DYNATECH CORP, 10-Q, 1998-11-05

DYNATECH CORP
10-Q, 1998-11-05
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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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 SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-12657

DYNATECH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MASSACHUSETTS 04-2258582
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)

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 October 15, 1998 there were 120,251,396 shares of common stock of the
registrant outstanding.

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<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 SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................. $123,601 $115,856 $232,744 $220,176
Cost of sales......................... 52,665 50,812 98,819 93,449
-------- -------- -------- --------
Gross profit.......................... 70,936 65,044 133,925 126,727
Selling, general & administrative
expense.............................. 35,996 33,278 71,185 65,037
Product development expense........... 13,565 13,384 27,066 27,079
Recapitalization-related costs........ -- -- 43,386 --
Amortization of intangibles........... 1,632 1,439 3,072 2,882
Amortization of unearned
compensation......................... 403 403
-------- -------- -------- --------
Total operating expenses.............. 51,596 48,101 145,112 94,998
-------- -------- -------- --------
Operating income (loss)............... 19,340 16,943 (11,187) 31,729
Interest expense...................... (13,900) (429) (19,981) (781)
Interest income....................... 1,299 872 2,087 1,364
Gain on sale of subsidiary............ -- -- 15,900 --
Other income (expense)................ (99) 282 (67) 452
-------- -------- -------- --------
Income (loss) before income taxes..... 6,640 17,668 (13,248) 32,764
Income tax provision (benefit)........ 2,979 7,156 (4,976) 13,270
-------- -------- -------- --------
Net income (loss)..................... $ 3,661 $ 10,512 $ (8,272) $ 19,494
======== ======== ======== ========
Income (loss) per common share:
Basic............................... $ 0.03 $ 0.63 $ (0.09) $ 1.16
Diluted............................. $ 0.03 $ 0.60 $ (0.09) $ 1.12
======== ======== ======== ========
Weighted average number of common
shares:
Basic............................... 120,251 16,725 92,013 16,748
Diluted............................. 129,465 17,426 92,013 17,394
======== ======== ======== ========
</TABLE>

See notes to condensed consolidated financial statements.

2
<PAGE>

DYNATECH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 MARCH 31
1998 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 38,023 $ 64,904
Accounts receivable, net............................... 72,640 69,988
Inventories:
Raw materials........................................ 22,018 24,263
Work in process...................................... 12,505 11,769
Finished goods....................................... 10,086 12,850
--------- --------
Total inventory.................................... 44,609 48,882
Other current assets..................................... 15,297 16,823
--------- --------
Total current assets............................... 170,569 200,597
Property and equipment, net.............................. 25,708 26,365
Intangible assets, net................................... 55,270 39,595
Other assets............................................. 54,697 21,573
--------- --------
$ 306,244 $288,130
========= ========
LIABILITIES & EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt...................... $ 8,247 $ 150
Accounts payable....................................... 18,255 22,933
Accrued expenses:
Compensation and benefits............................ 17,573 21,750
Deferred revenue..................................... 13,681 13,868
Other accrued expenses............................... 33,702 24,105
--------- --------
Total current liabilities.......................... 91,458 82,806
Long-term debt........................................... 543,257 83
Deferred compensation.................................... 4,785 3,122
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock............................................. -- 3,721
Additional paid-in capital............................... 322,452 7,647
Retained earnings (deficit).............................. (644,658) 237,282
Unearned compensation.................................... (9,261) --
Cumulative other comprehensive loss...................... (1,789) (1,600)
Treasury stock........................................... -- (44,931)
--------- --------
Total shareholders' equity (deficit)............... (333,256) 202,119
--------- --------
$ 306,244 $288,130
========= ========
</TABLE>

See notes to condensed consolidated financial statements.

3
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DYNATECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30
-------------------
1998 1997
--------- --------
<S> <C> <C>
Operating activities:
Net income (loss)....................................... $ (8,272) $ 19,494
Adjustments to net income:
Depreciation.......................................... 6,064 5,730
Amortization of intangibles........................... 3,072 2,882
Gain on sale of subsidiary............................ (15,900) --
Recapitalization-related costs........................ 14,640 --
Amortization of unearned compensation................. 403 --
Other................................................. 1,114 32
Change in deferred income tax asset..................... (5,500) --
Change in operating assets and liabilities.............. 5,985 (18,978)
--------- --------
Net cash flows provided by continuing operations........ 1,606 9,160
Net cash flows provided by (used in) discontinued opera-
tions.................................................. 532 (10,197)
--------- --------
Net cash flows provided by (used in) operating activi-
ties..................................................... 2,138 (1,037)
Investing activities:
Purchases of property and equipment..................... (5,764) (7,796)
Proceeds from disposals of property and equipment....... 230 --
Proceeds from sale of business.......................... 21,000 --
Business acquired in purchase transaction, net of cash
acquired............................................... (19,615) --
Other................................................... (4,978) (58)
--------- --------
Net cash flows used in continuing operations............ (9,127) (7,854)
Net cash flows provided by discontinued operations...... -- 507
--------- --------
Net cash flows used in investing activities............... (9,127) (7,347)
Financing activities:
Net borrowings of debt.................................. 551,000 16,000
Repayment of notes payable.............................. (2,124) --
Repayment of capital lease obligations.................. (64) --
Financing fees.......................................... (40,289) --
Proceeds from issuance of stock......................... 278,568 2,177
Purchases of treasury stock and stock outstanding....... (806,508) (5,330)
--------- --------
Net cash flows provided by (used in) financing activi-
ties..................................................... (19,417) 12,847
Effect of exchange rate on cash........................... (475) (701)
--------- --------
Increase (decrease) in cash and cash equivalents.......... (26,881) 3,762
Cash and cash equivalents at beginning of year............ 64,904 39,782
--------- --------
Cash and cash equivalents at end of period................ $ 38,023 $ 43,544
========= ========
</TABLE>

See notes to condensed consolidated financial statements.

4
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)

A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited condensed consolidated balance
sheet at September 30, 1998, and the unaudited consolidated statements of
operations and unaudited consolidated condensed statements of cash flows for
the interim periods ended September 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 year-end 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.

B. 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.

C. RELATED PARTY

The Company will pay an annual management fee of $0.5 million to CDR. In
return for the annual management fee, CDR will provide management and
financial consulting services to the Company and its subsidiaries.

D. FINANCIAL POSITION OF DYNATECH CORPORATION AND TTC LLC

In connection with the Merger and related transactions, Telecommunications
Techniques Co., LLC (to be renamed Dynatech, LLC), Dynatech Corporation's
wholly owned subsidiary ("TTC LLC"), became the primary obligor (and Dynatech
Corporation, a guarantor) with respect to indebtedness of Dynatech
Corporation, including the 9 3/4% Senior Subordinated Notes due 2008 (the
"Senior Subordinated Notes") and the Senior Secured Credit Facilities referred
to elsewhere in this report.

Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with
no independent operations and no significant assets other than its membership
interest in TTC LLC. See Note M. Debt. Accordingly, the condensed consolidated
financial statements of Dynatech Corporation, presented in this report, are
not materially different from those of TTC LLC. Management has not included
separate financial statements of TTC LLC because management has determined
that they would not be material to holders of the Senior Subordinated Notes or
to the holders of Dynatech Corporation's common stock. TTC LLC is subject,
under agreements governing its indebtedness, to prohibitions on its ability to
make distributions to Dynatech Corporation (with limited exceptions) and other
significant restrictions on its operations. See Note M. Debt.

5
<PAGE>

E. ACQUISITION

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 acquisition was accounted for
using the purchase method of accounting. The pro forma effects related to the
acquisition are not material to the consolidated financial statements of the
Company and are, therefore, not presented.

F. DIVESTITURE

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.
ComCoTec is a supplier of pharmacy management software and services and was a
subsidiary within the Company's visual communications products group.

G. LITIGATION

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.

H. 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.

In June, 1997, 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 may result in the
provision of additional details in 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. Due to its limited use of derivative instruments,
the Company is assessing the impact of the adoption of SFAS 133 on its results
of operations and its financial position.

6
<PAGE>

I. COMPREHENSIVE INCOME (LOSS)

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 (loss) and its components. SFAS 130 requires, among other
things, foreign currency translation adjustments which, prior to adoption,
were reported separately in shareholders' equity (deficit) to be included in
other comprehensive income (loss).

The following table shows adjustments to net income for other comprehensive
loss (consisting primarily of foreign currency translation adjustments).

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)...................... $ 3,661 $ 10,512 $ (8,272) $ 19,494
Other comprehensive loss............... (74) (550) (189) (860)
-------- --------- -------- --------
Comprehensive income (loss)............ $ 3,587 $ 9,962 $ (8,461) $ 18,634
======== ========= ======== ========
</TABLE>

J. INCOME (LOSS) PER SHARE

Effective as of December 31, 1997, 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.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss)................... $ 3,661 $ 10,512 $ (8,272) $ 19,494
========= ========= ========= =========
BASIC:
Common stock outstanding, net of
treasury stock, beginning of peri-
od................................. 120,251 16,699 16,871 16,803
Weighted average common stock and
treasury stock issued during the
period............................. -- 26 87,731 64
Weighted average common stock and
treasury stock repurchased......... -- -- (12,589) (119)
--------- --------- --------- ---------
Weighted average common stock
outstanding, net of treasury stock,
end of period...................... 120,251 16,725 92,013 16,748
========= ========= ========= =========
Income (loss) per common share...... $ 0.03 $ 0.63 $ (0.09) $ 1.16
========= ========= ========= =========
</TABLE>

7
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------------
1998 1997 1998 1997
--------- ------------------ ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
DILUTED:
Common stock outstanding, net of
treasury stock, beginning of period.. 120,251 16,699 16,871 16,803
Weighted average common stock and
treasury stock issued during the pe-
riod................................. -- 26 87,731 64
Weighted average common stock
equivalents (a)...................... 9,214 701 -- 646
Weighted average common stock and
treasury stock repurchased........... -- -- (12,589) (119)
--------- -------- --------- --------
Weighted average common stock out-
standing, net of treasury stock, end
of period............................ 129,465 17,426 92,013 17,394
========= ======== ========= ========
Income (loss) per common share........ $ 0.03 $ 0.60 $ (0.09) $ 1.12
========= ======== ========= ========
</TABLE>

- --------

(a) As of September 30, 1998, the Company had options outstanding to purchase
33.1 million shares of common stock that were excluded from the diluted
earnings per share computation for the six months ended September 30, 1998
as the effect of their inclusion would have been antidilutive with respect
to losses per share.

The loss per share and weighted average common shares outstanding for the
periods ending September 30, 1998 are based on the Company's recapitalized
structure. The income per share for the periods ending September 30, 1997 is
based on the Company's capital structure at that time (prior to the Merger).

8
<PAGE>

K. INTANGIBLE ASSETS

Intangible assets acquired primarily from business acquisitions are
summarized as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
<S> <C> <C>
Product technology...................................... $17,042 $17,042
Excess of cost over net assets acquired................. 51,224 32,478
Other intangible assets................................. 13,307 13,307
------- -------
81,573 62,827
Less accumulated amortization........................... 26,303 23,232
------- -------
Total................................................. $55,270 $39,595
======= =======
</TABLE>

On June 19, 1998 the Company acquired the outstanding capital stock of
Pacific for $20 million, which generated approximately $18 million of
goodwill.

L. 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 for compensation
expenses was generated in relation to the stock option cancellation payments.

The detail of Other Assets is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
<S> <C> <C>
Deferred financing fees................................. $26,272 $ --
Deferred tax asset...................................... 22,552 17,084
Other assets............................................ 5,873 4,489
------- -------
Total Other Assets.................................... $54,697 $21,573
======= =======
</TABLE>

M. DEBT

Long-term debt is summarized below:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
<S> <C> <C>
Senior secured credit facilities........................ $276,000 $ --
Senior subordinated notes............................... 275,000 --
Capitalized leases...................................... 504 233
-------- ------
Total debt............................................ 551,504 233
Less current portion.................................... 8,247 150
-------- ------
Long-term debt........................................ $543,257 $ 83
======== ======
</TABLE>

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").

In connection with the Merger and related transactions, TTC LLC became the
primary obligor with respect to the Senior Secured Credit Facility and the
Senior Subordinated Notes. See Note D. Financial Position of Dynatech
Corporation and TTC LLC. Dynatech Corporation has guaranteed the Senior
Secured Credit Facilities and the Senior Subordinated Notes.

9
<PAGE>

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. During fiscal 1999 the
Company is required to make mandatory principal payments of $8 million of
which $4 million was repaid during the first six months of fiscal 1999. With
respect to the $260 million initially borrowed under the Term Loan Facility
(which is divided into four tranches, each of which has a different term and
repayment schedule), the Company is required to make scheduled principal
payments of the $50 million of tranche A term loan thereunder during its six-
year term, with substantial amortization of the $70 million tranche B term
loan, $70 million 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% per annum. Total interest expense including the amortization of
deferred debt issuance costs is expected to be approximately $47 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 in the Senior Secured Credit
Agreement) 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, 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 or accomplished on acceptable terms.

The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 9.1% per annum for the period commencing May 21, 1998 and ending
September 30, 1998, and is expected to be 8.3% per annum for the period
commencing October 1, 1998 and ending December 31, 1998. However, the Company
has entered into interest rate swaps which will be effective for periods
ranging from two to three years beginning September 30, 1998 to fix the
interest charged on a portion of the total debt outstanding under the Term
Loan Facility. After giving effects to these arrangements, approximately $220
million of the debt outstanding will be subject to an effective average annual
fixed rate of 5.71% plus an applicable margin. See Note N. Interest Rate
Swaps. 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 following the May 1998 closing of the
Recapitalization was $70 million. The undrawn portion of this facility will be
available to meet future working capital and other business needs of the
Company. At September 30, 1998, the undrawn portion of this facility was $90
million. 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.

10
<PAGE>

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. These restrictions, among other things, preclude
TTC LLC from distributing assets to Dynatech Corporation (which has no
independent operations and no significant assets other than its membership
interest in TTC LLC), except in limited circumstances. 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 Credit Facility (other than the $50 million tranche A term loan)
are governed by negative covenants that 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.

N. INTEREST RATE SWAPS

The Company uses interest rate swap agreements to effectively fix a portion
of its variable rate Term Loan Facility to a fixed rate in order to reduce the
impact of interest rate changes on future income. The differential to be paid
or received under these agreements will be recognized as an adjustment to
interest expense related to the debt. At September 30, 1998 the Company had
three interest rate swap agreements (commencing September 30, 1998 and ending
September 30, 2001) (with notional amounts totaling $195 million) under which
the Company will pay fixed rates of 5.85%, 5.845% and 5.8375%, respectively,
and will receive three-month LIBOR.

On October 14, 1998 the Company entered into a fourth interest rate swap
agreement (commencing on October 16, 1998 and ending October 16, 2000) for a
notional amount of $25 million. The Company will pay a fixed rate of 4.715%
and will receive three-month LIBOR.

O. UNEARNED COMPENSATION

In connection with the unearned compensation on July 15, 1998, the Company
granted non-qualified options to certain key employees to purchase 14.3
million shares of common stock at an exercise price lower than fair market
value. The options were priced at the anticipated market price of the
recapitalized common stock on the date of the Merger. The Company has
historically granted options at a price equal to the closing market price on
the date of the grant.

Unearned compensation related to these options of $9.7 million was recorded
within shareholders' equity (deficit) and will be charged to expense over a
five-year vesting period. As of September 30, 1998, the unamortized portion of
the total compensation expense was $9.3 million.

11
<PAGE>

P. SHAREHOLDERS' EQUITY (DEFICIT)

The following is a summary of changes in shareholders' equity (deficit) for
the period ended September 30, 1998.

<TABLE>
<CAPTION>
NUMBER OF SHARES CUMULATIVE TOTAL
----------------- ADDITIONAL RETAINED OTHER SHAREHOLDERS'
COMMON TREASURY COMMON PAID-IN EARNINGS UNEARNED COMPENSATION TREASURY EQUITY
STOCK STOCK STOCK CAPITAL (DEFICIT) COMPENSATION LOSS STOCK (DEFICIT)
------- -------- ------ ---------- --------- ------------ ------------ -------- -------------
<S> <C> <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) $ 202,319
Net Income........... (8,272) (8,272)
Translation adjust-
ments................ (189) (189)
Exercise of stock
options and other
issuances............ 59 (378) 1,946 1,568
Recapitalization-re-
lated costs:
Common stock
repurchased......... (18,605) 1,682 (3,721) (7,269) (873,668) 42,985 (841,673)
Issuance of new
stock, net of fees.. 120,251 298,140 298,148
Stock option
expense............. 14,640 14,640
Unearned
compensation........ 9,664 $(9,664)
Amortization of
unearned
compensation........ 403 403
------- ------ ------ -------- --------- ------- ------- -------- ---------
Balance at 9/30/98... 120,251 0 $ 0 $322,452 $(644,658) $(9,261) $(1,789) $ 0 $(333,256)
======= ====== ====== ======== ========= ======= ======= ======== =========
</TABLE>

12
<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.

OVERVIEW

The Merger. On May 21, 1998 the Company was merged with 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"). 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.

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.

Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with
no independent operations and no significant assets other than its membership
interest in TTC LLC. See "Capital Resources and Liquidity." Accordingly, the
condensed consolidated financial statements of Dynatech Corporation, presented
in this report, are not materially different from those of TTC LLC. Management
has not included separate financial statements of TTC LLC because management
has determined that they would not be material to holders of the Senior
Subordinated Notes or to the holders of Dynatech Corporation's common stock.
TTC LLC is subject, under the agreements governing its indebtedness, to
prohibitions on its ability to make distributions to Dynatech Corporation
(with limited exceptions) and other significant restrictions on its
operations. See "Capital Resources and Liquidity."

Acquisition. 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 acquisition
was accounted for using the purchase method of accounting. Pacific designs and
manufactures customer-specified avionics and integrated cabin management
equipment for the corporate and general aviation market.

Divestiture. 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. ComCoTec is a supplier of pharmacy management software and services
and was a subsidiary within the Company's visual communications products
group.

13
<PAGE>

CURRENT TRENDS

For the six month period ended September 30, 1998, sales have been
relatively flat compared to the same period a year ago in the Company's
largest business. The Company cannot predict whether growth will continue at
historical rates in either its own business or in the markets in which it
participates, due in part to recent global economic events.

Growth rates of enterprises engaged in the manufacture and provision of
telecommunications equipment and services will likely be affected by the
current trend of consolidation among such enterprises. In the shorter term,
the Company believes that such consolidation is being reflected in delays in
orders for the Company's products as consolidating companies integrate or
coordinate their purchasing practices. In addition, particularly in the near
term, recent capital market volatility and reduced financing availability may
affect growth rates for certain customers, particularly those that may be
highly leveraged with significant capital requirements, as well as growth of
the economy in general. Any resulting slowdown in such growth could result in
delays or reductions of orders for the Company's products, and accordingly
affect the Company's own growth.

Industrial Computing and Communications Trends. Itronix, as a manufacturer
of ruggedized portable computing and communications hardware, generally has
lower margins than the Company's other businesses. As a result, profitability
of the Company's industrial computing and communications business is lower
than the average profitability of the Company's other businesses. Itronix is
also currently facing significant manufacturing and marketing challenges,
including competition from "semi-rugged" portable computers that constrains
pricing of premium ruggedized products like Itronix's. The Company has taken
several steps designed to improve the operating performance of Itronix,
including programs designed to reduce costs and streamline manufacturing, as
well as a change in Itronix senior management. On October 28, 1998, the
Company announced that Itronix had recently received orders totaling more than
$13 million from a leading communications service company. As a result, the
Company anticipates improvements in Itronix's performance in fiscal 1999.
Results of operations for Itronix are expected to continue to vary widely
because of the relatively small number of potential customers with large
field-service work forces and the irregularity of the timing and size of such
customers' orders. Growth at ICS in the near term is expected to lag behind
historical growth rates.

RESULTS OF OPERATIONS

Three Months Ended September 30, 1998 as compared to Three Months Ended
September 30, 1997.

Sales. Consolidated sales increased $7.7 million or 6.7% to $123.6 million
for the three months ended September 30, 1998 as compared to $115.9 million
for the same period a year ago.

Sales of communications test products increased $4.5 million to $62.1
million or 7.7% for the three months ended September 30, 1998 as compared to
$57.6 million for the same period last year due to increased volume due to the
timing of customer demand.

Sales for industrial computing and communication products increased $0.3
million to $39.2 million or 0.9% for the three months ended September 30, 1998
as compared to $38.8 million from the same period last year. Sales were higher
for the Company's rack-mounted computers, which were offset by fewer shipments
of its ruggedized laptops. The decrease in shipments of ruggedized laptops was
due to the initially high shipping volume of the Company's Pentium-based
laptop when it was introduced during the second quarter of last year. High
shipping volumes at that time were due to the orders for these laptops already
in backlog at the end of the first quarter of last year because of a delayed
introduction of the product.

Sales of visual communications products increased $2.9 million to $22.4
million or 15.2% for the three months ended September 30, 1998 as compared to
$19.4 million from the same period last year. The increase was primarily
attributable to the continued demand for the Company's real-time flight
information passenger video displays. In addition, the Company also incurred
additional sales from Pacific which were slightly offset by the reduction in
sales from the divestiture of ComCoTec.

14
<PAGE>

Gross Profit. Consolidated gross profit increased $5.9 million to $70.9
million or 57.4% of consolidated sales for the three months ended September
30, 1998 as compared to $65.0 million or 56.1% of consolidated sales for the
same period a year ago. The percentage increase was attributable to a
favorable product mix, with selling prices and costs of sales across the
Company's product lines generally at levels similar to those during the same
period last year.

Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; amortization of intangibles; and amortization of unearned
compensation. Total operating expenses were $51.6 million or 41.7% of
consolidated sales as compared to $48.1 million or 41.5% of consolidated sales
for the same period last year.

Selling, general and administrative expense was $36.0 million or 29.1% of
consolidated sales for the three months ended September 30, 1998, compared to
$33.3 million or 28.7% of consolidated sales for the same period a year ago.
The increase in percentage was primarily attributable to increased selling and
marketing expense due to an increase in compensation expense.

Product development expense was $13.6 million or 11.0% of consolidated sales
for the three months ended September 30, 1998 as compared to $13.4 million or
11.6% of consolidated sales for the same period last year.

Amortization of intangibles was $1.6 million or 1.3% of consolidated sales
for the three months ended September 30, 1998 as compared to $1.4 million or
1.2% of consolidated sales for the same period last year. The increase was
primarily attributable to increased goodwill amortization related to the
acquisition of Pacific in June 1998.

Amortization of unearned compensation of $0.4 million relates to the
amortization of the $9.7 million recorded within shareholders' equity related
to the 14.3 million options that were issued in July, 1998 at a grant price
lower than fair market value.

Operating income. Operating income increased to $19.3 million or 15.6% of
consolidated sales for the three months ended September 30, 1998 as compared
to $16.9 million or 14.6% of consolidated sales for the same period a year
ago. The increase is primarily attributable to the increase in sales.

Interest. Interest expense, net of interest income, was $12.6 million for
the second quarter of fiscal 1999 as compared to net interest income of $0.4
million for the same period last year. The increase in net interest expense
was attributable to the debt incurred in connection with the Merger. Also
included in interest expense is $1.0 million of amortization expense related
to deferred debt issuance costs.

Taxes. The effective tax rate for the second quarter of fiscal 1999 was
45.0%, compared to 40.5% for the same period a year ago. The increase is due
to permanent differences arising as a result of the accounting for the Merger.

Net income. Net income decreased $6.8 million to $3.7 million or $0.03 per
share on a diluted basis for the three months ended September 30, 1998 as
compared to $10.5 million or $0.60 per share on a diluted basis for the same
period a year ago. The decrease was primarily attributable to the additional
interest expense incurred in connection with the Merger. The reduction in
earnings per share is also attributable to a higher number of common shares
outstanding in connection with the Merger.

Six Months Ended September 30, 1998 as compared to Six Months Ended September
30, 1997

Sales. Consolidated sales increased $12.6 million or 5.7% to $232.7 million
for the six months ended September 30, 1998 as compared to $220.2 million for
the same period a year ago.

Sales of communications test products increased $1.2 million to $115.9
million or 1.1% for the six months ended September 30, 1998 as compared to
$114.6 million from the same period last year. The Company received a similar
number of orders from its telecommunications customers during this period as
compared to the same period last year, due in part to the industry
consolidation involving certain of those customers and the resulting delays in
orders as merging companies integrate and coordinate their purchasing
practices.

15
<PAGE>

Sales for industrial computing and communication products increased $5.6
million to $73.1 million or 8.3% for the six months ended September 30, 1998
as compared to $67.5 million from the same period last year. The increase was
attributable to increased sales for both the Company's rack-mounted computers
and ruggedized laptops.

Sales of visual communications products increased $5.7 million to $43.8
million or 15.1% for the six months ended September 30, 1998 as compared to
$38.0 million from the same period last year. The increase was primarily
attributable to sales for the Company's real-time flight information passenger
video displays, which continued to be strong, as well as increased sales from
Pacific. Offsetting this increase were lower sales for video compression and
graphical user-interface (GUI) products as well as a reduction in sales from
the sale of ComCoTec.

Gross Profit. Consolidated gross profit increased $7.2 million to $133.9
million or 57.5% of consolidated sales for the six months ended September 30,
1998 as compared to $126.7 million or 57.6% of consolidated sales for the same
period a year ago, due primarily to an increased volume of shipments of
products.

Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; recapitalization-related costs; amortization of intangibles; and
amortization of unearned compensation. Total operating expenses were $145.1
million or 62.3% of consolidated sales for the six months ended September 30,
1998 as compared to $95.0 million or 43.1% of consolidated sales for the same
period last year. Included in the operating expenses for the six months ended
September 30, 1998 were $43.4 million of expenses related to the
Recapitalization, primarily for the option cancellation payments. Excluding
these Recapitalization-related expenses, operating expenses for the six months
ended September 30, 1998 were $101.7 million or 43.7% of consolidated sales,
with the increase in percentage being primarily attributable to an increase in
commissions and compensation.

Selling, general and administrative expense was $71.2 million or 30.6% of
consolidated sales for the six months ended September 30, 1998, compared to
$65.0 million or 29.5% of consolidated sales for the same period a year ago.
The increase is primarily due to an increase in commissions and compensation
expense.

Product development expense was $27.1 million or 11.6% of consolidated sales
for the six months ended September 30, 1998 as compared to $27.1 million or
12.3% of consolidated sales for the same period last year.

Recapitalization-related costs. In connection with the Merger, the Company
incurred $43.4 million, consisting of $39.9 million (including a $14.6 million
non-cash charge) for the cancellation payments of employee stock options and
compensation expense due to the acceleration of unvested stock options, and
$3.5 million for certain other expenses resulting from the Merger, including
employee termination expense. 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 shareholders' equity.

Amortization of intangibles was $3.1 million or 1.3% of consolidated sales
for the six months ended September 30, 1998 as compared to $2.9 million or
1.3% of consolidated sales for the same period last year. The dollar increase
was primarily attributable to increased goodwill amortization related to the
acquisition of Pacific.

Operating income (loss). Operating income decreased 135.3% to an operating
loss of $11.2 million for the six months ended September 30, 1998 as compared
to operating income of $31.7 million or 14.4% of consolidated sales for the
same period a year ago. The loss is primarily attributable to the
Recapitalization-related costs in connection with the Merger. Excluding these
expenses, the Company generated operating income of $32.2 million or 13.8% of
consolidated sales. The percentage decrease is primarily attributable to
higher operating expenses described above.

16
<PAGE>

Interest. Interest expense, net of interest income, was $17.9 million for
the first six months of fiscal 1999 as compared to net interest income of $0.6
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. Also included in interest expense is $1.0 million of amortization
expense related to deferred debt issuance costs.

Gain on sale of subsidiary. On June 30, 1998 the Company sold the assets of
ComCoTec for $21 million which resulted in a gain of $15.9 million.

Income (loss) before income taxes. The Company incurred a loss before income
taxes of $13.2 million for the six months ended September 30, 1998 as compared
to income before income taxes of $32.8 million or 14.9% of consolidated sales
for the same period last year. The loss is primarily due to an increase in
interest expense and to the one-time Recapitalization-related costs which were
in part offset by the gain on the sale of ComCoTec. Excluding the one-time
charge and gain, income before income taxes for the current period was $14.2
million or 6.1% of consolidated sales. The decrease is primarily due to
additional interest expense offset in part by higher sales.

Taxes. The effective tax rate for the first six months of fiscal 1999 was a
tax benefit of 37.5% compared to a tax expense of 40.5% for the same period a
year ago due to the permanent differences arising as a result of the
accounting for the Recapitalization, and a smaller amount of income (loss)
before income taxes, which magnified the effect of such permanent differences.

Net income (loss). Net income decreased $27.8 million to a net loss of $8.3
million or ($0.09) per share on a diluted basis for the six months ended
September 30, 1998 as compared to net income of $19.5 million or $1.12 per
share on a diluted basis for the same period a year ago. The decrease was
primarily attributable to the additional interest expense and the
Recapitalization-related expenses incurred in connection with the Merger,
offset by the gain on the sale of ComCoTec.

Backlog. Backlog at September 30, 1998 was $89.4 million, an increase of
$10.3 million over the backlog at March 31, 1998.

CAPITAL RESOURCES AND LIQUIDITY

The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments.
In addition, liquidity includes the ability to obtain appropriate debt and
equity financing and to convert into cash those assets that are no longer
required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist
of current or potentially available funds for use in achieving long-range
business objectives and meeting debt service commitments.

The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of working capital and capital expenditures. As of September 30, 1998,
the Company had $551.5 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $254.0 million in
borrowings under the Term Loan Facility and $20.0 million in borrowings under
the new Revolving Credit Facility.

Cash flows. The Company's cash and cash equivalents decreased $26.9 million
during the first six months of fiscal 1999 principally due to the
Recapitalization of the Company and repayment of debt.

Working capital. During the first six months of fiscal 1999, the Company's
working capital increased as its operating assets and liabilities provided a
$6.0 million source of cash, excluding the acquisition of Pacific. Inventory
levels decreased, creating a source of cash of $6.0 million, due primarily to
better inventory management at the Company's industrial computing and
communications operations. Accounts receivable increased, creating a use of
cash of approximately $2.7 million, due to the increase in shipments at the
end of the quarter. Other current assets decreased, creating a source of cash
of $1.7 million mainly due to the recognition

17
<PAGE>

of expenses previously capitalized in connection with the Merger. Accounts
payable decreased, creating a use of cash of $5.0 million as a result of the
timing of the payment of bills. Other current liabilities increased, creating
a source of cash of $5.9 million due to the accrual of expenses related to the
final phase of the Merger.

Investing activities. The Company's investing activities used a total of
$9.1 million during the first six months of fiscal 1999 primarily for the
purchase and replacement of property and equipment and the payment of an
earnout incentive related to the fiscal 1998 operating results 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 cash
purchase price for Pacific. The Company's capital expenditures were $5.8
million compared with $7.8 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 or close to the same level
in fiscal year 1999 as in fiscal year 1998.

Debt and equity. The Company's financing activities used $19.4 million in
cash during the first six months of fiscal 1999, due mainly to the Merger.

Debt Service. 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. During fiscal 1999 the
Company is required to make mandatory principal payments of $8 million of
which $4 million was repaid during the first six months of fiscal 1999. With
respect to the $260 million initially borrowed under the Term Loan Facility
(which is divided into four tranches, each of which has a different term and
repayment schedule), the Company is required to make scheduled principal
payments of the $50 million of tranche A term loan thereunder during its six-
year term, with substantial amortization of the $70 million tranche B term
loan, $70 million 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 % per annum. Total interest expense including the amortization of deferred
debt issuance costs is expected to be approximately $47 million in fiscal
1999.

18
<PAGE>

The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 9.1% per annum for the period commencing May 21, 1998 and ending
September 30, 1998, and is expected to be 8.3% per annum for the period
commencing October 1, 1998 and ending December 31, 1998. However, the Company
has entered into interest rate swaps which will be effective for periods
ranging from two to three years beginning September 30, 1998 to fix the
interest charged on a portion of the total debt outstanding under the Term
Loan Facility. After giving effects to these arrangements, approximately $220
million of the debt outstanding will be subject to an effective average annual
fixed rate of 5.71% plus an applicable margin. See Note N. Interest Rate Swaps
to the notes to condensed consolidated financial statements provided elsewhere
in this report. 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.

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. These restrictions, among other things, preclude
TTC LLC from distributing assets to Dynatech Corporation (which has no
independent operations and no significant assets other than its membership
interest in TTC LLC), except in limited circumstances. 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 Credit Facility (other than the $50 million tranche A term loan)
are governed by negative covenants that 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

Broadly speaking, Year 2000 issues may arise when certain computer programs
use only two digits to refer to a year or to recognize a year. As a result,
computers that are not Year 2000 compliant may read the date 2000 as 1900. The
Company is aware that Year 2000 issues could adversely impact its operations,
and as detailed below, has commenced a process intended to address Year 2000
issues that the Company has been able to identify.

19
<PAGE>

State of Readiness. Management at each of the Company's businesses has
commenced a review of its computer systems and products to assess exposure to
Year 2000 issues. The review process is being conducted by employees with
expertise in information technology ("IT") as well as engineers familiar with
non-IT systems, and focuses on both the Company's internal systems and its
existing and installed base of products. As of September 15, 1998, the Company
had conducted an inventory of almost all of its existing internal systems and
existing products with regard to Year 2000 issues (i.e., an assessment phase).
The Company has not completed its assessment of its installed base of products
for Year 2000 compliance.

As part of its assessment phase, the Company is in the process of
communicating with its significant suppliers and customers to determine the
extent to which the Company is vulnerable to any failure by those third
parties to remediate their own Year 2000 issues. In addition, the Company is
evaluating the extent to which Year 2000 issues may arise as a result of some
combinations of certain of its products with other companies' products. If any
such suppliers to customers or product combinations do not successfully and
timely achieve Year 2000 compliance, the Company's business or operations
could be materially adversely affected.

While the Company's assessment of Year 2000 issues is ongoing, internal
testing and remediation of the Company's internal systems and existing
products for compliance has commenced. Although the Company has used the
services of consultants to a limited extent in connection with its asssessment
of some Year 2000 issues, it has not used independent verification and
validation processes in its testing of its systems and products. The Company
believes that, as of September 15, 1998, it had tested almost all of its
significant internal systems and existing products.

The targeted completion date for the review and remediation process for the
Communications Test business, the Company's largest, is June 1999. Management
does not consider data time fields to be critical to the functionality of the
Company's Communications Test products. Target completion dates range from
June 1998 to June 1999 for the review and remediation process for the
Company's other product categories, which may employ data time fields in areas
that are critical to product functionality.

Costs. The Company's historical and estimated costs of remediation have not
been and are not anticipated to be material to the Company's financial
position or results of operations, and will be funded through operating cash
flows. Total costs associated with remediation of Year 2000 (including
systems, software, and non-IT systems replaced as a result of Year 2000
issues) are currently estimated at approximately $3 million to $4 million, of
which at least $2 million to $3 million remains to be spent. The largest cost
factor to date has consisted of expenditure of management and employee time in
attention to Year 2000 and related issues. Estimated remediation costs are
based on management's best estimates. There can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated, particularly if unanticipated Year 2000 issues arise.

Year 2000 Risks and Related Plans. While the Company expects to make the
necessary modifications of changes to both its internal IT and non-IT systems
and existing product base in a timely fashion, there can be no assurance that
the Company's internal systems and existing or installed base of products will
not be materially adversely affected by the advent of Year 2000. Certain of
the Company's products are used, in conjunction with products of other
companies, in applications that may be critical to the operations of its
customers. Any product non-compliance, whether standing alone or used in
conjunction with the products of other companies, may expose the Company to
claims from its customers or 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.

In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. In an
effort intended to minimize potential disruption to its internal

20
<PAGE>

systems, the Company intends to perform additional hard-disk back-up of its
rudimentary systems and critical information in advance of the Year 2000.

Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could
lose or have trouble accessing or receive inaccurate third party data,
experience internal and external communications difficulties or have
difficulty obtaining components that are Year 2000 compliant from its vendors.
The Company could also experience a slowdown or reduction of sales if
customers such as telecommunications companies or commercial airlines are
adversely affected by Year 2000 issues.

THE EURO CONVERSION

On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") are scheduled to establish fixed
conversion rates between their existing sovereign currencies (the "legacy
currencies") and the euro. The participating countries have agreed to adopt
the euro as their common legal currency on that date. The euro will then trade
on currency exchanges and be available for non-cash transactions.

As of January 1, 1999, the participating countries no longer will control
their own monetary policies by directing independent interest rates for the
legacy currencies. Instead, the authority to direct monetary policy, including
money supply and official interest rates for the euro, will be exercised by
the new European Central Bank.

Following introduction of the euro, the legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the
euro between January 1, 1999 and January 1, 2002 (the "transition period").
During the transition period, public and private parties may pay for goods and
services using either the euro or the participating country's legacy currency.

The impact of the euro is not expected to materially affect the results of
operations of Dynatech. The Company operates primarily in U.S. dollar-
denominated purchase orders and contracts, and the Company neither has a large
customer nor vendor base within the countries participating in the euro
conversion.

NEW PRONOUNCEMENTS

On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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

21
<PAGE>

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. Due to its limited use of derivative instruments,
the Company is assessing the impact of the adoption of SFAS 133 on its results
of operations and its financial position.

RECENT DEVELOPMENT

On October 8, 1998, TTC LLC commenced an offer to exchange, for the Senior
Subordinated Notes, notes that are registered under the Securities Act of 1933
and that have materially identical terms (with minor exceptions relating to
payment of additional interest and registration rights). The exchange offer is
scheduled to expire (unless extended) on November 9, 1998.

22
<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

The Annual Meeting of Stockholders was held on September 25, 1998 in Boston,
Massachusetts. At such meeting, 120,251,396 shares were entitled to vote. The
table below discloses the vote with respect to each proposal:

Proposal I

To set the number of directors at six (subject to enlargement or reduction
by the Board of Directors) and to elect the following Directors to serve until
their successors are duly elected and qualified.

<TABLE>
<CAPTION>
NUMBER OF
SHARES/VOTES
--------------------
FOR WITHHELD
--- --------
<S> <C> <C>
John F. Reno............................................... 112,770,653 45,475
Allan M. Kline............................................. 112,770,653 45,475
John R. Peeler............................................. 112,770,653 45,475
Joseph L. Rice, III........................................ 112,770,653 45,475
Brian D. Finn.............................................. 112,770,653 45,475
Charles P. Pieper.......................................... 112,770,653 45,475
</TABLE>

Proposal II

To approve an amendment to and restatement of the Dynatech Corporation 1994
Stock Option and Incentive Plan as described in the Proxy Statement.

<TABLE>
<S> <C>
FOR 112,566,016
AGAINST 239,600
ABSTAIN 10,512
</TABLE>

23
<PAGE>

Proposal III

To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent auditors for the current fiscal year.

<TABLE>
<S> <C>
FOR 112,811,384
AGAINST 150
ABSTAIN 4,594
</TABLE>

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:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation of Dynatech Corporation.*
3.2 Bylaws of Dynatech Corporation.*
3.3 Certificate of Formation of Telecommunications Techniques Co., LLC, filed with
the Secretary of State of Delaware on May 14, 1998.**
3.4 Limited Liability Company Agreement of Telecommunications Techniques Co., LLC,
dated as of May 14, 1998.**
4.1 Indenture, dated May 21, 1998, among Dynatech Corporation, TTC Merger Co. LLC and
State Street Bank and Trust Company, as Trustee.**
4.2 Form of 9 3/4% Senior Subordinated Note due 2008 (included in Exhibit 4.1).
4.3 First Supplemental Indenture, dated May 21, 1998, between Telecommunications
Techniques Co., LLC and State Street Bank and Trust Company, as Trustee.**
10.1 Agreement and Plan of Merger, dated as of December 20, 1997 by and between CDRD
Merger Corporation and Dynatech Corporation.***
10.2 Agreement and Plan of Merger, dated May 18, 1998, between TTC Reorg Corp. and
Telecommunications Techniques Co., LLC.**
10.3 Agreement and Plan of Merger, dated May 21, 1998, between TTC Merger Co. LLC and
Telecommunications Techniques Co., LLC.**
10.4 Credit Agreement, dated May 21, 1998, among Dynatech Corporation, TTC Merger Co.
LLC, the lenders named therein, Morgan Guaranty and Trust Company of New York, as
administrative agent, Credit Suisse First Boston, as syndication agent, and The
Chase Manhattan Bank, as documentation agent.**
10.5 Guarantee and Collateral Agreement, dated as of May 21, 1998, among Dynatech
Corporation, Telecommunications Techniques Co., LLC and certain of its
subsidiaries and Morgan Guaranty and Trust Company of New York.**
10.6 Indemnification Agreement, dated May 21, 1998, among Dynatech Corporation,
Telecommunications Techniques Co., LLC, Clayton, Dubilier & Rice, Inc. and
Clayton, Dubilier & Rice Fund V Limited Partnership.**
10.7 Consulting Agreement, dated May 21, 1998, by and among Dynatech Corporation,
Telecommunications Techniques Co., LLC and Clayton, Dubilier & Rice, Inc.**
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------------------------------
<S> <C>
10.8 Tax Sharing Agreement, dated May 21, 1998 between Dynatech Corporation and
Telecommunications Techniques Co., LLC.**
10.9 Registration Rights Agreement, dated May 21, 1998, by and among Dynatech
Corporation, Clayton, Dubilier & Rice Fund V Limited Partnership, Mr. Reno, the
Suzanne D. Reno Trust and the John F. Reno Trust.**
10.10 Assignment and Assumption Agreement, dated May 21, 1998, between Dynatech
Corporation and Telecommunications Techniques Co., LLC.**
10.11 Purchase Agreement, dated May 14, 1998, among Dynatech Corporation, TTC Merger
Co. LLC, Credit Suisse First Boston Corporation and J.P. Morgan Securities,
Inc.**
10.12 Purchase Agreement Supplement, dated May 21, 1998, between Dynatech Corporation,
Telecommunications Techniques Co., LLC., Credit Suisse First Boston Corporation
and J.P. Morgan Securities, Inc.**
10.13 Assumption Agreement, dated May 21, 1998, among Dynatech Corporation, TTC Merger
Co. LLC, and Telecommunications Techniques Co., LLC and consented to by Morgan
Guaranty Trust Company of New York, as administrative agent.**
27 Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference to Dynatech Corporation Form 10-K for the fiscal
year ended March 31, 1998 (File No. 001-12657).
** Incorporated by reference to Dynatech Corporation's Registration Statement
on Form S-4 (Registration No. 333-60893).
*** Incorporated by reference to Dynatech's Registration Statement on Form S-4
(File No. 333-44933).

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated May 21, 1998 relating
to the merger by Dynatech Corporation and CDRD Merger Corporation.

25
<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 November 5, 1998 /s/ Allan M. Kline
-------------------------------------
ALLAN M. KLINE
Vice President, Chief Financial
Officer and Treasurer

Date November 5, 1998 /s/ Robert W. Woodbury, JR.
-------------------------------------
ROBERT W. WOODBURY, JR.
Vice President, Corporate
Controller and Principal Accounting
Officer

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 38,023
<SECURITIES> 0
<RECEIVABLES> 74,370
<ALLOWANCES> 1,730
<INVENTORY> 44,609
<CURRENT-ASSETS> 170,569
<PP&E> 69,895
<DEPRECIATION> 44,187
<TOTAL-ASSETS> 306,244
<CURRENT-LIABILITIES> 91,458
<BONDS> 543,257
0
0
<COMMON> 0
<OTHER-SE> (333,256)
<TOTAL-LIABILITY-AND-EQUITY> 306,244
<SALES> 232,744
<TOTAL-REVENUES> 232,744
<CGS> 74,837
<TOTAL-COSTS> 98,819
<OTHER-EXPENSES> 145,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,981
<INCOME-PRETAX> (13,248)
<INCOME-TAX> (4,976)
<INCOME-CONTINUING> (8,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,272)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)

</TABLE>