<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) October 30, 1998
------------------
L-3 Communications Holdings
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
13-3937434
- --------------------------------------------------------------------------------
(Commission File Number) (IRS Employer Identification No.)
600 Third Avenue, New York, New York 10016
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 697-1111
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
<PAGE>
General Note: The information included in this Form 8-K has previously been
filed on Form 8-K (August 19, 1998) and Form 8-KA (October 27, 1998) of L-3
Communications Corp. This Form 8-K filing has been made to also add L-3
Communications Holdings, Inc. as the Registrant.
Item 2 Acquisition of Assets
Pursuant to a definitive agreement entered into on July 2, 1998,
L-3 Communications Corporation acquired the stock of SPD Technologies,
Inc. ("SPD") on August 13, 1998 for $230 million subject to adjustment based on
closing adjusted net assets, as defined. The acquisition was financed with cash
on hand and borrowings under the Company's senior credit facilities. In 1997,
SPD had pro forma sales of approximately $170 million. SPD is a leader in
providing state-of-the-art, mission-critical electronics and electrical power
products and subsystems for the U.S. Navy and many domestic and international
customers.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
a. Financial Statements:
Unaudited Condensed Consolidated Financial Statements as of June 30, 1998
and for the six months ended June 30, 1998 and 1997 ...................... A-1 to A-6
Condensed Consolidated Balance Sheet as of June 30, 1998
Condensed Consolidated Statements of Earnings for the six months
ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Consolidated Financial Statements as of December 31, 1997 and
for the year ended December 31, 1997 ..................................... A-7 to A-21
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statement of Earnings for the year ended
December 31, 1997
Consolidated Statement of Cash Flows for the year ended
December 31, 1997
Notes to Consolidated Financial Statements
Consolidated Financial Statements as of December 31, 1996 and 1995 and for
the years ended December 31, 1996 and 1995 ............................... A-22 to A-34
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Earnings and Accumulated Deficit as of
December 31, 1996 and 1995
Consolidated Statements of Cash Flows as of December 31, 1996 and 1995
Notes to Consolidated Financial Statements
b. Pro Forma Financial Information:
Unaudited Pro Forma Condensed Consolidated Financial Statements as of
June 30, 1998 and for the six months ended June 30, 1998 and for the year
ended December 31, 1997 .................................................. B-1 to B-8
c. Exhibits
*2. Amended and Restated Agreement and Plan of Merger dated as of
August 13, 1998 by and among L-3 Communications Corporation,
SPD Merger Co., SPD Technologies, Inc. and Midmark
Capital, L.P.
*23. Consent of Grant Thornton LLP
</TABLE>
* Incorporated by reference from the L-3 Communications Corporation form 8-K/A
filed October 27, 1998 (file no. 333-46983).
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS
------------------------------
Registrant
Date October 30, 1998 By: /s/ Robert V. LaPenta
----------------- --------------------------
President and Chief
Financial Officer
(Principal Financial Officer)
2
<PAGE>
UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
A-1
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ....................................................... $ 197,000
Accounts receivable, less allowance for doubtful accounts of
$582,000.................................................. 25,931,000
Inventories ................................................ 28,174,000
Unbilled costs ............................................. 5,259,000
Deferred income tax benefit ................................ 6,100,000
Prepaid expenses and other ................................. 2,596,000
------------
Total current assets ..................................... 68,257,000
Property, plant and equipment--at cost $ 15,663,000
Less accumulated depreciation and amortization ............. (2,782,000) 12,881,000
------------
DEFERRED INCOME TAX BENEFIT ................................. 927,000
INTANGIBLE ASSETS - NET ..................................... 78,035,000
OTHER ASSETS ................................................ 366,000
------------
$160,466,000
============
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt ............................... $ 6,250,000
Accounts payable ................................................... 12,428,000
Accrued expenses and other liabilities ............................. 21,808,000
------------
Total current liabilities ........................................ 40,486,000
LONG-TERM DEBT, LESS CURRENT MATURITIES ............................. 69,745,000
POSTRETIREMENT BENEFITS LIABILITY ................................... 25,500,000
PENSION BENEFITS LIABILITY .......................................... 4,731,000
OTHER LIABILITIES ................................................... 435,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock -- authorized, 1,000,000 shares of $.01 par
value; issued and outstanding, 38,010 shares, at stated value..... $ 3,801,000
Common stock -- authorized, 1,000,000 shares of $.01 par
value; issued and outstanding, 99,000 shares ..................... 990
Additional paid-in capital ......................................... 2,422,010
Carryover basis adjustment ......................................... (2,151,000)
Net earnings ....................................................... 15,785,000
Cumulative translation adjustment .................................. (289,000) 19,569,000
------------ ------------
$160,466,000
============
</TABLE>
The accompanying notes are an integral part of this statement.
A-3
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net revenues ............................................. $105,505,000 $50,782,000
Cost of goods sold ....................................... 76,429,000 33,929,000
------------ -----------
Gross profit ............................................ 29,076,000 16,853,000
------------ -----------
Operating expenses
Selling, general and administrative ..................... 14,132,000 5,525,000
Engineering, research and development ................... 3,853,000 3,942,000
Actuarial and other changes to postretirement and defined
benefit pension plans ................................. -- (2,663,000)
------------ -----------
17,985,000 6,804,000
------------ -----------
Earnings from operations ................................ 11,091,000 10,049,000
------------ -----------
Other income (expenses)
Interest expense, net ................................... (4,951,000) (554,000)
Earnings before income taxes .......................... 6,140,000 9,495,000
Income tax expense ....................................... 2,272,000 2,460,000
------------ -----------
NET EARNINGS .......................................... $ 3,868,000 $ 7,035,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-4
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ....................................................... $ 3,868,000 $ 7,035,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization ...................................... 2,559,000 529,000
Changes in operating assets and liabilities, net of effect of
acquisition of SPD Technologies Inc.
Accounts receivable ............................................. (6,544,000) (2,868,000)
Inventories ..................................................... 7,036,000 (386,000)
Unbilled costs .................................................. (644,000) 827,000
Prepaid expenses and other ...................................... (793,000) (511,000)
Accounts payable ................................................ 1,332,000 (618,000)
Pension and postretirement benefits liability ................... (1,033,000) (2,956,000)
Accrual expenses and other liabilities .......................... 1,776,000 880,000
Income taxes payable ............................................ 1,284,000 703,000
------------ ------------
Net cash provided by operating activities .......................... 8,841,000 2,635,000
------------ ------------
Cash flows from investing activities
Acquisition of SPD Technologies Inc., net of cash acquired ......... (791,000) --
Capital expenditures ............................................... (2,950,000) (914,000)
------------ ------------
Net cash (used in) investing activities .......................... (3,741,000) (914,000)
------------ ------------
Cash flows from financing activities
Proceeds from the issuance of common and preferred stock ........... 1,000 --
Principal payments on short-term debt .............................. (2,955,000) (1,978,000)
Principal payments on long-term debt ............................... (2,500,000) (750,000)
------------ ------------
Net cash (used in) financing activities .......................... (5,454,000) (2,728,000)
------------ ------------
NET (DECREASE) IN CASH ........................................... $ (354,000) $ (1,007,000)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
A-5
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SPD Technologies Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and market electrical power delivery systems and components and
vehicular control systems, focused on switching and distribution and frequency
and voltage conversion for military, commercial marine, rail transportation,
utility and commercial specialty markets in the United States and overseas.
SPD's products encompass the entire electrical distribution (power delivery)
system utilized on self-contained power systems such as ships and rail cars.
In January 1997, SPD Holdings Inc., a company formed by an investor group
and certain minority stockholders of SPD Technologies Inc., the predecessor
company, acquired all of the outstanding stock of the Company. The acquisition
was accounted for as a purchase and was financed by the issuance of common and
preferred stock and bank borrowings. As a result of certain minority
shareholders of the predecessor company acquiring ownership in SPD Holdings
Inc., the Company recorded a carryover basis adjustment to stockholders' equity
of $(2,151,000). During 1997, SPD Holdings Inc. changed its name to SPD
Technologies Inc.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month periods ended June 30, 1998 and 1997 are
not necessarily indicative of the results that may be expected for the years
ended December 31, 1997 and 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's financial
statements for the year ended December 31, 1997.
NOTE B -- INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist
of the following:
JUNE 30, 1998
--------------
Materials and purchased parts ................................. $10,730,000
Work-in-process, primarily on U.S. Government
contracts ................................................... 24,064,000
Finished goods ................................................ 1,703,000
-----------
36,497,000
Less progress billings related to long-term contracts
and programs ................................................ 8,323,000
-----------
$28,174,000
-----------
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE C -- SUBSEQUENT EVENT
Pursuant to a definitive agreement entered into on July 2, 1998, L-3
Communications Corporation acquired the stock of the Company on August 13, 1998
for $230,000,000, subject to adjustment based on closing net assets, as
defined. In connection with the sale of the Company, as provided for in the
Company's stock option plan, on August 13, 1998 the vesting date for all
outstanding stock options of the Company was accelerated and the Company
recorded a related $22,078,000 pre-tax compensation charge.
A-6
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
DECEMBER 31, 1997
A-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SPD TECHNOLOGIES INC.
We have audited the accompanying consolidated balance sheet of SPD Technologies
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of earnings and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SPD Technologies
Inc. and Subsidiaries as of December 31, 1997, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
New York, New York
February 25, 1998
/s/ Grant Thornton LLP
A-8
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash $ 551,230
Accounts receivable, less allowance for doubtful accounts
of $772,000 19,791,544
Inventories 35,209,738
Unbilled costs 4,616,034
Deferred income tax benefit 6,100,000
Prepaid expenses and other 1,219,101
------------
Total current assets 67,487,647
PROPERTY, PLANT AND EQUIPMENT -- AT COST
Land $ 150,651
Building and improvements 826,754
Machinery and equipment 8,701,809
Furniture and fixtures 783,851
Leasehold improvements 2,469,130
------------
12,932,195
Less accumulated depreciation and amortization (1,626,808) 11,305,387
------------
DEFERRED INCOME TAX BENEFIT 927,466
INTANGIBLE ASSETS -- NET 78,434,265
OTHER ASSETS 726,932
------------
$158,881,697
============
</TABLE>
A-9
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 6,305,700
Accounts payable 11,096,002
Postretirement benefits liability 3,500,000
Pension benefits liability 3,049,508
Accrued expenses and other liabilities 18,808,646
Income taxes payable 229,479
------------
Total current liabilities 42,989,335
LONG-TERM DEBT, LESS CURRENT MATURITIES 75,403,527
POSTRETIREMENT BENEFITS LIABILITY 22,681,000
PENSION BENEFITS LIABILITY 2,033,797
------------
143,107,659
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock -- authorized, 1,000,000 shares of $.01
par value; issued and outstanding, 38,010 shares, at
stated value $ 3,801,000
Common stock -- authorized, 1,000,000 shares of $.01
par value; issued and outstanding, 99,000 shares 990
Additional paid-in capital 2,422,170
Carryover basis adjustment (2,151,000)
Net earnings 11,916,021
Cumulative translation adjustment (215,143) 15,774,038
------------ ------------
$158,881,697
============
</TABLE>
The accompanying notes are an integral part of this statement.
A-10
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net revenues $130,039,536
Cost of goods sold 86,533,682
------------
Gross profit 43,505,854
------------
Operating expenses
Selling, general and administrative 15,749,504
Engineering, research and development 8,500,920
Amortization of intangible assets 1,458,755
Actuarial and other changes to postretirement and defined
benefit pension plans (5,332,680)
------------
20,376,499
------------
Earnings from operations 23,129,355
Other income (expenses)
Interest expense, net (4,842,334)
------------
Earnings before income taxes 18,287,021
Income taxes
Current 3,100,000
Deferred 3,271,000
------------
6,371,000
------------
NET EARNINGS $ 11,916,021
============
</TABLE>
The accompanying notes are an integral part of this statement.
A-11
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net earnings $ 11,916,021
Adjustments to reconcile net earnings to net cash provided by operating
activities
Depreciation and amortization of property, plant and equipment 1,626,808
Amortization of intangible assets 1,458,755
Deferred income taxes 3,271,000
Actuarial and other changes to postretirement and defined benefit
pension plans (5,332,680)
Provision for losses on accounts receivable 643,000
Changes in operating assets and liabilities, net of effect of
acquisitions of SPD Technologies Inc. and Power Paragon Inc.
Accounts receivable 664,814
Inventories (6,995,194)
Unbilled costs 2,484,834
Prepaid expenses and other 923,808
Accounts payable 1,897,353
Pension and postretirement benefits liability (2,893,879)
Other liabilities 2,055,969
-------------
Net cash provided by operating activities 11,720,609
-------------
Cash flows from investing activities
Acquisition of SPD Technologies Inc. and Power Paragon Inc., net of
cash acquired (84,920,664)
Capital expenditures (1,886,136)
-------------
Net cash used in investing activities (86,806,800)
-------------
Cash flows from financing activities
Proceeds from the issuance of common and preferred stock 3,122,000
Net proceeds from long-term debt 96,954,761
Principal payments on long-term debt (22,718,315)
Payment of deferred financing costs (1,721,025)
-------------
Net cash provided by financing activities 75,637,421
-------------
NET INCREASE IN CASH $ 551,230
=============
</TABLE>
The accompanying notes are an integral part of this statement.
A-12
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
SPD Technologies Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and market electrical power delivery systems and components and
vehicular control systems, focused on switching and distribution and frequency
and voltage conversion for military, commercial marine, rail transportation,
utility and commercial specialty markets in the United States and overseas.
SPD's products encompass the entire electrical distribution (power delivery)
system utilized on self-contained power systems such as ships and rail cars.
In January 1997, SPD Holdings Inc., a company formed by an investor group
and certain minority stockholders of SPD Technologies Inc., the predecessor
company, acquired all of the outstanding stock of the Company. The acquisition
was accounted for as a purchase and was financed by the issuance of common and
preferred stock and bank borrowings. As a result of certain minority
shareholders of the predecessor company acquiring ownership in SPD Holdings
Inc., the Company recorded a carryover basis adjustment to stockholders' equity
of $(2,151,000). During 1997, SPD Holdings Inc. changed its name to SPD
Technologies Inc.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPD and its
wholly-owned subsidiaries, SPD Electrical Systems, Inc., SPD Switchgear Inc.,
PacOrd Inc., Henschel, Inc., Power Paragon Inc. and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
2. REVENUE RECOGNITION
Revenues for production-type contracts are recognized as units are shipped
or are substantially ready to be shipped subject to customer inspection.
Revenues on long-term, production-type contracts, service contracts and
engineering and development contracts are recognized on the
percentage-of-completion method, whereunder the estimated sales value is
determined on the basis of contract milestones achieved and costs are
recognized on the basis of contract percentage completions (as measured by
applying the most recent estimated profit margin for the entire contract at
completion to the revenues recognized based on contractual milestones
achieved).
The Company believes its approach is conservative and generally results in
lower revenues and gross profits in the early stages of a contract when
estimates are more susceptible to change.
Sales under cost reimbursement contracts are recorded as costs are
incurred and include estimated earned fees proportionate to total estimated
costs. The fees under certain government contracts may be increased or
decreased in accordance with cost or performance incentive provisions, which
measure actual performance against established targets or other criteria. Such
incentive fee awards or penalties are included in sales at the time the amounts
can be reasonably determined.
Generally, sales and earnings on long-term government contracts are
determined on a contract-by-contract basis, based on estimates that are
reviewed and revised periodically and adjustments to recognized sales and
earnings resulting from such revisions are recorded on a cumulative basis in
the period in which they are identified. Provisions for anticipated losses are
made in the period in which they first become determinable.
3. CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with original
maturities of less than three months as cash equivalents.
A-13
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
4. INVENTORIES
Inventories are stated at the lower of cost or market with appropriate
provision to reduce excess and obsolete inventory to net realizable values.
Generally, the Company values inventory at cost, which approximates actual on a
first-in, first-out basis and the weighted moving average method. One
subsidiary values inventory related to government contracts to include all
costs identified with the contract and an allocation of all other indirect
costs, including marketing, general and administrative, and other expenses.
5. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization of property, plant and equipment are
computed by the straight-line method over the estimated useful lives of the
assets for financial reporting purposes and straight-line and accelerated
methods for tax reporting purposes.
6. INTANGIBLE ASSETS
Goodwill is being amortized on a straight-line basis over forty years.
Deferred financing costs are being amortized over the five-year term of the
loan agreement. The Company evaluates goodwill on an annual basis for possible
impairment based on the expected future cash flows of the businesses acquired.
7. INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to postretirement benefits other
than pensions, pension costs, depreciation, inventory and various accrued
expenses.
8. FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's German subsidiaries are
translated into U.S. dollars at current exchange rates in effect at the
reporting date. Income statement items are generally translated at average
exchange rates prevailing during the year. The resulting translation
adjustments are recorded as a separate component of stockholders' equity. Gains
or losses resulting from foreign currency transactions are included in the
consolidated statement of earnings as incurred.
9. ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE B -- ACQUISITION OF POWER PARAGON INC.
At the close of business on June 30, 1997, SPD acquired all of the
outstanding stock of Power Paragon Inc. ("PPI") and subsidiaries (formerly
known as PTS Holdings, Inc. and subsidiaries). PPI develops and manufactures
electrical power systems and components for military and commercial specialty
applications in the United States and overseas. The acquisition was financed
principally by bank borrowings. The acquisition has been accounted for as a
purchase and, accordingly, the results of operations of PPI are included in the
consolidated financial statements from the date of acquisition. In lieu
A-14
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE B -- ACQUISITION OF POWER PARAGON INC. (CONTINUED)
of cash, certain minority stockholders of PPI exchanged options for the
purchase of stock in PPI for options to purchase shares of the Company's common
stock. The fair value of the PPI options exchanged, totalling approximately
$2,324,000, was recorded as additional paid-in capital at the date of the
acquisition.
NOTE C -- INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist
of the following:
<TABLE>
<S> <C>
Materials and purchased parts $ 8,939,257
Work-in-process, primarily on U.S. Government
contracts 33,786,558
Finished goods 1,874,897
-----------
44,600,712
Less progress billings related to long-term contracts
and programs 9,390,974
-----------
$35,209,738
===========
</TABLE>
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE D -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Goodwill $ 78,171,995
Deferred financing costs 1,721,025
------------
79,893,020
Less accumulated amortization (1,458,755)
------------
$ 78,434,265
============
</TABLE>
A-15
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE E -- LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Term loan A payable in quarterly installments of
principal plus interest at a variable rate (9.5% at
December 31, 1997) maturing June 30, 2002 $37,550,000
Term loan B payable in quarterly installments of
principal plus interest at a variable rate (9.75% at
December 31, 1997) maturing June 30, 2004 24,950,000
Revolving loan payable bearing interest at a variable
rate (9.5% at December 31, 1997) maturing
June 30, 2002 18,949,707
Capital lease obligation payable in monthly
installments of $6,261 through January 2002 less
amount representing interest of $47,285 259,520
-----------
81,709,227
Less current maturities 6,305,700
-----------
$75,403,527
===========
</TABLE>
Substantially all of the assets and capital stock of the Company's
subsidiaries are pledged as collateral for borrowings under the term and
revolving loans. The loan agreement limits the payment of dividends and
provides for mandatory prepayments based upon excess cash flow, as defined. The
agreement also contains various restrictive financial covenants including
interest coverage and leverage ratios and limitations on annual capital
expenditures. Commencing January 1, 1998, the Company has the option to elect a
fixed rate of interest based on LIBOR. At December 31, 1997, approximately
$16,000,000 is available on the revolving loan payable.
The following is a summary of the annual maturities of long-term debt:
<TABLE>
<S> <C>
Year ending December 31,
1998 $ 6,305,700
1999 7,561,100
2000 8,816,100
2001 10,320,300
2002 29,081,000
Thereafter 19,625,027
-----------
$81,709,227
===========
</TABLE>
NOTE F -- COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its business utilizing
leased facilities and equipment with terms lasting through June 2009. The terms
of one principal facility lease include an option to purchase the leased
premises based on 50% of the fair market value of the land and 100% of the fair
market value of the building. The Company can renew the lease for two
additional five-year terms.
A-16
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1997, future minimum payments under noncancellable
operating leases with remaining terms of more than one year were as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 $ 4,086,000
1999 3,870,000
2000 2,892,000
2001 2,488,000
2002 2,464,000
Thereafter 7,942,000
-----------
$23,742,000
===========
</TABLE>
Rent expense for operating leases was approximately $3,344,000 for the
year ended December 31, 1997.
As a defense contractor for the U.S. Government, the books, records and
other supporting documentation of the Company used to establish certain
contract prices are subject to audit to determine the allowability and
reasonableness of costs. The Company routinely undergoes audits by the
Government on both a pre-award and post-award basis.
The Company contributed approximately $1,000 in 1997 to multiemployer
pension plans for employees covered by collective bargaining agreements. Under
the Multiemployer Pension Plan Amendments Act of 1980, if the plan terminates
or the Company withdraws, the Company could be subject to a "withdrawal
liability."
NOTE G -- PREFERRED STOCK AND COMMON STOCK WARRANT AND OPTIONS
The preferred stock has a stated value of $100 per share and provides for
cumulative dividends at 8%. All shares of preferred stock are subject to
mandatory redemption at the stated value in the event of a sale of securities
of the Company or a sale of substantially all of the assets or a significant
subsidiary of the Company.
In connection with the acquisition discussed in Note A, the Company issued
a warrant for the purchase of 1,000 shares of common stock at an exercise price
of $1.00 to the principal stockholder of the Company. The warrant expires on
December 31, 2006.
In connection with the acquisition discussed in Note B, the Company issued
options for the purchase of 4,397 shares of the Company's common stock at an
exercise price of $68.37 per share. The options are exercisable in four years
or if the Company is acquired. The Company issued additional options to acquire
an aggregate of 14,740 Class B Nonvoting common shares to employees and
directors. The options are exercisable at $1.00 per share and expire on July 1,
2007. These options become exercisable only upon the closing of an initial
public offering or a sale of the Company for an amount in excess of a "minimum
threshold amount." One-half of the options vest in 12 1/2% increments over the
initial four-year period. The remaining one-half of the options vest in four
equal installments beginning on December 31, 1998, based upon the attainment of
certain performance goals.
The Company has determined that a compensation charge will be recorded
once it is determined that it is likely that the options will become
exercisable, as defined above. The amount of the compensation charge will be
based upon the difference between the fair value of the shares of the Company's
common stock at the date of exercise and the exercise price. No compensation
charge has been recorded as of December 31, 1997.
A-17
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H -- POSTRETIREMENT BENEFITS
1. PENSION PLAN
Substantially all the employees of the Company are covered under two
defined benefit pension plans in the United States and one defined benefit plan
in Germany. The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheet at December 31, 1997:
<TABLE>
<CAPTION>
UNITED
STATES GERMANY
--------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations including
vested benefits in the United States of
$61,292,666 and in Germany of $325,971 $ 61,698,595 $494,879
============ ========
Projected benefit obligation for services
rendered to date $ 65,881,023 $682,412
Plan assets at fair value, primarily fixed income
investments and common stocks 62,312,893 --
------------ --------
Projected benefit obligation in excess of
plan assets - pension liability $ 3,568,130 $682,412
============ ========
Net periodic pension cost includes the following components:
United
States Germany
------------ --------
Service cost - benefit earned during the year $ 1,562,196 $ 21,731
Interest cost on projected benefit obligation 4,956,982 23,171
Actual (return) on plan assets (7,532,589) --
Net amortization and deferral 2,477,131 --
------------ --------
Net periodic pension cost $ 1,463,720 $ 44,902
============ ========
</TABLE>
The weighted average discount rates used in determining the present value
of the projected benefit obligations was 8.15%. The projected rate of increase
in future compensation levels was 5% - 5.5%. The expected long-term rate of
return on assets was 8% - 9.5%. The Company's policy is to fund pension cost
under its pension plan to the extent necessary under the Employee Retirement
Income Security Act of 1974. For the year ended December 31, 1997, the Company
recorded actuarial and other gains on its pension plans totalling approximately
$3,239,000 principally resulting from better than projected performance of plan
assets.
2. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain subsidiaries of the Company have a defined benefit postretirement
plan that provides medical benefits for retirees. The Company does not fund
retiree benefits in advance. In 1993, the predecessor company established plan
cost maximums to account for and control future medical costs more effectively.
The Company requires that the projected future cost of providing postretirement
benefits, principally health care, be accrued over the period earned rather
than expensed as claims are incurred.
A-18
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H -- POSTRETIREMENT BENEFITS (CONTINUED)
Net periodic postretirement benefit cost for the year ended December 31,
1997, included the following components:
<TABLE>
<S> <C>
Service cost benefits attributed to service
during the period $ 117,000
Interest cost on the accumulated postretirement
benefit obligation 2,088,000
Net amortization and deferral (2,114,000)
------------
Net periodic postretirement benefit cost $ 91,000
============
</TABLE>
Cost was determined by application of the terms of the medical plan,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health care cost trend rates projected at
annual rates progressively declining from 12% in 1995. Future benefits for
union-represented employees will be capped at the limits in effect for December
31, 1996. The effect of a 1% annual increase in these assumed cost trend rates
would increase the accumulated postretirement benefit obligation by
approximately $919,000 in 1997; the annual costs would not be materially
affected. For the year ended December 31, 1997, the Company recognized prior
service costs of approximately $4,362,000 relating to additional costs of
salaried employees whose employer contributions do not have a cap and
approximately $6,476,000 of net gains resulting from various underwriting
changes including lower expected medical cost premiums as a result of more
salaried employees choosing HMO's.
The following table provides information on the status of the plan at
December 31, 1997:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation
Retirees $18,420,000
Fully eligible active plan participants 5,984,000
Other active plan participants 1,777,000
-----------
Accumulated postretirement benefit obligation $26,181,000
===========
</TABLE>
Measurement of the accumulated postretirement benefit obligation was based
on an assumed discount rate of 8.15% in 1997. The health care cost trend rate
for salaried employees was 9% in 1997.
3. EMPLOYEES' SAVINGS AND PROFIT-SHARING PLAN
The Company maintains various employee 401(k) savings plans. The Company
contributes a guaranteed minimum of eligible employee contributions. Additional
company contributions are voluntary and at the discretion of the Board of
Directors. Profit-sharing expense was approximately $754,000 for the year ended
December 31, 1997.
4. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has two supplemental executive retirement plans which are
nonqualified plans maintained primarily for the purpose of providing additional
deferred compensation for a select group of management or highly compensated
employees, as defined by the Employee Retirement Income Security Act of 1974.
Participation in, benefits under, and the duration of the plans are subject to
the Company's discretion.
Participants in the plans accrue benefits each fiscal year based on the
Company's discretionary contribution for each participant. The Company has
accrued $132,000 of estimated yearly contributions to be paid for the year
ended December 31, 1997.
A-19
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H -- POSTRETIREMENT BENEFITS (CONTINUED)
In conjunction with the establishment of the plans, the Company
established rabbi trusts to aid in the payment of plan benefits. The trusts are
revocable and the assets contributed to the trusts can only be used to pay
participant benefits, with certain exceptions. Although the rabbi trusts
established are revocable by the Company, the trust agreements provide that,
after a change in control, the rabbi trusts shall not be revocable until all
protected benefits have been paid in full. The assets held in the trusts at
December 31, 1997 (included in other assets) amounted to approximately
$576,000. Earnings on trust assets are allocated to participants' accounts and
are included in the trust assets amount.
NOTE I -- INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<S> <C>
Currently payable
Federal $2,377,000
State 708,000
Germany 15,000
----------
3,100,000
----------
Deferred
Federal 2,842,000
State 711,000
Germany (282,000)
----------
3,271,000
----------
$6,371,000
==========
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<S> <C>
Expected provision for Federal income taxes 34.0%
State and local taxes, net of Federal income
tax benefit 5.1
Research and development credits (4.9)
Amortization of goodwill 2.8
Other (2.2)
----
34.8%
====
</TABLE>
A-20
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE I -- INCOME TAXES (CONTINUED)
Deferred income taxes at December 31, 1997 relate to the following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
---------------- ------------
<S> <C> <C>
Pension and postretirement benefits $ 12,773,000
Net operating loss of German subsidiary 1,245,466
Inventory costs 2,097,000
Contract costs $2,663,000
Vacation pay accrual 1,180,000
Warranty costs 519,000
Other temporary differences 2,822,000 318,000
Valuation allowance (10,628,000)
------------- ----------
$ 10,008,466 $2,981,000
============= ==========
</TABLE>
The Federal income tax returns of PPI for the year ended June 30, 1995 are
under examination by the Internal Revenue Service. As of December 31, 1997, no
adjustments have been proposed.
PPI's subsidiaries in Germany have a net operating loss carryforward of
approximately $2,600,000 which has no expiration date.
NOTE J -- CASH FLOW INFORMATION
The following is supplemental cash flow information:
<TABLE>
<S> <C>
Cash paid for
Interest $2,850,000
Income taxes 4,431,000
</TABLE>
In connection with the acquisitions of SPD Technologies Inc. and Power
Paragon Inc., liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $161,974,000
Cash paid 84,921,000
------------
Liabilities assumed $ 77,053,000
============
</TABLE>
NOTE K -- ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<S> <C>
Accrued employment costs $ 7,365,243
Accrued interest 2,112,342
Allowance for contract
adjustments 2,258,777
Accrued warranties 1,287,972
Customer advances 1,315,714
Other current liabilities 4,468,598
-----------
$18,808,646
===========
</TABLE>
A-21
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
A-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SPD TECHNOLOGIES INC.
We have audited the accompanying consolidated balance sheets of SPD
Technologies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings and accumulated deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SPD Technologies
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for the years
then ended in conformity with generally accepted accounting principles.
New York, New York
February 28, 1997
/s/ Grant Thornton LLP
A-23
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 738,344 $ 689,013
Accounts receivable, less allowance for doubtful accounts of $825,000
and $1,147,000 in 1996 and 1995, respectively 12,536,032 10,570,568
Inventories 15,622,720 13,261,009
Unbilled costs 6,896,859 6,146,263
Deferred income tax benefit 3,185,000 3,279,000
Prepaid expenses and other 185,954 446,548
----------- -----------
Total current assets 39,164,909 34,392,401
EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- AT COST
Machinery and equipment 15,312,374 13,874,680
Furniture and fixtures 2,627,740 1,958,226
Leasehold improvements 895,940 815,572
----------- -----------
18,836,054 16,648,478
Less accumulated depreciation and amortization 13,834,973 13,041,802
----------- -----------
5,001,081 3,606,676
DEFERRED INCOME TAX BENEFIT 2,900,000 2,900,000
INTANGIBLE ASSETS -- NET 2,476,449 3,473,475
OTHER ASSETS 211,961 224,016
----------- -----------
$49,754,400 $44,596,568
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-24
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Note payable $ 2,187,087 $ 3,604,724
Current maturities of long-term debt 2,500,000 2,500,000
Accounts payable 6,000,531 2,760,861
Accrued employment costs 3,902,930 3,182,689
Pension and postretirement benefits liability 6,091,716 8,651,354
Other liabilities and accrued expenses 7,258,908 5,170,895
Income taxes payable 55,100 521,000
------------- -------------
Total current liabilities 27,996,272 26,391,523
LONG-TERM DEBT, LESS CURRENT MATURITIES 2,500,000 5,000,000
POSTRETIREMENT BENEFITS LIABILITY 26,138,784 26,432,090
PENSION LIABILITY 2,870,173 3,750,000
DEFERRED INCOME TAXES 285,000 379,000
MINORITY INTEREST IN SUBSIDIARY 116,955
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock -- authorized, 1,000,000 shares of $.01 par value; issued
and outstanding, 102,750 shares, in 1996 and 1995, respectively 1,027 1,027
Additional paid-in capital 2,394,281 2,394,281
Accumulated deficit (12,294,547) (19,868,308)
------------- -------------
(9,899,239) (17,473,000)
Less: 2,355 shares of common stock in treasury -- at cost at
December 31, 1996 136,590
------------- -------------
(10,035,829) (17,473,000)
------------- -------------
$ 49,754,400 $ 44,596,568
============= =============
</TABLE>
A-25
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Net revenues $ 93,340,918 $ 87,181,721
Cost of goods sold 61,902,538 57,193,503
------------- -------------
Gross profit 31,438,380 29,988,218
------------- -------------
Operating expenses
Selling, general and administrative 10,328,101 11,432,406
Engineering, research and development 7,213,821 5,487,788
Actuarial gain from postretirement plan (3,000)
------------- -------------
17,541,922 16,917,194
------------- -------------
Earnings from operations 13,896,458 13,071,024
Other income (expenses)
Interest expense, net (1,179,697) (1,728,787)
------------- -------------
Earnings before provision for income tax expense (benefit)
and minority interest 12,716,761 11,342,237
Income taxes -- currently payable 5,143,000 3,042,000
------------- -------------
Earnings before minority interest 7,573,761 8,300,237
Minority interest 125,414
------------- -------------
NET EARNINGS 7,573,761 8,425,651
Accumulated deficit at beginning of year (19,868,308) (28,293,959)
------------- -------------
Accumulated deficit at end of year $ (12,294,547) $ (19,868,308)
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
A-26
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 7,573,761 $ 8,425,651
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization 1,179,610 988,886
Actuarial gain from postretirement plan (3,000)
Provision for losses on accounts receivable (74,200) 9,495
Loss on sale of equipment 25,198
Minority interest (142,214)
Changes in operating assets and liabilities
Accounts receivable (1,891,264) 823,833
Inventories (2,361,711) 1,437,531
Unbilled costs (750,596) (613,467)
Prepaid expenses and other 272,649 (134,658)
Accounts payable 3,239,670 (1,383,543)
Pension and postretirement benefits liability (2,971,220) (4,915,779)
Other liabilities 2,247,311 501,886
------------ -------------
Net cash provided by operating activities 6,464,010 5,019,819
------------ -------------
Cash flows from investing activities
Capital expenditures (2,338,539) (1,202,917)
Proceeds from sale of equipment 24,069
------------ -------------
Net cash used in investing activities (2,338,539) (1,178,848)
------------ -------------
Cash flows from financing activities
Net (decrease) increase in borrowings (1,417,638) 3,345,454
Term loan borrowing 7,500,000
Principal payments on long-term debt (2,500,000) (14,500,000)
(Purchase) sale of company stock (136,590) 2,351
Purchase of minority interest (21,912)
------------ -------------
Net cash used in financing activities (4,076,140) (3,652,195)
------------ -------------
NET INCREASE IN CASH 49,331 188,776
Cash at beginning of year 689,013 500,237
------------ -------------
Cash at end of year $ 738,344 $ 689,013
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
A-27
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
SPD Technologies, Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and service circuit protection systems, ship control systems and
combat systems, and perform overhaul and repairs for naval vessels primarily
under fixed-price contracts. At December 31, 1996, Merrill Lynch Capital Corp.
("MLCC") owned 77.9% of the Company. Reference is made to Note L.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPD and its
wholly-owned subsidiaries, SPD Switchgear Inc., PacOrd Inc. and Henschel, Inc.
All material intercompany accounts and transactions have been eliminated. In
1996, the Company purchased the minority interest of Henschel, Inc. for
$21,912.
2. REVENUE RECOGNITION
Substantially all of the Company's revenues and accounts receivable arise
from contracts with the U.S. Navy or its suppliers.
Production-type contracts, not classified as long-term, provide a
substantial portion of the Company's revenues. Revenues are recognized as units
are shipped or are substantially ready to be shipped subject to customer
inspection. Revenues on long-term, production-type contracts, service contracts
and engineering and development contracts are recognized on the
percentage-of-completion method. Under the Company's methodology, revenues and
gross profit are recognized based on billings rather than on a level-of-effort
basis. The Company believes its approach is more conservative and generally
results in lower revenues and gross profits in the early stages of a contract
when estimates are more susceptible to change. Provisions for anticipated
losses are made in the period in which they first become determinable.
3. INVENTORIES
Inventories are stated at the lower of cost or market, with appropriate
provision to reduce excess and obsolete inventory to net realizable values. In
general, cost is currently adjusted standard cost, which approximates actual
cost on a first-in, first-out basis, and the weighted moving average method.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are computed by the straight-line method
over their estimated useful lives for financial reporting purposes and
straight-line and accelerated methods for tax reporting purposes.
5. INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to postretirement benefits other
than pensions, pension costs, depreciation, inventory and various accrued
expenses.
6. ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
A-28
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- INVENTORIES
Inventories primarily relate to production-type contracts and include
expenditures for materials, purchased parts and work-in-process beyond what is
required for recorded orders. These expenditures are incurred primarily to help
maintain stable production schedules.
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Materials and purchased parts .................................... $ 2,906,353 $ 2,960,879
Work-in-process, primarily on U.S. Government contracts .......... 10,624,008 9,248,883
Finished goods ................................................... 2,092,359 1,051,247
----------- -----------
$15,622,720 $13,261,009
=========== ===========
</TABLE>
NOTE C -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Engineering drawings ............................................. $ 699,013 $ 699,013
Less accumulated amortization .................................... (699,013) (463,538)
---------- ----------
-- 235,475
Intangible asset - pension ....................................... 2,476,449 3,238,000
---------- ----------
$2,476,449 $3,473,475
========== ==========
</TABLE>
NOTE D -- REVOLVING CREDIT FACILITY
During 1995, the Company entered into a $15,000,000 revolving credit
facility with a financial institution which expires on November 29, 1998.
Borrowings are based upon eligible accounts receivable and inventory of the
Company, as defined. Borrowings bear interest at the lender's prime rate plus
.50% (9% at December 31, 1996).
The agreement contains certain restrictive covenants, including, among
other matters, the requirement to maintain certain financial ratios, and
restricts the payment of dividends. Borrowings under this facility are
collateralized by the Company's inventories and accounts receivable. Available
borrowings under this credit arrangement are subject to a 0.37 percent
commitment fee.
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Term Loan due to Heller Financial Inc. .......... $5,000,000 $7,500,000
Less current maturities ......................... 2,500,000 2,500,000
---------- ----------
$2,500,000 $5,000,000
========== ==========
</TABLE>
The term loan due to Heller Financial Inc. is payable in quarterly
installments of $625,000, and bears interest at prime plus .75% per annum,
payable monthly (9.25% as of December 31, 1996).
The term loan is collateralized by substantially all of the Company's
equipment and leasehold improvements. The loan agreement restricts payment of
dividends and contains certain restrictive covenants regarding the maintenance
of financial ratios.
A-29
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its business utilizing
leased facilities and equipment with terms lasting through January 31, 2005.
The terms of the facility lease include an option to purchase the leased
premises based on 50% of the fair market value of the land and 100% of the fair
market value of the building. The Company can renew the lease for two
additional five-year terms.
A subsidiary of the Company also conducts its business in a leased
facility. The lease has a non-cancellable initial term of ten years expiring in
December 1999 with two five-year renewal options.
At December 31, 1996, future minimum payments under noncancellable
operating leases with remaining terms of more than one year were as follows:
<TABLE>
<S> <C>
Year ending December 31, 1997 ......... $1,450,000
1998 ................................. 1,337,000
1999 ................................. 1,324,000
2000 ................................. 720,000
2001 ................................. 651,000
Thereafter ........................... 778,000
----------
$6,260,000
==========
</TABLE>
Total rental expense for operating leases was approximately $1,875,000 and
$1,787,000 for the years ended December 31, 1996 and 1995, respectively.
As a defense contractor for the U.S. Government, the books, records and
other supporting documentation of the Company used to establish certain
contract prices are subject to audit to determine the allowability and
reasonableness of costs. The Company routinely undergoes audits by the
Government on both a pre-award and post-award basis.
NOTE G -- COMMON STOCK AND INCENTIVE STOCK OPTIONS
In 1995, the Company sold 2,355 shares of common stock previously held in
treasury to two employees and a director.
The Company has options outstanding to key executives for the purchase of
954 shares of common stock at an exercise price of $1.00 per share. The options
expire on December 31, 2002.
A-30
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- POSTRETIREMENT BENEFITS
1. PENSION PLAN
Substantially all the employees of the Company are covered under a defined
benefit pension plan. The following table sets forth the plan's funded status
and amounts recognized in the Company's balance sheets at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations including vested benefits of
$59,278,594 in 1996 and $52,700,092 in 1995........................ $ 60,303,661 $ 58,252,380
============ ============
Projected benefit obligation for services rendered to date ........... $ 63,413,303 $ 61,142,368
Plan assets at fair value, primarily fixed income investments and
common stocks ....................................................... 54,588,989 49,449,375
------------ ------------
Projected benefit obligation in excess of plan assets ................ 8,824,314 11,692,993
Unrecognized net loss ................................................ (3,054,968) (3,056,450)
Unrecognized prior service costs ..................................... (2,596,625) (3,238,223)
Unrecognized net transition asset .................................... 65,502 77,783
Minimum liability adjustment ......................................... 2,476,449 3,326,902
------------ ------------
Pension liability .................................................... $ 5,714,672 $ 8,803,005
============ ============
Net periodic pension cost includes the following components: .........
1996 1995
------------- -------------
Service cost - benefit earned during the year ........................ $ 1,327,831 $ 1,300,886
Interest cost on projected benefit obligation ........................ 4,872,752 4,743,858
Actual (return) on plan assets ....................................... (4,854,957) (6,663,443)
Net amortization and deferral ........................................ 879,262 3,511,186
------------- -------------
Net periodic pension cost ......................................... $ 2,224,888 $ 2,892,487
============= =============
</TABLE>
The weighted average discount rates used in determining the present value
of the projected benefit obligations was 8.15% in 1996 and 1995. The projected
rate of increase in future compensation levels was 5.0% for both years. The
expected long-term rate of return on assets was 9.5% for both years. Prior
service costs are amortized using a straight-line method over the average
remaining service period of employees expected to receive benefits under the
plan. The Company's policy is to fund pension cost under its pension plan to
the extent necessary under the Employee Retirement Income Security Act of 1974.
2. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a defined benefit postretirement plan that provides
medical benefits for retirees. The Company does not fund retiree benefits in
advance. In 1992, the Company established plan cost maximums to account for and
control future medical costs more effectively. The Company requires that the
projected future cost of providing postretirement benefits, principally health
care, be accrued over the period earned rather than expensed as claims are
incurred.
A-31
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- POSTRETIREMENT BENEFITS (CONTINUED)
Net periodic postretirement benefit cost for the years ended December 31,
1996 and 1995, included the following components:
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Service cost benefits attributed to service during the period .......... $ 9,000 $ 13,000
Interest cost on the accumulated postretirement benefit
obligation ............................................................ 2,216,000 2,305,000
Net amortization and deferral .......................................... (104,000)
----------
Net periodic postretirement benefit cost ............................... $2,121,000 $2,318,000
========== ==========
</TABLE>
Cost was determined by application of the terms of the medical plan,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health care cost trend rates projected at
annual rates progressively declining from 12% in 1995. Future benefits will be
capped at the limits in effect for December 31, 1996. The effect of a 1% annual
increase in these assumed cost trend rates would increase the accumulated
postretirement benefit obligation by approximately $-0- in 1996 and $32,000 in
1995; the annual costs would not be materially affected. In addition to net
periodic postretirement cost, the Company recognized an actuarial gain of
$3,000 in 1995.
The following tables provide information on the status of the plan at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees ............................................................... $23,193,000 $23,144,000
Fully eligible active plan participants ................................ 4,197,000 4,552,000
Other active plan participants ......................................... 142,000 183,000
----------- -----------
Accumulated postretirement benefit obligation ........................... 27,532,000 27,879,000
Unrecognized net gain (loss) ............................................ 1,854,000 2,135,000
----------- -----------
Accrued postretirement benefit cost recognized in the
consolidated balance sheet ............................................. $29,386,000 $30,014,000
=========== ===========
</TABLE>
Measurement of the accumulated postretirement benefit obligation was based
on an assumed discount rate of 8.15% in 1996 and 1995. The health care cost
trend rate was 0% in 1996 and 12% in 1995.
3. EMPLOYEES' SAVINGS AND PROFIT-SHARING PLAN
The Company maintains an hourly and salaried employees' savings plan. The
Company contributes a guaranteed minimum of eligible employee contributions.
Additional company contributions of up to 25% of eligible employee
contributions are voluntary and at the discretion of the Board of Directors.
Profit-sharing expense was approximately $642,000 and $506,000 for the years
ended December 31, 1996 and 1995, respectively.
4. MULTIEMPLOYER PLAN
The Company contributed $1,000 in 1996 and 1995 to multiemployer pension
plans for employees covered by collective bargaining agreements. These plans
are not administered by the Company and contributions are determined in
accordance with provisions of the negotiated labor contract. Information with
respect to the Company's proportionate share of the excess, if any, of the
actuarially computed value of vested benefits over the total of the pension
plans' net assets is not available from the plans' administrators.
A-32
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- POSTRETIREMENT BENEFITS (CONTINUED)
The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provisions of the Act, if the plan terminates or the
Company withdraws, the Company could be subject to a "withdrawal liability."
NOTE I -- INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Currently payable
Federal ......... $4,133,000 $2,269,000
State ........... 1,010,000 773,000
---------- ----------
$5,143,000 $3,042,000
========== ==========
</TABLE>
The effective tax rate varies from the statutory rate primarily due to
state and local income taxes and for the year ended December 31, 1995 due to
adjustment of prior year's tax provision.
Deferred income taxes at December 31 relate to the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Pension and postretirement benefits ......... $ 13,821,000 $ -- $ 15,462,000 $ --
Other temporary differences ................. 1,683,000 285,000 2,252,000 379,000
Inventory costs ............................. 1,640,000 -- 1,713,000 --
Vacation pay accrual ........................ 644,000 -- 625,000 --
Warranty costs .............................. 484,000 -- 652,000 --
Valuation allowance ......................... (12,187,000) -- (14,525,000) --
------------- -------- ------------- --------
$ 6,085,000 $285,000 $ 6,179,000 $379,000
============= ======== ============= ========
</TABLE>
NOTE J -- CASH FLOW INFORMATION
The following is supplemental cash flow information:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash paid for
Interest .................................. $1,179,000 $1,665,000
Income taxes .............................. 5,621,000 3,916,000
</TABLE>
NOTE K -- OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Allowance for contract adjustments .......... $2,499,449 $ 783,513
Accrued warranties .......................... 1,160,613 1,490,294
Customer advances ........................... 797,931 851,364
Other current liabilities ................... 2,800,915 2,045,724
---------- ----------
$7,258,908 $5,170,895
========== ==========
</TABLE>
A-33
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L -- SUBSEQUENT EVENTS
In January 1997, a newly formed company, by an investor group and certain
minority stockholders of the Company, acquired all the outstanding stock of the
Company. The acquisition was financed through the issuance of preferred and
common stock and bank borrowings.
A-34
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the following transactions as if they had occurred on January 1, 1997: (i) the
Company's purchase of the stock of SPD Technologies, Inc. ("SPD"); (ii) the
acquisition (the "L-3 Acquisition") by L-3 Communications Holdings, Inc.,
("Holdings" or the "Company") of ten business units from Lockheed Martin
Corporation (the "Predecessor Company"); (iii) the acquisitions by the Company
of the assets of the Ocean Systems business ("Ocean Systems") of Allied Signal,
Inc., the assets of ILEX Systems ("ILEX") and the assets of the Satellite
Transmission Systems division ("STS") of California Microwave, Inc.
(collectively, the "Other Acquisitions"); and (iv) the sale of 6.9 million
shares by Holdings of its common stock in an initial public offering, the
issuance by the Company of $180.0 million of 8 1/2% Senior Subordinated Notes,
and the amendment of the Company's credit facilities to increase its revolving
credit facility to $200.0 million (collectively, the "Offerings"). The pro
forma financial information is based on (i) the unaudited condensed
consolidated financial statements of the Company and SPD as of June 30, 1998
and for the six months ended June 30, 1998, (ii) the consolidated statement of
operations of the Company for the nine-month period ended December 31, 1997,
(iii) the combined statement of operations of the Predecessor Company for the
three months ended March 31, 1997, and (iv) the statements of operations of SPD
and the Other Acquisitions for the year ended December 31, 1997, using the
purchase method of accounting and the assumptions and adjustments in the
accompanying notes to the unaudited pro forma condensed consolidated financial
statements.
The pro forma adjustments are based upon preliminary estimates of purchase
prices and the related purchase price allocations for SPD and the Other
Acquisitions. Actual adjustments will be based on final appraisals and other
analyses of fair values which are in process. Management does not expect that
differences between the preliminary and final allocations will have a material
impact on the Company's pro forma financial position or results of operations.
The pro forma statement of operations does not reflect any cost savings that
management of the Company believes would have resulted had the Transactions
occurred on January 1, 1997. The pro forma financial information should be read
in conjunction with (i) the unaudited condensed consolidated financial
statements of SPD for the six months ended June 30, 1998, (ii) the audited
consolidated financial statements of SPD for the year ended December 31, 1997,
(iii) the unaudited condensed consolidated financial statements of the Company
for the six months ended June 30, 1998, (iv) the audited consolidated
(combined) financial statements of the Company and the Predecessor Company as
of December 31, 1997 and for the nine months ended December 31, 1997 and the
three months ended March 31, 1997, (v) the audited financial statements of STS
for the year ended June 30, 1997, (vi) the unaudited condensed financial
statements of STS as of December 31, 1997 and for the six months ended December
31, 1997 and 1996, (vii) the audited consolidated financial statements of ILEX
for the year ended December 31, 1997, and (viii) the audited combined financial
statements of Ocean Systems for the year ended December 31, 1997. The
historical financial statements of the Company, Ocean Systems, ILEX and STS
referred to above are included in the Company's previously filed Annual Report
on Form 10-K, as amended, for the year ended December 31, 1997 and Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998. The unaudited pro
forma condensed financial information may not be indicative of the financial
position and results of operations of the Company that actually would have
occurred had the Transactions been in effect on the dates indicated or the
financial position and results of operations that may be obtained in the
future.
B-1
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
COMPANY SPD PRO FORMA PRO FORMA
JUNE 30, 1998 JUNE 30, 1998(6) ADJUSTMENTS(7) JUNE 30, 1998
--------------- ------------------ ------------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. ........................... $ 100.5 $ 0.2 ($ 95.2) $ 5.5
Contracts in process ................................. 266.3 59.4 2.0 327.7
Other current assets. ................................ 17.7 8.7 -- 26.4
-------- ------- ------- ---------
Total current assets. .............................. 384.5 68.3 ( 93.2) 359.6
-------- ------- ------- ---------
Property, plant and equipment, net. ................... 101.4 12.9 -- 114.3
Intangibles, primarily cost in excess of net assets
acquired, net of amortization ........................ 393.7 78.0 136.5 608.2
Other assets. ......................................... 73.7 1.3 14.5 (9) 89.5
-------- ------- ------- ---------
Total assets . ..................................... $ 953.3 $ 160.5 $ 57.8 $ 1,171.6
======== ======= ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . .................. $ -- $ 6.3 ($ 6.3) $ --
Accounts payable and accrued expenses . .............. 82.4 27.9 -- 110.3
Customer advances and amounts in excess of costs
incurred ........................................... 75.5 2.1 -- 77.6
Other current liabilities ............................ 49.6 4.2 -- 53.8
-------- ------- ------- ---------
Total current liabilities .......................... 207.5 40.5 ( 6.3) 241.7
-------- ------- ------- ---------
Pension, postretirement benefits and other
liabilities ........................................ 56.7 30.8 10.0 97.5
Revolving credit facility ............................ -- -- 143.3 143.3
Senior subordinated notes ............................ 405.0 -- -- 405.0
SPD debt ............................................. -- 69.7 ( 69.7) --
Shareholders' equity ................................. 284.1 19.5 ( 19.5) 284.1
-------- ------- ------- ---------
Total liabilities and shareholders' equity ......... $ 953.3 $ 160.5 $ 57.8 $ 1,171.6
======== ======= ======= =========
</TABLE>
B-2
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SPD
PRO FORMA
COMPANY SPD(6) ADJUSTMENTS
----------- ----------- ---------------
(in millions, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ................................ $ 417.0 $ 105.5 $ --
Costs and expenses ................... 383.4 94.4 1.6 (7)
------- -------- --------
Operating income (loss) ............. 33.6 11.1 (1.6)
Interest and investment income
(expense). .......................... 1.5 -- --
Interest expense. .................... 21.6 5.0 --
------- -------- --------
Income (loss) before income
taxes ............................. 13.5 6.1 (1.6)
Income tax expense (benefit) ......... 5.3 2.2 (0.6)(9)
------- -------- --------
Net income (loss) ................... $ 8.2 $ 3.9 $ (1.0)
======= ======== ========
EARNINGS PER COMMON SHARE(10):
Basic ............................... $ 0.37
Diluted. ............................ $ 0.36
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(10):
Basic ............................... 21.9
Diluted. ............................ 23.0
<CAPTION>
OTHER
ACQUISITIONS
OTHER PRO FORMA FINANCING
ACQUISITIONS(2)(3) ADJUSTMENTS(4) TRANSACTIONS(5)(8) PRO FORMA
-------------------- ---------------- -------------------- ----------
(in millions, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ................................ $ 20.7 $ -- $ -- $ 543.2
Costs and expenses ................... 23.2 0.5 -- 503.1
------ ------ -------- -------
Operating income (loss) ............. ( 2.5) (0.5) 40.1
Interest and investment income
(expense). .......................... -- -- (1.5) --
Interest expense. .................... 0.1 -- 0.1 26.8
------ ------ -------- --------
Income (loss) before income
taxes ............................. ( 2.6) (0.5) (1.6) 13.3
Income tax expense (benefit) ......... ( 0.6) (0.2) (0.6)(9) 5.5
------ ------ -------- --------
Net income (loss) ................... $ (2.0) $ (0.3) $ (1.0) $ 7.8
======= ====== ======== ========
EARNINGS PER COMMON SHARE(10):
Basic ............................... $ 0.29
Diluted. ............................ $ 0.27
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(10):
Basic ............................... 6.9 27.2
Diluted. ............................ 6.9 28.4
</TABLE>
B-3
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
COMPANY THREE
NINE MONTHS MONTHS PRO FORMA
ENDED ENDED ADJUSTMENTS PRO FORMA
DECEMBER 31, MARCH 31, L-3 L-3
1997 1997(1) ACQUISITION(1) ACQUISITION SPD(6)
-------------- ------------ ---------------- ------------- -----------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Sales. ........................... $ 546.5 $ 158.9 $ (1.8) $ 703.6 $ 130.0
Costs and expenses ............... 495.0 151.0 (7.6) 638.4 106.9
------- ------- ------ -------- --------
Operating income (loss) ......... 51.5 7.9 5.8 65.2 23.1
Interest and investment income
(expense). ...................... 1.4 -- -- 1.4 --
Interest expense. ................ 29.9 8.4 1.5 39.8 4.8
------- ------- ------ -------- --------
Income (loss) before income
taxes ........................... 23.0 ( 0.5) 4.3 26.8 18.3
Income tax expense (benefit) ..... 10.7 ( 0.2) -- 10.5 6.4
------- ------- ------ -------- --------
Net income (loss) ............... $ 12.3 $ (0.3) $ 4.3 $ 16.3 $ 11.9
======= ======== ====== ======== ========
EARNINGS PER COMMON
SHARE(10):
Basic ........................... $ 0.62
Diluted. ........................ $ 0.61
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(10):
Basic ........................... 20.0
Diluted. ........................ 20.0
<CAPTION>
PRO FORMA
SPD ADJUSTMENTS
PRO FORMA OTHER OTHER FINANCING PRO
ADJUSTMENTS ACQUISITIONS(2)(3) ACQUISITIONS(2) TRANSACTIONS(5)(8) FORMA
--------------- -------------------- ----------------- -------------------- -------------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Sales. ........................... $ - $ 190.4 $ -- $ -- $ 1,024.0
Costs and expenses ............... 4.0 (7) 196.3 1.1 (4) -- 946.7
-------- ------- -------- -------- ---------
Operating income (loss) ......... (4.0) ( 5.9) (1.1) -- 77.3
Interest and investment income
(expense). ...................... -- ( 0.1) -- (1.3) --
Interest expense. ................ -- 0.5 -- 8.5 53.6
-------- ------- -------- -------- ----------
Income (loss) before income
taxes ........................... (4.0) ( 6.5) (1.1) (9.8) 23.7
Income tax expense (benefit) ..... (1.6)(9) ( 4.0) (0.4)(9) (3.8)(9) 7.1
-------- ------- -------- -------- ----------
Net income (loss) ............... $ (2.4) $ (2.5) $ (0.7) $ (6.0) $ 16.6
======== ======== ======== ======== ==========
EARNINGS PER COMMON
SHARE(10):
Basic ........................... $ 0.62
Diluted. ........................ $ 0.60
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(10):
Basic ........................... 6.9 26.9
Diluted. ........................ 6.9 27.7
</TABLE>
B-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following facts and assumptions were used in determining the pro forma
effect of the Transactions.
1. The Company's historical financial statements reflect the results of
operations of the Company since the effective date of the L-3 Acquisition,
April 1, 1997, and the Predecessor Company historical financial statements
reflect the results of operations of the Predecessor Company for the three
months ended March 31, 1997. The adjustments made to the pro forma
statement of operations for the three months ended March 31, 1997 and for
the year ended December 31, 1997, relating to the L-3 Acquisition are: (a)
the elimination of $1.8 million of sales and $1.8 million of costs and
expenses related to the Hycor business which was acquired as part of the
L-3 Acquisition and which has been accounted for as "net assets of acquired
business held for sale", (b) a reduction to costs and expenses of $0.8
million to record amortization expenses on the excess of the L-3
Acquisition purchase price over net assets acquired of $303.2 million over
40 years, net of the reversal of amortization expenses of intangibles
included in the Predecessor Company historical financial statements, (c) a
reduction to costs and expenses of $0.6 million to record estimated pension
cost on a separate company basis net of the reversal of the allocated
pension cost included in the Predecessor Company historical financial
statements, (d) a net increase to interest expense of $1.5 million,
comprised of a $0.2 million allocated interest expense reduction related to
the Hycor business and a net $1.7 million increase, reflecting pro forma
interest expense of $10.2 million based on actual borrowings of $400.0
million and the effective cost of borrowing rate incurred by the Company to
finance the L-3 Acquisition less interest expense of approximately $8.5
million included in the historical financial statements of the Predecessor
Company, and (e) the reversal of a $4.4 million noncash compensation charge
related to the initial capitalization of the Company included in the
Company's historical results of operations for the nine months ended
December 31, 1997 which is nonrecurring in nature. A statutory (federal,
state and foreign) tax rate of 39.0% was assumed on these pro forma
adjustments except for adjustment (e), where no tax effect has been
reflected.
2. On February 5, 1998, the Company purchased the assets of STS for $27.5
million of cash including expenses. On March 4, 1998, the Company purchased
substantially all the assets of ILEX for $51.5 million of cash including
expenses (net of acquired cash of $2.4 million) plus additional
consideration contingent upon post-acquisition performance of ILEX. On
March 30, 1998, the Company purchased the assets of Ocean Systems for $68.7
million of cash including expenses. The STS and ILEX purchase prices are
subject to adjustment based upon the actual closing net assets as defined.
The aggregate purchase prices including expenses of the Other Acquisitions
of $147.7 million were substantially all financed with the proceeds from
the Offerings (See Note 5 below). The Other Acquisitions are included in
the Company's historical balance sheet as of June 30, 1998.
3. The pro forma statements of operations include the following historical
financial data for the Other Acquisitions:
B-5
<PAGE>
The pro forma statement of operations for the six months ended June 30,
1998 includes the following historical data for the Other Acquisitions.
<TABLE>
<CAPTION>
OCEAN OTHER
STS (A) ILEX (A) SYSTEMS (B) ACQUISITIONS
--------- ---------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Sales ........................................ $ 2.3 $ 4.5 $ 13.9 $ 20.7
Costs and expenses ........................... 5.9 4.4 12.9 23.2
------ ------ ------- ------
Operating (loss) income. ..................... (3.6) 0.1 1.0 ( 2.5)
Interest and investment income (expense) ..... -- -- -- --
Interest expense ............................. -- -- 0.1 0.1
------ ------ ------- ------
Income (loss) before income taxes . .......... (3.6) 0.1 0.9 ( 2.6)
Income tax (benefit) provision . ............. (1.0) -- 0.4 ( 0.6)
------ ------ ------- ------
Net (loss) income ............................ $ (2.6) $ 0.1 $ 0.5 $ (2.0)
====== ====== ======= =======
</TABLE>
----------
(a) Represents results for the one-month period ended January 31, 1998
(b) Represents results for the three-month period ended March 31, 1998
The pro forma statement of operations for the year ended December 31, 1997
includes the following historical data for the Other Acquisitions.
<TABLE>
<CAPTION>
OCEAN OTHER
STS (A) ILEX (A) SYSTEMS (B) ACQUISITIONS
--------- ---------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Sales ....................................... $ 53.9 $ 63.5 $ 73.0 $ 190.4
Costs and expenses .......................... 61.7 55.9 78.7 196.3
------ ------- ------ -------
Operating (loss) income. .................... ( 7.8) 7.6 ( 5.7) ( 5.9)
Interest and investment income
(expense) ................................. -- ( 0.2) 0.1 ( 0.1)
Interest expense ............................ -- -- 0.5 0.5
------ ------- ------ -------
Income (loss) before income taxes . ......... ( 7.8) 7.4 ( 6.1) ( 6.5)
Income tax (benefit) provision . ............ ( 2.1) 0.5 ( 2.4) ( 4.0)
------ ------- ------ -------
Net (loss) income ........................... $ (5.7) $ 6.9 $ (3.7) $ (2.5)
======= ======= ======= ========
</TABLE>
----------
(a) Represents fiscal year ended June 30, 1997 plus the six month
period ended December 31, 1997 minus the six month period ended
December 31, 1996.
4. The aggregate estimated excess of purchase price including expenses over
fair value of net assets acquired related to the Other Acquisitions is
$94.6 million, comprised of $38.6 million and $56.0 million, respectively,
for ILEX and Ocean Systems and is being amortized over 40 years resulting
in a charge of $2.4 million per annum. Based upon preliminary estimates of
fair value, the acquisition of STS resulted in no goodwill being recorded
since the purchase price was equal to the net assets acquired.
B-6
<PAGE>
Adjustments to costs and expenses in the pro forma statements of
operations relating to the Other Acquisitions were comprised of the
following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------------------ -------------
(in millions)
<S> <C> <C>
(a) Amortization expense of estimated purchase cost
in excess of net assets ........................... $ 0.4 $ 2.4
(b) Elimination of goodwill amortization expense
included in the historical financial statements for
the 1998 Acquisitions ............................. (0.1) (2.1)
(c) Estimated rent expense on the Sylmar facility of
Ocean Systems which was not be acquired by L-3
Communications .................................... 0.3 1.1
(d) Elimination of depreceiation expense on
buildings and improvements on the Sylmar
facility of Ocean Systems which was not acquired
by L-3 Communications ............................. (0.1) (0.3)
------ ------
Total increase to costs and expenses .............. $ 0.5 $ 1.1
====== ======
</TABLE>
5. The Offerings include the sale of 6.9 million shares of Holdings' common
stock in an Initial Public Offering ("IPO") for $22 per share or $139.5
million, after underwriting discounts and commissions and expenses of $12.3
million and the sale of $180.0 million aggregate principal amount of 8 1/2%
Senior Subordinated Notes due May 15, 2008 (the "1998 Notes"), whose
proceeds amounted to $173.8 million after debt issuance costs of $6.2
million. The net proceeds from the Offerings of $313.3 million have been
used to (i) prepay all $171.0 million of borrowings outstanding under the
term loan facilities, and (ii) finance substantially all of the aggregate
purchase prices of the Other Acquisitions (See Note 2 above). The Offerings
were completed on May 19, 1998 and their effect is included in Company's
historical balance sheet as of June 30, 1998.
6. On August 13, 1998, the Company acquired 100% of the the stock of SPD for
$230.0 million of cash, subject to adjustment based on final closing
adjusted net assets, as defined. For purposes of the pro forma financial
information an estimated purchase price of $238.5 million including
expenses (net of cash acquired of $0.2 million) was assumed reflecting the
contract price of $230.0 million and an estimated purchase price adjustment
of $8.5 million based on the June 30, 1998 net assets of SPD. The SPD
acquisition was assumed to be financed using $95.2 million of cash on hand
and $143.3 million of borrowings under the Company's revolving credit
facility. The SPD balance sheet as of June 30, 1998, and the SPD statements
of operations for the six months ended June 30, 1998 and the year ended
December 31, 1997 have been derived from SPD's historical financial
statements included elsewhere herein.
7. The estimated excess of purchase price over fair value of net assets
acquired for SPD of $209.5 million and is being amortized over 40 years
resulting in a charge of $5.2 million per annum. Further, the pro forma
balance sheet includes the elimination of (i) $78.0 million of intangibles,
primarily cost in excess of net assets acquired, included in the SPD
historical balance sheet, (ii) $76.0 of SPD debt which was repaid in
connection with SPD acquisition, and (iii) $25.7 million of SPD's
historical shareholders' equity. The pro forma balance sheet also reflects
these adjustments related to preliminary purchase price allocation:
(a) an estimated increase to contracts in process of $2.0 million
related to valuing certain commercial work-in-process and
finished goods inventory at their fair values. The non-recurring
charge to income resulting from the above mentioned inventoried
adjustment is not material to the pro forma statement of
operations;
(b) an adjustment of $5.0 million to intangible assets to reflect the
estimated value of acquired identifiable intangibles which are
being amortized over an estimated 15-year period relating in a
change of $0.3 million per annum;
B-7
<PAGE>
(c) an increase to pension and postretirement benefits liabilities
of $10.0 million to reflect the use of the Company's discount
rate which is lower than the discount rate used in the SPD
historical financial statements; and
(d) an increase in deferred tax asset of $14.5 million to reflect
(i) the elimination of a valuation allowance of $10.6 million
included in the SPD historical financial statements to reflect
the Company's ability to realize the acquired SPD deferred tax
assets on a consolidated basis and (ii) a deferred tax benefit of
$3.9 million related to the above-mentioned increase in the SPD
pension and postretirement benefits liabilities.
Adjustments to costs and expenses relating to the SPD acquisition in the
pro forma statements of operations for the six months ended June 30, 1998
and the year ended December 31, 1997 were increases of $1.6 million and
$4.0 million, respectively, and were comprised of (i) amortization expense
of estimated intangibles, primarily cost in excess of net assets acquired,
of $2.8 million and $5.5 million, respectively, and (ii) the elimination of
goodwill amortization expense included in the historical financial
statements of SPD of $1.2 million and $1.5 million, respectively.
8. Adjustments to the pro forma statements of operations include the
elimination of interest income of $1.5 million and $1.3 million for the six
months ended June 30, 1998 and the year ended December 31, 1997,
respectively, to reflect the use of cash on hand to partially finance the
aggregate purchase prices for the Other Acquisitions and SPD acquisition.
Assuming the SPD acquisition, the Other Acquisitions, and the Offerings
were completed on January 1, 1997, adjustments to pro forma interest
expense for the six months ended June 30, 1998 and the year ended December
31, 1997 include increases of $0.1 million and $8.5 million, respectively.
The details of interest expense, after such pro forma adjustments follow:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------------------ -------------
(in millions)
<S> <C> <C>
Interest on the 1997 Notes (10.375% on $225.0 million) .. $ 11.7 $ 23.3
Interest on the 1998 Notes (8.50% on $180.0 million)..... 7.7 15.3
Interest on borrowings under facility (8.0% on $146.0
million) .............................................. 5.8 11.7
Commitment fee of 0.5% on unused portion of revolving
credit facility (0.5% on $54.0 million) ............... 0.1 0.3
Amortization of deferred debt issuance costs ............ 1.5 3.0
------- -------
Total pro forma interest expense ........................ $ 26.8 $ 53.6
======= =======
</TABLE>
In accordance with SEC regulations, the pro forma statements of operations
do not reflect interest income on the $5.5 million pro forma cash balance
at June 30, 1998.
9. The pro forma adjustments were tax-effected, as appropriate, using a
statutory (federal, state and foreign) tax rate of 39.0%.
10. Pro forma basic earnings per common share are computed based upon the
weighted-average number of shares of common stock outstanding, giving
effect to the Holdings IPO. Pro forma diluted earnings per common stock are
computed based upon: (a) the weighted average number of shares of common
stock and potential common stock outstanding, to the extent the potential
common stock is not anti-dilutive, giving effect to the IPO; and (b) an
assumed average market price of common stock for the year ended December
31, 1997 of $22.00 per share based on the IPO price and of $23.87 per share
for the six months ended June 30, 1998 based on the IPO price of $22.00 for
the period January 1, 1998 to May 19, 1998 (the IPO date) and actual
average market prices of the Company's common stock for the period May 20,
1998 to June 30, 1998, were used for the assumed purchase of common shares
for treasury.
B-8
