<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1998
Commission file number 1-12657
DYNATECH CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2258582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (781) 272-6100
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 preceding 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
--- ---
At July 15, 1998 there were 120,251,396 shares of common stock of the registrant
outstanding.
<PAGE>
Part I. Financial Information
------------------------------
Item 1. Financial Statements
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30
1998 1997
--------- ---------
<S> <C> <C>
Sales $ 109,143 $ 104,320
Cost of sales 46,154 42,637
--------- ---------
Gross profit 62,989 61,683
Selling, general & administrative expense 35,189 31,759
Product development expense 13,501 13,695
Recapitalization related costs 43,386 ---
Amortization of intangibles 1,440 1,443
--------- ---------
Operating income (loss) (30,527) 14,786
Interest expense (6,082) (352)
Interest income 788 492
Gain on sale of subsidiary 15,900 ---
Other income 32 170
--------- ---------
Income (loss) before income taxes (19,889) 15,096
Income tax provision (benefit) (7,956) 6,114
--------- ---------
Net income (loss) $ (11,933) $ 8,982
========= =========
Income (loss) per common share:
Basic $ (0.19) $ 0.54
Diluted $ (0.19) $ 0.52
========= =========
Weighted average number of common shares:
Basic 63,464 16,770
Diluted 63,464 17,343
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30 March 31
1998 1998
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,925 $ 64,904
Accounts receivable, net 58,789 69,988
Inventories:
Raw materials 26,184 24,263
Work in process 11,421 11,769
Finished goods 13,518 12,850
--------- --------
Total inventory 51,123 48,882
Other current assets 14,988 16,823
--------- --------
Total current assets 176,825 200,597
Property and equipment, net 25,424 26,365
Intangible assets, net 56,551 39,595
Other assets 56,282 21,573
--------- --------
$ 315,082 $288,130
========= ========
LIABILITIES & EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $ 9,471 $ 150
Accounts payable 17,012 22,933
Accrued expenses:
Compensation and benefits 14,842 21,750
Deferred revenue 13,232 13,868
Other accrued expenses 27,602 24,105
--------- --------
Total current liabilities 82,159 82,806
Long-term debt 565,285 83
Deferred compensation 4,884 3,122
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock --- 3,721
Additional paid-in capital 312,788 7,647
Retained earnings (648,319) 237,282
Cumulative other comprehensive loss (1,715) (1,600)
Treasury stock --- (44,931)
--------- --------
Total shareholders' equity (deficit) (337,246) 202,119
--------- --------
$ 315,082 $288,130
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
--------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (11,933) $ 8,982
Adjustments for noncash items included in net
income:
Depreciation 3,173 2,840
Amortization of intangibles 1,440 1,443
Gain on sale of subsidiary (15,900) ---
Recapitalization related costs 14,640 ---
Other 1 48
Change in deferred income tax asset (5,500) ---
Change in operating assets and liabilities 4,320 (13,133)
--------- --------
Net cash flows provided by (used in) continuing
operations (9,759) 180
Net cash flows provided by (used in) discontinued
operations 403 (9,963)
--------- --------
Net cash flows used in operating activities (9,356) (9,783)
Investing activities:
Purchases of property and equipment (2,416) (4,022)
Proceeds from disposals of property and equipment 127 18
Proceeds from sale of business 20,000 ---
Business acquired in purchase transaction, net of
cash acquired (19,615) ---
Other (4,149) 76
--------- --------
Net cash flows used in continuing operations (6,053) (3,928)
Net cash flows provided by discontinued operations --- 507
--------- --------
Net cash flows used in investing activities (6,053) (3,421)
Financing activities:
Net borrowings of debt 573,000 20,000
Repayment of notes payable (905) ---
Repayment of capital lease obligations (32) ---
Financing fees (41,324) ---
Proceeds from issuance of stock 278,568 1,054
Purchases of treasury stock and stock outstanding (806,508) (5,330)
--------- --------
Net cash flows provided by financing activities 2,799 15,724
Effect of exchange rate on cash (369) (199)
--------- --------
Increase (decrease) in cash and cash equivalents (12,979) 2,321
Cash and cash equivalents at beginning of year 64,904 39,782
--------- --------
Cash and cash equivalents at end of period $ 51,925 $ 42,103
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. MERGER/RECAPITALIZATION
On May 21, 1998 the Company completed its management-led merger with a
company formed at the direction of Clayton, Dubilier & Rice, Inc. ("CDR")
(the "Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
B. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited condensed consolidated balance
sheet at June 30, 1998, and the unaudited consolidated statements of income
and unaudited consolidated condensed statements of cash flows for the interim
periods ended June 30, 1998 and 1997 include all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly these financial
statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The March 31, 1998 balance sheet
data was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. It is
suggested that these condensed statements be read in conjunction with the
Company's most recent Form 10-K as of March 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Significant estimates in these financial statements include
allowances for accounts receivable, net realizable value of inventories, and
tax valuation reserves. Actual results could differ from those estimates.
C. NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the reporting of operating segments in the
financial statements. The Company is required to adopt SFAS 131 in the fourth
quarter of fiscal 1999 and its adoption is not expected to have a material
impact on the Company's disclosures.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. The Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS 133 will not have
a significant effect on the Company's results of operations or its financial
position.
5
<PAGE>
D. COMPREHENSIVE INCOME
In the quarter ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires, among other
things, foreign currency translation adjustments which, prior to adoption,
were reported separately in stockholders' equity to be included in other
comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net income (loss) $(11,933) $8,982
Other comprehensive loss (115) (310)
-------- ------
Comprehensive income (loss) $(12,048) $8,672
======== ======
</TABLE>
E. INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," which modifies the calculation of earnings per share
("EPS"). The Standard replaces the previous presentation of primary and fully
diluted EPS to basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
includes the dilution of common stock equivalents, and is computed similarly
to fully diluted EPS pursuant to APB Opinion 15. All prior periods presented
have been restated to reflect this adoption.
6
<PAGE>
<TABLE>
<CAPTION>
(In thousands except per share data) 1998 1997
-------- --------
<S> <C> <C>
Net income (loss) $(11,933) $ 8,982
======== =======
BASIC:
Common stock outstanding, net
of treasury stock, beginning of period 16,871 16,803
Weighted average common stock and treasury stock
issued during the period 54,416 42
Weighted average common stock and treasury stock
purchased (7,823) (75)
-------- -------
Weighted average common stock
outstanding, net of treasury
stock, end of period 63,464 16,770
======== =======
Income (loss) per common share $ (0.19) $ 0.54
======== =======
DILUTIVE:
Common stock outstanding, net of
treasury stock, beginning of period 16,871 16,803
Weighted average common stock and treasury stock
issued during the period 54,416 42
Weighted average common stock
equivalents (a) --- 573
Weighted average common stock and treasury stock
purchased (7,823) (75)
-------- -------
Weighted average common stock
outstanding, net of treasury stock,
end of period 63,464 17,343
======== =======
Income (loss) per common share $ (0.19) $ 0.52
======== =======
</TABLE>
(a) As of June 30, 1998, the Company had options outstanding to purchase 19.5
million shares of common stock that were excluded from the diluted earnings
per share computation as the effect of their inclusion would have been
antidilutive.
The loss per share and weighted average common shares outstanding for the
three months ended June 30, 1998 is based on the Company's recapitalized
structure. The income per share for the three months ended June 30, 1997 is
based on the Company's capital structure at that time (prior to the Merger).
F. DEBT
Long-term debt is summarized below:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
<S> <C> <C>
Notes payable $ 1,355 $ ---
Senior Secured Credit Facilities 298,000 ---
Senior subordinated notes 275,000 ---
Capitalized leases 401 233
-------- -----
Total debt $574,756 $ 233
Less current portion 9,471 150
-------- -----
Long-term debt $565,285 $ 83
======== =====
</TABLE>
7
<PAGE>
In connection with the Merger, the Company entered into a senior secured
credit agreement (the "Senior Secured Credit Agreement") consisting of a $260
million term loan facility (the "Term Loan Facility") and a $110 million
revolving credit facility, (the "Revolving Credit Facility") (collectively,
the "Senior Secured Credit Facilities"). In addition, the Company incurred
$275 million of debt through the sale of its 9 3/4% Senior Subordinated Notes
(the "Senior Subordinated Notes"). Principal and interest payments under the
new Senior Secured Credit Agreement and interest payments on the Senior
Subordinated Notes represent significant liquidity requirements for the
Company. With respect to the $260 million borrowed under the Term Loan
Facility, in which the facility is divided into tranches, of which each
tranche has a different term and repayment schedule, the Company will be
required to make scheduled principal payments of $50 million of tranche A
term loan thereunder of its six year term, with substantial amortization of
the $70 million of tranche B term loan, $70 million of tranche C term loan
and $70 million tranche D term loan thereunder occurring after six, seven and
eight years, respectively. The $275 million of Senior Subordinated Notes will
mature in 2008, and bear interest at 9 3/4%. Total interest expense is
expected to be approximately $51 million in fiscal 1999. The Senior Secured
Credit Facilities are also subject to mandatory prepayment and reduction in
an amount equal to, subject to certain exceptions, (a) 100% of the net
proceeds of (i) certain debt offerings by the Company and any of its
subsidiaries, (ii) certain asset sales by the Company or any of its
subsidiaries, and (iii) casualty insurance, condemnation awards or other
recoveries received by the Company or any of its subsidiaries, and (b) 50% of
the Company's excess cash flow (as defined) for each fiscal year in which the
Company exceeds a certain leverage ratio. The Senior Subordinated Notes are
subject to certain mandatory prepayments under certain circumstances. The
Revolving Credit Facility matures in 2004, with all amounts then outstanding
becoming due. The Company expects that its working capital needs will require
it to obtain new revolving credit facilities at the time that the Revolving
Credit Facility matures, whether by extending, renewing, replacing or
otherwise refinancing the Revolving Credit Facility. No assurance can be
given that any such extension, renewal, replacement or refinancing can be
successfully accomplished. The loans under the Senior Secured Credit
Agreement bear interest at floating rates based upon the interest rate option
elected by the Company. However, the Company has entered into interest rate
swaps which will be effective for three years beginning September 30, 1998 to
fix the interest rate charged on a portion of the total debt outstanding
under the Term Loan Facility. After giving effect to these arrangements,
approximately $195 million of the debt outstanding will be subject to an
effective average annual fixed interest rate of 5.84% plus an applicable
margin. As a result of the substantial indebtedness incurred in connection
with the Merger, it is expected that the Company's interest expense will be
higher and will have a greater proportionate impact on net income in
comparison to preceding periods.
Future financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn at June 30, 1998 was $70 million. The
undrawn portion of this facility will be available to meet future working
capital and other business needs of the Company. The Company believes that
cash generated from operations, together with amounts available under the
Revolving Credit Facility and any other available sources of liquidity, will
be adequate to permit the Company to meet its debt service obligations,
capital expenditure program requirements, ongoing operating costs and working
capital needs, although no assurance can be given in this regard. The
Company's future operating performance and ability to service or refinance
the Senior Subordinated Notes and to repay, extend or refinance the Senior
Secured Credit Facilities (including the Revolving Credit Facility) will be,
among other things, subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control.
8
<PAGE>
Covenant Restrictions. The Senior Secured Credit Agreement imposes
restrictions on the ability of the Company to make capital expenditures and
both the Senior Secured Credit Facilities and the indenture governing the
Senior Subordinated Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature of
the Company, could limit the Company's ability to respond to market
conditions, to meet its capital-spending program, to provide for
unanticipated capital investments, or to take advantage of business
opportunities. The covenants contained in the Senior Secured Credit
Agreement also, among other things, restrict the ability of the Company and
its subsidiaries to dispose of assets, incur guarantee obligations, prepay
other indebtedness, make restricted payments, create liens, make equity or
debt investments, make acquisitions, modify terms of the indenture governing
the Senior Subordinated Notes, engage in mergers or consolidations, change
the business conducted by the Company and its subsidiaries taken as a whole
or engage in certain transactions with affiliates. In addition, under the
Senior Secured Credit Agreement, the Company is required to comply with a
minimum interest expense coverage ratio and a maximum leverage ratio. These
financial tests become more restrictive in future years. The term loans
under the Senior Secured Credit Facility (other than the $50 million tranche
A term loan) have negative covenants which are substantially similar to the
negative covenants contained in the indenture governing the Senior
Subordinated Notes, which also impose restrictions on the operation of the
Company's business.
G. OTHER ASSETS
In connection with the Merger, the Company incurred financing fees which will
be amortized over the life of the Senior Secured Credit Facilities and Senior
Subordinated Notes. In addition, a deferred tax asset of $5.5 million was
generated as a result of modifications to stock options in the
recapitalization.
The detail of Other Assets is as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
<S> <C> <C>
Deferred financing fees $27,307 $ ---
Deferred tax asset 22,552 17,084
Other assets 6,423 4,489
------- -------
Total Other Assets $56,282 $21,573
======= =======
</TABLE>
9
<PAGE>
H. STOCKHOLDERS' (DEFICIT) EQUITY
The following is a summary of changes in shareholders' equity (deficit) for
the period ended June 30, 1998.
<TABLE>
<CAPTION>
Number of Shares Additional Cumulative Total
Common Treasury Common Paid-In Retained Translation Treasury Shareholders'
Stock Stock Stock Capital Earnings Adjustments Stock Equity
- ----------------------- ------- --------- ------- ---------- --------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 3/31/98 18,605 (1,741) $ 3,721 $ 7,647 $ 237,282 $(1,600) $(44,931) $ 202,119
Net loss (11,933) (11,933)
Translation adjustments (115) (115)
Exercise of stock
options and other
issuances 59 (378) 1,946 1,568
Recapitalizations:
Common stock
repurchased (18,605) 1,682 (3,721) (7,269) (873,668) 42,985 (841,673)
Issuance of new
stock, net of fees 120,251 298,148 298,148
Stock options 14,640 14,640
------- -------- ------- --------- --------- ----------- -------- ------------
Balance at 6/30/98 120,251 0 $ 0 $312,788 $(648,319) $(1,715) $ 0 $(337,246)
======= ======== ======= ========= ========= =========== ======== ============
</TABLE>
I. RELATED PARTY
During the quarter ended June 30, 1998, the Company paid a one-time
transaction fee of $9.2 million and will pay an annual management fee of $500
thousand to CDR. In exchange for the transaction fee, CDR provided services
to arrange the Recapitalization/Merger and the financing for the Merger. In
return for the annual management fee, CDR will provide management and
financial consulting services to the Company and its subsidiaries.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 1998.
The Merger. On May 21, 1998 the Company was merged with and into CDRD Merger
Corporation ("MergerCo"), a nonsubstantive transitory merger vehicle organized
at the direction of Clayton, Dubilier & Rice, Inc. ("CDR"), a private investment
firm, with the Company continuing as the surviving corporation ("the Merger").
In the Merger, (i) each then outstanding share of common stock, par value $0.20
per share, of the Company (the "Common Stock") was converted into the right to
receive $47.75 in cash and 0.5 shares of common stock, no par value, of the
Company (the "Recapitalized Common Stock") and (ii) each then outstanding share
of common stock of MergerCo was converted into one share of Recapitalized Common
Stock.
As a result of the Merger, Clayton, Dubilier & Rice Fund V Limited Partnership,
an investment partnership managed by CDR "(CDR Fund V") holds approximately
92.3% of the Recapitalized Common Stock. John F. Reno, the Chairman, President
and Chief Executive Officer of the Company together with two family trusts holds
approximately 0.7% of the Recapitalized Common Stock and other stockholders hold
approximately 7.0% of the Recapitalized Common Stock.
The Merger and related transactions were treated as a Recapitalization for
financial reporting purposes. Accordingly, the historical basis of the Company's
assets and liabilities was not affected by these transactions.
Acquisitions. On June 19, 1998 the Company, through one of its indirect wholly
owned subsidiaries, acquired all of the outstanding capital stock of Pacific
Systems Corporation of Kirkland, Washington ("Pacific") for a total purchase
price of $20 million, including an incentive earnout. The Company generated
$17.8 million of goodwill related to this acquisition. Pacific designs and
manufactures customer-specified avionics and integrated cabin management
equipment for the corporate and general aviation market.
Sale of Subsidiary. On June 30, 1998 the Company sold the assets of ComCoTec,
Inc. ("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc. for
$21 million with $1 million remaining in escrow pending any purchase price
adjustments which resulted in a gain of $15.9 million. ComCoTec is a supplier of
pharmacy management software and services and was a subsidiary within the
Company's visual communications products group.
Sales. Consolidated sales increased $4.8 million or 4.6% to $109.1 million for
the three months ended June 30, 1998 as compared to $104.3 million for the same
period a year ago.
Sales of communications test products decreased $3.2 million to $53.8 million or
5.6% over the same period last year. This was the result of reduced demand for
hand-held test devices plus a slowdown of orders from the Regional Bell
Operating Companies ("RBOCs") due to the lengthening of the sales cycle during a
period of industry consolidation.
Sales for industrial computing and communication products increased $5.3 million
to $34.0 million or 18.4% over the same period last year. The increase was
primarily attributable to additional sales volume of the Company's ruggedized
laptop computers due to fewer Pentium-based field-service units shipped during
the first quarter of last year while the products continued final testing.
11
<PAGE>
Sales of visual communications products increased $2.8 million to $18.9 million
or 15.0% over the same period last year. Sales for the Company's real-time
flight information passenger video displays continued to be strong. Offsetting
this increase were lower sales in the video compression and graphical user-
interface (GUI) products.
Gross Profit. Consolidated gross profit increased $1.3 million to $63.0 million
or 57.7% of consolidated sales for the three months ended June 30, 1998 as
compared to $61.7 million or 59.1% of consolidated sales for the same period a
year ago. The percentage decrease was attributable to a change in the product
mix of the Company. The Company had increased shipments of ruggedized laptop
computers which sell at a lower gross margin and fewer shipments of
communications test products that have a higher gross margin than the
consolidated family of products.
Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; recapitalization related costs; and amortization of intangibles. Total
operating expenses were $93.5 million or 85.7% of consolidated sales for the
three months ended June 30, 1998 as compared to $46.9 million or 45.0% of
consolidated sales for the same period last year. Included in this quarter's
operating expenses were the expenses related to the Merger for the option
cancellation payments. Excluding these expenses, operating expenses for the
three months ended June 30, 1998 were $50.1 million or 45.9% of consolidated
sales. The increase in percentage was primarily attributable to increased
selling and marketing expense.
Selling, general and administrative expense was $35.2 million or 32.2% of
consolidated sales for the three months ended June 30, 1998, compared to $31.8
million or 30.4% of consolidated sales for the same period a year ago. The
increase in percentage was primarily attributable to increased commission and
compensation expense during the first quarter of fiscal 1999 as well as
additional expenses related to catalog costs for the Company's Industrial
Computer Source-Book.
Product development expense was $13.5 million or 12.4% of consolidated sales for
the three months ended June 30, 1998 as compared to $13.7 million or 13.1% of
consolidated sales for the same period last year. The decrease was primarily
driven by a higher product development expense for the same period last year in
which the Company incurred for the introduction of Pentium-based ruggedized
laptops.
Recapitalization related costs. In connection with the Merger, the Company
incurred $43.4 million for the cancellation payments of employee stock options,
compensation expense due to the acceleration of unvested stock options, and
other merger-related expenses. The Company incurred an additional $41.3 million
in expenses, of which $27.3 million was capitalized and will be amortized over
the life of the Senior Secured Credit Facilities and Senior Subordinated Notes,
and $14.0 million was charged directly to shareholder's equity.
Amortization of intangibles during the first quarter of both fiscal 1999 and
1998 was $1.4 million.
Interest. Interest expense, net of interest income, was $5.3 million for the
first quarter of fiscal 1999 as compared to net interest income of $0.1 million
for the same period last year. The increase in net interest expense was
attributable to the debt incurred in connection with the Merger on May 21, 1998.
12
<PAGE>
Other income. Other income for the first quarter was $32 thousand as compared
to $170 thousand for the same period a year ago.
Taxes. The effective tax rate for the first quarter was 40.0%, essentially at
the same level as the same period a year ago.
Net income (loss). The Company's net loss was $11.9 million or $(0.19) per
share on a diluted basis for the three months ended June 30, 1998 as compared to
net income of $9.0 million or $0.52 per share on a diluted basis for the same
period a year ago. The loss was primarily attributable to both the cancellation
payments of the employee stock options plus the additional interest expense
incurred in connection with the Merger.
Backlog. Backlog at June 30, 1998 was $88.8 million, an increase of $9.7
million over the backlog at March 31, 1998.
Capital Resources and Liquidity
Cash flows. The Company's cash and cash equivalents decreased $13 million
during the first three months of fiscal 1999 principally due to the
Recapitalization of the Company.
Working Capital. During the first quarter of fiscal 1999, the Company's working
capital increased as its operating assets and liabilities provided a $4.3
million source of cash excluding the acquisition of Pacific. Inventory levels
increased, creating a use of cash of $400 thousand. Accounts receivable
decreased from $70.0 million to $58.8 million, or a source of cash of $11.1
million, as a result of improved collection processes at the Company. Other
current assets decreased, creating a source of cash of $3.0 million due mainly
to the recognition of expenses previously capitalized related to the Merger.
Accounts payable decreased, creating a use of cash of $6.3 million. Other
current liabilities decreased, creating a use of cash of $3.1 million, relating
primarily to the payment of bonuses previously accrued.
Investing Activities. The Company's investing activities totaled $6.1 million
primarily for the purchase and replacement of property and equipment and the
payment of an earnout incentive related to the fiscal 1998 operating result of
Advent Design, Inc., a subsidiary purchased in March 1997. Also included in this
total are the proceeds received from the sale of ComCoTec, offset by the
purchase of Pacific. The Company's capital expenditures were $2.4 million
compared with $4.0 million for the same period last year. The decrease is
primarily due to the timing of certain capital expenditure purchases. The
Company anticipates capital expenditures to be at the same level in fiscal year
1999 as in fiscal year 1998.
Debt and Equity. The Company's financing activities generated $2.8 million in
cash after $573 M of net proceeds from borrowing and $277 million from issuance
of stock related to the Merger were used to pay $806.5 million for the purchase
of the outstanding stock and $41.3 million for financing fees related to the
Merger.
In connection with the Merger, the Company entered into a senior secured credit
agreement (the "Senior Secured Credit Agreement") consisting of a $260 million
term loan facility (the "Term Loan Facility") and a $110 million revolving
credit facility, (the "Revolving Credit Facility") (collectively, the "Senior
Secured Credit Facilities"). In addition, the Company incurred $275 million of
debt through the sale of its 9 3/4% Senior Subordinated Notes (the "Senior
Subordinated Notes"). Principal and interest payments under the new Senior
Secured Credit Agreement and interest payments on the Senior Subordinated Notes
represent significant liquidity requirements for the Company. With respect to
the $260.0 million borrowed under the Term Loan Facility, in which the facility
is divided into tranches, of which each tranche has a different term and
repayment schedule, the Company will be
13
<PAGE>
required to make scheduled principal payments of $50 million of tranche A term
loan thereunder of its six year term, with substantial amortization of the $70
million of tranche B term loan, $70 million of tranche C term loan and $70
million tranche D term loan thereunder occurring after six, seven and eight
years, respectively. The $275 million of Senior Subordinated Notes will mature
in 2008, and bear interest at 9 3/4%. Total interest expense is expected to be
approximately $51 million in fiscal 1999. The Senior Secured Credit Facilities
are also subject to mandatory prepayment and reduction in an amount equal to,
subject to certain exceptions, (a) 100% of the net proceeds of (i) certain debt
offerings by the Company and any of its subsidiaries, (ii) certain asset sales
by the Company or any of its subsidiaries, and (iii) casualty insurance,
condemnation awards or other recoveries received by the Company or any of its
subsidiaries, and (b) 50% of the Company's excess cash flow (as defined) for
each fiscal year in which the Company exceeds a certain leverage ratio. The
Senior Subordinated Notes are subject to certain mandatory prepayments under
certain circumstances. The Revolving Credit Facility matures in 2004, with all
amounts then outstanding becoming due. The Company expects that its working
capital needs will require it to obtain new revolving credit facilities at the
time that the Revolving Credit Facility matures, whether by extending, renewing,
replacing or otherwise refinancing the Revolving Credit Facility. No assurance
can be given that any such extension, renewal, replacement or refinancing can be
successfully accomplished. The loans under the Senior Secured Credit Agreement
bear interest at floating rates based upon the interest rate option elected by
the Company. However, the Company has entered into interest rate swaps which
will be effective for three years beginning September 30, 1998 to fix the
interest rate charged on a portion of the total debt outstanding under the Term
Loan Facility. After giving effect to these arrangements, approximately $195
million of the debt outstanding will be subject to an effective average annual
fixed interest rate of 5.84% plus an applicable margin. As a result of the
substantial indebtedness incurred in connection with the Merger, it is expected
that the Company's interest expense will be higher and will have a greater
proportionate impact on net income in comparison to preceding periods.
Future financing Sources and Cash Flows. The amount under the Revolving Credit
Facility that remained undrawn at June 30, 1998 was $70 million. The undrawn
portion of this facility will be available to meet future working capital and
other business needs of the Company. The Company believes that cash generated
from operations, together with amounts available under the Revolving Credit
Facility and any other available sources of liquidity, will be adequate to
permit the Company to meet its debt service obligations, capital expenditure
program requirements, ongoing operating costs and working capital needs for at
least the next twelve months, although no assurance can be given in this regard.
The Company's future operating performance and ability to service or refinance
the Senior Subordinated Notes and to repay, extend or refinance the Senior
Secured Credit Facilities (including the Revolving Credit Facility) will be,
among other things, subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control.
Covenant Restrictions. The Senior Secured Credit Agreement imposes restrictions
on the ability of the Company to make capital expenditures and both the Senior
Secured Credit Facilities and the indenture governing the Senior Subordinated
Notes limit the Company's ability to incur additional indebtedness. Such
restrictions, together with the highly leveraged nature of the Company, could
limit the Company's ability to respond to market conditions, to meet its
capital-spending program, to provide for unanticipated capital investments, or
to take advantage of business opportunities. The covenants contained in the
Senior Secured Credit Agreement also, among other things, restrict the ability
of the Company and its subsidiaries to dispose of assets, incur guarantee
obligations, prepay other indebtedness, make restricted payments, create liens,
make equity or debt investments, make acquisitions, modify terms of the
indenture governing the Senior Subordinated Notes, engage in mergers or
consolidations, change the business conducted by the Company and its
subsidiaries taken as a whole
14
<PAGE>
or engage in certain transactions with affiliates. In addition, under the Senior
Secured Credit Agreement, the Company is required to comply with a minimum
interest expense coverage ratio and a maximum leverage ratio. These financial
tests become more restrictive in future years. The term loans under the Senior
Secured Credit Facility (other than the $50 million tranche A term loan) have
negative covenants which are substantially similar to the negative covenants
contained in the indenture governing the Senior Subordinated Notes, which also
impose restrictions on the operation of the Company's business.
Year 2000
The Company has commenced a review of its computer systems and products in order
to assess its exposure to Year 2000 issues. The Company is currently in the
process of determining the full scope, related costs and action plan to insure
that the Company's systems continue to meet its internal needs and those of its
customers. The Company expects to make the necessary modifications or changes
to its computer information systems to enable proper processing of transactions
relating to the Year 2000 and beyond. However, there can be no assurance that
Year 2000 costs and expenses will not have a material adverse effect on the
Company. In addition, the Company does not currently have complete information
concerning the Year 2000 compliance status of its suppliers and customers. In
the event that any of the Company's significant suppliers or customers do not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be materially adversely affected. Finally, there can be no
assurance that the Company's existing or installed base of products are Year
2000 compliant, or that the Company's products will not be integrated by the
Company or its customers with, or otherwise interact with, non-compliant
software or other products. Any such product non-compliance may expose the
Company to claims from its customers and others, and could impair market
acceptance of the Company's products and services, increase service and warranty
costs, or result in payment of damages, which in turn could materially adversely
affect the Company.
New Pronouncements
In the quarter ended June 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income." SFAS
130 establishes standards for the reporting and display of comprehensive income
and its components. SFAS 130 requires, among other things, foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity to be included in other comprehensive income.
In the quarter ended June 30, 1998, the Company adopted Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions.
The Financial Accounting Standards Board issued Statement No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the reporting of operating segments in the financial
statements. The Company is required to adopt SFAS 131 in the fourth quarter of
fiscal 1999 and its adoption is not expected to have a material impact on the
Company's disclosures.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 133 ("SFAS 133"), "Accounting for
15
<PAGE>
Derivative Instruments and Hedging Activities." SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
16
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
On June 27, 1996, Cincinnati Microwave, Inc. ("CMI") filed an action in the
United States District Court for the Southern District of Ohio against the
Company and Whistler Corporation of Massachusetts ("Whistler"), alleging willful
infringement of CMI's patent for a mute function in radar detectors. In 1994,
the Company sold its radar detector business to Whistler. The Company and
Whistler have asserted in response that they have not infringed, and that the
patent is invalid and unenforceable. The Company obtained an opinion of counsel
from Bromberg & Sunstein LLP in connection with the manufacture and sale of the
Company's Whistler series radar detectors and will be offering the opinion,
among other things, as evidence that any alleged infringement was not willful.
On March 24, 1998, CMI, together with its co-plaintiff and patent assignee
Escort, Inc., moved for summary judgment. The Company and Whistler have opposed
the motion for summary judgment. The Company intends to defend the lawsuit
vigorously and does not believe that the outcome of the litigation is likely to
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
On May 21, 1998, the Company was merged with MergerCo. In the Merger, (i) each
then outstanding share of Common Stock of the Company was converted into the
right to receive $47.75 in cash and 0.5 shares of Recapitalized Common Stock,
which shares were registered on a Registration Statement on Form S-4 and (ii)
the then outstanding 111,590,528 shares of common stock of MergerCo were
converted on a one-for-one basis into an equal number of shares of Recapitalized
Common Stock pursuant to the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote
A Special Meeting of Stockholders was held on May 21, 1998 in New York, New
York. At such meeting, 16,864,434 shares were entitled to vote. The table below
discloses the vote with respect to each proposal:
Proposal I
- ----------
To approve and adopt an Agreement and Plan of Merger (the "Merger Agreement")
dated as of December 20, 1997 between Dynatech and CDRD Merger Corporation, the
merger of CDRD Merger Corporation with and into Dynatech contemplated thereby
and other such matters as are reasonably necessary or advisable for the
consummation of the transactions contemplated in the Merger Agreement.
For 12,966,899
Against 126,365
Abstain 17,786
Proposal II
- -----------
To transact such other business as may properly come before the Special
Meeting or at any adjournments or postponements thereof.
For 10,069,149
Against 2,565,197
Abstain 437,523
Non-Vote 39,181
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in the Exhibit Table of Item 601 of Regulation
S-K:
Exhibit Number Description
-------------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATECH CORPORATION
--------------------
Date August 13, 1998 /s/ ALLAN M. KLINE
- --------------------- ---------------------
Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
Date August 13, 1998 /s/ ROBERT W. WOODBURY, JR.
- --------------------- ---------------------------
Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
18
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