-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WbZX1jQv9XWfsmRq8UQHyrvpHRiNy5xaRmBqByADX9hi0IcfSUwbOZHaIVPLSDxT atiQ5A4D+/4tXuSlGdbRuA== 0000950136-99-001082.txt : 19990817 0000950136-99-001082.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950136-99-001082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS HOLDINGS INC CENTRAL INDEX KEY: 0001056239 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 133937434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14141 FILM NUMBER: 99693154 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001039101 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 133937436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-46983 FILM NUMBER: 99693155 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 1216971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 10-Q 1 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 JUNE 30, 1999 Commission file numbers 001-14141 and 333-46983 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION State of incorporation: Delaware IRS identification numbers: 13-3937434 and 13-3937436 600 Third Avenue New York, NY 10016 Telephone: (212) 697-1111 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- There were 32,705,534 shares of L-3 Communications Holdings, Inc. common stock with a par value of $0.01 outstanding as of the close of business on August 9, 1999. - -------------------------------------------------------------------------------- L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION FORM 10-Q QUARTERLY REPORT FOR QUARTER ENDED JUNE 30, 1999 PART I -- FINANCIAL INFORMATION:
PAGE NO. --------- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 ......................................................................... 1 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 1999 and June 30, 1998 ................................. 2-3 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and June 30, 1998 .............................................. 4 Notes to Unaudited Condensed Consolidated Financial Statements ................ 5-10 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .................................................................... 11-18 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .................... 18 PART II -- OTHER INFORMATION: ITEM 4. Submission of Matters to a Vote of Security Holders ........................... 19 ITEM 6. Exhibits and Reports on Form 8-K .............................................. 19
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 1999 DECEMBER 31, 1998 --------------- ------------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ......................................... $ 46,757 $ 26,130 Contracts in process .............................................. 465,121 351,049 Deferred income taxes ............................................. 12,885 16,591 Other current assets .............................................. 7,908 11,597 ---------- ---------- Total current assets ............................................ 532,671 405,367 ---------- ---------- Property, plant and equipment ...................................... 182,813 155,712 Less, accumulated depreciation and amortization ................... 45,010 32,557 ---------- ---------- 137,803 123,155 ---------- ---------- Intangibles, primarily cost in excess of net assets acquired, net of amortization ...................................................... 769,354 669,362 Deferred income taxes .............................................. 65,322 39,139 Other assets ....................................................... 49,099 48,373 ---------- ---------- Total assets .................................................... $1,554,249 $1,285,396 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade ........................................... $ 75,710 $ 81,826 Accrued employment costs .......................................... 68,155 58,380 Accrued expenses .................................................. 28,240 18,241 Customer advances ................................................. 63,874 45,874 Accrued interest .................................................. 12,617 6,698 Other current liabilities ......................................... 44,439 36,515 ---------- ---------- Total current liabilities ....................................... 293,035 247,534 ---------- ---------- Pension and postretirement benefits ................................ 114,522 114,293 Other liabilities .................................................. 20,790 18,595 Long-term debt ..................................................... 605,000 605,000 Commitments and contingencies Shareholders' equity: Common stock $.01 par value; authorized 100,000,000 shares, issued and outstanding 32,510,054 and 27,402,429 shares ................ 471,267 264,769 Retained earnings ................................................. 63,141 44,856 Equity adjustments ................................................ (13,506) (9,651) ---------- ---------- Total shareholders' equity ......................................... 520,902 299,974 ---------- ---------- Total liabilities and shareholders' equity ...................... $1,554,249 $1,285,396 ========== ==========
See notes to unaudited condensed consolidated financial statements. 1 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ----------------------------- 1999 1998 ------------- ------------- Sales ..................................... $ 314,432 $ 230,424 Costs and expenses ........................ 283,283 210,966 --------- --------- Operating income .......................... 31,149 19,458 Interest and other income ................. 1,815 780 Interest expense .......................... 14,939 11,041 --------- --------- Income before income taxes ................ 18,025 9,197 Provision for income taxes ................ 6,939 3,587 --------- --------- Net income ................................ $ 11,086 $ 5,610 ========= ========= Earnings per common share: Basic .................................... $ 0.34 $ 0.24 ========= ========= Diluted .................................. $ 0.33 $ 0.23 ========= ========= Weighted average common shares outstanding: Basic .................................... 32,488 23,718 ========= ========= Diluted .................................. 33,948 24,853 ========= =========
See notes to unaudited condensed consolidated financial statements. 2 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------------- 1999 1998 ------------- ------------- Sales ..................................... $ 589,994 $ 416,988 Costs and expenses ........................ 532,678 383,437 --------- --------- Operating income .......................... 57,316 33,551 Interest and other income ................. 2,829 1,576 Interest expense .......................... 30,414 21,646 --------- --------- Income before income taxes ................ 29,731 13,481 Provision for income taxes ................ 11,446 5,258 --------- --------- Net income ................................ $ 18,285 $ 8,223 ========= ========= Earnings per common share: Basic .................................... $ 0.58 $ 0.37 ========= ========= Diluted .................................. $ 0.56 $ 0.36 ========= ========= Weighted average common shares outstanding: Basic .................................... 31,495 21,942 ========= ========= Diluted .................................. 32,925 22,961 ========= =========
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)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1999 1998 ------------ ------------- OPERATING ACTIVITIES: Net income ............................................................... $ 18,285 $ 8,223 Depreciation and amortization ............................................ 26,390 16,112 Amortization of deferred debt issue costs ................................ 1,957 1,107 Deferred income tax provision ............................................ 8,295 5,133 Other noncash items ...................................................... 3,767 -- Changes in operating assets and liabilities, net of amounts acquired ..... Contracts in process .................................................... (30,093) (5,288) Other current assets .................................................... 2,896 704 Other assets ............................................................ (183) (81) Accounts payable and accrued expenses ................................... (15,407) 4,913 Customer advances ....................................................... 16,308 1,712 Other current liabilities ............................................... (3,352) 2,084 Pension and postretirement benefits ..................................... 229 (367) Other liabilities ....................................................... (1,377) 1,186 All other operating activities .......................................... (1,783) 281 ---------- ---------- Net cash from operating activities ....................................... 25,932 35,719 ---------- ---------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired .......................... (205,003) (157,215) Proceeds from net assets held for sale ................................... -- 6,653 Capital expenditures ..................................................... (10,993) (6,317) Disposition of property, plant and equipment ............................. 5,273 381 Other investing activities ............................................... 5,007 -- ---------- ---------- Net cash (used in) investing activities .................................. (205,716) (156,498) ---------- ---------- FINANCING ACTIVITIES: Repayment of borrowings under term loan facilities ....................... -- (172,000) Borrowings under revolving credit facility ............................... 74,700 67,800 Repayment of borrowings under revolving credit facility .................. (74,700) (67,800) Proceeds from sale of 81/2% senior subordinated notes .................... -- 180,000 Proceeds from sale of common stock, net .................................. 201,582 139,500 Other financing activities ............................................... (1,171) (3,731) ---------- ---------- Net cash from financing activities ....................................... 200,411 143,769 ---------- ---------- Net increase in cash ..................................................... 20,627 22,990 Cash and cash equivalents, beginning of the period ....................... 26,130 77,474 ---------- ---------- Cash and cash equivalents, end of the period ............................. $ 46,757 $ 100,464 ========== ==========
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" or the "Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products, which are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The Company's customers include the U.S. department of defense (the "DoD"), certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. Secure Communication Systems. This segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. These operations are principally performed under cost plus, sole source contracts supporting long-term programs for the U.S. armed forces and classified customers. Major secure communications programs and systems include: secure data links for airborne, satellite, ground and seabased remote platforms for information collection, command and control and dissemination to users in real-time; strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information and related support contracts for military and intelligence efforts; secure telephone, fax and network equipment and encryption management; communication software support services to military and related government intelligence markets; and communications systems for surface and undersea platforms and manned space flights. Specialized Communication Products. This segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. Microwave Components includes commercial off the shelf, high performance microwave components and frequency monitoring equipment. Avionics and Ocean Products include aviation recorders, display products, antenna products, acoustic undersea warfare systems and naval power distribution, conditioning, switching and protection equipment for naval ships and submarines. Telemetry, Instrumentation and Space Products include commercial off the shelf real-time data collection and transmission products and components for missile, aircraft and space based electronic systems. The Specialized Communication Products segment provides products, systems and services used in the satellite transmission of voice, video and data through earth stations for uplink and downlink terminals. This segment also provides commercial off the shelf satellite control software, telemetry, tracking and control, mission processors, global positioning systems (GPS) and software engineering services to the worldwide military, civilian and commercial satellite markets. The accompanying unaudited condensed consolidated financial statements also include the financial statements of L-3 Communications Corporation ("L-3 Communications"), which is a wholly owned subsidiary of Holdings. Holdings owns all of the authorized, issued and outstanding common stock, par value $0.01 per share, of L-3 Communications. Holdings has no other assets or liabilities and conducts no operations other than through its subsidiary, L-3 Communications. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"); accordingly, they do not include all of the information and notes required by generally accepted accounting principles for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods presented have been included. The results of operations for these interim periods are not necessarily indicative of results for the full year. For further information, these interim 5 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) financial statements should be read in conjunction with the Consolidated Financial Statements of Holdings and L-3 Communications for the fiscal year ended December 31, 1998, included in the Annual Report on Form 10-K for fiscal year ended December 31, 1998 of Holdings and L-3 Communications. 2. COMMON STOCK OFFERING On February 4, 1999, Holdings sold 5.0 million shares of common stock in a public offering for $42.00 per share (the "February 1999 Common Stock Offering") representing 15.4% of Holdings outstanding common stock immediately after the February 1999 Common Stock Offering. The net proceeds to Holdings from the February 1999 Common Stock Offering amounted to $201.5 million and were contributed to L-3 Communications. In addition, 6.5 million shares were sold in the February 1999 Common Stock Offering by the Lehman Brothers Capital Partners III, LLP and its affiliates ("the Lehman Partnership") and Lockheed Martin Corporation ("Lockheed Martin"), after which the Lehman Partnership owned 24.7% and Lockheed Martin owned 7.1% of the outstanding shares of Holding's common stock. 3. ACQUISITIONS On August 13, 1998, the Company purchased all of the outstanding stock of SPD Technologies, Inc. ("SPD") for $238,241 of cash including expenses, net of cash acquired. On February 5, 1998, March 4, 1998 and March 30, 1998 the Company purchased the assets of the Satellite Transmission Systems division ("STS") of California Microwave, Inc. and ILEX Systems ("ILEX"), Ocean Systems business ("Ocean Systems") of AlliedSignal, Inc. for cash of $26,517, $51,905 and $68,812, respectively. SPD, STS, ILEX and Ocean Systems, collectively comprise the "1998 Acquisitions". All of the acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their effective dates. On January 8, 1999 the Company acquired all of the outstanding common stock of Microdyne Corporation ("Microdyne") for $94,228 in cash, including expenses and the repayment of assumed debt, net of cash acquired. On April 16, 1999, the Company acquired all of the outstanding common stock of Aydin Corporation ("Aydin") for $59,333 in cash, including expenses, net of cash acquired. On June 30, 1999, the Company acquired all the outstanding common stock of Interstate Electronics Corporation ("IEC") for $44,792 in cash including expenses, subject to adjustment based on closing date net worth, as defined. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions". Had the 1999 Acquisitions and the related financing transactions, occurred on January 1, 1999, the unaudited pro forma sales, operating income, net income and diluted earnings per common share for the six months ended June 30, 1999 would have been $641,900, $60,800, $21,300 and $0.63, respectively. Had the 1998 Acquisitions and the 1999 Acquisitions and the related financing transactions occurred on January 1, 1998, the unaudited pro forma sales, operating income, net loss and diluted loss per share for the six months ended June 30, 1998 would have been $646,700, $17,100, $(14,300) and $(0.44), respectively. The pro forma results are based on various assumptions and are not necessarily indicative of the result of operations that would have occurred had the 1998 Acquisitions and the 1999 Acquisitions and the related financing transactions occurred on January 1, 1998. The assets and liabilities recorded in connection with the acquisitions of Microdyne, Aydin and IEC were $113,383 and $95,268, $99,039 and $74,395, and $52,875 and $43,998, respectively. The assets and liabilities recorded in connection with the acquisitions of Microdyne, Aydin, and IEC are based upon preliminary estimates of fair values for the valuation of contracts in process, inventories and deferred taxes. Actual adjustments will be based on the final purchase prices and the final appraisals and other analyses of fair values which are in process. Management does not expect that differences between the preliminary and final purchase price allocations will have a material impact on the Company's financial position or results of operations. 6 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. CONTRACTS IN PROCESS The components of contracts in process are presented below.
JUNE 30, 1999 DECEMBER 31, 1998 --------------- ------------------ Billed contract receivables ........................ $ 117,986 $ 100,234 Unbilled contract receivables ...................... 113,120 69,361 Other billed receivables, principally commercial and affiliates ....................................... 101,718 81,372 Inventoried costs .................................. 182,876 130,350 --------- --------- 515,700 381,317 Less, unliquidated progress payments . ............. (50,579) (30,268) --------- --------- Contracts in process ............................. $ 465,121 $ 351,049 ========= =========
5. DEBT Long term debts consist of:
JUNE 30, 1999 DECEMBER 31, 1998 --------------- ------------------ 10 3/8% Senior Subordinated Notes due 2007 ......... $225,000 $225,000 8 1/2% Senior Subordinated Notes due 2008 .......... 180,000 180,000 8% Senior Subordinated Notes due 2008 .............. 200,000 200,000 -------- -------- Total debt ....................................... 605,000 605,000 Less current portion ............................... -- -- -------- -------- Long-term debt ................................... $605,000 $605,000 ======== ========
Available borrowings under the Revolving Credit Facility and the Revolving 364 Day Credit Facility at June 30, 1999 were $120,120 and $200,000, respectively, after reductions for outstanding letters of credit of $79,880, and $0, respectively. In July 1999, the Revolving 364-Day Credit Facility was renewed for an additional 364 days and will expire on August 10, 2000, at which time the Company may exercise an option to convert any or all of the borrowings outstanding thereunder into term loans which fully amortize over a two year period beginning March 31, 2001. 6. L-3 COMMUNICATIONS SHAREHOLDERS' EQUITY Holdings has no other assets or liabilities and conducts all of its operations through its wholly owned subsidiary, L-3 Communications. The table below presents the components of the shareholders' equity of L-3 Communications.
JUNE 30, 1999 DECEMBER 31, 1998 --------------- ------------------ Common stock, $0.1 par value; 100 shares authorized and outstanding ................. $ -- $ -- Additional paid in capital ................... 471,267 264,769 Retained earnings ............................ 63,141 44,856 Accumulated other comprehensive loss ......... (13,506) (9,651) --------- -------- Total shareholders' equity ................. $ 520,902 $299,974 ========= ========
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) The increase in additional paid-in capital at June 30, 1999 reflects the contribution to L-3 Communications from Holdings of the $201,500 of net proceeds from the February 1999 Common Stock Offering. 7. STOCK OPTIONS On January 19, 1999, Holdings granted to certain of its employees options to purchase 414,150 shares of its common stock at an exercise price of $40.50. 8. COMPREHENSIVE INCOME For the six months ended June 30, 1999, comprehensive income was $14,430 and was comprised of net income of $18,285 and other comprehensive losses of $1,783 and $2,072, respectively, relating to foreign currency translations and unrealized losses on investments. For the six months ended June 30, 1998, net comprehensive income was $8,504 and was comprised of net income of $8,223 and other comprehensive income of $281 relating to foreign currency translations. 9. EARNINGS PER SHARE Details of the computation of earnings per share are presented in the table below.
SIX MONTHS ENDED JUNE THREE MONTHS ENDED JUNE 30, 30, ------------------------ ------------------------ 1999 1998 1999 1998 ------------ ----------- ------------ ----------- Basic: Net income .................................. $ 18,285 $ 8,223 $ 11,085 $ 5,610 Weighted average common share outstanding ... 31,495 21,942 32,488 23,718 --------- -------- --------- -------- Basic earnings per share .................... $ 0.58 $ 0.37 $ 0.34 $ 0.24 ========= ======== ========= ======== Diluted: Net income .................................. $ 18,285 $ 8,223 $ 11,085 $ 5,610 --------- -------- --------- -------- Common and potential common shares: Weighted average common share outstanding 31,495 21,942 32,488 23,718 Assumed exercise of stock options ......... 3,233 2,737 3,266 2,655 Assumed purchase of common shares for treasury ................................. (1,803) (1,718) (1,806) (1,520) --------- -------- --------- -------- Common and potential common shares .......... 32,925 22,961 33,948 24,853 ========= ======== ========= ======== Diluted earnings per share .................. $ 0.56 $ 0.36 $ 0.33 $ 0.23 ========= ======== ========= ========
10. CONTINGENCIES The Company is engaged in providing products and services under contracts with the U.S. government and to a lesser degree, under foreign government contracts, some of which are funded by the U.S. government. All such contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. government investigate whether such contracts were and are being conducted in accordance with these requirements. Under government procurement regulations, an indictment of the Company by a federal grand jury could result in the Company being suspended for a period of time from eligibility for awards of new government contracts. A conviction could result in debarment from contracting with the federal government for a specified term. 8 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Management continually assesses the Company's obligations with respect to applicable environmental protection laws. While it is difficult to determine the timing and ultimate cost to be incurred by the Company in order to comply with these laws, based upon available internal and external assessments, with respect to those environmental loss contingencies of which management is aware, the Company believes that even without considering potential insurance recoveries, if any, there are no environmental loss contingencies that, individually or in the aggregate, would be material to the Company's results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has been periodically subject to litigation, claims or assessments and various contingent liabilities incidental to its business. With respect to those investigative actions, items of litigation, claims or assessments of which they are aware, management of the Company is of the opinion that the probability is remote that, after taking into account certain provisions that have been made with respect to these matters, the ultimate resolution of any such investigative actions, items of litigation, claims or assessments will have a material adverse effect on the financial position or results of operations of the Company. 11. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED JUNE 30, --------------------- 1999 1998 ---------- ---------- Interest paid ................................. $22,322 $18,626 Income taxes paid ............................. 3,871 125 Noncash transactions: Contribution in common stock to savings plan 3,767 --
12. SEGMENT INFORMATION The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. Secure Communication Systems consists of secure, high data rate communications in support of military and other U.S. government reconnaissance and surveillance applications. Specialized Communication Products consists of the microwave components, avionics and ocean products, and telemetry, instrumentation and space products operations of the Company. See Note 1. The Company evaluates the performance of its operating divisions and reportable segments based on sales and operating income. The table below presents sales and operating income by reportable segment for the six-month periods ended June 30, 1999 and 1998 and assets by reportable segment as of June 30, 1999 and December 31, 1998. 9 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)
SECURE SPECIALIZED ELIMINATION OF COMMUNICATION COMMUNICATION INTERSEGMENT CONSOLIDATED SYSTEMS PRODUCTS CORPORATE SALES TOTAL --------------- --------------- ----------- --------------- ------------- Six Months Ended June 30, 1999: Sales ........................ $243,447 $ 348,623 $ (2,076) $ 589,994 Operating income ............. 21,411 35,905 57,316 Six Months Ended June 30, 1998: Sales ........................ 223,218 197,013 (3,243) 416,988 Operating income ............. 18,702 14,849 33,551 Assets as of: June 30, 1999 ................ 411,953 1,010,841 $131,455 1,554,249 December 31, 1998 ............ 368,891 797,469 119,036 1,285,396
13. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1999, the Company adopted Statement of Position 98-5, Reporting on the Costs of Startup Activities ("SOP 98-5"), which provides guidance on the financial reporting of startup and organization costs, including precontract costs. It requires costs of startup activities and organization costs to be expensed as incurred. The impact of adopting SOP 98-5 was not material to the Company's results of operations or financial position. In September 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all quarters of fiscal years beginning after June 15, 2000. The Company does not expect SFAS 133 to have a material impact on its financial position. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL L-3 Communications Holdings, Inc. and its subsidiaries ("Holdings, "L-3" or "the Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. Holdings has no other assets or liabilities and conducts no other operations other than through its wholly owned subsidiary, L-3 Communications Corporation ("L-3 Communications"). The Company's customers include the DoD, certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. The Secure Communication Systems segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. These operations are principally performed under cost plus, sole source contracts supporting long term programs for the U.S. armed forces and classified customers. The Secure Communication Systems segment also supplies communication software support services to military and related government intelligence markets. The Specialized Communication Products segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. All domestic government contracts and subcontracts of the Company are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. government. Multiyear U.S. government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contracts generally include comparable provisions relating to termination for the convenience of the relevant foreign government. The defense industry has undergone significant changes precipitated by ongoing U.S. federal budget pressures and new roles and missions to reflect changing strategic and tactical threats. Since the mid-1980's, the overall U.S. defense budget has declined in real dollars. In response, the DoD has focused its resources on enhancing its military readiness, joint operations and the value added capability of digital command and control communications by incorporating advanced electronics to improve the performance, reduce operating costs and extend the life expectancy of its existing and future platforms. The emphasis on system interoperability, force multipliers and providing battlefield commanders with real time data is increasing the electronics content of nearly all of the major military procurement and research programs. As a result, the DoD's budget for communications and defense electronics is expected to grow. ACQUISITION HISTORY 1998 Acquisitions. On August 13, 1998, the Company purchased all of the outstanding stock of SPD Technologies, Inc. ("SPD"). On March 30, 1998, March 4, 1998 and February 5, 1998, respectively, the Company acquired the assets of the Ocean Systems business ("Ocean Systems") of AlliedSignal, Inc., ILEX Systems ("ILEX") and Satellite Transmission Systems ("STS") of California Microwave, Inc. Collectively, the acquisitions of SPD, Ocean Systems, ILEX and STS comprise the "1998 Acquisitions". Additionally, during 1998, the Company purchased several other operations and product lines, which individually and in the aggregate were not material to the results of operations or financial position of the Company. 1999 Acquisitions. On December 3, 1998 the Company signed an agreement to acquire all of the outstanding common stock of Microdyne Corporation ("Microdyne") through a tender offer. The tender offer was completed in January 1999. The cost of the Microdyne acquisition was $94.2 million, paid in cash, including the repayment of assumed debt and expenses, net of cash acquired. The Company financed 11 the Microdyne acquisition using cash on hand and borrowings under the Company's Senior Credit Facilities, which were subsequently repaid during the first quarter of 1999. On March 1, 1999, the Company signed an agreement to acquire all of the outstanding common stock of Aydin Corporation ("Aydin") through a tender offer. The Company completed the tender offer and the acquisition in April 1999. The cost of this acquisition was $59.3 million, paid in cash, including expenses, net of cash acquired. The Aydin acquisition was financed using cash on hand. On April 19, 1999, the Company signed a definitive agreement to acquire all of the outstanding common stock of Interstate Electronics Corporation ("IEC"). The Company completed this acquisition in June 1999. The cost of this acquisition was $44.8 million, paid in cash, including expenses, and is subject to adjustment based on closing date net worth, as defined. The IEC acquisition was financed using cash on hand. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions." RESULTS OF OPERATIONS The following information should be read in conjunction with the Condensed Consolidated Financial Statements as of June 30, 1999, which reflect the results of operations of the Company's acquisitions from their respective effective dates. Accordingly, the results of operations for the six months ended June 30, 1999 and 1998 are significantly affected by the timing of those acquisitions. The tables below provide selected statement of operations data for the Company for the three-month period ended June 30, 1999 ("the 1999 Second Quarter") and the three-month period ended June 30, 1998 ("the 1998 Second Quarter") and for the six-month period ended June 30, 1999 ("the 1999 First Half") and six-month period ended June 30, 1998 ("the 1998 First Half"). THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
THREE MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ----------- ----------- (in millions) Sales(1): Secure Communication Systems .................... $ 125.6 $ 119.1 Specialized Communication Products .............. 188.8 111.3 -------- -------- Total ......................................... $ 314.4 $ 230.4 ======== ======== Operating income: Secure Communication Systems .................... $ 10.5 $ 10.4 Specialized Communication Products .............. 20.6 9.1 -------- -------- Total ......................................... $ 31.1 $ 19.5 ======== ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems .................... $ 4.8 $ 3.9 Specialized Communication Products .............. 8.9 4.7 -------- -------- Total ......................................... $ 13.7 $ 8.6 ======== ======== EBITDA(2) Secure Communication Systems .................... $ 15.3 $ 14.3 Specialized Communication Products .............. 29.5 13.8 -------- -------- Total ......................................... $ 44.8 $ 28.1 ======== ========
- ---------- (1) Sales are after intersegment eliminations. See Note 12 to the Unaudited Condensed Consolidated Financial Statements. (2) EBITDA is defined as operating income plus depreciation expense and amortization expense (excluding the amortization of debt issuance costs). EBITDA is not a substitute for operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity and may not be comparable to similar measures presented by other entities. EBITDA is presented as additional information because the Company believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. 12 Sales increased $84.0 million to $314.4 million in the 1999 Second Quarter compared with $230.4 million in the 1998 Second Quarter, and was comprised of growth in sales of $6.5 million for the Secure Communication systems segment and of $77.5 million for the Specialized Communication Products segment. Operating income increased $11.6 million to $31.1 million, and operating income as a percentage of sales ("operating margin") improved to 9.9% from 8.5% for the reasons described below under the reportable segments discussion. Depreciation and amortization expenses increased $5.1 million to $13.7 million, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to capital expenditures. EBITDA increased $16.7 million to $44.8 million. EBITDA as a percentage of sales ("EBITDA margin") improved to 14.3% from 12.2%. Basic earnings per common share ("EPS") and diluted EPS grew 41.7% to $0.34 and 43.5% to $0.33, respectively. Basic weighted-average common shares outstanding and diluted weighted-average common shares outstanding increased 37.0% and 36.6%, respectively, principally because of the shares of common stock issued, and the timing thereof in connection with the Company's Initial Public Offering in May 1998 (the "IPO") and the public offering in February 1999 (the "February 1999 Common Stock Offering"). Sales of Secure Communication Systems segment increased $6.5 million or 5.5% to $125.6 million in 1999 Second Quarter compared with the 1998 Second Quarter. Operating income increased $0.1 million to $10.5 million. Operating margin declined to 8.4% from 8.7%. The increase in sales was primarily attributable to the Microdyne acquisition and increased sales on the U-2 Support Program and secure telephone equipment (STE), partially offset by lower sales of communication subsystems for the International Space Station (ISS) consistent with the scheduled phasedown of this program and lower sales of information security systems. The decline in operating margin were principally attributable to lower margins from the Microdyne acquired business and costs incurred for network security systems. EBITDA increased $1.0 million to $15.3 million and EBITDA margin improved to 12.2% from 12.0%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting operating income. Sales of the Specialized Communication Products segment increased $77.5 million or 69.6% to $188.8 million in 1999 Second Quarter compared with the 1998 Second Quarter. Operating income increased $11.5 million to $20.6 million and operating margin improved to 10.9% from 8.2%. The increase in sales was principally attributable to the SPD and Aydin acquisitions and volume increases on commercial aviation recorders partially offset by lower sales volume on microwave components and decreased shipments of displays and antenna products. The increase in operating margin was principally attributable to improved margins on aviation recorders attributable to volume increases and cost reductions and higher margins from the SPD acquired business which was not included in the results of operations for the 1998 Second Quarter, partially offset by lower margins on microwave components, antenna products attributable to declines in sales. EBITDA increased $15.7 million to $29.5 million and EBITDA margin improved to 15.6% from 12.4%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Interest expense, net of interest and other income, increased $2.8 million to $13.1 million in 1999 Second Quarter and was attributable to higher average outstanding debt during 1999 Second Quarter compared with the 1998 Second Quarter principally because of the $380.0 million of senior subordinated notes sold by the Company in May 1998 and December 1998, partially offset by other income of $0.5 million from a gain recognized on the sale of a business in June 1999. The income tax provision for the 1999 Second Quarter reflects the Company's estimated effective income tax rate for 1999 of 38.5%, compared with the effective tax rate of 39.0% for 1998 Second Quarter. The decrease in the effective tax rate was principally attributable to additional research and experimentation credits partially offset by an increase in amortization expense for costs in excess of net assets acquired for certain acquisitions which were not deductible for income tax purposes. 13 SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ----------- ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $ 243.0 $ 223.2 Specialized Communication Products ................................ 347.0 193.8 -------- -------- Total ........................................................... $ 590.0 $ 417.0 ======== ======== Operating income: Secure Communication Systems ...................................... $ 21.4 $ 18.7 Specialized Communication Products ................................ 35.9 14.9 -------- -------- Total ........................................................... $ 57.3 $ 33.6 ======== ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 9.5 $ 8.1 Specialized Communication Products ................................ 16.9 8.0 -------- -------- Total ........................................................... $ 26.4 $ 16.1 ======== ======== EBITDA Secure Communication Systems ...................................... $ 30.9 $ 26.8 Specialized Communication Products ................................ 52.8 22.9 -------- -------- Total ........................................................... $ 83.7 $ 49.7 ======== ========
- ---------- (1) Sales are after intersegment eliminations. See Note 12 to the Unaudited Condensed Consolidated Financial Statements. Sales increased $173.0 million to $590.0 million in 1999 First Half compared with $417.0 million in the 1998 First Half comprised of growth in sales of $19.8 million for the Secure Communication Systems segment and of $153.2 million for the Specialized Communication Products segment. Operating income increased $23.7 million to $57.3 million, and operating income as a percentage of sales ("operating margin") improved to 9.7% from 8.1% for the reasons described below under the reportable segments discussion. Depreciation and amortization expenses increased $10.3 million to $26.4 million, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to capital expenditures. EBITDA increased $34.0 million to $83.7 million. EBITDA as a percentage of sales ("EBITDA margin") improved to 14.2% from 11.9%. Basic earnings per common share ("EPS") and diluted EPS grew 56.8% to $0.58 and 55.6% to $0.56, respectively. Basic weighted-average common shares outstanding and diluted weighted-average common shares outstanding increased 43.5% and 43.4%, respectively, principally because of the shares of common stock issued, and the timing thereof, in connection with the IPO in May 1998 and the February 1999 Common Stock Offering. Sales of Secure Communication Systems segment increased $19.8 million or 0.9% to $243.0 million in 1999 First Half compared with the 1998 First Half. Operating income increased $2.7 million to $21.4 million. Operating margin increased to 8.8% from 8.4%. The increase in sales was primarily attributable to the Microdyne acquisition and increased sales on the U-2 Support Program and STE, partially offset by lower sales of communication subsystems for ISS consistent with the scheduled phasedown of this program and lower sales of information security systems. The increase in operating margin was principally attributable to improved margins on military communication systems and high data rate communication systems arising from cost reductions, partially offset by costs incurred for network security systems. EBITDA increased $4.1 million to $30.9 million and EBITDA margin improved to 12.7% from 12.0%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. 14 Sales of the Specialized Communication Products segment increased $153.2 million or 79.1% to $347.0 million in 1999 First Half compared with the 1998 First Half. Operating income increased $21.0 million to $35.9 million and operating margin improved to 10.3% from 7.7%. The increase in sales was principally attributable to the SPD, Aydin and Ocean acquisitions and volume increases on commercial aviation recorders and satellite control products partially offset by lower sales volume on microwave components and decreased shipments of displays and antenna products. The increase in operating margin was principally attributable to improved margins on aviation recorders attributable to volume increases and cost reductions and higher margins from the SPD acquired business which was not included in the results of operations for the 1998 First Half, partially offset by lower margins on microwave components, and antenna products attributable to declines in sales. EBITDA increased $29.9 million to $52.8 million and EBITDA margin improved to 15.2% from 11.8%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income and operating margin. Interest expense, net of interest and other income, increased $7.5 million to $27.6 million in 1999 First Half principally because of higher average outstanding debt during 1999 First Half compared with the 1998 First Half. The income tax provision for the 1999 First Half reflects the Company's estimated effective income tax rate for 1999 of 38.5%, compared with the effective tax rate of 39.0% for 1998 First Half. See discussion under "Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998" above. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Contracts in process increased $114.1 million in the 1999 First Half, of which $97.6 million of the balance at June 30, 1999 was related to businesses acquired during the 1999 First Half, and $16.5 million was principally from (i) increases in unbilled receivables arising from an increase in programs entering the production phase wherein unbilled costs and profits generally exceed progress payments received from the customers until contract shipments are completed and (ii) increases in inventory because of production on certain programs and products in advance of sales expected to occur in the second half of 1999. The increase in intangibles was related to the acquired businesses. The decrease in accounts payable was principally related to the timings of deliveries from and payments to vendors. Working capital, adjusted to exclude cash, and the current portion of long term debt, increased $61.2 million to $192.9 million at June 30, 1999 from $131.7 million at December 31, 1998. The working capital excluding cash at June 30, 1999 attributable to the acquired businesses was $57.5 million. STATEMENT OF CASH FLOWS The following table provides cash flow statement data for the Company for 1999 First Half and 1998 First Half:
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ----------- ----------- (in millions) Net cash from operating activities. ............. $ 25.9 $ 35.7 Net cash (used in) investing activities ......... (205.7) (156.5) Net cash from financing activities .............. 200.4 143.8
OPERATING ACTIVITIES During the 1999 First Half, L-3 generated $25.9 million of cash from its operating activities, a decrease of $9.8 million compared with the 1998 First Half, principally as a result of increased working capital requirements. See discussion under "Balance Sheet" above. The Company expects its rate of investment in working capital to decline during the remainder of 1999. 15 INVESTING ACTIVITIES Since L-3's formation in April 1997, the Company has actively pursued its acquisition strategy. In the 1999 First Half, the Company invested $205.0 million in acquisitions for Microdyne, Aydin and IEC and purchase price adjustments related to closing date net assets for certain acquisitions completed in 1998. The Company also received net proceeds of $4.8 million for the sale of a business in June 1998. The Company makes capital expenditures for improvement of manufacturing facilities and equipment. The increase in capital expenditures for the 1999 First Half compared with the 1998 First Half was principally attributable to the capital expenditures of business acquired after June 30, 1998. The Company expects that its capital expenditures for 1999 will be approximately $37.0 million. FINANCING ACTIVITIES On February 4, 1999, Holdings sold 5.0 million shares of common stock in an offering for $42.00 per share in the February 1999 Common Stock Offering representing 15.4% of Holdings' common stock immediately after the offering. In addition, 6.5 million shares were sold by the Lehman Brothers Capital Partners III, LLP and its affiliates ("the Lehman Partnership") and Lockheed Martin Corporation ("Lockheed Martin") in the February 1999 Common Stock Offering, immediatley after which the Lehman Partnership owned 24.7% and Lockheed Martin owned 7.1% of the outstanding shares of Holding's common stock. The net proceeds to Holdings from the February 1999 Common Stock Offering amounted to $201.5 million and were contributed to the Company. The net proceeds were partially used to finance the acquisitions of Microdyne, Aydin and IEC. On March 3, 1999, the Senior Credit Facilities were amended to increase the Company's revolving credit facilities thereunder by $15.0 million to $400.0 million. At June 30, 1999, available borrowings under the revolving credit facilities were $320.1 million after reductions for outstanding letters of credit of $79.9 million. The Company's 364 Day Revolving Credit Facility for $200.0 million was renewed for one additional 364-day period in July 1999 and will expire on August 10, 2000 at which time the Company may request that the exercise an option to convert any or all of the borrowings outstanding thereunder into term loans which fully amortize over a two year period beginning March 31, 2001. The Senior Credit Facilities and the Senior Subordinated Notes contain financial covenants which remain in effect so long as any amount is owed or any commitment to lend exists thereunder by L-3 Communications. As of June 30, 1999, L-3 Communications had been in compliance with these covenants at all times. The borrowings under the Senior Credit Facilities are guaranteed by Holdings and by substantially all of the Company's subsidiaries. The payments of principal and premium, if any, and interest on the Senior Subordinated Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by substantially all of the Company's subsidiaries, all of which are wholly owned. Based upon the current level of operations, management believes that the Company's cash from operating activities, together with available borrowings under the Senior Credit Facilities, will be adequate to meet its anticipated requirements for working capital, capital expenditures, research and development expenditures, program and other discretionary investments, and interest payments for the foreseeable future including at least the next three years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company's ability to make scheduled principal payments, to pay interest on or to refinance its indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond its control. There can be no assurance that sufficient funds will be available to enable the Company to service its indebtedness, or make necessary capital expenditures and program and discretionary investments. 16 CONTINGENCIES See Note 10 to the Unaudited Condensed Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING STANDARDS Effective January 1, 1999, the Company adopted Statement of Position 98-5, Reporting on the Costs of Start Up Activities ("SOP 98-5"), which provides guidance on the financial reporting of startup and organization costs, including precontract costs. It requires costs of startup activities and organization costs to be expensed as incurred. The impact of adopting SOP 98-5 was not material to the Company's results of operations or financial position. In September 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not expect that the impact of SFAS 133, which is effective for all quarters of fiscal years beginning after June 15, 2000, will be material to the Company's financial position. YEAR 2000 The inability of business processes to continue to function correctly after the beginning of the Year 2000 could have serious adverse effects on companies and entities throughout the world. Because the Company's business units operate autonomously, each business unit has undertaken an effort to identify and mitigate Year 2000 issues related to their information systems, products, facilities, suppliers and customers. Therefore, the Company's Year 2000 effort is a composite of its business units' Year 2000 efforts, coordinated through a Company wide program instituted to oversee, guide and track business units' Year 2000 efforts and to facilitate Company-wide communications regarding Year 2000 methods. Each business unit has appointed a Year 2000 project manager who oversees a team responsible for performing its Year 2000 efforts in four phases: (i) define, identify and inventory possible sources of Year 2000 issues, including internal systems and products and services sold to customers; (ii) analyze and determine the nature and extent of Year 2000 issues and develop project plans to address those issues; (iii) implement and execute project plans to remediate or replace non-compliant items, as appropriate, based upon assessed risk and priority; and (iv) commence and complete testing, continue monitoring readiness and prepare necessary contingency plans. The progress of this program is monitored at each business unit with oversight by management. This oversight includes periodic reviews as well as visits to each business unit to monitor progress with the plans. The first three phases of the program have been completed for a majority of critical systems within the Company. A limited number of systems are currently in the final phase with completions targeted for the third quarter of 1999. The business units of the Company's recently completed acquisitions including Microdyne, Aydin and IEC have been integrated into the Company's Year 2000 efforts and these acquired business units are currently performing their respective Year 2000 efforts at various stages within the four phases enumerated above. The Company plans to have substantially all significant information systems, products and facilities for these acquired businesses in the final phase of the program by the end of the third quarter of 1999. The total estimated costs associated with the Company's Year 2000 efforts have been updated to reflect recently acquired business units and estimated costs for calendar year 2000. The revised estimated cost are $19.8 million and include $7.0 million of capitalizable costs, with the remaining costs to be expensed as incurred. The Company has incurred approximately $15.0 million of such costs to date. Substantially all of the remaining estimated costs are expected to be incurred during the remainder of 1999. 17 The Company believes that there is low risk with respect to its operations that any internal critical system will not be Year 2000 compliant by the end of 1999. The Company's business operations are also dependent on the Year 2000 readiness of its customers and infrastructure suppliers in areas such as utilities, communications, transportation and other services. In a "reasonably likely worst case" scenario, there could be instances of failure that could cause disruptions in business transaction processes of the Company. The likelihood and effects of failures in infrastructure systems and in the customer and supply chains cannot be estimated, but such a failure could potentially result in a material adverse impact on results of operations, liquidity or financial position of the Company. The Company continues to attempt to assess the Year 2000 compliance and readiness of its material third-party suppliers and customers. Such attempts include written inquiries as to their Year 2000 certification of compliance. As indicated above, contingency plans for suppliers, customers, critical systems and utilities impacted by Year 2000 issues have been developed except for these pertaining to recently acquired businesses for which the anticipated completion is the fourth quarter of 1999. It is anticipated that the contingency plans will be tested throughout the remainder of 1999. These estimates and projections could change as the year 2000 efforts progress. FORWARD LOOKING STATEMENTS Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance, and financial condition, including in particular, the likelihood of our success in developing and expanding our business and the realization of sales from backlog, include forward looking statements within the meaning of section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" and similar expressions are forward looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors such as our dependence on the defense industry and the business risks peculiar to that industry including changing priorities or reductions in the U.S. government defense budget; our reliance on contracts with a limited number of agencies of, or contractors to, the U.S. government and the possibility of termination of government contracts by unilateral government action or for failure to perform; our extensive use of fixed price contracts as compared to cost plus contracts; our ability to identify future acquisition candidates or to integrate acquired operations; the rapid change of technology in the communication equipment industry; the high level of competition in the communications equipment industry; our introduction of new products into commercial markets or our investments in commercial products; the significant amount of our debt and the restrictions contained in our debt agreements; Year 2000 issues; collective bargaining labor disputes; pension, environmental or legal matters or proceedings and various other market, competition and industry factors, many of which are beyond our control. Investors are cautioned that any such statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources--Market Risks", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 for a discussion of its exposure to market risks. There was no significant change in the Company's market risks during the six months ended June 30, 1999. 18 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 27, 1999, at the Company's annual meeting of Stockholders, the following proposals were acted on: (1) Four nominees for the Board of Directors were elected to three year terms expiring in 2002, four nominees were elected to two year terms expiring in 2001 and three nominees were elected to one year terms expiring in 2000. The votes were as follows:
FOR WITHHELD ------------ --------- David J. Brand ................. 27,256,683 54,886 Thomas A. Corcoran ............. 27,013,498 298,071 Alberto M. Finali .............. 27,256,733 54,836 Eliot M. Fried ................. 27,256,633 54,936 Frank C. Lanza ................. 27,256,853 54,716 Robert V. LaPenta .............. 27,257,198 54,371 Frank H. Menaker, Jr. .......... 27,257,298 54,271 Robert M. Millard .............. 27,256,798 54,771 John E. Montague ............... 27,231,798 79,771 John M. Shalikashvili .......... 27,256,778 54,791 Alan H. Washkowitz ............. 27,256,798 54,771
(2) The selection of PricewaterhouseCoopers LLP to serve as independent auditors for 1999 was ratified. The votes were as follows: For ...................... 27,256,555 Against .................. 16,450 Abstentions .............. 29,564
(3) The 1999 Long Term Performance Plan was approved. The votes were as follows: For ...................... 21,447,451 Against .................. 5,683,277 Abstentions .............. 174,141 Broker non-votes ......... 6,700
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits *11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Share 27 Financial Data Schedule - ---------- * The information required on this exhibit is presented on Note 9 to the Unaudited Condensed Consolidated Financial Statements as of June 30, 1999 in accordance with the provisions of SFAS No. 128, Earnings Per Share. (b) Reports on Form 8-K Report filed on May 3, 1999 regarding the acquisition of Aydin Corporation. Report filed on May 12, 1999 regarding the acquisition of Aydin Corporation. 19 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. L-3 Communications Holdings, Inc. and L-3 Communications Corporation ----------------------------------- Registrants Date: August 16, 1999 /s/ Robert V. LaPenta ----------------------------------- Name: Robert V. LaPenta Title: President and Chief Financial Officer (Principal Financial Officer) 20 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0001039101 L-3 COMMUNICATIONS CORPORATION 6-MOS DEC-31-1999 JUN-30-1999 46,757 0 319,476 (12,770) 158,415 532,671 182,813 45,010 1,554,249 293,035 605,000 0 0 471,267 49,635 1,554,249 0 589,994 0 532,678 0 0 30,414 29,731 11,446 18,285 0 0 0 18,285 0.58 0.56
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