10-Q 1 0001.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 Commission file numbers 001-14141 and 333-46983 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION 600 Third Avenue New York, NY 10016 Telephone: (212) 697-1111 State of incorporation: Delaware IRS identification numbers: 13-3937434 and 13-3937436 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No There were 33,524,934 shares of L-3 Communications Holdings, Inc. common stock with a par value of $0.01 outstanding as of the close of business on November 6, 2000. ================================================================================ L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION FORM 10-Q QUARTERLY REPORT FOR QUARTER ENDED SEPTEMBER 30, 2000 PART I -- FINANCIAL INFORMATION:
PAGE NO. --------- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 ....................................................... 1 Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2000 and September 30, 1999 .................. 2 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2000 and September 30, 1999 ......................... 4 Notes to Unaudited Condensed Consolidated Financial Statements ........... 5 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ..................................................... 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ............... 23 PART II -- OTHER INFORMATION: ITEM 6. Exhibits and Reports on Form 8-K ......................................... 24
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2000 1999 --------------- ------------- ASSETS Current assets: Cash and cash equivalents ......................................... $ 30,219 $ 42,788 Contracts in process .............................................. 663,541 484,173 Deferred income taxes ............................................. 51,002 32,985 Other current assets .............................................. 16,117 7,761 ---------- ---------- Total current assets ............................................ 760,879 567,707 ---------- ---------- Property, plant and equipment, net ................................. 158,320 140,971 Intangibles, primarily cost in excess of net assets acquired, net of amortization ...................................................... 1,308,874 821,552 Deferred income taxes .............................................. 86,328 56,858 Other assets ....................................................... 42,017 46,683 ---------- ---------- Total assets .................................................... $2,356,418 $1,633,771 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under Senior Credit Facilities ......................... $ 237,000 $ -- Accounts payable, trade ........................................... 123,697 98,693 Accrued employment costs .......................................... 97,868 70,618 Accrued expenses .................................................. 47,315 27,931 Customer advances ................................................. 55,530 56,738 Accrued interest .................................................. 20,448 12,683 Income taxes ...................................................... -- 2,715 Other current liabilities ......................................... 81,440 48,928 ---------- ---------- Total current liabilities ....................................... 663,298 318,306 ---------- ---------- Pension and postretirement benefits ................................ 99,378 110,262 Other liabilities .................................................. 101,707 17,028 Long-term debt ..................................................... 836,500 605,000 Commitments and contingencies Shareholders' equity: Common stock of Holdings $.01 par value; authorized 100,000,000 shares, issued and outstanding 33,452,178 and 32,794,547 shares.. 508,537 483,694 Retained earnings ................................................. 155,049 103,545 Unearned compensation ............................................. (2,806) (1,661) Accumulated other comprehensive loss .............................. (5,245) (2,403) ---------- ---------- Total shareholders' equity ......................................... 655,535 583,175 ---------- ---------- Total liabilities and shareholders' equity ...................... $2,356,418 $1,633,771 ========== ==========
See notes to unaudited condensed consolidated financial statements. 1 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2000 1999 ------------ ---------- Sales .............................................. $514,415 $382,356 Costs and expenses ................................. 451,600 339,516 -------- -------- Operating income ................................... 62,815 42,840 Interest and other income .......................... 904 636 Interest expense ................................... 24,831 15,266 -------- -------- Income before income taxes ......................... 38,888 28,210 Provision for income taxes ......................... 14,778 10,861 -------- -------- Net income ......................................... $ 24,110 $ 17,349 ======== ======== Holdings earnings per common share: Basic ............................................. $ 0.72 $ 0.53 ======== ======== Diluted ........................................... $ 0.69 $ 0.51 ======== ======== Holdings weighted average common shares outstanding: Basic ............................................. 33,542 32,650 ======== ======== Diluted ........................................... 35,166 34,222 ======== ========
See notes to unaudited condensed consolidated financial statements. 2 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ------------- ------------ Sales .............................................. $1,352,443 $972,350 Costs and expenses ................................. 1,205,306 872,194 ---------- -------- Operating income ................................... 147,137 100,156 Interest and other income .......................... 3,461 3,465 Interest expense ................................... 67,122 45,680 ---------- -------- Income before income taxes ......................... 83,476 57,941 Provision for income taxes ......................... 31,972 22,307 ---------- -------- Net income ......................................... $ 51,504 $ 35,634 ========== ======== Holdings earnings per common share: Basic ............................................. $ 1.55 $ 1.12 ========== ======== Diluted ........................................... $ 1.48 $ 1.06 ========== ======== Holdings weighted average common shares outstanding: Basic ............................................. 33,288 31,885 ========== ======== Diluted ........................................... 34,847 33,465 ========== ========
See notes to unaudited condensed consolidated financial statements. 3 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2000 1999 ------------ ------------ OPERATING ACTIVITIES: Net income ......................................................... $ 51,504 $ 35,634 Depreciation and amortization ...................................... 53,186 40,380 Amortization of deferred debt issue costs .......................... 4,039 2,918 Deferred income taxes .............................................. 19,502 18,011 Other noncash items ................................................ 8,087 4,391 Changes in operating assets and liabilities, net of amounts acquired: Contracts in process .............................................. (34,554) (54,910) Other current assets .............................................. (8,619) 4,957 Other assets ...................................................... (3,572) (145) Accounts payable and accrued expenses ............................. 32,172 2,185 Customer advances ................................................. (14,592) 7,412 Other current liabilities ......................................... (34,472) 559 Pension and postretirement benefits ............................... (8,917) 1,884 Other liabilities ................................................. 349 (1,344) All other operating activities, net ................................ (1,441) (1,740) ---------- ---------- Net cash from operating activities ................................. 62,672 60,192 ---------- ---------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired .................... (532,873) (211,393) Capital expenditures ............................................... (21,356) (15,758) Disposition of property, plant and equipment ....................... 3,225 6,138 Other investing activities ......................................... 5,865 4,777 ---------- ---------- Net cash (used in) investing activities ............................ (545,139) (216,236) ---------- ---------- FINANCING ACTIVITIES: Borrowings under revolving credit facilities ....................... 754,500 74,700 Repayment of borrowings under revolving credit facilities .......... (286,000) (74,700) Proceeds from sale of Holdings common stock, net ................... -- 201,582 Other financing activities, net .................................... 1,398 (875) ---------- ---------- Net cash from financing activities ................................. 469,898 200,707 ---------- ---------- Net (decrease) increase in cash .................................... (12,569) 44,663 Cash and cash equivalents, beginning of the period ................. 42,788 26,130 ---------- ---------- Cash and cash equivalents, end of the period ....................... $ 30,219 $ 70,793 ========== ==========
See notes to unaudited condensed consolidated financial statements. 4 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION L-3 Communications Holdings, Inc. ("Holdings" and together with its subsidiaries "L-3" or the "Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. The Company produces secure, high data rate communication systems, avionics and ocean products, telemetry, instrumentation and space products, microwave components and training and simulation systems. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The Company's systems and specialized products are used to connect a variety of airborne, space, ground-and sea-based communication systems and are used in the transmission, processing, recording, monitoring and dissemination functions of these communication systems. The Company's customers include the U.S. Department of Defense ("DoD"), certain U.S. Government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. L-3's business areas employ proprietary technologies and capabilities and have leading positions in their respective primary markets. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. Secure Communication Systems. This segment provides secure, high data rate communications for military and other U.S. Government reconnaissance and surveillance applications. These operations are principally strategic, long-term programs performed under cost plus, sole-source contracts supporting the DoD and other government agencies. The major secure communication programs and systems include: o secure data links for airborne, satellite, ground-and sea-based remote platforms for real time information collection and dissemination to users; o strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information; o secure telephone and network equipment and encryption management; o communication software support services; and o communication systems for surface and undersea vessels and manned space flights. The Secure Communication Systems segment includes our Training and Simulation business, which produces advanced simulation and training products, with high-fidelity representations of cockpits and operator stations for aircraft and vehicle system simulation which are principally performed under long-term fixed price contracts. The training business also provides a full range of teaching, training and logistic services and training device support to domestic and international customers. Specialized Communication Products. This segment includes products to military and commercial customers, that focus on niche markets in which the Company can achieve a market leadership position. This reportable segment includes three product categories: o avionics and ocean products including our aviation recorders, airborne collision avoidance products, displays, antennas, acoustic undersea warfare products and naval power distribution, conditioning, switching and protection equipment; o telemetry, instrumentation and space products including our commercial off-the-shelf, real-time data collection and transmission products and components for missile, aircraft and space-based electronic systems; and o microwave components including our commercial off-the-shelf, high-performance microwave components and frequency monitoring equipment. 5 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The accompanying unaudited condensed consolidated financial statements also include those of L-3 Communications Corporation ("L-3 Communications"), which is a wholly owned subsidiary of Holdings. Holdings has no other assets or liabilities and conducts no operations other than through its wholly owned subsidiary, L-3 Communications. Therefore, the consolidated financial statements of Holdings and L-3 Communications reflect the same results of operations, cash flows, assets, liabilities and shareholders' equity. L-3 Communications common stock consists of 100 shares authorized and outstanding of $0.01 par value. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"); accordingly, they do not include all of the information and notes required by generally accepted accounting principles for a complete set of financial statements. Certain reclassifications have been made to conform prior year financial statements amounts to the current year presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs and expenses during the reporting period. The most significant of these estimates and assumptions relate to contract estimates of sales and costs, estimates of pension and postretirement benefit obligations, recoverability of recorded amounts of fixed assets and cost in excess of net assets acquired, income taxes, litigation and environmental obligations. Actual results could differ from these estimates. For further information, these interim financial statements should be read in conjunction with the Consolidated Financial Statements of Holdings and L-3 Communications for the fiscal year ended December 31, 1999, included in their Annual Report on Form 10-K for fiscal year ended December 31, 1999. 2. ACQUISITIONS AND DIVESTITURES On December 31, 1999, the Company acquired the assets of the Space and Navigation Systems business ("SNS") of Honeywell International Inc. ("Honeywell") for $55,000 in cash, plus expenses, subject to adjustment based on closing date net assets. On February 10, 2000, the Company acquired the assets of the Training Devices and Training Services ("TDTS") business of Raytheon Company for $160,000 in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition the Company changed the name of TDTS to L-3 Communications Link Simulation and Training ("Link Simulation and Training"). On February 14, 2000, the Company acquired the assets of Trex Communications Corporation, ("TrexCom"), for $50,210 in cash, plus expenses, subject to adjustment based on closing date net worth, as defined. The acquisitions were financed using borrowings under the Company's Senior Credit Facilities. On April 28, 2000, the Company acquired the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $237,000 in cash, reflecting a price reduction of $17,000 based on the preliminary closing date net assets which is subject to a final adjustment. The TCAS acquisition was financed with borrowings under a new revolving 364 day senior credit facility. In addition, in February 2000, the Company entered into a Memorandum of Agreement ("MOA") with 6 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to create a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets acquired from Honeywell to the TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final purchase price paid by the Company for TCAS (which is expected to be approximately $71,100 based on the preliminary closing date net assets) (collectively, the "TCAS Minority Interest Transaction"). L-3 will consolidate the TCAS LLC. The Company anticipates that it will complete the definitive agreements regarding the TCAS Minority Interest Transaction with Sextant in the fourth quarter of 2000. The TCAS Minority Interest Transaction is subject to regulatory approval by United States agencies and the European Union Commission and the execution of definitive agreements. On June 30, 2000, the Company acquired all the outstanding stock of MPRI for $34,500 in cash subject to adjustment based on closing date net assets, plus additional consideration contingent upon the post-acquisition financial performance of MPRI for the year ending June 30, 2001. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. On July 11, 2000, the Company acquired 53.5% of the outstanding common stock of LogiMetrics, Inc. ("LogiMetrics") for $15,000. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. The Company also agreed to invest an additional $5,000 in LogiMetrics during 2001 for an additional equity interest, and will contribute to LogiMetrics certain technologies, upon satisfaction of certain future conditions. All of the Company's acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their respective effective dates. The assets and liabilities recorded in connection with the purchase price allocations for the acquisitions of SNS, TDTS, TrexCom and TCAS are based upon preliminary estimates of fair values for acquired contracts in process including reserves for contract losses, inventories, pension and postretirement benefit liabilities and deferred taxes. Actual adjustments will be based on the final purchase prices and final appraisals and other analyses of fair values which are in process. Except for the TDTS acquisition, as discussed below, the Company does not expect the differences between the preliminary and final purchase price allocations for the acquisitions to be material.The preliminary assets and liabilities recorded in connection with the acquisitions of SNS, TDTS, TrexCom, TCAS, MPRI and LogiMetrics were $80,177 and $24,706; $262,068 and $101,141; $66,821 and $15,905; $249,425 and $11,992; $41,713 and $6,628; and $20,126 and $11,209, respectively. The Company has valued acquired contracts in process at contract price, less the estimated costs to complete and an allowance for normal profit on the Company's effort to complete such contracts. The excess of purchase price over the fair value of net assets acquired is being amortized on a straight-line basis over periods of 40 years for SNS, TDTS, TCAS and MPRI and 20 years for LogiMetrics and TrexCom. The SEC requires that the Company file separate audited financial statements of the most recent fiscal years for TDTS and TCAS prior to their acquisition by L-3 with unaudited pro forma financial information. However, audited financial statements for the TDTS and TCAS businesses are not readily available, because prior to the acquisitions, TDTS and TCAS were not stand-alone entities and their financial statements were not audited. These financial statements are currently being audited, and upon their completion, the Company will file the required TDTS and TCAS financial statements and pro forma financial information with the SEC. However, based on the unaudited preliminary data, sales and operating loss for the year ended December 31, 1999 for the TDTS business, including a loss provision for estimated costs in excess of estimated billings to complete certain contracts in process, were $270,600 and $(36,900), respectively, and sales and operating income for the year ended December 31, 1999 for the 7 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) TCAS product line were $108,000 and $46,100, respectively. Actual results, based upon completion of the audits, could differ materially from these preliminary statements of operations data. Additionally, depending on the December 31, 1999 audit results for TDTS, the final purchase allocation for TDTS relating to loss reserves for estimated costs in excess of estimated billings to complete certain acquired contracts in process could be materially different than those recorded in the Company's preliminary purchase allocation for the TDTS acquisition which is reflected on the Company's consolidated balance sheet as of September 30, 2000. Based on unaudited statements of operations data for TrexCom, TDTS and TCAS, had these acquisitions occurred on January 1, 2000, pro forma sales, net income and diluted earnings per share for the nine months ended September 30, 2000 would have been $1,404,000, $50,200 and $1.44, respectively. Based on unaudited preliminary statements of operations for TDTS and TCAS and unaudited statement of operations data for Aydin, IEC, SNS and TrexCom for the year ended December 31, 1999, had these acquisitions occurred on January 1, 1999, pro forma sales would have been $1,418,400 for the nine months ended September 30, 1999. Pro forma net income and earnings per share for the nine months ended September 30, 1999 have not been provided because the required interim historical financial information is not yet available. The pro forma data are based on various assumptions and are not necessarily indicative of the results that would have occurred had the acquisitions occurred on January 1, 1999, nor do they purport to be indicative of future consolidated results. In March 2000, the Company recognized an after-tax gain of $6,754 on the sale of its interest in the Network Security business and recorded an unrelated after-tax write down of $6,359 on the carrying value of certain investments. In May 2000, the Company recognized an after-tax gain of $2,000 on the sale of its interest in the Cardiovascular Computer Systems business and recognized an unrelated after-tax write down of $1,215 on the carrying value of certain investments. In September 2000, the Company sold a 60% interest in its Turkish subsidiary which resulted in an after-tax gain of $373. As a result of these non-recurring items which were all recorded in Interest and Other Income on the Statement of Operations, the net earnings during the nine-month period ended September 30, 2000 reflect a net after-tax gain of $1,553 ($0.04 per diluted share) related to these transactions. The net proceeds from the sale of the Network Security business and Cardiovascular Computer Systems business were $13,443 and $5,594, respectively, and are included in Other Investing Activities on the Statement of Cash Flows. The sales price of the Turkish subsidiary consists of $2,000 in cash and $4,000 of retained receivables. The cash sales proceeds are payable in three installments, $500 in the fourth quarter of 2000, and $750 in each of April 2001 and October 2001. 3. CONTRACTS IN PROCESS
Contracts in process consist of: SEPTEMBER 30, 2000 DECEMBER 31, 1999 -------------------- ------------------ Billed receivables ......................................... $ 299,518 $ 258,054 --------- --------- Unbilled contract receivables, gross ....................... 257,866 125,652 Less: unliquidated progress payments ....................... (73,905) (10,351) --------- --------- Unbilled contract receivables, net ........................ 183,961 115,301 --------- --------- Inventories and inventoried contract costs, gross .......... 211,146 130,091 Less: unliquidated progress payments ....................... (31,084) (19,273) --------- --------- Inventories and inventoried contract costs, net ........... 180,062 110,818 --------- --------- Total contracts in process ................................ $ 663,541 $ 484,173 ========= =========
8 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. DEBT
Debt consists of: SEPTEMBER 30, 2000 DECEMBER 31, 1999 -------------------- ------------------ Borrowings under Senior Credit Facilities .......... $ 468,500 $ -- 103/8% Senior Subordinated Notes due 2007 .......... 225,000 225,000 81/2% Senior Subordinated Notes due 2008 ........... 180,000 180,000 8% Senior Subordinated Notes due 2008 .............. 200,000 200,000 ---------- -------- Total debt ........................................ 1,073,500 605,000 Less current portion of borrowings under Senior Credit Facilities ............................... (237,000) -- ---------- -------- Long-term debt .................................... $ 836,500 $605,000 ========== ========
On April 28, 2000, the Company entered into a new 364 day revolving credit facility for $300,000 (the "New 364 Day Revolving Credit Facility") that expires on April 27, 2001 and amended the Senior Credit Facilities to change the spreads used to determine borrowing rates and commitment fees thereunder, as follows: on "base rate" borrowings, ranging from 0.375% to 1.75%; on "LIBOR rate" borrowings ranging from 1.25% to 2.75%; and, on commitment fees, ranging from 0.20% to 0.50%; in each case, depending on L-3 Communications' Debt to EBITDA Ratio at the time of determination. The amendment also provided that from April 28, 2000 until the adjustment date for the quarter ending September 30, 2000, the spreads will be no lower than 0.75% and 1.75%, respectively, on "base rate" borrowings and "Eurodollar" borrowings. The spreads for the New 364 Day Revolving Credit Facility are the same as those under the Senior Credit Facilities. The lenders under the New 364 day Revolving Credit Facility rank pari passu with the lenders under the other Senior Credit Facilities. The borrowings outstanding of $237,000 at September 30, 2000 under the New 364 Day Revolving Credit Facility are classified under current liabilities on the balance sheet because the facility expires in April 2001. The Company intends to either refinance the New 364 Day Revolving Credit Facility or to restructure it together with the Company's other existing revolving credit facilities by the end of the first quarter of 2001. In August 2000 the Revolving 364-Day Credit Facility was renewed for an additional 364 days and will expire on August 9, 2001, at which time the Company may convert a portion of the borrowings outstanding thereunder into term loans which fully amortize over an eighteen month period beginning September 30, 2001. Available borrowings under the Company's revolving credit facilities at September 30, 2000 were $115,890, after reductions for outstanding borrowings of $468,500 and letters of credit of $115,610. 5. COMPREHENSIVE INCOME
Comprehensive income consists of: NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2000 1999 --------- -------- Net income .................................................. $51,504 $35,634 Foreign currency translation losses ......................... (1,441) (1,740) Unrealized gain (loss) on investments, net of taxes ......... (1,401) (2,144) ------- ------- Comprehensive income ........................................ $48,662 $31,750 ======= =======
9 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 6. EARNINGS PER SHARE Earnings per share data is not provided for L-3 Communications since it is a wholly-owned subsidiary of Holdings. Weighted-average shares for Holdings used in the computation of earnings per share are presented in the table below.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- ---------- --------- ---------- Basic: Net income .......................................... $24,110 $17,349 $51,504 $35,634 Weighted average common shares outstanding .......... 33,542 32,650 33,288 31,885 ------- ------- ------- ------- Basic earnings per share ............................ $ 0.72 $ 0.53 $ 1.55 $ 1.12 ======= ======= ======= ======= Diluted: Net income .......................................... $24,110 $17,349 $51,504 $35,634 ------- ------- ------- ------- Common and potential common shares: Weighted average common shares outstanding ......... 33,542 32,650 33,288 31,885 Assumed exercise of stock options .................. 3,979 3,281 4,005 3,249 Assumed purchase of common shares for treasury ......................................... (2,355) (1,709) (2,446) (1,669) ------- ------- ------- ------- Common and potential common shares .................. 35,166 34,222 34,847 33,465 ======= ======= ======= ======= Diluted earnings per share .......................... $ 0.69 $ 0.51 $ 1.48 $ 1.06 ======= ======= ======= =======
7. CONTINGENCIES The Company is engaged in providing products and services under contracts with the U.S. government and to a lesser degree, under foreign government contracts, some of which are funded by the U.S. government. All such contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. government investigate whether such contracts were and are being conducted in accordance with these requirements. Under government procurement regulations, an indictment of the Company by a federal grand jury could result in the Company being suspended for a period of time from eligibility for awards of new government contracts. A conviction could result in debarment from contracting with the federal government for a specified term. Additionally, in the event that U.S. government expenditures for products and services of the type manufactured and provided by the Company are reduced, and not offset by greater commercial sales or other new programs or products, or acquisitions, there may be a reduction in the volume of contracts or subcontracts awarded to the Company. Management continually assesses the Company's obligations with respect to applicable environmental protection laws. While it is difficult to determine the timing and ultimate cost to be incurred by the Company in order to comply with these laws, based upon available internal and external assessments, with respect to those environmental loss contingencies of which management is aware, the Company believes that even without considering potential insurance recoveries, if any, there are no environmental loss contingencies that, individually or in the aggregate, would be material to the Company's financial position or results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has been periodically subject to litigation, claims or assessments and various contingent liabilities incidental to its business. With respect to those investigative actions, items of 10 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) litigation, claims or assessments of which they are aware, management of the Company is of the opinion that the probability is remote that, after taking into account certain provisions that have been made with respect to these matters, the ultimate resolution of any such investigative actions, items of litigation, claims or assessments will have a material adverse effect on the financial position or results of operations of the Company. 8. SEGMENT INFORMATION The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products which are described in Note 1. The Company evaluates the performance of its operating divisions and reportable segments based on sales and operating income. The table below presents sales, operating income and assets by reportable segment.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- -------------- ----------- SALES: Secure Communication Systems ............... $233,747 $141,940 $ 598,967 $385,387 Specialized Communication Products ......... 284,126 242,625 760,759 591,248 Elimination of intersegment sales .......... (3,458) (2,209) (7,283) (4,285) -------- -------- ---------- -------- Consolidated total ....................... $514,415 $382,356 $1,352,443 $972,350 ======== ======== ========== ======== OPERATING INCOME: Secure Communication Systems ............... $ 25,100 $ 11,697 $ 63,796 $ 33,525 Specialized Communication Products ......... 37,715 31,143 83,341 66,631 -------- -------- ---------- -------- Consolidated total ....................... $ 62,815 $ 42,840 $ 147,137 $100,156 ======== ======== ========== ========
SEPTEMBER 30, 2000 DECEMBER 31, 1999 -------------------- ------------------ ASSETS: Secure Communication Systems ............... $ 736,661 $ 381,699 Specialized Communication Products ......... 1,558,258 1,123,487 Corporate .................................. 61,499 128,585 ---------- ---------- Consolidated total ....................... $2,356,418 $1,633,771 ========== ==========
9. NEW ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all quarters of fiscal years beginning after September 15, 2000. The Company does not expect SFAS 133 to have a material impact on its results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The SEC delayed the effective date of this SAB in June 2000, so that the SAB 11 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) must now be adopted by December 31, 2000. The Company does not expect SAB No. 101 to have a material impact on its results of operations or financial position. 10. UNAUDITED FINANCIAL INFORMATION OF L-3 COMMUNICATIONS SUBSIDIARY GUARANTORS L-3 Communications is a wholly owned subsidiary of Holdings. The debt of L-3 Communications, including the Senior Subordinated Notes and borrowings under and amounts drawn against the Company's credit facilities are guaranteed, on a joint and several, full and unconditional basis, by certain of its wholly owned domestic subsidiaries (the "Guarantor Subsidiaries"). The foreign subsidiaries and certain domestic subsidiaries of L-3 Communications (the "Non-Guarantor Subsidiaries") do not guarantee the debt of L-3 Communications. None of the debt of L-3 Communications has been issued by its subsidiaries. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L-3 Communications. In lieu of providing separate unaudited interim financial statements for the Guarantor Subsidiaries, the Company has included the accompanying condensed consolidating financial statement data based on the Company's understanding of the SEC's Financial Reporting Release No. 55 which has amended Rule 3-10 of SEC Regulation S-X and Staff Accounting Bulletin No. 53. The following unaudited condensed consolidating financial information present the results of operations, financial position and cash flows of (i) L-3 Communications excluding its consolidated subsidiaries (the "Parent") (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries and (iv) the consolidating adjustments to arrive at the information for L-3 Communications on a consolidated basis.
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS L-3 COMMUNICATIONS ------------- -------------- --------------- --------------- ------------------- CONDENSED CONSOLIDATING BALANCE -------------------------------------------- SHEETS: -------------------------------------------- AS OF SEPTEMBER 30, 2000 -------------------------------------------- Current assets: Cash and cash equivalents ................. $ 24,764 $ 4,548 $ 907 $ -- $ 30,219 Contracts in process ...................... 403,575 202,758 57,208 -- 663,541 Other current assets ...................... 41,502 16,115 9,502 67,119 ---------- -------- --------- ---------- ---------- Total current assets .................... 469,841 223,421 67,617 -- 760,879 ---------- -------- --------- ---------- ---------- Property, plant and equipment, net ......... 121,130 25,338 11,852 -- 158,320 Intangibles, net ........................... 863,326 389,855 55,693 -- 1,308,874 Other assets ............................... 92,274 13,735 22,336 -- 128,345 Investment in and amounts due to and from consolidated subsidiaries ............ 647,609 4,408 (37,051) (614,966) -- ---------- -------- --------- ---------- ---------- Total assets ............................ $2,194,180 $656,757 $ 120,447 $ (614,966) $2,356,418 ========== ======== ========= ========== ========== Current liabilities: Borrowings under Senior Credit Facilities .............................. $ 237,000 $ -- $ -- $ -- $ 237,000 Accounts payable and accrued expenses ................................ 208,326 58,258 22,744 -- 289,328 Customer advances ......................... 49,270 4,041 2,219 -- 55,530 Other current liabilities ................. 56,802 16,301 8,337 -- 81,440 ---------- -------- --------- ---------- ---------- Total current liabilities ............... 551,398 78,600 33,300 -- 663,298 ---------- -------- --------- ---------- ---------- Other liabilities .......................... 150,747 48,609 1,729 -- 201,085 Long-term debt ............................. 836,500 -- -- -- 836,500 Shareholders' equity ....................... 655,535 529,548 85,418 (614,966) 655,535 ---------- -------- --------- ---------- ---------- Total liabilities and shareholders' equity ................................. $2,194,180 $656,757 $ 120,447 $ (614,966) $2,356,418 ========== ======== ========= ========== ==========
12 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS L-3 COMMUNICATIONS ------------- -------------- --------------- --------------- ------------------- CONDENSED CONSOLIDATING BALANCE ------------------------------- SHEETS: ------- AS OF DECEMBER 31, 1999 ----------------------- Current assets: Cash and cash equivalents ................... $ 34,037 $ 5,164 $ 3,587 $ -- $ 42,788 Contracts in process ........................ 264,658 162,088 57,427 -- 484,173 Other current assets ........................ 24,616 10,455 5,675 -- 40,746 ---------- -------- --------- ---------- ---------- Total current assets ...................... 323,311 177,707 66,689 -- 567,707 ---------- -------- --------- ---------- ---------- Property, plant and equipment, net ........... 104,087 25,005 11,879 -- 140,971 Intangibles, net ............................. 399,746 377,177 44,629 -- 821,552 Other assets ................................. 67,820 10,337 25,384 -- 103,541 Investment in and amounts due to and from consolidated subsidiaries 644,560 23,591 (25,423) (642,728) -- ---------- -------- --------- ---------- ---------- Total assets .............................. $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771 ========== ======== ========= ========== ========== Current liabilities: Accounts payable and accrued expenses .................................. $ 135,709 $ 57,924 $ 19,007 $ -- $ 212,640 Customer advances ........................... 53,345 543 2,850 -- 56,738 Other current liabilities ................... 24,798 17,230 6,900 -- 48,928 ---------- -------- --------- ---------- ---------- Total current liabilities ................. 213,852 75,697 28,757 -- 318,306 ---------- -------- --------- ---------- ---------- Other liabilities ............................ 79,234 47,961 95 -- 127,290 Long-term debt ............................... 605,000 -- -- -- 605,000 Shareholders' equity ......................... 641,438 490,159 94,306 (642,728) 583,175 ---------- -------- --------- ---------- ---------- Total liabilities and shareholders' equity ................................... $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771 ========== ======== ========= ========== ========== CONDENSED CONSOLIDATING STATEMENTS OF ------------------------------------- OPERATIONS: ----------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ------------------ Sales ........................................ $ 911,281 $318,347 $ 122,815 $ -- $1,352,443 ---------- -------- --------- ---------- ---------- Operating income (loss)....................... 148,123 3,034 (4,020) -- 147,137 Interest and other income .................... 4,563 227 (1,329) -- 3,461 Interest expense ............................. 66,804 140 178 -- 67,122 Provision (benefit) for income taxes ......... 32,634 1,304 (1,966) -- 31,972 Equity in net income (loss) of consolidated subsidiaries ................... (1,744) -- -- 1,744 -- ---------- -------- --------- ---------- ---------- Net income (loss) ............................ $ 51,504 $ 1,817 $ (3,561) $ 1,744 $ 51,504 ========== ======== ========= ========== ========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------------ Sales ........................................ $ 581,522 $303,478 $ 87,350 $ -- $ 972,350 ---------- -------- --------- ---------- ---------- Operating income (loss) ...................... 69,732 35,921 (5,497) -- 100,156 Interest and other income .................... 2,986 210 269 -- 3,465 Interest expense ............................. 45,369 207 104 -- 45,680 Provision (benefit) for income taxes ......... 10,287 13,831 (1,811) -- 22,307 Equity in net income (loss) of consolidated subsidiaries ................... 18,572 -- -- (18,572) -- ---------- -------- --------- ---------- ---------- Net income (loss) ............................ $ 35,634 $ 22,093 $ (3,521) $ (18,572) $ 35,634 ========== ======== ========= ========== ==========
13 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR PARENT SUBSIDIARIES ------------- -------------- CONDENSED CONSOLIDATING STATEMENTS OF ------------------------------------- CASH FLOWS: ----------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000: --------------------------------------------- OPERATING ACTIVITIES: Net income (loss)........................................ $ 51,504 $ 1,817 Depreciation, amortization, deferred taxes and noncash items .......................................... 67,859 13,310 Equity in net (income) loss of consolidated subsidiaries ........................................... 1,744 -- Changes in operating assets and liabilities ............. (74,723) 3,305 ----------- ----------- Net cash from (used in) operating activities ............ 46,384 18,432 ----------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ......... (496,346) (26,416) Investment in consolidated subsidiaries ................. (36,527) -- Capital expenditures, net of dispositions ............... (13,009) (3,973) Other investing activities, net ......................... 5,865 -- ----------- ----------- Net cash (used in) from investing activities ............ (540,017) (30,389) ----------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net ........................................ 468,500 -- Intercompany financing activities, net .................. 14,462 11,341 Other financing activities, net ......................... 1,398 -- ----------- ----------- Net cash from (used in) financing activities ............ 484,360 11,341 ----------- ----------- Net (decrease) in cash .................................. (9,273) (616) Cash and cash equivalents, beginning of period .......... 34,037 5,164 ----------- ----------- Cash and cash equivalents, end of period ................ $ 24,764 $ 4,548 =========== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: --------------------------------------------- OPERATING ACTIVITIES: Net income (loss) ....................................... $ 35,634 $ 22,093 Depreciation, amortization, deferred taxes and noncash items .......................................... 50,186 12,443 Equity in net (income) loss of consolidated subsidiaries ........................................... (18,572) -- Changes in operating assets and liabilities ............. (18,828) (20,392) ----------- ----------- Net cash from (used in) operating activities ............ 48,420 14,144 ----------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ......... -- (156,119) Investment in consolidated subsidiaries ................. (211,393) -- Capital expenditures, net of dispositions ............... (10,606) 291 Other investing activities, net ......................... 4,777 -- ----------- ----------- Net cash from (used in) investing activities ............ (217,222) (155,828) ----------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net ........................................ -- -- Contribution from Holdings .............................. 201,582 -- Intercompany financing activities, net .................. 1,767 149,084 Other financing activities, net ......................... (875) -- ----------- ----------- Net cash from (used in) financing activities ............ 202,474 149,084 ----------- ----------- Net increase in cash .................................... 33,672 7,400 Cash and cash equivalents, beginning of period .......... 23,737 459 ----------- ----------- Cash and cash equivalents, end of period ................ $ 57,409 $ 7,859 =========== =========== NON-GUARANTOR CONSOLIDATING CONSOLIDATED SUBSIDIARIES ADJUSTMENTS L-3 COMMUNICATIONS --------------- --------------- ------------------- CONDENSED CONSOLIDATING STATEMENTS OF ------------------------------------- CASH FLOWS: ----------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000: --------------------------------------------- OPERATING ACTIVITIES: Net income (loss)........................................ $ (3,561) $ 1,744 $ 51,504 Depreciation, amortization, deferred taxes and noncash items .......................................... 3,645 -- 84,814 Equity in net (income) loss of consolidated subsidiaries ........................................... -- (1,744) -- Changes in operating assets and liabilities ............. (2,228) -- (73,646) --------- ---------- ----------- Net cash from (used in) operating activities ............ (2,144) -- 62,672 --------- ---------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ......... (10,111) -- (532,873) Investment in consolidated subsidiaries ................. -- 36,527 -- Capital expenditures, net of dispositions ............... (1,149) -- (18,131) Other investing activities, net ......................... -- 5,865 --------- ---------- ----------- Net cash (used in) from investing activities ............ (11,260) 36,527 (545,139) --------- ---------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net ........................................ -- -- 468,500 Intercompany financing activities, net .................. 10,724 (36,527) -- Other financing activities, net ......................... -- -- 1,398 --------- ---------- ----------- Net cash from (used in) financing activities ............ 10,724 (36,527) 469,898 --------- ---------- ----------- Net (decrease) in cash .................................. (2,680) -- (12,569) Cash and cash equivalents, beginning of period .......... 3,587 -- 42,788 --------- ---------- ----------- Cash and cash equivalents, end of period ................ $ 907 $ -- $ 30,219 ========= ========== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: --------------------------------------------- OPERATING ACTIVITIES: Net income (loss) ....................................... $ (3,521) $ (18,572) $ 35,634 Depreciation, amortization, deferred taxes and noncash items .......................................... 3,071 -- 65,700 Equity in net (income) loss of consolidated subsidiaries ........................................... -- 18,572 -- Changes in operating assets and liabilities ............. (1,922) -- (41,142) --------- ---------- ----------- Net cash from (used in) operating activities ............ (2,372) -- 60,192 --------- ---------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ......... (55,274) -- (211,393) Investment in consolidated subsidiaries ................. -- 211,393 -- Capital expenditures, net of dispositions ............... 695 -- (9,620) Other investing activities, net ......................... -- -- 4,777 --------- ---------- ----------- Net cash from (used in) investing activities ............ (54,579) 211,393 (216,236) --------- ---------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net ........................................ -- -- -- Contribution from Holdings .............................. -- -- 201,582 Intercompany financing activities, net .................. 60,542 (211,393) -- Other financing activities, net ......................... -- -- (875) --------- ---------- ----------- Net cash from (used in) financing activities ............ 60,542 (211,393) 200,707 --------- ---------- ----------- Net increase in cash .................................... 3,591 -- 44,663 Cash and cash equivalents, beginning of period .......... 1,934 -- 26,130 --------- ---------- ----------- Cash and cash equivalents, end of period ................ $ 5,525 $ -- $ 70,793 ========= ========== ===========
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL L-3 Communications Holdings, Inc. and its subsidiaries ("Holdings, "L-3" or "the Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. Holdings has no other assets or liabilities and conducts no other operations other than through its wholly owned subsidiary, L-3 Communications Corporation ("L-3 Communications"). The Company's customers include the U.S. Department of Defense ("DoD"), certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. The Secure Communication Systems segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. The Secure Communication Systems segment also includes our Training and Simulation business, which produces advanced simulation and training products, and also provides a full range of teaching, training and logistic services and training device support to domestic and international customers. The Specialized Communication Products segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. All domestic government contracts and subcontracts of the Company are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. government. Multiyear U.S. government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contracts generally include comparable provisions relating to termination for the convenience of the relevant foreign government. The defense industry has undergone significant changes precipitated by ongoing U.S. federal budget pressures and new roles and missions to reflect changing strategic and tactical threats. Since the mid-1980's, the overall U.S. defense budget has declined in real dollars. In response, the DoD has focused its resources on enhancing its military readiness, joint operations and the value added capability of digital command and control communications by incorporating advanced electronics to improve the performance, reduce operating costs and extend the life expectancy of its existing and future platforms. The emphasis on system interoperability, force multipliers and providing battlefield commanders with real time data is increasing the electronics content of nearly all of the major military procurement and research programs. As a result, the DoD's budget for communications and defense electronics is expected to grow. ACQUISITIONS On January 8, 1999, the Company acquired all of the outstanding common stock of Microdyne Corporation ("Microdyne"). On April 16, 1999, the Company acquired all of the outstanding common stock of Aydin Corporation ("Aydin"). On June 30, 1999, the Company acquired all of the outstanding common stock of Interstate Electronics Corporation ("IEC") of Scott Technologies Inc. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions". On December 31, 1999, the Company completed its acquisition of the assets of the Space and Navigation business ("SNS") from Honeywell International, Inc ("Honeywell"), for $55.0 million in cash plus expenses, subject to adjustment based on closing date net assets. On February 10, 2000, the Company acquired the assets of the Training Devices and Training Services ("TDTS") business of the Raytheon Company for $160.0 million in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition the Company changed the name of TDTS to L-3 Communications Link Simulation and Training. On 15 February 14, 2000, the Company acquired the assets of Trex Communications Corporation ("TrexCom") for $50.2 million in cash, plus expenses, subject to adjustment based on closing date net worth, as defined. The acquisitions were financed using borrowings under the Company's Senior Credit Facilities. On April 28, 2000, the Company acquired the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $237.0 million in cash, reflecting a price reduction of $17.0 million based on the preliminary closing date net assets, which is subject to a final adjustment. The TCAS acquisition was financed with borrowings under a new revolving 364 day senior credit facility. In addition, in February 2000, the Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to create a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets acquired from Honeywell to the TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final purchase price paid by the Company for TCAS (which is expected to be approximately $71.1 million based on the preliminary closing date net assets) (collectively, the "TCAS Minority Interest Transaction"). L-3 will consolidate the TCAS LLC. The Company anticipates that it will complete the definitive agreements regarding the TCAS Minority Interest Transaction with Sextant in the fourth quarter of 2000. The TCAS Minority Interest Transaction is subject to regulatory approval by United States agencies and the European Union Commission and the execution of definitive agreements. On June 30, 2000, the Company acquired all the outstanding stock of MPRI for $34.5 million in cash, subject to adjustment based on closing date net assets, plus additional consideration contingent upon the post-acquisition financial performance of MPRI for the year ending June 30, 2001. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. On July 11, 2000, the Company acquired 53.5% of the outstanding common stock of LogiMetrics, Inc. ("LogiMetrics") for $15.0 million. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. The Company also agreed to invest an additional $5.0 million in LogiMetrics during 2001 for an additional equity interest, and will contribute to LogiMetrics certain technologies, upon satisfaction of certain future conditions. All of the acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their respective effective dates. The Securities and Exchange Commission ("SEC") requires that the Company file separate audited financial statements of the most recent fiscal years for TDTS and TCAS prior to their acquisition by L-3 with unaudited pro forma financial information. However audited financial statements for the TDTS and TCAS businesses are not readily available, because prior to the acquisitions, TDTS and TCAS were not stand-alone entities and their financial statements were not audited. These financial statements are currently being audited, and upon their completion, the Company will file the required TDTS and TCAS financial statements and pro forma financial information with the SEC. However, based on the unaudited preliminary data, sales and operating loss for the year ended December 31, 1999 for the TDTS business, including a loss provision for estimated costs in excess of estimated billings to complete certain contracts in process, were $270.6 million and $(36.9) million, respectively, and sales and operating income for the year ended December 31, 1999 for the TCAS product line were $108.0 million and $46.1 million, respectively. Actual results, based upon completion of the aforementioned audits, could differ materially from these statements of operations data. Additionally, depending on the December 31, 1999 audit results for TDTS, the final purchase allocation for TDTS relating to loss reserves for estimated costs in excess of estimated billings to complete certain acquired contracts in process could be materially different than those recorded in the Company's preliminary purchase allocation for the TDTS acquisition which is reflectd on the Company's consolidated balance sheet as of September 30, 2000. RESULTS OF OPERATIONS The following information should be read in conjunction with the Condensed Consolidated Financial Statements as of September 30, 2000, which reflect the results of operations of the Company's acquisitions from their respective effective dates. The results of operations for all periods presented are significantly 16 affected by the timing of the Company's acquisitions. The tables below provide selected statement of operations data for the Company for the three-month period ended September 30, 2000 (the "2000 Third Quarter") and the three-month period ended September 30, 1999 (the "1999 Third Quarter") and for the nine-month period ended September 30, 2000 ("the 2000 Nine Month Period") and nine-month period ended September 30, 1999 ("the 1999 Nine Month Period"). Prior year reported segment information has been restated to conform to the 2000 presentation of the Company's reportable segments. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1999
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2000 1999 ----------- ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $ 230.7 $ 141.4 Specialized Communication Products ................................ 283.7 241.0 -------- -------- Total ........................................................... $ 514.4 $ 382.4 ======== ======== Operating income: Secure Communication Systems ...................................... $ 25.1 $ 11.7 Specialized Communication Products ................................ 37.7 31.1 -------- -------- Total ........................................................... $ 62.8 $ 42.8 ======== ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 6.8 $ 4.5 Specialized Communication Products ................................ 12.2 9.5 -------- -------- Total ........................................................... $ 19.0 $ 14.0 ======== ======== EBITDA(2) Secure Communication Systems ...................................... $ 31.9 $ 16.2 Specialized Communication Products ................................ 49.9 40.6 -------- -------- Total ........................................................... $ 81.8 $ 56.8 ======== ========
---------- (1) Sales are after intersegment eliminations. See Note 8 to the Unaudited Condensed Consolidated Financial Statements. (2) EBITDA is defined as operating income plus depreciation expense and amortization expense (excluding the amortization of debt issuance costs). EBITDA is not a substitute for operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity. EBITDA is presented as additional information because the Company believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. EBITDA as defined by the Company may differ from similarly named measures used by other entities. Sales increased $132.0 million to $514.4 million in 2000 Third Quarter compared with $382.4 million in the 1999 Third Quarter, reflecting sales growth of $89.3 million for the Secure Communication Systems segment and $42.7 million for the Specialized Communication Products segment. Operating income increased $20.0 million to $62.8 million, and operating income as a percentage of sales ("operating margin") increased to 12.2% from 11.2% for the reasons described below under the reportable segments discussion. Depreciation and amortization expenses in the 2000 Third Quarter increased $5.0 million to $19.0 million, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to acquisitions and capital expenditures. EBITDA increased $25.0 million to $81.8 million. EBITDA as a percentage of sales ("EBITDA margin") increased to 15.9% from 14.9%. Basic earnings per common share ("EPS") and diluted EPS grew 35.8% to $0.72 and 35.3% to $0.69, respectively. Basic weighted-average common shares outstanding and diluted weighted-average common shares outstanding increased 2.7% and 2.8%, respectively. Interest expense, net of interest income increased $9.3 million to $23.9 million in the 2000 Third Quarter because of the higher average outstanding debt, net of cash during the 2000 Third Quarter compared with the 1999 Third Quarter attributable to borrowings made under the Senior Credit Facilities 17 to finance acquisitions completed during the 2000 Nine Month Period. The income tax provision for the 2000 Third Quarter reflects an estimated effective income tax rate of 38.0%, compared with 38.5% for the 1999 Third Quarter. Included in interest and other income for the 2000 Third Quarter is a pre-tax gain of $0.6 million ($0.4 million after-tax or $0.01 per diluted share) on the sale in a 60% interest in the Company's Turkish subsidiary. Excluding this gain, diluted EPS was $0.68 per share, an increase of 33.3% over 1999 Third Quarter diluted EPS. Sales of Secure Communication Systems segment increased $89.3 million or 63.2% to $230.7 million in 2000 Third Quarter compared with the 1999 Third Quarter. Operating income increased $13.4 million to $25.1 million. Operating margin increased to 10.9% from 8.3%. The increase in sales was primarily attributable to the Link Simulation and Training and MPRI acquired businesses and increased volume on, high data rate communications systems, communication software support services and airport security equipment. The increase in operating margin was principally attributable to improved margins on military communication systems and high data rate communication systems arising from cost reductions and improved operating efficiencies, partially offset by the expected lower margins on the Link Training and Simulation acquired business. EBITDA increased $15.7 million to $31.9 million in 2000 Third Quarter and EBITDA margin improved to 13.8% from 11.5%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Sales of the Specialized Communication Products segment increased $42.7 million or 17.7% to $283.7 million in 2000 Third Quarter compared with the 1999 Third Quarter. Operating income increased $6.6 million to $37.7 million and operating margin increased to 13.3% from 12.9%. The increase in sales was principally attributable to the TCAS, SNS and TrexCom acquired businesses and volume increases on airborne dipping sonar systems, aviation recorders, microwave products, antenna and display products, that were partially offset by decreased shipments of naval power systems and telemetry products. The increase in operating margin was principally attributable to improved margins on ocean products, aviation recorders and antenna and display products arising from sales volume increases and cost reductions and higher margins on the TCAS acquired business. These margin improvements were partially offset by lower margins on naval power systems and telemetry products attributable to reduced shipments and the expected lower margins on the SNS and TrexCom acquired businesses. EBITDA increased $9.3 million to $49.9 million and EBITDA margin increased to 17.6% from 16.8%. The changes in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. 18 NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2000 1999 ------------ ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $ 593.1 $ 384.4 Specialized Communication Products ................................ 759.3 588.0 --------- -------- Total ............................................................ $ 1,352.4 $ 972.4 ========= ======== Operating income: Secure Communication Systems ...................................... $ 63.8 $ 33.5 Specialized Communication Products ................................ 83.3 66.6 --------- -------- Total ............................................................ $ 147.1 $ 100.1 ========= ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 18.6 $ 13.7 Specialized Communication Products ................................ 34.5 26.7 --------- -------- Total ............................................................ $ 53.1 $ 40.4 ========= ======== EBITDA Secure Communication Systems ...................................... $ 82.4 $ 47.2 Specialized Communications Products ............................... 117.8 93.3 --------- -------- Total ............................................................ $ 200.2 $ 140.5 ========= ========
---------- (1) Sales are after intersegment eliminations. See Note 8 to the Unaudited Condensed Consolidated Financial Statements. Sales increased $380.0 million or 39.1% to $1,352.4 million in the 2000 Nine Month Period compared with $972.4 million in the 1999 Nine Month Period comprised of growth in sales of $208.7 million for the Secure Communication Systems segment and of $171.3 million for the Specialized Communication Products segment. Operating income increased $47.0 million to $147.1 million, and operating income as a percentage of sales ("operating margin") improved to 10.9% from 10.3% for the reasons described below under the reportable segments discussion. Depreciation and amortization expenses increased $12.7 million to $53.1 million, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to capital expenditures. EBITDA increased $59.7 million to $200.2 million. EBITDA as a percentage of sales ("EBITDA margin") increased to 14.8% from 14.4%. Basic earnings per common share ("EPS") and diluted EPS grew 38.4% to $1.55 and 39.6% to $1.48, respectively. Basic weighted-average common shares outstanding increased 4.4% and diluted weighted-average common shares outstanding increased 4.1%. Interest expense, net of interest income, increased $21.5 million to $63.7 million in 2000 Nine Month Period principally because of higher average outstanding debt, net of cash during 2000 Nine Month Period compared with the 1999 Nine Month Period. The income tax provision for the 2000 Nine Month Period reflects the Company's estimated effective income tax rate for 2000 of 38.3%, compared with an effective tax rate of 38.5% for 1999 Nine Month Period. Included in interest and other income for the 2000 Nine Month Period are net pre-tax gains of $14.9 million (after-tax gain of $9.2 million), consisting of gains on the sale of the Company's interests in the Network Security and Cardiovascular Computer Systems businesses and the divestiture of 60% of the Company's Turkish subsidiary, which were largely offset by a pre-tax loss of $12.4 million (after-tax loss of $7.6 million) on the write-down in the carrying value of certain other investments recorded during the first half of 2000, which contributed $0.04 to diluted EPS. Excluding these net gains, diluted EPS was $1.44 per share, an increase of 35.9% over the 1999 Nine Month Period diluted EPS. The 1999 Nine Month Period other income included a $0.5 million pre-tax gain recognized on the sale of a business in June 1999. 19 Sales of Secure Communication Systems segment increased $208.7 million or 54.3% to $593.1 million in 2000 Nine Month Period compared with the 1999 Nine Month Period. Operating income increased $30.3 million to $63.8 million. Operating margin increased to 10.8% from 8.7%. The increase in sales was primarily attributable to the Link Training and Simulation and MPRI acquired businesses and increased sales on secure telephone equipment ("STE"), communication software support services and airport security equipment. The increase in operating margin was attributable to improved margins on military communication systems, STE and high data rate communication systems, partially offset by the expected lower margins on the Link Training and Simulation acquired business. EBITDA increased $35.2 million to $82.4 million and EBITDA margin improved to 13.9% from 12.3%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Sales of the Specialized Communication Products segment increased $171.3 million or 29.1% to $759.3 million in 2000 Nine Month Period compared with the 1999 Nine Month Period. Operating income increased $16.7 million to $83.3 million and operating margin declined to 11.0% from 11.3%. The increase in sales is attributable to acquisitions and volume increases on airborne dipping sonar systems, and display products that were partially offset by decreased shipments of naval power systems, telemetry products. The decline in operating margin is attributable to lower margins on naval power systems, telemetry products and microwave components principally attributable to sales volumes and mix and the expected lower margins on the SNS and TrexCom acquired businesses, partially offset by higher margins on avionics and ocean products arising from sales volume increases and cost reductions and the TCAS acquired business. EBITDA increased $24.5 million to $117.8 million and EBITDA margin declined to 15.5% from 15.9%. The changes in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Contracts in process increased $179.4 million from December 31, 1999 to September 30, 2000, of which $121.7 million was related to businesses acquired during the 2000 Nine Month Period. The remaining increase in contracts in process was principally attributable to increases in inventory and unbilled receivables because of production on certain programs and products in advance of shipments expected to occur in the fourth quarter of 2000. The increases from December 31, 1999 to September 30, 2000 in current deferred tax assets, property, plant and equipment, intangibles, accrued employment costs, accrued expenses, other current liabilities and other liabilities were principally related to acquired businesses. The increase in accounts payable was principally related to balances of acquired businesses, partially offset by the timing of payments to vendors. The increase in accrued interest was attributable to higher outstanding debt balances and the timing of interest payments. STATEMENT OF CASH FLOWS The following table provides cash flow statement data for the Company.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2000 1999 ------------ ------------ (in millions) Net cash from operating activities .............. $ 62.7 $ 60.2 Net cash (used in) investing activities ......... $ (545.1) $ (216.2) Net cash from financing activities .............. $ 469.9 $ 200.7
OPERATING ACTIVITIES During the 2000 Nine Month Period, L-3 generated $62.7 million of cash in its operating activities, an increase of $2.5 million from the $60.2 million generated in the 1999 Nine Month Period, principally as a result of improvements of $35.0 million in earnings adjusted for non-cash items and deferred taxes, 20 largely offset by an increase in working capital and other operating assets and liabilities excluding the effects of acquisitions of $32.5 million in the 2000 Nine Month Period compared with the 1999 Nine Month Period. The increase in working capital was principally related to increases in contracts in process in advance of shipments expected to occur in the fourth quarter of 2000, and delays in collecting certain receivables that were expected to occur in September 2000, but slipped into the fourth quarter of 2000. The Company expects its rate of increase in working capital to decline during the fourth quarter of 2000, and as a result cash flow is expected to improve. Additionally, cash flows from operating activities during the 2000 Nine Month Period were adversely affected by uses of cash relating to certain contracts in process that were assumed in the TDTS acquisition for which the estimated costs exceed the estimated billings to complete such contracts. The Company expects to experience negative impacts on its cash flows related to the completion of such TDTS acquired contracts in process during the fourth quarter of 2000 and continuing throughout 2001, but to a lesser extent than in the 2000 Nine Month Period. INVESTING ACTIVITIES The Company continued to pursue its acquisition strategy during the 2000 Nine Month Period and invested $532.9 million to acquire businesses, compared with $211.4 million in the 1999 Nine Month Period (See discussion under "Acquisitions" above). The Company makes capital expenditures for improvement of manufacturing facilities and equipment. The Company expects that its capital expenditures for the year ending December 31, 2000 will be about $35.0 million. In March 2000, the Company sold its interest in the Network Security business for net cash proceeds of $13.4 million. In May 2000, the Company sold its interest in the Cardiovascular Computer Systems business for net cash proceeds of $5.6 million. FINANCING ACTIVITIES On February 4, 1999, Holdings sold 5.0 million shares of common stock in a public offering for $42.00 per share (the "February 1999 Common Stock Offering"); the net proceeds of $201.5 million were contributed to the Company and partially used to repay borrowings made in January 1999 under the Senior Credit Facilities to finance the Microdyne acquisition. At September 30, 2000, available borrowings under the revolving credit facilities were $115.9 million after reductions for outstanding borrowings, made during the 2000 Nine Month Period of $468.5 million used principally to finance acquisitions, and outstanding letters of credit of $115.6 million. On April 28, 2000 the Company entered into a new 364 day revolving senior credit facility for $300.0 million (the "New 364 Day Revolving Credit Facility") that expires on April 27, 2001, and on April 28, 2000 borrowed $237.0 million thereunder to finance the TCAS acquisition. Additionally, on April 28, 2000 the Company amended the Senior Credit Facilities to change the spreads on borrowings and commitment fees thereunder. The spreads on the New 364 Day Revolving Credit Facility are the same as those under the Senior Credit Facilities, and the lenders under the New 364 Day Revolving Credit Facility rank pari passu with the lenders under the Senior Credit Facilities. See Note 4 to the Condensed Consolidated Financial Statements. The borrowings outstanding of $237.0 million at September 30, 2000 under the New 364 Day Revolving Credit Facility are classified under current liabilities on the balance sheet because the facility expires in April 2001. The Company intends to either refinance the New 364 Day Revolving Credit Facility or to restructure it together with the Company's other existing revolving credit facilities by the end of the first quarter of 2001. In August 2000, the Revolving 364 Day Credit Facility for $200.0 million was renewed for an additional 364 days and will expire on August 9, 2001, at which time the Company may convert a portion of the borrowings outstanding thereunder into term loans which fully amortize over an eighteen month period beginning September 30, 2001. The Senior Credit Facilities and the Senior Subordinated Notes contain financial covenants which remain in effect so long as any amount is owed or any commitment to lend exists thereunder by 21 L-3 Communications. As of September 30, 2000, L-3 Communications had been in compliance with these covenants at all times. The borrowings under the Senior Credit Facilities are guaranteed by Holdings and by substantially all of the Company's subsidiaries. The payments of principal and premium, if any, and interest on the Senior Subordinated Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by substantially all of the subsidiaries of L-3 Communications, all of which guarantor subsidiaries are wholly owned. Based upon the current level of operations, management believes that the Company's cash from operating activities, together with available borrowings under the Senior Credit Facilities, will be adequate to meet its anticipated requirements for working capital, capital expenditures, research and development expenditures, program and other discretionary investments, and interest payments for the foreseeable future including at least the next three years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company's ability to make scheduled principal payments, to pay interest on or to refinance its indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond its control. There can be no assurance that sufficient funds will be available to enable the Company to service its indebtedness, or make necessary capital expenditures and program and discretionary investments. CONTINGENCIES See Note 7 to the Condensed Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING STANDARDS In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all quarters of fiscal years beginning after September 15, 2000. The Company does not expect SFAS 133 to have a material impact on its results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The SEC delayed the effective date of this SAB in June 2000, so that the SAB must now be adopted by December 31, 2000. The Company does not expect SAB No. 101 to have a material impact on its results of operations or financial position. YEAR 2000 The Company has not experienced any impact to its business since the Year 2000 roll-over either internally or from its customers and infrastructure suppliers. The planned phases of the Year 2000 efforts have been completed with total cost for all the efforts of $18.7 million which included $6.2 million of capitalized costs. Although the Company has experienced no failures in infrastructure systems and in the customer and supply chains since the Year 2000 roll-over, the likelihood and effect of such failure cannot be estimated, but such a failure could potentially result in a material adverse impact on results of operations, liquidity or financial position of the Company. The Year 2000 effort costs reflected above could change in the event of any unknown Year 2000 related occurrence during the remainder of the year ending December 31, 2000. FORWARD-LOOKING STATEMENTS Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance, and financial condition, including in particular, the likelihood of our success in developing 22 and expanding our business and the realization of sales from backlog, include forward-looking statements within the meaning of section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are predictive in nature, that depend upon or refer to events or conditions or that include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", and similar expressions are forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors such as our dependence on the defense industry and the defense budget; our reliance on contracts with a limited number of agencies of, or contractors to, the U.S. government business risks peculiar to that industry including changing priorities or reductions in the U.S. government and the possibility of termination of government contracts by unilateral government action or for failure to perform; the ability to obtain or the timing of obtaining future government contracts; the availability of government funding and customer requirements; economic conditions, competitive environment, international business and political conditions, timing of international awards and contracts; our extensive use of fixed price contracts as compared to cost plus contracts; our ability to identify future acquisition candidates or to integrate acquired operations; the rapid change of technology in the communication equipment industry; the high level of competition in the communications equipment industry; our introduction of new products into commercial markets or our investments in commercial products or companies; the significant amount of out debt and the restrictions contained in our debt agreements; Year 2000 issues; collective bargaining labor disputes; pension, environmental or legal matters or proceedings and various other market, competition and industry factors, many of which are beyond our control. Investors are cautioned that any such statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to the future financial results and other projections, actual results will be different due to the inherent nature of projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes or circumstances or changes in expectations or the occurrence of anticipated events. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources--Market Risks", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 for a discussion of the Company's exposure to market risks. There was no significant change in those risks during the nine months ended September 30, 2000. 23 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits *11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Share 27 Financial Data Schedule *The information required on this exhibit is presented in Note 6 to the Condensed Consolidated Financial Statements as of September 30, 2000 in accordance with the provisions of FASB SFAS No. 128, Earnings Per Share. (b) Reports on Form 8-K None 24 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. L-3 Communications Holdings, Inc. and L-3 Communications Corporation ---------------------------------------- Registrants Date: November 7, 2000 /s/ Robert V. LaPenta ---------------------------------------- Name: Robert V. LaPenta Title: President and Chief Financial Officer (Principal Financial Officer) 25