the first half of
2000, which contributed $0.04 to diluted EPS. Excluding these net gains,
diluted EPS was $1.44 per share, an increase of 35.9% over the 1999 Nine Month
Period diluted EPS. The 1999 Nine Month Period other income included a $0.5
million pre-tax gain recognized on the sale of a business in June 1999.
19
<PAGE>
Sales of Secure Communication Systems segment increased $208.7 million or
54.3% to $593.1 million in 2000 Nine Month Period compared with the 1999 Nine
Month Period. Operating income increased $30.3 million to $63.8 million.
Operating margin increased to 10.8% from 8.7%. The increase in sales was
primarily attributable to the Link Training and Simulation and MPRI acquired
businesses and increased sales on secure telephone equipment ("STE"),
communication software support services and airport security equipment. The
increase in operating margin was attributable to improved margins on military
communication systems, STE and high data rate communication systems, partially
offset by the expected lower margins on the Link Training and Simulation
acquired business. EBITDA increased $35.2 million to $82.4 million and EBITDA
margin improved to 13.9% from 12.3%. The increases in EBITDA and EBITDA margin
were primarily attributable to the items affecting the trends in operating
income.
Sales of the Specialized Communication Products segment increased $171.3
million or 29.1% to $759.3 million in 2000 Nine Month Period compared with the
1999 Nine Month Period. Operating income increased $16.7 million to $83.3
million and operating margin declined to 11.0% from 11.3%. The increase in
sales is attributable to acquisitions and volume increases on airborne dipping
sonar systems, and display products that were partially offset by decreased
shipments of naval power systems, telemetry products. The decline in operating
margin is attributable to lower margins on naval power systems, telemetry
products and microwave components principally attributable to sales volumes and
mix and the expected lower margins on the SNS and TrexCom acquired businesses,
partially offset by higher margins on avionics and ocean products arising from
sales volume increases and cost reductions and the TCAS acquired business.
EBITDA increased $24.5 million to $117.8 million and EBITDA margin declined to
15.5% from 15.9%. The changes in EBITDA and EBITDA margin were primarily
attributable to the items affecting the trends in operating income.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $179.4 million from December 31, 1999 to
September 30, 2000, of which $121.7 million was related to businesses acquired
during the 2000 Nine Month Period. The remaining increase in contracts in
process was principally attributable to increases in inventory and unbilled
receivables because of production on certain programs and products in advance
of shipments expected to occur in the fourth quarter of 2000.
The increases from December 31, 1999 to September 30, 2000 in current
deferred tax assets, property, plant and equipment, intangibles, accrued
employment costs, accrued expenses, other current liabilities and other
liabilities were principally related to acquired businesses. The increase in
accounts payable was principally related to balances of acquired businesses,
partially offset by the timing of payments to vendors. The increase in accrued
interest was attributable to higher outstanding debt balances and the timing of
interest payments.
STATEMENT OF CASH FLOWS
The following table provides cash flow statement data for the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
------------ ------------
(in millions)
<S> <C> <C>
Net cash from operating activities .............. $ 62.7 $ 60.2
Net cash (used in) investing activities ......... $ (545.1) $ (216.2)
Net cash from financing activities .............. $ 469.9 $ 200.7
</TABLE>
OPERATING ACTIVITIES
During the 2000 Nine Month Period, L-3 generated $62.7 million of cash in
its operating activities, an increase of $2.5 million from the $60.2 million
generated in the 1999 Nine Month Period, principally as a result of
improvements of $35.0 million in earnings adjusted for non-cash items and
deferred taxes,
20
<PAGE>
largely offset by an increase in working capital and other operating assets and
liabilities excluding the effects of acquisitions of $32.5 million in the 2000
Nine Month Period compared with the 1999 Nine Month Period. The increase in
working capital was principally related to increases in contracts in process
in advance of shipments expected to occur in the fourth quarter of 2000, and
delays in collecting certain receivables that were expected to occur in
September 2000, but slipped into the fourth quarter of 2000. The Company
expects its rate of increase in working capital to decline during the fourth
quarter of 2000, and as a result cash flow is expected to improve.
Additionally, cash flows from operating activities during the 2000 Nine Month
Period were adversely affected by uses of cash relating to certain contracts in
process that were assumed in the TDTS acquisition for which the estimated costs
exceed the estimated billings to complete such contracts. The Company expects
to experience negative impacts on its cash flows related to the completion of
such TDTS acquired contracts in process during the fourth quarter of 2000 and
continuing throughout 2001, but to a lesser extent than in the 2000 Nine Month
Period.
INVESTING ACTIVITIES
The Company continued to pursue its acquisition strategy during the 2000
Nine Month Period and invested $532.9 million to acquire businesses, compared
with $211.4 million in the 1999 Nine Month Period (See discussion under
"Acquisitions" above).
The Company makes capital expenditures for improvement of manufacturing
facilities and equipment. The Company expects that its capital expenditures for
the year ending December 31, 2000 will be about $35.0 million.
In March 2000, the Company sold its interest in the Network Security
business for net cash proceeds of $13.4 million. In May 2000, the Company sold
its interest in the Cardiovascular Computer Systems business for net cash
proceeds of $5.6 million.
FINANCING ACTIVITIES
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"); the net proceeds of $201.5 million were contributed to the Company
and partially used to repay borrowings made in January 1999 under the Senior
Credit Facilities to finance the Microdyne acquisition.
At September 30, 2000, available borrowings under the revolving credit
facilities were $115.9 million after reductions for outstanding borrowings,
made during the 2000 Nine Month Period of $468.5 million used principally to
finance acquisitions, and outstanding letters of credit of $115.6 million.
On April 28, 2000 the Company entered into a new 364 day revolving senior
credit facility for $300.0 million (the "New 364 Day Revolving Credit
Facility") that expires on April 27, 2001, and on April 28, 2000 borrowed
$237.0 million thereunder to finance the TCAS acquisition. Additionally, on
April 28, 2000 the Company amended the Senior Credit Facilities to change the
spreads on borrowings and commitment fees thereunder. The spreads on the New
364 Day Revolving Credit Facility are the same as those under the Senior Credit
Facilities, and the lenders under the New 364 Day Revolving Credit Facility
rank pari passu with the lenders under the Senior Credit Facilities. See Note 4
to the Condensed Consolidated Financial Statements. The borrowings outstanding
of $237.0 million at September 30, 2000 under the New 364 Day Revolving Credit
Facility are classified under current liabilities on the balance sheet because
the facility expires in April 2001. The Company intends to either refinance the
New 364 Day Revolving Credit Facility or to restructure it together with the
Company's other existing revolving credit facilities by the end of the first
quarter of 2001.
In August 2000, the Revolving 364 Day Credit Facility for $200.0 million
was renewed for an additional 364 days and will expire on August 9, 2001, at
which time the Company may convert a portion of the borrowings outstanding
thereunder into term loans which fully amortize over an eighteen month period
beginning September 30, 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
21
<PAGE>
L-3 Communications. As of September 30, 2000, 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 subsidiaries of L-3 Communications, all of which guarantor
subsidiaries 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.
CONTINGENCIES
See Note 7 to the Condensed Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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 September 15,
2000. The Company does not expect SFAS 133 to have a material impact on its
results of operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. The SEC delayed the effective date
of this SAB in June 2000, so that the SAB must now be adopted by December 31,
2000. The Company does not expect SAB No. 101 to have a material impact on its
results of operations or financial position.
YEAR 2000
The Company has not experienced any impact to its business since the Year
2000 roll-over either internally or from its customers and infrastructure
suppliers. The planned phases of the Year 2000 efforts have been completed with
total cost for all the efforts of $18.7 million which included $6.2 million of
capitalized costs. Although the Company has experienced no failures in
infrastructure systems and in the customer and supply chains since the Year
2000 roll-over, the likelihood and effect of such failure 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 Year
2000 effort costs reflected above could change in the event of any unknown Year
2000 related occurrence during the remainder of the year ending December 31,
2000.
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
22
<PAGE>
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 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 defense budget; our reliance on contracts with a
limited number of agencies of, or contractors to, the U.S. government business
risks peculiar to that industry including changing priorities or reductions in
the U.S. government and the possibility of termination of government contracts
by unilateral government action or for failure to perform; the ability to
obtain or the timing of obtaining future government contracts; the availability
of government funding and customer requirements; economic conditions,
competitive environment, international business and political conditions,
timing of international awards and contracts; 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 or
companies; the significant amount of out 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.
As for the forward-looking statements that relate to the future financial
results and other projections, actual results will be different due to the
inherent nature of projections and may be better or worse than projected. Given
these uncertainties, you should not place any reliance on these forward-looking
statements. These forward-looking statements also represent our estimates and
assumptions only as of the date that they were made. We expressly disclaim a
duty to provide updates to these forward-looking statements, and the estimates
and assumptions associated with them, after the date of this filing to reflect
events or changes or circumstances or changes in expectations or the occurrence
of anticipated events.
ITEM 3. QUANTITIVE 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, 1999 for a discussion of the Company's exposure to market risks.
There was no significant change in those risks during the nine months ended
September 30, 2000.
23
<PAGE>
PART II - OTHER INFORMATION
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 in Note 6 to the
Condensed Consolidated Financial Statements as of September 30, 2000 in
accordance with the provisions of FASB SFAS No. 128, Earnings Per Share.
(b) Reports on Form 8-K
None
24
<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: November 7, 2000
/s/ Robert V. LaPenta
----------------------------------------
Name: Robert V. LaPenta
Title: President and Chief Financial Officer
(Principal Financial Officer)
25
