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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.20 per share
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of class)
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 .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
At June 3, 1998, the aggregate market value of the Common Stock of the
registrant held by non-affiliates was $36,659,844.
At June 3, 1998 there were 120,251,375 shares of Common Stock of the registrant
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Item 1. Business
Incorporated in Massachusetts in 1959, Dynatech Corporation (the
"Company") has its principal offices at 3 New England Executive Park,
Burlington, Massachusetts 01803. As used in this Form 10-K, the "Company"
refers to Dynatech Corporation, or, as the context requires, Dynatech
Corporation and its subsidiaries.
On May 21, 1998 CDRD Merger Corporation ("MergerCo"), a nonsubstantive
transitory merger vehicle, which was organized at the direction of Clayton,
Dubilier & Rice, Inc. ("CDR"), a private investment firm was merged with and
into the Company (the "Merger") with the Company continuing as the surviving
corporation. 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 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 COMPANY
The Company develops, manufactures and sells market-leading test, analysis,
communications and computing equipment in three product categories:
. Communications Test. The Company believes its subsidiary,
Telecommunications Techniques Co. LLC ("TTC"), is the second largest U.S.
provider of communications test instruments (by U.S. sales). TTC provides
products to communications service providers (such as the Regional Bell
Operating Companies ("RBOCs"), long-distance companies and competitive
access providers), service users (such as large corporate and government
network operators), and manufacturers of communications equipment and
systems. TTC's broad test and analysis product line ranges from portable
units (used by field service technicians to test telephone and data
communications lines and services) to centralized test and monitoring
systems installed in telephone company central offices. TTC's
communications test business accounted for 51% of the Company's sales (or
approximately $240.4 million) for the fiscal year ended March 31, 1998.
. Industrial Computing and Communications. The Company addresses two distinct
segments of the North American ruggedized computer market. Industrial
Computer Source ("ICS") is the only significant direct marketer of
computer products and systems designed to withstand excessive temperatures,
dust, moisture and vibration in harsh operating environments such as
production facilities. ICS markets to engineers,
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scientists and production managers through its widely recognized Industrial
Computer Source-Book catalogs. Itronix sells ruggedized portable
communications and computing devices used by field-service workers for
telephone companies, utilities, insurance companies and other organizations
with large field-service workforces. The Company's industrial computing and
communications business accounted for 33% of the Company's sales (or
approximately $155.0 million) for the fiscal year ended March 31, 1998.
. Visual Communications. The Company's visual communications business
consists principally of two market-leading niche-focused subsidiaries: (i)
AIRSHOW is the world leader in passenger cabin video information display
systems and information services for the general and commercial aviation
markets; and (ii) da Vinci is the world leader in digital color enhancement
systems used in the process of transferring film images into electronic
signals--a process commonly used to transfer film images to video for use
in the production of television commercials and programming. The Company's
visual communications business accounted for 16% of the Company's sales (or
approximately $77.5 million) for the fiscal year ended March 31, 1998.
For the fiscal year ended March 31, 1998, the Company generated sales of $472.9
million.
Competitive Strengths
The following characteristics contribute to the Company's competitive position
and outlook.
. Leading Market Positions. The Company's principal businesses occupy the #1
or #2 overall position in their respective principal markets. TTC, which is
the Company's largest subsidiary and operates in a highly fragmented
market, has in recent years held the #1 or #2 position in market segments
accounting for an estimated 70% of its test instrument sales. ICS is the
only significant direct marketer of ruggedized industrial computers and
Itronix is the leading supplier of ruggedized portable notebook computers
to U.S. telecommunications companies. AIRSHOW and da Vinci have the #1
shares in their respective niche markets. The Company's market leadership
is enhanced by its well known brand names, including FIREBERD and T-BERD
test instruments, the Industrial Computer Source-Book catalogs, and the
AIRSHOW map system.
. Double-Digit Market Growth. The Company participates in market segments
that management believes have been growing at least 10% annually in recent
years. Between fiscal 1995 and 1998, the Company increased sales at a
compound annual growth rate of 25% (15% excluding the impact of
acquisitions), a rate which management believes exceeds the composite sales
growth rate for the market segments the Company addresses. The growth of
the communications test instrument market, the Company's largest, is driven
in part by the growth of telecommunications equipment and services.
. High-Margin, Cash-Generative Business. The Company's gross profit margin
was 56.5% for the fiscal year ended March 31, 1998. Management believes
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the Company's strong profitability is attributable to its leading market
positions, its extensive sales and distribution networks, its entrenched
customer relationships and a management culture emphasizing product quality
and customer service and support, rather than price-based competition. The
Company's strong profitability, combined with relatively low capital
expenditure requirements (averaging 3% of sales since 1995), provides cash
flow to fund the Company's growth strategy and has facilitated a cumulative
investment of approximately $165 million in product development from the
beginning of fiscal 1995 through fiscal 1998.
. High Installed Base of Products. As leaders in each of their respective
served markets, the Company's principal businesses enjoy high installed
product bases, which the Company believes generally provide a competitive
advantage in selling product enhancements, upgrades, replacements and
aftermarket parts and service. For example, the Company has sold over
100,000 of its communications test instruments (representing over $1.0
billion in customer investment), the majority of which the Company believes
are currently in service. This installed base also represents a substantial
investment by customers in training on the Company's communications test
products, a familiarity that the Company capitalizes on in selling and
marketing its products and in the development of new products.
. Extensive Sales and Distribution Network with Longstanding Customer
Relationships. Management believes that each of the Company's principal
businesses enjoys one of the most extensive, effective and highly trained
sales and distribution networks in its respective principal markets. The
communications test business, for example, has a 180-person U.S. sales
organization comprising predominantly of engineers and technical
professionals, who undergo rigorous, ongoing education and training. The
Company has been selling to service providers such as AT&T, MCI, Sprint,
GTE and Bell Atlantic (or their predecessors) since prior to the early
1980s. The Industrial Computer Source-Book (over six million copies
distributed in fiscal 1998) is the most widely recognized catalog of
ruggedized industrial computer systems by scientists and engineers. These
purchasers rely upon ICS's sales staff, comprising predominantly of
electrical engineers, to solve compatibility and functionality issues in
configuring the systems.
. Experienced Management Team with Substantial Equity Ownership. Led by CEO
John F. Reno, a 23-year Dynatech veteran, the senior management of each of
the Company's businesses has on average more than 15 years of industry
experience. Approximately 350 senior managers and key employees are
expected to collectively own or have options to acquire approximately 25%
of the Recapitalized Common Stock on a fully diluted basis.
Business Strategy
The Company intends to pursue the following strategies:
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. Leverage Leading Market Positions. The Company believes that its leading
market positions provide it with several competitive advantages in
comparison to smaller market participants, particularly in its
communications test business, and position it to expand its business by (i)
spreading product development costs over a larger sales and unit base, (ii)
leveraging its sales and marketing resources and customer relationships to
sell new and enhanced products through established channels, and (iii)
taking advantage of its high installed base of instruments to generate
incremental sales for product enhancements, upgrades, replacements and
service.
. Address New Market Segments. The Company intends to continue to develop
products to address new market segments in each of its businesses and
thereby expand the size of its total served market. For example, the
Company currently addresses approximately two-thirds of the $2.1 billion
communications test instrument market and is beginning to address segments
within the $1.0 billion communications test and monitoring systems market.
With product line extensions and additions, the Company can expand the size
of its served market while leveraging its extensive sales and distribution
network.
. Pursue Strategic Acquisitions. Since the end of fiscal 1993, the Company
has focused on its higher-growth, more profitable market-leading
businesses, selling 24 non-core businesses for gross proceeds of $190
million and acquiring five complementary businesses. The Company intends to
continue to pursue strategic acquisitions that complement its existing
businesses and further expand its product lines and technological
capabilities. The communications test instrument market is highly
fragmented, which management believes provides significant opportunities
for future strategic acquisitions. With the Company's economies of scale,
well-established sales and marketing channels and customer relationships,
the Company believes it can, through selective acquisitions, improve
profitability while expanding the breadth of its product line and enhancing
its technological expertise.
Increase International Penetration. The Company generated approximately 87%
of sales for the fiscal year ended March 31, 1998 in North America,
primarily in the United States, where it has established market-leading
positions in each of its principal businesses. The Company believes there
are significant opportunities to expand its international business. For
example, while the Company generated only 11% of its communications test
sales from markets outside North America during the fiscal year ended March
31, 1998, the $900 million international market represents an estimated 43%
of the global communications test instrument market for the same period and
grew approximately 12% from 1996 to 1997.
Industry Overview
Communications Test
Market Overview. The Company believes that the worldwide market for
communications testing is approximately $3.1 billion, comprising the $2.1
billion communications test instrument market and the $1.0 billion test and
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monitoring systems market. Test instruments are used in the design,
manufacturing, installation and maintenance of communications equipment and
networks while test and monitoring systems automate the process of detecting,
isolating and resolving faults within a communications network. TTC currently
addresses approximately two-thirds of the $2.1 billion test instruments market,
primarily in North America, and is beginning to address segments within the $1.0
billion test and monitoring systems market.
Given the growth of communications networks, the multiplicity of
communications technologies and the broad range of applications at various
points in a network, there are numerous different tests and analyses necessary
for communications service providers and users to install, maintain and
troubleshoot communications networks. As a result, the communications test
instrument market is highly fragmented with many competitors, most of which
address only selected niches within the overall market. The Company estimates
that there are approximately 50 competitors in the communications test
instrument market having sales of over $1 million. A small number of larger
companies compete in many segments of the overall market, including Hewlett-
Packard Company, which the Company believes is the worldwide overall market
leader and which competes in many of the same segments as the Company. Other
significant participants in the overall market include Tektronix, Inc., Wandel &
Goltermann GmbH & Co. and Wavetek Corporation and Network General Corporation.
Industry Trends. Growth in the communications test instrument market is driven
in part by growth in the number of service providers, increased demand for
communications services and the introduction of new communications protocols.
Deregulation and privatization of the worldwide telecommunications industry has
produced increased competition and a proliferation of service providers. To
compete, communications providers must accelerate their network deployment,
maintain and upgrade existing infrastructures, and continue to increase their
quality of service, all while also reducing cost structures. In addition, the
growth of the volume of voice traffic, LAN backbones and interconnections, high-
speed interconnects, Internet access and cellular and other wireless
communications systems have led to the deployment of new high-speed transmission
technologies such as Synchronous Optical Network ("SONET"), Asynchronous
Transfer Mode ("ATM"), frame relay and Integrated Services Digital Network
("ISDN").
The Company believes that these trends have driven overall communications test
instrument industry growth of approximately 10-12% annually in recent years.
Growth rates vary widely across segments of the market and are typically higher
in segments that support the development of high growth communications services
such as ATM, frame relay, SONET and wireless services.
Industrial Computing and Communications
The Company's industrial computing and communications business addresses two
markets: (1) the market for ruggedized rack-mounted computers, which is
characterized by thousands of smaller customers who typically order fewer than
ten units each, and (2) the market for ruggedized portable computers, which is
characterized by a more concentrated group of larger customers that typically
order large quantities of units.
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Ruggedized Rack-Mounted Computers. The Company believes that the global market
for ruggedized industrial computer products currently exceeds $1.0 billion
annually, split roughly evenly between North America and the rest of the world.
The Company estimates that this global market has been growing approximately 10%
annually in recent years, driven by the increased use of computers in harsh
environments. The market consists of sales of (i) modular component products,
which include chassis and CPUs sold separately and integrated by the customer,
and (ii) fully integrated systems, which consist of a considerably broader
product offering that is fully integrated into complete systems prior to sale.
The Company believes that modular component products and fully integrated
systems each account for approximately half of the total global market. ICS
competes primarily in the fully integrated systems segment of the market and
focuses on the direct marketing of its products to engineers and scientists,
purchasing one to ten units through its catalogs, utilizing a proprietary
database developed over many years. In ICS's target market, ICS's principal
competitors include Texas Microsystems Inc., the I-Bus Division of Maxwell
Technologies, Inc., American Advantech Corp. and Diversified Technology, Inc.
Other significant competitors in the overall market include IBM and Siemens AG.
Ruggedized Portable Computers. The market for ruggedized portable computers
consists of customers with large mobile workforces in industries such as
telecommunications, utilities, insurance and others that employ service and
maintenance technicians for a variety of products. The Company estimates that
the global market for ruggedized portable notebook computers, Itronix's
principal market, currently exceeds $400 million. In this market, because of the
relatively small number of customers with large field-service work forces, the
timing and size of whose orders are irregular, growth rates vary widely.
Ruggedized portable computers provide field workers with the ability to install,
diagnose and maintain company and customer equipment and collect critical
information from remote locations. The critical feature of ruggedized portable
computers is the ability to operate reliably in adverse environments and work
conditions while withstanding mechanical shock, vibration, moisture and extreme
temperatures. Itronix is the market leader in sales to U.S. telecommunications
service providers, whose large field service personnel require portable
computers to collect data from various remote locations. Itronix's competitors
in the fully-ruggedized portable notebook computer market include Panasonic
Industrial Co. (which the Company believes is the worldwide market leader) and a
number of smaller competitors, as well as competition from manufacturers of
competing mass-market "semi-rugged" mobile computers, which constrains the
pricing of premium portable ruggedized products like Itronix's. Producers of
ruggedized portable computers also face indirect competition from off-the-shelf
portable computers and single-purpose diagnostic and data collection
instruments.
Visual Communications
AIRSHOW. AIRSHOW addresses a segment of the overall market for information and
entertainment systems used by passengers of commercial and general aviation
aircraft. The market is driven by growth in aircraft production and demand by
aircraft passengers to receive real-time video or data information while the
aircraft is in the air. Management projects estimated growth in new general
aviation aircraft production of 20% in 1998. AIRSHOW has a leadership
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position in a market niche for passenger cabin video information systems for the
general aviation and commercial airline markets. See "--Products and Services."
da Vinci. da Vinci produces digital color correction systems, which are a
component of telecine systems used by video post production and commercial
production facilities to enhance and color match images as they are transferred
from film to video tape for editing and distribution. The principal application
of da Vinci's color correction system is to conform and enhance color in the
film editing process and to provide color to black and white films and video
images. da Vinci products occupy the leadership position in this small niche
market, growth in which is driven primarily by the introduction of new video
technologies and standards within the film and video production industry.
Products and Services
Communications Test
Overview. TTC provides a wide range of test and analysis products, service and
support that enable customers worldwide to develop, manufacture, install and
maintain communications networks and equipment. TTC's products include a broad
portfolio of test instruments, test systems, software and professional services
that address multiple technologies and applications at various locations in
communications networks.
TTC's test instrument products address two key categories of applications in
communications networks: (i) transmission testing between service providers'
central offices ("digital transport") and between a service provider's central
office and its customers (the "local loop"), and (ii) network services testing
by both service providers and users of a broad range of technologies and
services delivered principally to business customers. In addition, TTC is
expanding its product offerings for the communications test and monitoring
systems market.
Transmission Testing. TTC produces a wide range of products that test and
monitor the physical transmission of voice and data signals across a service
provider's network of transmission circuits, cables, connectors and related
network components in the central office and local loop. Domestic and
international service providers use TTC's transport test products to install and
maintain high-speed transmission circuits. Service providers have employed such
circuits as inter-office links to connect voice and data transmission between
long-distance carriers, local exchange carriers and wireless carriers. More
recently, transmission circuits employing newer technologies, such as ISDN,
SONET and ATM, have been proliferating as more analog networks are being
upgraded as customers demand improvements to facilitate high-speed data
transmission. TTC's products cover most widely accepted existing and emerging
technologies in its markets, with average selling prices ranging from $5,000 for
a handheld unit to $45,000 for a fully-featured portable instrument to $70,000
for a test system.
Service providers use TTC's local loop test products to install and maintain
voice telephone services, ISDN, digital data system ("DDS"), T1 lines, and fiber
optic facilities between the service providers' local
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central offices and the customers' premises. For example, technicians use
products such as the T-BERD 209OSP, a ruggedized field service test set, to
perform fault location and data quality testing of voice or data circuits in the
local loop. With the increased competition among service providers and the
attendant workforce downsizing of incumbent local service providers such as the
RBOCs, TTC designs its local loop test products to assist such customers in
improving service quality and productivity while reducing costs.
Network Services Testing. TTC's network services products test communications
technologies and services employed primarily by businesses, including their
physical transmission facilities, voice services, and data services such as ATM,
frame relay and ISDN. TTC's FIREBERD data communications analyzers, for example,
measure performance of a wide range of network transmission equipment utilized
on a business customer's premises and have a modular construction to facilitate
simple upgrades as new technologies and services are employed. TTC's FIREBERD
500 Internetwork Analyzer monitors and tests network traffic between a LAN and
WAN and can analyze numerous communications protocols. In addition, TTC
manufactures portable, hand-held test instruments that enable service
technicians to install or repair networks.
Communications Test and Monitoring Systems. TTC historically has focused on
the communications test instrument market, which continues to account for the
predominance of TTC's sales. However, TTC has been developing products to
address the $1.0 billion communications test and monitoring systems market. For
example, the CENTEST 650 was developed to automate the monitoring and testing of
DS0, DS1 and DS3 signals so that service providers can identify network trouble
spots quickly and direct mobile repair crews more efficiently from a central
location. In addition, TTC is devoting significant resources to develop
additional products for the communications test and monitoring systems market.
TTC's sales were $172.0 million in fiscal 1996, $211.3 million in fiscal 1997
and $240.4 million in fiscal 1998, representing an 18.2% compound annual growth
rate.
Industrial Computing and Communications
Overview. The Company's industrial computing and communications business
consists of two subsidiaries addressing different segments of the ruggedized
computer market: (1) ICS, primarily a direct marketer of rack-mounted computer
products and systems used by engineers, scientists and others in industrial or
otherwise harsh operating environments, and (2) Itronix, acquired by the Company
in December 1996, which produces mobile computing and communications devices
used by companies with field service organizations such as telephone companies
and utilities. ICS generally sells to thousands of small accounts, which
typically order fewer than ten units, whereas Itronix sells to a more
concentrated group of large organizations that typically order large quantities
of units.
Industrial Computer Source. ICS employs a direct marketing strategy with its
widely recognized Industrial Computer Source-Book catalogs, proprietary target
customer database and highly trained sales force of electrical
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engineers to sell a broad range of integrated industrial computers, input/output
devices, and communication and accessory products. ICS primarily sells fully
customized integrated systems that its sales force configures to address a
customer's particular computing needs. ICS is geared to serving a large number
of customers which typically order fewer than ten units per order. Over the past
three years, ICS has sold to over 12,000 customers with an average order size of
approximately $3,000. ICS mailed over six million catalogs in fiscal 1998 to a
proprietary and growing list of over 250,000 scientists, engineers and
production managers.
ICS offers rack-mounted personal computers for use in environments other than
homes and offices, including a wide range of commercial and communications
applications. Products include ruggedized computers and remote terminals
designed for operation in adverse environments (exposure to vibration, noise,
temperature fluctuations and extremes, dust, moisture, electromagnetic fields
and other hazards). ICS designs, configures and assembles its products but
generally sources components from third-party vendors and contract
manufacturers. ICS also uses its in-house CPU design capabilities to sell
customized modular products and subsystems to systems integrators.
Itronix. Itronix is the leading supplier of portable, networked notebook
computing and communications devices used by field-service technicians in the
U.S. telecommunications industry. These products are carried by field-service
technicians who use them in a broad range of environments to communicate--either
through wireline or wireless connections--to a central office. Customers use
Itronix's mobile computing products to automate dispatching, work management and
field reporting processes.
Itronix also targets utilities, insurance companies, and other organizations
seeking to increase the efficiency of their field-service personnel. Service
technicians often make multiple service calls to different locations without
returning to a base office. The use of networked computing devices allows for
more effective dispatching to service sites and provides two-way communications
with technicians. Itronix's flagship product provides technicians with the
ability to access engineering data and customer service histories, or to collect
and transmit key information regarding their service calls to a central
database.
Itronix currently produces two hardware product lines, the X-C Series of
laptop computers and the T Series of smaller handheld computing devices.
Itronix's flagship product line, the X-C series, is a rugged laptop computer
that features functionality and power that is similar to commodity laptops yet
is designed to withstand harsh environments, including heat, cold, rain and the
shock and vibration found in service vehicles. The X-C is also an integrated
communications device with options for both wired and wireless communications.
Other features include intelligent battery-life management and touch screen
functionality.
Itronix is facing significant manufacturing and marketing challenges.
Management is currently implementing a plan to (1) reduce manufacturing costs by
renegotiating component costs, outsourcing non-core manufacturing activities and
redesigning its products and (2) reposition its premium niche against new market
competition from "semi-rugged" and mass market products.
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Industrial Computing and Communications businesses sales were $142.2 million
in fiscal 1997 on a pro forma basis and $155.0 million in fiscal 1998.
Visual Communications
Overview. The Company's principal visual communications businesses are AIRSHOW
and da Vinci. The Company's total visual communications sales were $63.1 million
in fiscal 1996, $72.8 million in fiscal 1997 and $77.5 million in fiscal 1998,
representing a 10.8% compound annual growth rate.
AIRSHOW. AIRSHOW primarily manufactures passenger cabin video information
display systems for the general and commercial aviation markets, selling its
equipment to airlines, aircraft manufacturers, and aircraft electronic system
(avionics) installation centers. AIRSHOW also provides information services by
collecting data from various information service providers and transmitting
news, weather and financial information as text and graphics to aircraft
equipped with AIRSHOW Network products. AIRSHOW systems are installed on over
3,000 general aviation aircraft and on approximately 100 commercial airlines.
The AIRSHOW moving map system and real-time flight information passenger video
displays are offered across general and commercial aviation markets with
variations in equipment interface for different aircraft and video systems
types. The AIRSHOW Network is an extension of the moving map system and includes
a real-time data communications system. AIRSHOW Network is now offered as an
option by leading corporate aircraft manufacturers such as Bombardier Inc., The
Cessna Aircraft Company, Inc., Dassault Falcon Jet Corp., Gulfstream Aerospace
Corporation and Learjet Inc. AIRSHOW recently introduced its AIRSHOW TV service
which provides for reception of direct broadcast satellite TV aboard general
aviation aircraft which operate within the continental U.S. This service is
being primarily marketed to the general aviation market.
da Vinci. da Vinci produces digital color correction systems, which are a
component of telecine systems used by video post production and commercial
production facilities to enhance and color match images as they are transferred
from film to video tape for editing and distribution. The principal application
of da Vinci's color correction system is to conform and enhance color in the
film editing process and to provide color to black and white films and video
images. da Vinci products occupy the leadership position in this small niche
market, growth in which is driven primarily by the introduction of new video
technologies and standards within the film and video production industry.
Other Subsidiaries. The Company's other visual communications subsidiaries
are: DataViews, which provides tools for software developers; ComCoTec, which
develops software solutions for the pharmacy industry; and Parallax Graphics,
Inc., which the Company plans to close operations over time.
Product Development
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For each of the Company's businesses, the development of new and enhanced
products is a key element of its strategy, designed to further penetrate served
markets, address new markets and reduce costs. From the beginning of fiscal 1996
through fiscal 1998, consolidated product development expense was approximately
$134.7 million, representing an average of 11.9% of sales per year. Consolidated
product development expense was 12.4% of sales ($36.5 million) in fiscal 1996,
11.9% of sales ($43.3 million) in fiscal 1997 and 11.6% of sales ($55.0 million)
in fiscal 1998. The Company anticipates product development spending to continue
at similar levels as a percentage of sales in the future.
From the beginning of fiscal 1996 through fiscal 1998, the Company invested
approximately $89.2 million in the development of communications test products.
In fiscal 1998, the Company introduced a significant number of new test
instrument products including NetAnalyst, a client/server-based software product
that will allow users to centrally test the entire network from the network
operations center, the TPI 550E ISDN test set which provides complete ISDN
testing in a portable instrument, and the T-BERD 950 multi-service test set.
The Company has also made recent Pentium product introductions in its
industrial computing and communications product lines and has significantly
expanded its AIRSHOW product offerings.
The Company uses its customer relationships to focus its product development
strategy on customer needs and emerging technologies.
Customers and Marketing
Overview. The Company markets its products to a diverse customer base. The
Company's products are sold to a broad range of communications service
providers, including RBOCs, long-distance carriers, competitive access
providers, wireless service companies, independent telephone companies, cable
television operations, and a wide array of computer and data communication
users, corporate and industrial customers, and scientific organizations.
Most of the Company's revenues are generated through direct selling. The
Company also uses distributorships and representative relationships to sell its
products in areas of the United States and the rest of the world with relatively
low sales volume.
The Company's sales of goods and services to various agencies of the United
States federal government were approximately $12.8 million, $17.5 million and
$19.3 million in fiscal 1996, 1997 and 1998, respectively. Sales of goods and
services to the agencies of the United States federal government are made
pursuant to standard contracts which generally permit such agencies to cancel or
revise the contracts at will.
No single customer accounted for more than 10% of sales in any of these three
years.
Communications Test. In the U.S., TTC markets and sells its communications
test and analysis products primarily through a 180-person direct sales team
comprising predominantly engineers and technical professionals who undergo
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intensive initial training on TTC's and its competitors' products.
Internationally, TTC employs a 60-person direct sales team for key markets along
with distributors and representatives to market and sell its products. TTC's
principal customers are communications service providers (such as RBOCs, long-
distance companies and competitive access providers), service users such as
large corporate and government network operators, and manufacturers of
communications equipment and systems.
Industrial Computing and Communications. ICS sells its ruggedized industrial
computer products to engineers and scientists primarily through its catalogs and
a telemarketing sales force comprised of highly-trained electrical engineers.
Itronix employs a direct sales force of engineers to market and sell its
ruggedized mobile computer products to organizations with large field service
groups such as telephone and insurance companies and utilities. ICS typically
sells to thousands of customers with no significant customer concentration while
Itronix's sales tend to be more concentrated on fewer large customers.
Visual Communications. The Company's niche visual communications businesses
generally sell into niche markets directly through their own sales forces as
well as through distributors and representatives.
Product Assembly
The Company outsources most of its manufacturing and mechanical parts
fabrication and generally performs its own final assembly and testing of
products.
Competition
The markets in which the Company competes are highly competitive and are
characterized by rapidly changing technology. Principal competitors include
businesses with significant financial, development, marketing, and manufacturing
resources, as well as numerous small, specialized companies. The Company
believes it holds a relatively favorable position with respect to the important
competitive factors in each of its markets. The Company considers rapid product
development, product functionality and features, and highly trained technical
sales and support staff to be key competitive factors.
International
The Company maintains sales subsidiaries or branches for its communications
test business in major countries in Western Europe and Asia and has distribution
agreements in other countries where sales volume does not warrant a direct sales
organization. The Company's foreign sales from continuing operations (including
exports from the United States directly to foreign customers) were approximately
20%, 20%, and 16% of consolidated net sales in fiscal 1996, 1997, and 1998,
respectively.
The Company's international business is subject to risks customarily found in
foreign operations, such as fluctuations in currency exchange rates, import and
export controls, and regulatory policies of foreign governments. A
13
<PAGE>
summary of the Company's sales, earnings and identifiable assets by geographic
area is found in the Company's financial statements.
Discontinued Operations and Divested Businesses
The Company engaged in a business divestiture program beginning in 1994 and
ending in fiscal 1997. Through this program, the Company sold 24 non-core
businesses, which resulted in total proceeds to the Company of approximately
$190 million, including $13.5 million in non-cash proceeds. See "Notes to
Condensed Consolidated Financial Statements."
Backlog
The Company's backlog of orders at March 31, 1997 and 1998 was $71.7 million
and $79.1 million, respectively.
Employees
At March 31, 1998, the Company employed approximately 2,249 people. The
Company's experience has been that employees having requisite skills for the
Company's purposes are generally available in the areas where its facilities are
located, although there are constraints on the Company's ability to fill certain
engineering positions. The Company's employees are not represented by a labor
union, and the Company believes its employee relations are good.
Intellectual Property
The Company relies primarily on trade secrets, trademark laws, confidentiality
procedures and contractual restrictions to establish and protect its proprietary
rights.
The Company generally seeks patent protection for inventions and improvements
to its products which it believes to be patentable. It holds numerous United
States and foreign patents and patent applications covering many products. The
Company does not believe that the expiration of any patent or group of patents
would materially affect its business.
FIREBERD, T-BERD, CENTEST, INTERCEPTOR, XC 6250, INDUSTRIAL COMPUTER SOURCE-
BOOK, DA VINCI SYSTEMS and AIRSHOW are among the registered trademarks which the
Company considers valuable assets.
DYNATECH and design is a registered service mark of the Company in the United
States and a registered trade or service mark (issued or applied for) of the
Company in most other major industrialized countries of the world.
The Company is subject to customary risks of infringement of its proprietary
rights. While the Company considers its proprietary rights important, it
believes its technical marketing and manufacturing capabilities are of greater
competitive significance.
Suppliers
Materials and components used in the Company's products are normally available
stock items or can be obtained to Company specifications from more
14
<PAGE>
than one potential supplier, with the exception of certain components which are
being sourced from a single supplier. These include certain commercially
available and customized microprocessors and application specific integrated
circuits, power supplies, display devices and certain operating system software.
The Company has not entered into long term contracts for the supply of such
components. Although alternative sources generally exist for these materials, a
significant amount of time could be required before the Company would begin to
receive adequate supplies from such alternative suppliers. The Company also
purchases certain key components from sole source vendors, including a semi-
conductor manufacturer of a component utilized in the Company's communications
test business and a component manufacturer for the Itronix series of ruggedized
laptop computers. There can be no assurance that such components will continue
to be produced or that the price for such components may not significantly
increase. Some components and assemblies are purchased in Asia pursuant to
volume contracts.
Environmental Matters
Federal, state and local laws or regulations which have been enacted or
adopted regulating the discharge of materials into the environment have not had,
and under present conditions, the Company does not foresee that they will have,
a material adverse effect on capital expenditures, earnings, or the competitive
position of the Company.
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.
RISK FACTORS
Control by CDR Fund V
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<PAGE>
CDR Fund V currently controls approximately 92.3% of the outstanding shares of
Recapitalized Common Stock of the Company. As a result of its stock ownership,
CDR Fund V controls the Company and has the power to elect the directors of the
Company, appoint new management, and approve any action requiring approval by
the stockholders of the Company, including adopting certain amendments to the
Articles of Organization of the Company and approving any merger or sale of all
or substantially all the assets of the Company. The directors so elected have
the authority to effect decisions affecting the capital structure of the
Company, including the incurrence of additional indebtedness, the issuance of
preferred stock and the declaration of dividends. There can be no assurance that
the policies of the Company in effect prior to the Merger with respect to such
matters or other matters will continue after the Merger. Moreover, concentration
of ownership by CDR Fund V of Recapitalized Common Stock of the Company will
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from seeking to acquire, control of the Company. A
third party would be required to negotiate any such transaction with CDR Fund V.
There can be no assurance that the interests of CDR Fund V will not conflict
with the interests of stockholders with respect to any such transaction or
otherwise. CDR Fund V has agreed, pursuant to certain employment agreements with
Messrs. Reno, Kline and Peeler, to elect them to serve as directors of the
Company so long as they are employed by the Company.
Lack of Trading Market
Shares of Recapitalized Common Stock trade only in the over-the-counter
market. Although prices in respect of trades may be published by the National
Association of Securities Dealers, Inc. on its electronic bulletin board and
"pink sheets," quotes for such shares may not be readily available; accordingly,
it is anticipated that the Recapitalized Common Stock will trade much less
frequently than the Common Stock traded prior to the Merger, which may have a
material adverse effect on the market value of Recapitalized Common Stock. In
addition, (depending upon certain factors) the shares of Recapitalized Common
Stock may no longer constitute "margin securities" for the purposes of the
margin regulations of the Federal Reserve Board and therefore could no longer be
used as collateral for loans made by brokers.
Termination of Exchange Act Reporting
The Company is obligated by the Agreement and Plan of Merger (the "Merger
Agreement") dated as of December 20, 1997 between MergerCo and the Company, to
continue to be a reporting company under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act") and to continue to file periodic reports
(including annual and quarterly reports) for at least five years after the
Merger, unless fewer than 100 record holders of shares of Recapitalized Common
Stock are non-affiliates of the Company or except as otherwise provided in the
Merger Agreement. After the fifth anniversary of the effective time of the
Merger, the Company may deregister the Recapitalized Common Stock under the
Exchange Act if permitted by applicable law. If the Company were to cease to be
a reporting company under the Exchange Act and to the extent not required in
connection with any other debt or equity securities of the Company registered or
required to be registered under the Exchange Act, the information now available
to stockholders of the Company in the annual, quarterly and other reports
required to be filed by
16
<PAGE>
the Company with the Securities and Exchange Commission would not be available
to them as a matter of right.
Substantial Leverage; Liquidity
The Company incurred substantial indebtedness in connection with the Merger
and has thereby become highly leveraged, with indebtedness that is very
substantial in relation to its shareholders' equity. The Company did not have
substantial indebtedness prior to the Merger (approximately $233,000 at March
31, 1998). At May 31, 1998 the Company had a total of $575.2 million of debt,
which consisted primarily of $275 million through the sale of the Company's
9 3/4% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"),
$260 million from term loan borrowings under the Company's term loan facility
(the "Term Loan Facility"), and $40 million from borrowings under the
Company's $110 million revolving credit facility (the "Revolving Credit
Facility") (collectively, the "Senior Secured Credit Facilities"). The Term Loan
Facility and Revolving Credit Facilities are governed by a senior secured credit
agreement (the "Senior Secured Credit Agreement"). The Senior Secured Credit
Agreement and the indenture governing the Senior Subordinated Notes permit the
Company to incur or guarantee certain additional indebtedness, subject to
certain limitations. The Company will be required to repay the $260 million in
term loans under the Senior Secured Credit Facilities over the nine year period
following the effective time of the Merger. In addition, the Company will be
required to prepay Senior Secured Credit Facilities borrowings using the
proceeds from certain asset sales, certain casualty insurance, condemnation or
similar recoveries by the Company and certain indebtedness by the Company other
than as permitted under the Senior Secured Credit Agreement, as well as 50% of
its excess cash flow (as defined in the Senior Secured Credit Agreement) unless
a leverage ratio test is met. All outstanding revolving credit borrowings under
the Senior Secured Credit Agreement will become due on the sixth anniversary of
the effective time of the Merger. Because of its working capital needs, the
Company expects that it will be required at that time to enter into new
revolving credit facility arrangements. No assurance can be given that any
extension, renewal, replacement or refinancing of the Company's Revolving Credit
Facility can be successfully accomplished or accomplished on acceptable terms.
The Company's high leverage may have important consequences for the Company,
including but not limited to the following: (a) the Company's ability to obtain
additional financing for future acquisitions (if any), working capital, capital
expenditures or other purposes may be impaired or any such financing may not be
on terms favorable to the Company; (b) a substantial amount of the Company's
operating cash flow will be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing funds that would otherwise be available
for the Company's operations and other purposes, including investments in new
products, research and development, capital spending and acquisitions; (c) a
substantial decrease in net operating cash flows or increase in expenses could
make it difficult for the Company to meet its debt service requirements or force
it to modify its operations or sell assets; and (d) the Company's highly
leveraged capital structure may place it at a competitive disadvantage, hinder
its ability to adjust rapidly to market conditions or make it vulnerable to a
downturn
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<PAGE>
in its business or the economy generally or changing market conditions
and regulations.
The Company's ability to repay or to refinance its obligations with respect to
its indebtedness will depend on its future financial and operating performance,
which, in turn, will be subject to prevailing economic and competitive
conditions and to certain financial, business, legislative, regulatory,
industry, economic and other factors, many of which are beyond the Company's
control. These factors could include general economic conditions, operating
difficulties, increased operating costs, product pricing pressures, potential
revenue instability arising from cost savings initiatives or otherwise, labor
relations, the response of competitors or customers to the Company's business
strategy or projects, delays in implementation of the Company's business
strategy, telecommunication provider consolidation or strategy changes, and the
relative success of new product introductions. The Company's ability to meet its
debt service and other obligations may depend in significant part on the extent
to which the Company can implement successfully its business and growth
strategy. There can be no assurance that the Company will be able to implement
its strategy fully or that the anticipated results of its strategy will be
realized.
If the Company's cash flow and capital resources are insufficient to fund its
debt service obligations, the Company may be forced to reduce or delay capital
or other expenditures, sell assets, seek to obtain additional equity capital or
refinance or restructure its debt. There can be no assurance that the Company's
cash flow and capital resources will be sufficient for payment of principal of,
premium, if any, and interest on, its indebtedness in the future, or that any
such alternative measures would be successful or would permit the Company to
meet its scheduled debt service obligations. In addition, because the Company's
obligations under the Senior Secured Credit Facilities will bear interest at
floating rates, an increase in interest rates could materially adversely affect,
among other things, the Company's ability to meet its debt service obligations.
Dependence on Communications Industry
The Company's principal customers are RBOCs, competitive access providers,
wireless service providers, competitive local exchange carriers, other
communications service providers, mobile work forces and industrial engineers
and other users of the Company's communications devices and ruggedized
computers. The industries of the Company's principal customers are characterized
by intense competition and consolidation. Fewer customers as a result of such
consolidation could lead to pressure on the Company to lower prices. Competitive
pressures among the Company's customers or other communications industry
developments could lead to discontinuance or modifications of products
manufactured by the Company and could have a material adverse effect on the
Company's business, financial condition and results of operations. Regulation in
the communications industry could materially adversely affect the Company's
customers or otherwise materially limit or restrict the Company's business.
Further, these industries are evolving rapidly and it is difficult to predict
their potential size or future growth rate. There can be no assurance that the
deregulation trend in the telecommunications market that has resulted in
increased competition and
<PAGE>
escalating demand for technologies and services will continue in a manner
favorable to the Company or its business strategies.
Highly Competitive Markets
The markets for the Company's products and services are highly competitive.
The Company competes directly or indirectly with Hewlett-Packard Company and
Panasonic Industrial Co., among others. Due to the rapidly evolving markets in
which the Company competes, additional competitors with significant market
presence and financial resources, including large telecommunications equipment
manufacturers and computer hardware and software companies, may enter those
markets, thereby further intensifying competition. Increased competition could
result in price reductions and loss of market share which would materially
adversely affect the Company's business, financial condition and results of
operations. Certain of the Company's current and potential competitors have
greater name recognition and greater financial, selling and marketing,
technical, manufacturing and other resources than the Company. Although the
Company believes it has certain technological and other advantages over its
competitors, realizing and maintaining such advantages will require a continued
high level of investment by the Company in research and product development,
marketing and customer service and support. The highly leveraged nature of the
Company could limit the Company's ability to continue to make such investments
or other necessary or desirable capital expenditures, to compete effectively and
respond to market conditions. There can be no assurance that the Company will be
able to compete effectively with its existing competitors or with new
competitors, or that such competitors will not succeed in adapting more rapidly
and effectively to changes in technology or in the market or in developing or
marketing products that will be more widely accepted.
Rapid Technological Change; Challenges of New Product Introductions
The market for the Company's products and services is characterized by rapidly
changing technology, new and evolving industry standards and protocols and new
product and service introductions and enhancements that may render existing
offerings obsolete or unmarketable. Automation in the Company's addressed
markets for communications test instruments or a shift in customer emphasis from
communications test instruments to test and monitoring systems could likewise
render the Company's existing offerings obsolete or unmarketable or reduce the
size of the Company's addressed market. In particular, incorporation of self-
testing functions in the equipment currently addressed by the Company's
communications test instruments could render the Company's offerings redundant
and unmarketable. Failure to anticipate or respond rapidly to advances in
technology and to adapt the Company's products appropriately could have a
material adverse effect on the success of the Company's products and thus on the
Company's business, financial condition and results of operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends and the expenditure of substantial development costs. From the
beginning of fiscal 1996 through fiscal 1998, the Company has expended on
average 11.9% of its sales (or approximately $134.7 million) on product
development and, although the Company expects to continue product development
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<PAGE>
spending at similar levels, there can be no assurance that the Company will have
sufficient free cash flow to do so. There can be no assurance that errors will
not be found in new products or upgrades after commencement of commercial
shipments, resulting in delays in or loss of market acceptance and sales,
diversion of development resources, injury to the Company's reputation,
increased service and warranty costs or payment of compensatory or other
damages, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Product Certification and Evolving Industry Standards
Several of the Company's products must meet significant communications
regulations, certifications, standards and protocols, some of which are evolving
as new technologies are deployed. These regulations, certifications, and
standards and protocols include those promulgated by the Federal Communications
Commission, established by Underwriters Laboratories and imposed by various
foreign countries. Compliance with such regulations, certifications, standards
and protocols may prove costly and time-consuming for the Company, presenting
barriers to entry in particular markets or reducing the profitability of the
Company's product offerings. Such regulations, certifications, standards and
protocols may also adversely affect the communications industry, limit the
number of potential customers for the Company's products and services or
otherwise have a material adverse effect on the Company's business. The failure
of the Company's products to comply, or delays in compliance, with the various
existing and evolving industry regulations, standards and protocols could delay
the introduction of the Company's products or cause the Company's existing
products to become obsolete.
Dependence on Sole Source Suppliers and Licensors
The Company purchases certain key components and licenses technology from sole
source vendors, including a semiconductor manufacturer of a component utilized
in the Company's communications test business and a component manufacturer for
the Itronix series of ruggedized laptop computers. There can be no assurance
that such components will continue to be produced or that such licensed
technology will continue to be made available or that the price for such
components and licensed technology may not significantly increase. The inability
to develop alternative sources for these components and licensed technology or
to obtain sufficient quantities of these components could result in increased
costs and delays or reductions in product shipments which could materially
adversely affect the Company's business, financial condition and results of
operations. In the event of a reduction or interruption of supply, a significant
amount of time could be required before the Company would begin receiving
adequate supplies from such alternative suppliers. In such event, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the manufacture of certain of these sole source
components is technologically complex, and the Company's reliance on the
suppliers of these components exposes the Company to potential production
difficulties and quality variations, which could negatively impact cost and
timely delivery of the Company's products. If supply of certain components,
including but not limited to application-specific integrated circuits, power
supplies, display devices and operating system software, should cease, the
Company may be
20
<PAGE>
required to redesign certain of its products. No assurance can be given that
supply problems will not occur or, if such problems do occur, that satisfactory
solutions would be available.
Risks Relating to Business and Growth Strategy, Including Acquisitions
The Company's future performance depends in part on the Company's success in
implementing its business and growth strategy. The components of the Company's
strategy are subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to fully
implement its strategy or that the anticipated results of its strategy will be
realized.
The Company's strategy contemplates, among other things, growth through
acquisitions of complementary businesses and entry into new markets. Management
cannot predict the availability of appropriate acquisition candidates or the
likelihood of an acquisition being completed should any negotiations commence.
The Company could have difficulty obtaining financing to pursue acquisitions due
to its substantial debt and to the restrictive covenants in its debt
instruments, among other things. If the Company does complete any acquisitions,
the Company could have difficulties integrating acquired technology and
operations, or retaining and integrating key employees of acquired companies.
Integrating any acquired business could also divert management attention from
ongoing business concerns. In addition, the Company's future growth, whether by
acquisition or otherwise, depends in part upon its ability to enter markets in
which the Company may have limited experience, including international markets.
In conducting business in foreign jurisdictions, the Company may encounter
difficulties with, among other things, tariffs and other trade or regulatory
barriers, currency controls, hyperinflation, intellectual property protection,
potential adverse tax consequences, longer payment cycles, greater difficulty or
delay in accounts receivable collection, cultural differences and increased
political and economic instability.
The Company's planned growth, if achieved, may place significant demands on
its management, administrative and operational resources. The Company's ability
to manage growth effectively will require the Company to continue to develop and
improve its operational, financial and other internal systems, as well as its
sales capabilities, and attract, manage and retain its employees. There can be
no assurance that the Company will effectively manage any strategic growth it
may achieve.
Risks Relating to Itronix
Itronix is currently facing significant manufacturing and marketing
challenges, including competition from "semi-rugged" products that constrains
pricing of premium, ruggedized products like those manufactured by Itronix. In
addition, Itronix's results of operations have varied significantly in the past
and may vary significantly in the future, on a quarterly and annual basis, as a
result of a variety of factors, many of which are outside the Company's control.
These factors include, without limitation: (i) the timing and size of orders
which are received and can be shipped in any particular period; (ii) the
seasonality of the placement of customer orders; (iii)
21
<PAGE>
customer order deferrals in anticipation of product enhancements or new product
offerings by Itronix or its competitors; (iv) customer cancellation of orders
and the gain or loss of significant customers, including those due to industry
combinations and (v) the relative unpredictability of timing of customer orders
due to the relative concentration of organizations with large field-service work
forces. Moreover, any downturn in general economic conditions could precipitate
significant reductions in corporate spending for telecommunications equipment,
which could result in delays or cancellations of orders for Itronix's products.
Itronix's expense levels are relatively fixed and are based, in significant
part, on expectations of future revenues. Currently, costs are much higher as a
percentage of revenues for Itronix than for the Company overall, and Itronix is
not contributing to the Company's profitability. As a result of its
unpredictable revenues, costs at times can be disproportionately high as a
percentage of Itronix's business. If, as a result of these factors, Itronix's
costs exceed its revenues, Itronix's stand-alone financial condition and results
of operations would be materially adversely affected.
Reliance on Key Personnel
The Company's success depends in large part upon its senior management, as
well as its ability to attract and retain its highly-skilled technical,
managerial, sales and marketing personnel, particularly engineers skilled and
experienced with communications equipment. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
retaining its existing key personnel and in attracting and retaining the
personnel it requires. Failure to attract and retain key personnel will have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, continued labor market shortages of
technical personnel may require wage increases well in excess of the growth in
the Company's sales and margins, thereby reducing the overall profitability of
the Company.
Restrictive Financing Covenants
The Senior Secured Credit Agreement and the indenture governing the Senior
Subordinated Notes contain a number of covenants that significantly restrict the
operations of the Company, limiting the discretion of the Company's management
with respect to certain business matters. These covenants, among other things,
restrict the ability of the Company to incur additional indebtedness or
guarantee obligations, pay dividends and other distributions, prepay or modify
the terms of other indebtedness, create liens, make capital expenditures, make
certain investments or acquisitions, enter into mergers or consolidations, make
sales of assets, engage in certain transactions with affiliates and otherwise
restrict corporate activities. Certain term loans under the Senior Secured
Credit Agreement are subject to negative covenants similar to those contained in
the indenture. In addition, under the Senior Secured Credit Agreement, the
Company is required to satisfy a minimum interest expense coverage ratio and a
maximum leverage ratio. These financial tests become more restrictive in future
years.
The Company's ability to comply with the covenants and restrictions contained
in the Senior Secured Credit Agreement and the indenture governing the Senior
Subordinated Notes may be affected by events beyond its control,
22
<PAGE>
including prevailing economic, financial and industry conditions, and there can
be no assurance that the Company will be able to comply with such covenants or
restrictions in the future. A breach of the covenants and restrictions contained
in the Senior Secured Credit Agreement or the indenture governing the Senior
Subordinated Notes or in any agreements with respect to any additional financing
would result in an event of default under such agreements, which would permit
acceleration of the related debt and acceleration of debt under other debt
agreements that may contain cross-acceleration or cross-default provisions, as
well as termination of the commitments of the lenders to make further extensions
of credit under the Senior Secured Credit Agreement. In addition, if the Company
were unable to repay its indebtedness to the lenders under the Senior Secured
Credit Agreement, such lenders could proceed against the collateral securing
such indebtedness, including substantially all of the Company's assets.
Year 2000 Compliance
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
ensure 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.
Item 2. Properties.
The Company's policy is generally to lease real property for its manufacturing
and sales operations. Principal operating facilities for continuing operations
are as follows:
Square Lease
Location ------ -----
- -------- Feet Termination
---- -----------
Burlington, Massachusetts 14,600 1999
Ft. Lauderdale, Florida 16,300 2001
Germantown, Maryland 30,000 2006
Germantown, Maryland 68,400 2001
Germantown, Maryland 30,000 2003
Germantown, Maryland 68,600 2003
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Lombard, Illinois 23,300 1998
Northampton, Massachusetts 22,500 1999
Tustin, California 52,000 2005
Salem, Virginia 35,900 2004
San Diego, California 135,000 2004
Spokane, Washington 66,400 1999
The Company has other leases for continuing operations manufacturing space and
sales offices, but in each case the total leased space is under 15,000 square
feet.
The Company has leased approximately 239,000 square feet of space in various
facilities in discontinued operations at March 31, 1998.
Item 3. Legal Proceedings.
Litigation
The Company is involved from time to time in routine legal matters incidental
to its business. The Company believes that the resolution of such matters will
not have a material adverse effect on the Company's financial condition or
results of operations.
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. Discovery in this matter closed on June 20,
1998. 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 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.
Prior to January 28, 1997, the Common Stock was quoted on the Nasdaq National
Market. From January 28, 1997 to May 21, 1998, the Common Stock was traded on
the New York Stock Exchange. As a result of the Merger on May 21, 1998, trading
in the Common Stock was halted and the Recapitalized Common Stock is traded only
in the over-the-counter market. On
24
<PAGE>
June 3, 1998, the last reported price of the Recapitalized Common Stock was
$3.875.
The following table shows, for the fiscal periods indicated, the high and low
close prices of a share of Common Stock as reported by the New York Stock
Exchange and the Nasdaq National Market, as applicable.
Quarter Ended High Low
------------- -------- --------
March 31, 1998 48.50 46.19
December 31, 1997 47.31 34.00
September 30, 1997 41.94 34.38
June 30, 1997 41.88 29.00
March 31, 1997 54.50 28.00
December 31, 1996 58.00 40.50
September 30, 1996 46.88 30.75
June 30, 1996 35.00 23.00
There were approximately 1,042 stockholders of record as of June 3, 1998.
Since April 1, 1995, the Company has not declared or paid cash dividends on
its Common Stock or Recapitalized Common Stock. The Company intends to retain
earnings for use in the operation and expansion of its business. The terms of
the Company's current term loan prohibits, and the Senior Secured Credit
Agreement and the indenture governing the Senior Subordinated Notes restrict ,
the payment of cash dividends on its Recapitalized Common Stock.
Item 6. Selected Financial Data.
The information requested by this Item is attached as Appendix A.
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations.
The information requested by this Item is attached as Appendix B.
Item 8. Financial Statements and Supplementary Data.
The information requested by this Item is attached as Appendix C.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 10. Directors and Executive Officers of the Registrant.
The names, ages and positions of the current executive officers and the
directors after the Merger (the "New Directors") of the registrant are set forth
below.
25
<PAGE>
Name: Age: Position with the Company:
- -------- ---- --------------------------
John F. Reno 59 Chairman, President, Chief Executive Officer,
Director
Allan M. Kline 53 Corporate Vice President, Chief Financial
Officer, Treasurer, Director
John R. Peeler 43 Corporate Vice President- Communications Test
Business, Director
Samuel W. Tishler 60 Corporate Vice President, Corporate
Development
John A. Mixon 52 Corporate Vice President, Human Resources
Robert W. Woodbury, Jr. 41 Corporate Vice President, Corporate
Controller
Mark V.B. Tremallo 41 Corporate Vice President, General Counsel
Joseph L. Rice, III 66 Director
Brian D. Finn 37 Director
Charles P. Pieper 51 Director
John F. Reno presently serves as Chairman, President and Chief Executive
Officer of the Company and a Director of the Company. Mr. Reno has served as
Chairman, President and Chief Executive Officer since August 1996 and as
President and Chief Executive Officer since January 1993. From July 1991 to
January 1993, Mr. Reno was President and Chief Operating Officer. Prior to July
1991, Mr. Reno served as Executive Vice President and Chief Operating Officer.
Mr. Reno is also a director of Millipore Corporation.
Allan M. Kline presently serves as Corporate Vice President, Chief Financial
Officer, Treasurer and a Director of the Company. Mr. Kline joined the Company
in June 1996. From 1995 to 1996, he served as Senior Vice President, Chief
Financial Officer of CrossComm Corporation, a manufacturer of networking
products. From 1994 to 1995, he was President of TAR Acquisition Corp., a
private investment company. From 1989 to 1994, Mr. Kline was also a Director of
CrossComm Corporation. From 1990 to 1994, Mr. Kline was Senior Vice President,
Chief Financial Officer of Cabot Safety Corporation, a subsidiary of Cabot
Corporation. Prior to that, he served at Leggett & Platt, Incorporated and was a
partner with Arthur Young & Company.
John R. Peeler presently serves as Corporate Vice President--Communications
Test Business and President and Chief Executive Officer of all the Company's
communication test businesses and a Director of the Company. Mr. Peeler has been
employed by the Company since 1980.
Samuel W. Tishler presently serves as Corporate Vice President--Corporate
Development of the Company. Mr. Tishler joined the Company in September 1994.
From 1988 to 1994, he was Vice President of Raytheon Ventures, the venture
capital portfolio of Raytheon Co. From 1977 to 1986, he served as Vice President
of ADL Enterprises, a wholly owned subsidiary of Arthur D. Little, Inc. From
1970 to 1977, Mr. Tishler was President of Harnessed Energies, Inc., a
manufacturer of scientific instrumentation.
<PAGE>
John A. Mixon presently serves as Corporate Vice President--Human Resources of
the Company. Mr. Mixon has been employed by the Company since 1989.
Robert W. Woodbury, Jr. presently serves as Corporate Vice President--
Corporate Controller of the Company. Mr. Woodbury joined the Company in January
1996. From 1992 to January 1996, he served as Vice President and Controller for
Kollmorgen Corporation, a manufacturer of motion control devices. From 1990 to
1992, he was Chief Financial Officer of Kidde Fenwal, Inc., a manufacturer of
fire suppression equipment.
Mark V.B. Tremallo presently serves as Corporate Vice President--General
Counsel of the Company. Mr. Tremallo joined the Company in May 1997. From 1995
to 1997 he served as Vice President, General Counsel and Secretary of Aearo
Corporation (formerly Cabot Safety Corporation), a manufacturer of industrial
safety products. From 1990 to 1995 he was General Counsel of Cabot Safety
Corporation, a subsidiary of Cabot Corporation.
Joseph L. Rice, III is Chairman of CDR and a Director of the Company. In
addition, Mr. Rice is a director of Uniroyal Holding, Inc. Remington Arms
Company, Inc. and Thyssen Schulte Bautechnik, corporations in which an
investment partnership managed by CDR has an investment, and serves as a trustee
of Williams College and The Manhattan Institute. He is a graduate of Williams
College and Harvard Law School. Mr. Rice is a limited partner of CD&R Associates
V Limited Partnership, the general partner of CDR Fund V ("Associates V"), and
is a Director and President of CD&R Investment Associates II, Inc. ("Associates
II Inc."), the managing general partner of Associates V.
Brian D. Finn is a principal of CDR and a Director of the Company. Mr. Finn
is also a Director of U.S. Office Products Company. Mr. Finn joined CDR in 1997
from Credit Suisse First Boston where he was Managing Director and Co-Head of
Mergers & Acquisitions. During his 15 years at Credit Suisse First Boston he
advised a large number of corporate clients in various industries in
transactions totaling approximately $250 billion. Mr. Finn received his B.S. in
Economics from The Wharton School of the University of Pennsylvania. He is a
limited partner of Associates V and a Director of Associates II Inc.
Charles P. Pieper is a principal of CDR and a Director of the Company. Mr.
Pieper is also Chairman of North American Van Lines, Inc., and U.S. Office
Products Company. Mr. Pieper joined CDR in 1997. Prior to joining CDR, he was
President and Chief Executive Officer of GE Lighting Europe. During his 16-year
career at GE, Mr. Pieper was responsible for several key business units,
including serving as President and Chief Executive Officer of: GE Japan, Korea,
Taiwan; GE Medical Systems Asia; as well as GE Lighting Europe. He joined GE in
1981, from the Boston Consulting Group. Mr. Pieper graduated from Harvard
College and holds an M.B.A from Harvard Business School. He is a limited partner
of Associates V and a Director of Associates II Inc.
The composition of the Board is subject to change from time to time. CDR Fund
V has the right to elect the directors of the Board, except that CDR Fund V has
agreed, pursuant to the employment agreements with Messrs. Reno,
27
<PAGE>
Kline and Peeler, to elect such officers to serve as members of the Board during
the period of their employment with the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of copies of reports filed by persons ("Reporting
Persons") required to file such reports pursuant to Section 16(a) of the
Exchange Act, the Company believes that all filings required to be made by
Reporting Persons of the Company were timely made in accordance with the
requirements of the Exchange Act.
Compensation of Directors
During the fiscal year ended March 31, 1998, compensation of non-employee
Directors ("Non-Employee Directors") of the Company was at the rate of $1,500
for each Board of Directors or committee meeting attended ($500 for each
committee meeting held directly before or after a meeting of the Board of
Directors), $750 for a meeting held over the telephone, plus a quarterly
retainer fee paid at the rate of 200 shares of Dynatech Common Stock per
quarter. Chairmen of all Committees other than the Executive Committee also
received an additional 25 shares of Dynatech Common Stock per quarter. In
addition, the Dynatech Corporation 1994 Stock Option and Incentive Plan provides
for the automatic grant of stock options to non-employee Directors of the
Company. Each Non-Employee Director is entitled to receive an option to
purchase 10,000 shares of Common Stock upon initial election to the Board of
Directors and an additional option to purchase 3,000 shares of Common Stock
after each Annual Meeting of Stockholders. Non-Employee Directors who have
served on the Board for at least five years are also entitled to receive an
annual retirement benefit equal to $16,000. Such retirement benefit is payable
following the later of the Non-Employee Director's 60th birthday or retirement
from the Board (or such later date as the Director shall elect) for a period
equal to the number of full years service on the Board, up to a maximum of ten
years. None of the New Directors of the Company participate in the programs or
receive the compensation described above.
Item 11. Executive Compensation.
Summary Compensation Table
The following summary compensation table sets forth information concerning
compensation awarded to, earned by, or paid to (i) the Company's Chief Executive
Officer, and (ii) the four highest compensated executive officers who were
serving as executive officers at the end of fiscal 1998, (collectively, the
"Named Executive Officers") for services rendered in all capacities with respect
to the Company's fiscal years ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation (1)
- --------------------------- ------ ----------------
Long Term All Other
Compensation ---------
Fiscal Salary Bonus Awards(2) Compensation
------ ------ ----- --------- ------------
Year ($) ($) Options # ($)(3)
---- --- --- --------- ------
<S> <C> <C> <C> <C> <C>
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
John F. Reno 1998 481,250 604,053 56,700 11,857
Chairman, President and 1997 456,250 1,032,185 55,100 31,892
Chief Executive Officer 1996 435,000 372,836 62,000 25,533
John R. Peeler 1998 270,000 383,513 24,800 47,870
Corporate Vice President-- 1997 244,242 662,214 20,800 18,936
Communications Test Division 1996 225,042 293,128 28,000 15,939
John A. Mixon 1998 185,591 152,680 12,900 23,828
Corporate Vice President-- 1997 178,500 270,591 13,800 9,910
Human Resources 1996 172,125 94,384 14,000 8,851
Allan M. Kline(4) 1998 218,750 198,108 16,000 23,060
Corporate Vice President, 1997 158,333 218,918 50,000 3,234
Chief Financial Officer and Treasurer
Samuel W. Tishler(5) 1998 176,667 145,338 31,800 15,834
Corporate Vice President-- 1997 144,167 108,521 5,000 6,701
Corporate Development 1996 130,000 48,227 2,000 4,471
</TABLE>
(1) Perquisites and other personal benefits paid to each Named Executive Officer
in each instance aggregated less than 10% of the total annual salary and
bonus set forth in the columns entitled "Salary" and "Bonus" for each Named
Executive Officer, and accordingly, have been omitted from the table as
permitted by the rules of the SEC.
(2) Figures in this column show the number of options for Common Stock (not
Recapitalized Common Stock) granted. The Company did not grant any
restricted stock awards or stock appreciation rights to any of the Named
Executive Officers during the years shown.
(3) Figures in this column represent the Company's contributions on behalf of
each of the Named Executive Officers under the Company's 401(k) plan. These
figures also include the Company's contributions under a nonqualified
deferred compensation plan, which became effective April 1, 1995.
(4) Mr. Kline's employment with the Company commenced in June 1996.
(5) Mr. Tishler became an officer of the Corporation in May 1997.
Option Grants in Last Fiscal Year
The following table sets forth information concerning individual grants of
options to purchase Common Stock granted to the Named Executive Officers during
the fiscal year ended March 31, 1998:
<TABLE>
<CAPTION>
Individual Grants(1)
------------------------
% of Total
----------
Number of Options Potential Realizable
--------- ------- --------------------
Securities Granted to Valued at Assumed
---------- ---------- -----------------
Underlying Employees Exercise or Annual Rates of Stock
---------- --------- ----------- ---------------------
Options in Fiscal Base price Expiration Price Appreciation
------- --------- ---------- ---------- ------------------
Name Granted (#) Year (%) ($/Sh)(1) Date for Option Term(2)
- ---- ----------- -------- --------- ---- ------------------
5% ($) 10% ($)
----- ------
<S> <C> <C> <C> <C> <C> <C>
John F. Reno 56,700 8.9% $35.9375 7/30/07 $1,281,471 $3,247,498
John R. Peeler 24,800 3.9% $35.9375 7/30/07 $560,502 $1,420,422
John A. Mixon 12,900 2.0% $35.9375 7/30/07 $ 291,552 $ 738,849
Allan M. Kline 16,000 2.5% $35.9375 7/30/07 $ 361,614 $ 916,402
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Samuel W. Tishler 20,000 3.2% $38.8750 5/6/07 $ 488,966 $1,239,134
Samuel W. Tishler 11,800 1.8% $35.9375 7/30/07 $ 266,691 $ 675,846
</TABLE>
(1) Options vest annually in five equal installments beginning on the first
anniversary date of grant. The options in this table expire 10 years after
grant. In connection with the Merger, all of the options became fully
vested and exercisable, other than options to purchase 20,737 shares of
Common Stock granted to Mr. Reno.
(2) These columns show the hypothetical value of the options granted at the end
of the option terms if the price of the Common Stock were to appreciate
annually by 5% and 10%, respectively. There is no assurance that the stock
price will appreciate at the rates shown.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information regarding exercises of
options to purchase Common Stock by the Named Executive officers during the
fiscal year ended, March 31, 1998 and stock options held by the Named Executive
Officers at March 31, 1998:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
-------------------- --------------------
Underlying Unexercised In-the-Money Options
---------------------- --------------------
Shares Value Options at FY-End(#) at FY-End(2)($)
------ ----- -------------------- ---------------
Acquired on Realized Exercisable/ Exercisable/
----------- -------- ------------ -------------
Name Exercise(#) (1)($) Unexercisable Unexercisable
---- ----------- ------ ------------- -------------
<S> <C> <C> <C> <C>
John F. Reno 0 0 175,820/237,180 $5,674,711/5,824,895
John R. Peeler 0 0 68,160/98,240 2,271,940/2,464,210
John A. Mixon 3,250 96,906 30,360/52,340 898,303/1,224,860
Allan M. Kline 0 0 10,000/56,000 161,875/843,500
Samuel W. Tishler 0 0 1,800/37,000 37,288/424,075
</TABLE>
(1) Calculated on the basis of the fair market value of the Common Stock on the
date of exercise, less the option exercise price.
(2) Calculated on the basis of the fair market value of the Common Stock on
March 31, 1998 ($48.1875), less the applicable option exercise price.
Conversion of Options in Connection with the Merger
Immediately prior to the Merger, all outstanding Company stock options,
including the Company stock options then held by the Named Executive Officers,
became fully vested and exercisable except for certain of those stock options
held by Mr. Reno that qualify as "incentive stock options" under the Internal
Revenue Code. At the effective time of the Merger, outstanding options to
purchase Common Stock held by each of the Named Executive Officers were
converted into equivalent options to purchase shares of Common Stock. As a
result of the conversion of the options, Messrs. Reno, Peeler, Kline, Mixon and
Tishler hold options to purchase 8,094,800, 2,696,960, 1,293,600, 1,464,119 and
623,279 shares of Recapitalized Common Stock, respectively, at option exercise
prices ranging from $0.5357 to $1.9834. The terms of the converted options are
substantially similar to those of the prior options except that the period
following a termination of employment during which the Named Executive Officer
may exercise converted options (other than those that
30
<PAGE>
qualify as incentive stock options) has been extended and in the case of Messrs.
Reno, Peeler and Kline, such extended period is substantial.
Special Termination Agreements
Each of the Company's Executive Officers (other than Messrs. Reno, Kline,
Peeler and Other Executives) as well as other key employees, was, prior to the
Merger, party to a special termination agreement with the Company. These
agreements provided that if there is a "Change in Control" of the Company (as
defined in the Agreements), and if during the two-year period following such
Change in Control the officer's employment is terminated for any reason other
than on account of death or for "Cause," or the officer terminates his or her
own employment following a demotion, reduction in compensation, or similar
event, the officer will be entitled to receive a lump sum severance payment from
the Company within 15 days after the date of termination and continuance of
fringe benefits. Under the special termination agreements, the amount of the
severance payment is based on an officer's length of service with the Company,
ranging incrementally from one times the officer's average annual cash
compensation to three times the officer's average annual cash compensation after
fifteen years of service. In connection with the Merger, each of the Named
Executive Officers entered into the agreements described immediately below that
supersede the special termination agreements.
Employment and Other Agreements
In connection with the Merger, the Company entered into employment agreements,
with Messrs. Reno, Kline and Peeler. The employment agreements generally provide
for an initial term of five years, commencing at the effective time of the
Merger, and for compensation and benefit arrangements that are consistent with
the pre-existent compensation and benefit arrangements of each such Named
Executive Officer in effect prior to the Merger. The employment agreements
further provide for the election of such officers to serve as directors of the
Company during their employment with the Company.
Pursuant to his employment agreement, Mr. Reno together with his family
trusts, contributed 40,804 shares of Common Stock to MergerCo in exchange for
799,758 shares of Common Stock of MergerCo ("MergerCo Common Stock"), which
shares of MergerCo Common Stock were converted in the Merger into a like number
of shares of Recapitalized Common Stock. In addition, pursuant to their
respective other employment agreements, all options to purchase Common Stock
held by each of Messrs. Reno and Kline prior to the Merger and a substantial
majority of the options held by Mr. Peeler prior to the Merger were converted
into equivalent options to purchase shares of Recapitalized Common Stock (the
exercise prices of which preserve the economic value of their former options),
all of which, other than options to purchase 20,737 shares of Common Stock held
by Mr. Reno, became fully vested and exercisable in connection with the Merger.
In addition, the employment agreements: (i) restrict the ability of each Named
Executive Officer to transfer shares of Recapitalized Common Stock beneficially
owned by him (other than certain permitted transfers for estate planning
purposes and transfers not exceeding in the aggregate 25% of the Recapitalized
Common Stock owned, or subject to options held by each Named Executive Officer
at the effective time of the Merger), (ii) grant each Named Executive Officer
certain "tag along" rights
31
<PAGE>
which entitle the Named Executive Officer to participate in certain sales of
Recapitalized Common Stock by CDR Fund V prior to a Public Offering (as defined
in the employment agreements), (iii) grant CDR Fund V certain "drag along"
rights which entitle CDR Fund V to require each Named Executive Officer to sell
his shares of Recapitalized Common Stock in a proposed sale of substantially all
of CDR Fund V's shares prior to a Public Offering, and (iv) grant the Company
and CDR Fund V the right, following any termination of a Named Executive
Officer's employment prior to a Public Offering, to purchase the Named Executive
Officer's shares of Recapitalized Common Stock and options to purchase
Recapitalized Common Stock.
The Employment Agreements also provide that, in the event of a termination of
any such Named Executive Officer's employment during the term of the agreement
by the Company other than for "Cause" (as defined in the employment agreements)
or by such Named Executive Officer for "Good Reason" (as so defined), the Named
Executive Officer will be entitled to special termination benefits consisting of
(i) continued payments of his average annual base salary and average annual
bonus until the second anniversary of the date of termination, (ii) continued
coverage under the Company's medical insurance plan until his 65th birthday and
(iii) a pro rata incentive compensation bonus for the portion of the calendar
year preceding such termination. The agreements also contain customary
indemnification, confidentiality, noncompetition and nonsolicitation provisions.
In connection with the Merger, the Company entered into certain agreements
(the "Agreements"), with Messrs. Mixon and Tishler, which supersede their
special termination agreements. These Agreements provide that, in the event of a
termination of employment prior to the third anniversary of the effective time
of the Merger by the Company other than for "Cause" (as defined in such
agreements) or by such executive for "Good Reason" (as so defined), each such
executive will be entitled to special termination benefits during a salary
continuation period which will be based on such executive's period of service
with the Company. Such salary continuation benefits will consist of continued
payments of such executive's average annual base salary, average annual bonus
and continued coverage under the Company's medical insurance and other benefit
plans. These Agreements also contain customary indemnification, confidentiality,
noncompetition and nonsolicitation provisions.
Pursuant to the Agreements, a substantial majority of the options to purchase
shares of Common Stock held by Messrs. Mixon and Tishler prior to the Merger of
the Company were converted into equivalent options to purchase shares of
Recapitalized Common Stock (the exercise prices of which preserve the economic
value of his former options), all of which are fully vested and exercisable. In
addition, these Agreements provide for substantially the same call, drag-along
and tag-along rights as do the employment agreements of Messrs. Reno, Peeler and
Kline.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Recapitalized Common Stock as of June 3, 1998, with respect to
(i) each current director and each Named Executive Officer of the Company; (ii)
all current directors and executive officers of the Company
32
<PAGE>
as a group; and (iii) each current beneficial owner of five percent or more of
Recapitalized Common Stock.
<TABLE>
<CAPTION>
Amount and
----------
Nature of Percent of
---------- ----------
Beneficial Common
---------- ------
Name Ownership(1) Stock(2)
- ---- ------------ --------
<S> <C> <C>
Clayton, Dubilier & Rice Fund V Limited Partnership(3) 110,790,770 92.3%
John F. Reno(4) 8,491,637 6.6%
John R. Peeler(5) 2,708,907 2.2%
John A. Mixon(6) 1,624,027 1.3%
Allan M. Kline(7) 1,294,769 1.1%
Samuel W. Tishler (8) 623,780 *
All Directors and Executive Officers as a group (10 persons) (9) 126,777,355 93.8%
----------- ----
</TABLE>
* Less than 1% of outstanding Recapitalized Common Stock.
(1) Represents shares of Recapitalized Common Stock beneficially owned on June
3, 1998. Unless otherwise noted, each person has sole voting and investment
power with respect to such shares.
(2) Based upon 120,251,375 shares of Recapitalized Common Stock outstanding as
of June 3, 1998. Recapitalized Common Stock includes all shares of outstanding
Recapitalized Common Stock plus, as required for the purpose of determining
beneficial ownership (in accordance with Rule 13d-3 promulgated pursuant to the
Exchange Act), all shares of Recapitalized Common Stock subject to any right of
acquisition by such person, through exercise or conversion of any security,
within 60 days of June 3, 1998.
(3) B. Charles Ames, Michael G. Babiarz, William A. Barbe, Kevin J. Conway,
Brian D. Finn, Donald J. Gogel, Hubbard C. Howe, Thomas F. Ireland, Christopher
MacKenzie, Charles P. Pieper and Joseph L. Rice, III may be deemed to share
beneficial ownership of the shares owned of record by CDR Fund V by virtue of
their status as stockholders of Associates II Inc., the managing general partner
of Associates V, the general partner of CDR Fund V, but each expressly disclaims
such beneficial ownership of the shares owned by CDR Fund V. The voting
stockholders of Associates II Inc. share investment and voting power with
respect to securities owned by CDR Fund V. The business address for each of them
other than Mr. MacKenzie is 375 Park Avenue, New York, New York 10022. The
business address for Mr. MacKenzie is 45 Berkeley Street, London WIA WEB.
(4) Includes 1,000 shares owned by Mr. Reno's spouse, 294,000 shares owned by
The John F. Reno 1997 Qualified Annuity Trust for which Mr. Reno has sole voting
power, 294,000 shares owned by The Suzanne M. Reno 1997 Qualified Annuity Trust,
of which Mr. Reno is a Trustee, and 2,525 shares owned by a relative for which
Mr. Reno has power of attorney. Includes 7,688,355 shares of Common Stock
issuable upon exercise of stock options which are exercisable within 60 days of
June 3, 1998.
33
<PAGE>
(5) Includes 2,696,960 shares of Recapitalized Common Stock issuable upon
exercise of stock options which are exercisable within 60 days of June 3, 1998.
(6) Includes 1,464,120 shares of Recapitalized Common Stock issuable upon
exercise of stock options which are exercisable within 60 days of June 3,
1998.
(7) Includes 1,293,600 shares of Recapitalized Common Stock issuable upon
exercise of stock options which are exercisable within 60 days of June 3, 1998 .
(8) Includes 623,280 shares of Recapitalized Common Stock issuable upon exercise
of stock options which are exercisable within 60 days of June 3, 1998.
(9) Includes 14,871,755 shares of Recapitalized Common Stock issuable upon
exercise of stock options which are exercisable within 60 days of June 3, 1998.
Also includes 110,790,770 shares of Recapitalized Common Stock owned by CDR Fund
V. Brian D. Finn, Charles P. Pieper and Joseph L. Rice, III may be deemed to
share beneficial ownership of the shares owned of record by CDR Fund V by virtue
of their status as stockholders of Associates II Inc., the managing general
partner of Associates V, the general partner of CDR Fund V, but expressly
disclaims such beneficial ownership of the shares owned by CDR Fund V. The
voting stockholders of Associates II Inc. share investment and voting power with
respect to securities owned by CDR Fund V.
Item 13. Certain Relationships and Related Transactions.
CDR Fund V is a private investment fund managed by CDR. Amounts contributed
to CDR Fund V by its limited partners are invested at the discretion of the
general partner in equity or equity-related securities of entities formed to
effect leveraged acquisition transactions and in the equity of corporations
where the infusion of capital coupled with the provision of managerial
assistance by CDR can be expected to generate returns on investments comparable
to returns historically achieved in leveraged acquisition transactions. The
general partner of CDR Fund V is CD&R Associates V Limited Partnership, a Cayman
Islands exempted limited partnership ("Associates V"). Associates V has three
general partners. The managing general partner of Associates V is CD&R
Investment Associates II, Inc., a Cayman Island exempted company ("Associates II
Inc."). The other general partners of Associates V are CD&R Cayman Investment
Associates, Inc., a Cayman Islands exempted company ("Associates Cayman Inc.")
and CD&R Investment Associates Inc., a Delaware corporation ("Associates Inc.").
Mr. Rice, who is a principal of CDR and the Chairman of CDR, is a Director and
the Chairman of both Associates II Inc. and Associates Inc., is a shareholder
and Director of Associates Cayman Inc., and also serves as a Director of the
Company. Mr. Finn, who is a principal of CDR and is a Director of Associates II
Inc., also serves as a Director of the Company. Mr. Pieper, who is a principal
of CDR and a Director of Associates II Inc.,
34
<PAGE>
also serves as a Director of the Company. See "Item 10 Directors and Executive
Officers of the Registrant."
CDR is a private investment firm which is organized as a Delaware corporation.
CDR is the manager of a series of investment funds, including CDR Fund V formed
to invest in equity or equity-related securities of entities formed to effect
leveraged acquisition transactions and in the equity of corporation where the
infusion of capital coupled with the provision of managerial assistance by CDR
can be expected to generate returns on investments comparable to returns
historically achieved in leveraged acquisition transactions. CDR generally
assists in structuring arranging financing for and negotiating the transactions
in which the funds it manages invest. After the consummation of such
transactions, CDR generally provides management and financial consulting
services to the companies in which its investment funds have invested during the
period of such fund's investment. Such services include helping such companies
to establish effective banking, legal and other business relationships and
assisting management in developing and implementing strategies in improving the
operational, marketing and financial performance of such companies.
The Company entered into a consulting agreement with CDR which provides for
(i) an annual fee initially of $500,000, for providing such management and
financial consulting services to the Company and its subsidiaries and (ii)
reimbursement of out-of-pocket expenses it incurs after the Merger, for so long
as CDR Fund V has an investment in the Company and its subsidiaries. At the
closing of the Merger, the Company paid CDR a transaction fee of $9.2 million
plus reimbursement of out-of-pocket expenses incurred by CDR in consideration
for services provided by CDR in arranging the Merger, arranging and negotiating
the financing for the Merger and related services. The Company also agreed to
indemnify CDR and CDR Fund V and certain related parties, subject to certain
limitations, against all claims and liabilities arising out of or in connection
with the Securities Act, the Exchange Act or any other applicable securities or
other laws in connection with the Merger and related transactions and the
operation of the business following the Merger. In addition, the Company
entered into a registration rights agreement with CDR Fund V, Mr. Reno and
certain family trusts which provides that such persons may require the Company
to register their shares of Common Stock under the Securities Act.
See also "Item 11 Executive Compensation--Special Termination Agreements" and
"Employment and Other Agreements."
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) (1) Financial statements
The following financial statement and schedules of the Company are included as
Appendix C to this Report.
I. Consolidated Balance Sheets--March 31, 1998 and 1997.
II. Consolidated Statements of Operations--Fiscal Years ended March
31, 1998, 1997, and 1996.
35
<PAGE>
III. Consolidated Statements of Shareholders' Equity--Fiscal
Years ended March 31, 1998, 1997, and 1996.
IV. Consolidated Statements of Cash Flows--Fiscal Years ended
March 31, 1998, 1997, and 1996.
V. Notes to Consolidated Financial Statements.
(2) Financial statement schedules
I. Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted because they are
either not required or not applicable or because the required information has
been included elsewhere in the financial statements or notes thereto.
(b) Reports on Form 8-K
(1) Form 8-K dated December 20, 1997.
(c) Exhibits
The exhibits that are filed with this report or that are incorporated herein by
reference are set forth in the Exhibit Index on page E-1.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
-------------------------------
June __, 1998 By:
---------------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
- --------------------------- Chairman of the Board, President and Chief
John F. Reno Executive Officer, Director June __, 1998
- --------------------------- Corporate Vice President, Director,
Allan M. Kline Chief Financial Officer, and Treasurer
(Principal Financial Officer) June __, 1998
- --------------------------- Corporate Vice President, Controller
Robert W. Woodbury, Jr. (Principal Accounting Officer) June __, 1998
- --------------------------- Director June __, 1998
Joseph L. Rice, III
- --------------------------- Director June __, 1998
Brian D. Finn
- --------------------------- Director June __, 1998
Charles P. Pieper
- --------------------------- Director June __, 1998
John R.Peeler
37
<PAGE>
APPENDIX A
----------
Selected Historical Consolidated Financial Data
The following tables set forth selected consolidated historical, financial
and other data of the Company for the five fiscal years ended March 31,
1998 which have been derived from, and should be read in conjunction with,
the audited historical Consolidated Financial Statements, and related notes
thereto, of the Company contained herein.
(Amounts in thousands except per share data)
<TABLE>
<CAPTION> Years Ended March 31,
1998 1997 1996 1995 1994
- ---------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Results of operations
Sales $472,948 $362,412 $293,042 $243,078 $199,612
Cost of sales 205,522 137,254 111,436 91,412 72,103
-------- -------- -------- -------- --------
Gross profit 267,426 225,158 181,606 151,666 127,509
Selling, general & Administrative expense 138,310 114,479 98,487 86,329 70,719
Product development expense 54,995 43,267 36,456 30,585 26,863
Nonrecurring charges --- 27,776 16,852 --- ---
Amortization of intangibles 5,835 6,793 5,136 5,106 5,728
-------- -------- -------- -------- --------
Operating income 68,286 32,843 24,675 29,646 24,199
Interest expense (1,221) (828) (1,723) (3,919) (3,794)
Interest income 3,012 2,785 2,181 1,518 1,244
Other income, net 730 634 975 850 2,198
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes 70,807 35,434 26,108 28,095 23,847
Provision for income taxes 29,031 17,585 10,394 11,671 9,897
-------- -------- -------- -------- --------
Income from continuing operations 41,776 17,849 15,714 16,424 13,950
Discontinued operations, net of Income taxes --- 12,000 (1,471) 3,763 (43,933)
Extraordinary charge, net of Income taxes --- --- --- (1,019) ---
-------- -------- -------- -------- --------
Net income (loss) $ 41,776 $ 29,849 $ 14,243 $ 19,168 $(29,983)
======== ======== ======== ======== ========
Income (loss) per common share-basic:
Continuing operations $ 2.49 $ 1.04 $ 0.87 $ 0.92 $ 0.75
Discontinued operations --- 0.70 (0.08) 0.21 (2.36)
Extraordinary charge --- --- --- (0.06) ---
-------- -------- -------- -------- --------
$ 2.49 $ 1.74 $ 0.79 $ 1.07 $ (1.61)
======== ======== ======== ======== ========
Income (loss) per common share-diluted
Continuing operations 2.40 0.99 0.86 0.92 0.75
Discontinued operations --- 0.67 (0.08) 0.21 (2.36)
Extraordinary charge --- --- (0.06) ---
-------- -------- -------- -------- --------
$ 2.40 $ 1.66 $ .78 $ 1.07 $ (1.61)
======== ======== ======== ======== ========
Weighted average numer of shares:
Basic 16,795 17,200 17,969 17,846 18,579
Diluted 17,434 18,028 18,315 17,971 18,678
======== ======== ======== ======== ========
Balance sheet data
Net working capital $117,791 $ 80,394 $105,861 $ 91,513 $ 91,010
Total assets $288,130 $249,010 $205,189 $256,392 $280,553
Long-term debt $ 83 $ 5,226 $ 1,800 $ 7,915 $ 33,006
Shareholders' equity $202,119 $160,686 $160,719 $154,320 $142,643
Shares of stock outstanding 16,864 16,793 17,585 17,573 18,594
Shareholders' equity per share $ 11.99 $ 9.57 $ 9.14 $ 8.78 $ 7.67
</TABLE>
38
<PAGE>
APPENDIX B
- ----------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This Annual Report on Form 10-K 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 herein. See "Item 1 The Business--Risk Factors." The market
share and competitive position data contained in this Form 10-K are
approximations derived from Company estimates, which the Company believes to be
reasonable but which have not been independently verified and, to a lesser
extent, from industry sources, which the Company has not independently verified.
The Company believes that such data are inherently imprecise, but are generally
indicative of its relative market share and competitive position.
The Merger. On May 21, 1998 MergerCo, which was organized at the direction of
CDR, was merged with and into the Company with the Company continuing as the
surviving corporation. In the Merger, (i) each then outstanding share of Common
Stock was converted into the right to receive $47.75 in cash and 0.5 shares of
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, CDR Fund V holds approximately 92.3% of the
Recapitalized Common Stock. Mr. Reno 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.
In connection with the Merger, the Company entered into the Senior Secured
Credit Agreement with certain lenders providing for the Senior Secured Credit
Facilities including a $260 million Term Loan Facility and a $110 million
Revolving Credit Facility. In connection with the Merger, the Company also
completed the offering of $275 million aggregate principal amount of the Senior
Subordinated Notes. On May 31, 1998 the Company had a total of $575.2 million of
debt, which consisted primarily of $275 million principal amount of Senior
Subordinated Notes, $260 million in term loan borrowings under the Term Loan
Facility and $40 million in revolving credit borrowings under the Revolving
Credit Facility.
The Merger was accounted for as a recapitalization of Dynatech, which had no
impact on the historical basis of assets and liabilities as reflected in the
financial statements of Dynatech. However, the Merger involved a change in the
Company's capital structure which will lead to, among other things, higher
reported interest expense. As a result, operating results for periods subsequent
to the Merger will not be comparable in all material respects to operating
results for periods prior to the Merger.
39
<PAGE>
General. The Company develops, manufactures and sells test, analysis,
communications and computing equipment in three product categories: (i)
communications test instruments, (ii) industrial computing and communications,
and (iii) visual communications. In its communications test business the Company
provides products that test and analyze communications networks and equipment.
In its industrial computing and communications business, the Company addresses
two areas of the worldwide ruggedized computer market through two of its
subsidiaries: (i) ICS, which provides computer products for use in harsh
environments and (ii) Itronix, which provides ruggedized portable computing and
communications devices to field-service organizations such as telephone
companies. In its visual communications business, the Company sells visual
communications products principally through two of its subsidiaries: (i)
AIRSHOW, which provides passenger cabin video information display systems for
the general and commercial aviation markets and (ii) daVinci Systems, which
provides digital color enhancement systems used in transferring film images into
electronic signals. Since 1993, the Company has sold 24 non-core businesses
for gross proceeds of approximately $190 million pursuant to a plan to focus
on businesses that enjoy leading positions in their respective markets, strong
profitability, and good growth prospects.
Current and Historical Trends. The Company believes that overall trends in the
communications industry are the most significant trends affecting the Company's
sales and results of operations. The 18.3% average annual increase in sales of
its communications test instruments products from fiscal 1996 to 1998 was
principally driven by market growth and new product introductions by the
Company. The Company believes that demand for communications test equipment
during that period resulted from the combination of increased competition among
existing and new telecommunications service providers, the proliferation of new
telecommunications services and the increased usage of technologies related to
wireless and internet services. The Company believes that these trends have
driven overall communications test instrument industry growth of approximately
10-12% annually in recent years. Growth rates vary widely across segments of the
market and are typically higher in segments that support the development of high
growth communications services such as Asynchronous Transfer Mode, frame relay
and wireless services.
Operating Profit. From fiscal 1996 to 1998 the Company increased operating
profit, excluding non-recurring charges, by a compound annual growth of 28.2%,
driven primarily by sales growth and the Company's acquisitions during this
period. Excluding non-recurring charges, operating profit margins also
increased from 14.2% of consolidated sales to 14.4% of consolidated sales
for the same period. The non-recurring charges included a charge of $16.9
million for purchased incomplete technology related to the acquisition of Tele-
Path Industries, Inc., and $27.8 million for purchased incomplete technology and
impaired intangible asset writeoffs in fiscal 1996 and fiscal 1997,
respectively. Itronix, as a manufacturer of ruggedized portable computing and
communications hardware, generally has lower margins than the Company's other
businesses and Itronix currently is not contributing to the Company's
profitability. As a result, profitability of the Company's industrial computing
and communications businesses 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
40
<PAGE>
premium ruggedized products like Itronix's. The Company is implementing several
initiatives designed to increase the profitability of Itronix, including a
program to lower costs and reposition its products. See "Item 1 The Business--
Risk Factors--Risks Relating to Itronix."
Seasonality. As a result of purchasing patterns of its telecommunications
customers which tend to place large orders periodically typically at the end of
the Company's first and third fiscal quarters, the Company expects its results
of operations to vary significantly on a quarterly basis, as they have in the
past. In addition, growth rates and results of operations for Itronix also have
varied widely and are expected to continue to do so because of the relatively
small number of potential customers with large field-service work forces, the
timing and size of whose orders are irregular.
Product Development. The market for the Company's products is characterized by
changing technology evolving industry standards and protocols, and frequent
introductions of new products. Automation in the Company's addressed markets for
communications test instruments or a shift in customer emphasis from
communications test instruments to test and monitoring systems could render the
Company's existing product offerings obsolete or unmarketable or reduce the size
of the Company's addressed market. In particular, incorporation of self-testing
functions in the equipment currently addressed by the Company's communications
test instruments could render the Company's offerings redundant and
unmarketable. The Company thus faces the challenges of anticipating and
responding rapidly to advances in technology and adapting its existing products
or developing new products. The development of new, technologically advanced
products is a complex and uncertain process requiring the accurate anticipation
of technological and market trends and the expenditure of substantial
development costs. From the beginning of fiscal 1996 through March 31, 1998, the
Company has spent an aggregate of $134.7 million on product development or
approximately 11.9% of sales, and the Company expects to continue product
development spending at similar levels as a percentage of annual sales, to the
extent that the Company has sufficient free cash flow to do so. See "Item 1 The
Business--Risk Factors--Rapid Technological Change; Challenges of New Product
Introductions" and "Substantial Leverage: Liquidity."
Recent Acquisitions and Dispositions. On December 31, 1996, the Company acquired
substantially all of the assets and assumed certain liabilities of Itronix for
$65.4 million in cash. Incident to this acquisition was the purchase of
incomplete technology activities which resulted in a one-time non-cash charge of
$20.6 million reflected in the Company's results for fiscal 1997. This
incomplete technology had not reached technological feasibility and had no
alternative use.
In March 1997, the Company acquired the net assets of Advent Design, Inc.
("Advent"), a supplier to ICS for $3.5 million in cash. Advent designs and
manufactures high performance microprocessor-based systems for the computer,
medical and communications market.
During fiscal 1997, the Company essentially completed the disposition of non-
core businesses pursuant to a strategy approved by the Board of Directors of
Dynatech in February, 1996. The Company received proceeds of $110.2 million
41
<PAGE>
and $48.9 million in 1997 and 1996, respectively, related to these dispositions,
which resulted in an after-tax gain of $12.0 million.
On June 19, 1998, the Company acquired the stock of Pacific Systems Corporation
of Kirkland, Washington ("Pacific") for a total purchase price of $20 million,
including an incentive earnout. Pacific designs and manufactures customer
specified avionics and integrated cabin management equipment for the corporate
and general aviation market.
Pro Forma Financial Statements
On December 31, 1996 the Company acquired substantially all of the assets and
assumed certain liabilities of Itronix Corporation ("Itronix"). The following
discussion, as it relates to the twelve month fiscal year ended March 31, 1997,
refers to the financial information presented in "Acquisitions" of the Notes to
Consolidated Financial Statements, which presents a summary of consolidated
results of operations of the Company as if the acquisition had occurred at the
beginning of fiscal 1997.
The following table and commentary should be read in conjunction with the
Consolidated Financial Statements and related Notes to Consolidated Financial
Statements.
Percent
Change
1998
Percent of Sales vs.
Years Ended March 31, 1998 1997 1997
- --------------------- ------ ------ ------
Sales 100.0% 100.0% 11.0%
Gross profit 56.5 57.1 10.0
Selling, general & admin. Expense 29.2 28.7 13.2
Product development expense 11.6 11.4 13.4
Amortization of intangibles 1.2 2.1 (34.1)
Operating income 14.4 13.2 21.1
Net income from operations 8.8% 7.4% 32.3%
Fiscal 1998 Compared to Fiscal 1997 on a Pro Forma Basis
Sales. For the fiscal year ended March 31, 1998 consolidated sales increased
$46.7 million or 11.0% to $472.9 million as compared to $426.2 million for the
fiscal year ended March 31, 1997 on a pro forma basis. The increase was
primarily attributable to increased demand for communications test products,
catalog sales of industrial computing and communications products, and aircraft
cabin video information services.
Sales of communications test products increased $29.1 million or 13.8% to $240.4
million for the fiscal year ended March 31, 1998 as compared to $211.3 million
for the fiscal year ended March 31, 1997. The increase is primarily attributable
to continued growth in the U.S. market for communications test solutions as a
result of network expansions of the local telco service providers. The growth
was driven by the needs of communications service providers to provide higher
quality networks and to reduce costs through efficiency, which may be gained by
using test and monitoring systems.
42
<PAGE>
Sales of industrial computing and communications products increased $12.8
million or 9% to $155.0 million for the fiscal year ended March 31, 1998 as
compared to $142.2 million for the fiscal year ended March 31, 1997 on a pro
forma basis. The increase was primarily attributable to an increase in sales for
the Company's catalog-marketed, rack-mounted computers, with a significant
portion of sales to customers within the Original Equipment Manufacturer (OEM)
market. The overall increase in sales of Industrial Computing and Communication
products was partially offset by slightly lower sales of the Company's
ruggedized laptop computers.
Sales of visual communications products increased $4.7 million or 6.5% to $77.5
million for the fiscal year ended March 31, 1998 as compared to $72.8 million
for the fiscal year ended March 31, 1997. Sales of the Company's real-time
flight information passenger video displays increased as more airlines
integrated this product into their in-flight entertainment systems. In addition,
the Company has improved its market penetration with additional sales to
commercial airline companies. Partially offsetting this increase was a lower
sales volume in the video compression and graphical user-interface (GUI) product
lines.
International sales (defined as sales outside of North America) were $76.1
million or 16% of consolidated sales for the fiscal year ended March 31, 1998,
as compared to $70.8 or 16.6% for the fiscal year ended March 31, 1997 on a pro
forma basis.
Gross profit. Consolidated gross profit increased $24.2 million to $267.4
million or 56.5% of consolidated sales for the fiscal year ended March 31, 1998
as compared to $243.2 million or 57.1% for the fiscal year ended March 31, 1997
on a pro forma basis. The slight decrease in percentage was attributable to a
change in the sales mix within the consolidated group along with lower gross
margins on the Company's ruggedized laptop computers.
Operating expenses. Operating expenses consist of selling, general and
administrative expenses; product development expense; amortization of
intangibles; and non-recurring expenses. Total operating expenses were $199.1
million or 42.1% of consolidated sales for the fiscal year ended March 31, 1998
as compared to $186.7 million or 43.8% of consolidated sales for the fiscal year
ended March 31, 1997 on a pro forma basis. Excluding the impact of the non-
recurring charge of $7.1 million related to the impairment of intangible assets
during fiscal 1997, operating expenses were $179.6 million or 42.1% of
consolidated sales in fiscal 1997, at the same level as fiscal 1998.
Selling, general and administrative expense was $138.3 million or 29.2% of
consolidated sales for the fiscal year ended March 31, 1998 as compared to
$122.2 million or 28.7% of consolidated sales for the fiscal year ended March
31, 1997 on a pro forma basis. The percentage increase was primarily
attributable to additional expenses related to information systems upgrades and
increased selling expenses due to the increased sales volume within the
communications test business.
Product development expense was $55.0 million or 11.6% of consolidated sales for
the fiscal year ended March 31, 1998 as compared to $48.5 million or 11.4% of
consolidated sales for the fiscal year ended March 31, 1997 on a pro
43
<PAGE>
forma basis. The Company continues to invest in product development and
enhancement within all three product areas.
Amortization of intangibles was $5.8 million for the fiscal year ended March 31,
1998 as compared to $8.9 million for the fiscal year ended March 31, 1997 on a
pro forma basis. Amortization decreased during fiscal 1998 due to the write-off
of goodwill and certain intangibles related to product and distribution
transitions at the end of fiscal 1997.
Interest. Interest income, net of interest expense, was $1.8 million for the
fiscal year ended March 31, 1998 as compared to net interest expense of $0.5
million for the fiscal year ended March 31, 1997 on a pro forma basis. Net
interest income increased year to year based on higher average investment
balances and lower overall borrowings. Interest expense will increase in future
years due to the increase in borrowings.
Other income. Other income was $0.7 million for the fiscal year ended March 31,
1998, essentially at the same level of $0.6 million for the fiscal year ended
March 31, 1997 on a pro forma basis.
Taxes. The effective tax rate, before one time charges, increased for the fiscal
year ended March 31, 1998 to 41% as compared to 40.0% for the fiscal year ended
March 31, 1997 on a pro forma basis, primarily due to increased income in states
with higher income tax rates. The effective tax rate after one time charges
decreased to 41% for fiscal 1998 from 44.2% for fiscal 1997 on a pro forma basis
due to the limited tax benefits in 1997 of the charges relating to the $20.6
million writeoff of incomplete technology from the Itronix acquisition.
Net income. Net income from continuing operations was $41.8 million or $2.40 per
share on a diluted basis for the fiscal year ended March 31, 1998 as compared to
$31.6 million or $1.74 per share on a diluted basis and a pro forma basis for
the fiscal year ended March 31, 1997. The increase was primarily attributable to
the increase in sales. Net income in future years will be negatively impacted by
the expected rise in interest expense due to the increase in borrowings.
Backlog. Backlog at March 31, 1998 was $79.1 million, an increase of 10.3% from
$71.7 million at March 31, 1997.
Historical Financial Statements
The following discussion relates to the actual result of operations of the
Company, in which fiscal 1998 includes a full-year of operations of Itronix
Corporation ("Itronix") as compared to fiscal 1997 in which the results of
operations included only three months of operations.
The following table and commentary should be read in conjunction with the
Consolidated Financial Statements and related Notes to Consolidated Financial
Statements.
44
<PAGE>
<TABLE>
<CAPTION>
Percent of Change
1998 1997
Percent of Sales vs. vs.
Years ended March 31, 1998 1997 1996 1997 1996
- ---------------------------- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 30.5% 23.7%
Gross profit 56.5 62.1 62.0 18.8 24.0
Selling, general & admin. expense 29.2 31.6 33.6 20.8 16.2
Product development expense 11.6 11.9 12.4 27.1 18.7
Nonrecurring charges --- 7.7 5.8 (100.0) 64.8
Amortization of intangibles 1.2 1.9 1.8 (14.1) 32.3
Operating income 14.4 9.1 8.4 107.9 33.1
Net income from continuing operations 8.8 4.9 5.4 134.1 13.6
</TABLE>
Fiscal 1998 Compared to Fiscal 1997 on a Historical Basis
Sales. For the fiscal year ended March 31, 1998 consolidated sales increased
$110.5 million or 30.5% to $472.9 million as compared to $362.4 million for the
fiscal year ended March 31, 1997. The increase was primarily attributable to a
full year of operations of Itronix and increased demand for communications test
products, catalog sales of industrial computing and communications products, and
aircraft cabin video information services.
Sales of communications test products increased $29.1 million or 13.8% to $240.4
million for the fiscal year ended March 31, 1998 as compared to $211.3 million
for the fiscal year ended March 31, 1997. The increase was primarily
attributable to continued growth in the U.S. market for communications test
solutions as a result of network expansions of the local telco service
providers. The growth is driven by the needs of communications service providers
to provide higher quality networks and to reduce costs through efficiency, which
may be gained by using test and monitoring systems.
Sales of industrial computing and communications products increased $76.7
million or 97.8% to $155.0 million for the fiscal year ended March 31, 1998 as
compared to $78.3 million for the fiscal year ended March 31, 1997. The increase
was primarily attributable to a full-year of operations of Itronix in fiscal
1998 as compared to three months of operation in fiscal 1997. In addition, the
Company had an increase in sales for its rack-mounted computers.
Sales of visual communications products increased $4.7 million or 6.5% to $77.5
million for the fiscal year ended March 31, 1998 as compared to $72.8 million
for the fiscal year ended March 31, 1997. Sales of the Company's real-time
flight information passenger video displays increased as more airlines
integrated this product into their in-flight entertainment systems. In addition,
the Company has improved its market penetration with additional sales to
commercial airline companies. Offsetting this increase was a lower sales volume
in the video compression and graphical user-interface (GUI) product lines.
Gross profit. Consolidated gross profit increased $42.3 million to $267.4
million or 56.5% of consolidated sales for the fiscal year ended March 31, 1998
as compared to $225.2 million or 62.1% for the fiscal year ended March 31, 1997.
The decrease in gross margin was attributable to a lower gross
45
<PAGE>
margin at Itronix compared with other parts of the Company as well as a change
in the sales mix within the consolidated group.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; amortization of
intangibles; and non-recurring expenses. Total operating expenses were $199.1
million or 42.1% of consolidated sales for the fiscal year ended March 31, 1998
as compared to $192.3 million or 53.1% of consolidated sales for the fiscal year
ended March 31, 1997. Excluding the impact of the non-recurring charge of $27.8
million related to the impairment of intangible assets and the write-off of
purchased incomplete technology during fiscal 1997, operating expenses were
$164.5 million or 45.4% of consolidated sales in fiscal 1997.
Selling, general and administrative expense was $138.3 million or 29.2% of
consolidated sales for the fiscal year ended March 31, 1998 as compared to
$114.5 million or 31.6% of consolidated sales for the fiscal year ended March
31, 1997. The percentage decrease was primarily attributable to a full-year of
results of Itronix in which the percentage of selling, general and
administrative expense to sales for Itronix is less than the consolidated
average.
Product development expense was $55.0 million or 11.6% of consolidated sales for
the fiscal year ended March 31, 1998 as compared to $43.3 million or 11.9% of
consolidated sales for the fiscal year ended March 31, 1997. The Company
continues to invest in product development and enhancement within all three
product areas.
Amortization of intangibles was $5.8 million for the fiscal year ended March 31,
1998 as compared to $6.8 million for the fiscal year ended March 31, 1997.
Amortization decreased during fiscal 1998 due to the write-off of goodwill and
certain intangibles related to product and distribution transitions at the end
of fiscal 1997 and was offset by an increase in goodwill amortization related to
the acquisition of Itronix.
Interest. Interest income, net of interest expense, was $1.8 million for the
fiscal year ended March 31, 1998 as compared to $2.0 million for the fiscal year
ended March 31, 1997. Interest expense will increase in future years due to the
increase in borrowings.
Other income. Other income was $0.7 million for the fiscal year ended March 31,
1998, essentially at the same level of $0.6 million for the fiscal year ended
March 31, 1997.
Taxes. The effective tax rate, before one time charges, increased for the fiscal
year ended March 31, 1998 to 41% as compared to 40.5% for the fiscal year ended
March 31, 1997, primarily due to increased income in states with higher income
tax rates. The effective tax rate after one time charges decreased to 41% for
fiscal 1998 from 49.6% for fiscal 1997 due to the limited tax benefits in 1997
of the charges relating to the $20.6 million writeoff of incomplete technology
from the Itronix acquisition.
Net income. Net income from continuing operations was $41.8 million or $2.40 per
share on a diluted basis for the fiscal year ended March 31, 1998 as
46
<PAGE>
compared to $17.8 million or $0.99 per share on a diluted basis for the fiscal
year ended March 31, 1997. The fiscal 1997 net income included a pretax charge
of $27.8 million (with an aftertax effect on earnings per share on a diluted
basis of $1.10) related to the write-off of intangible assets and the write-off
of purchased incomplete technology. Net income in future years will be
negatively impacted by the expected rise in interest expense due to the increase
in borrowings.
Fiscal 1997 Compared to Fiscal 1996 on a Historical Basis
Sales For the year ended March 31, 1997, consolidated sales from continuing
operations increased 23.7% to $362.4 million from $293.0 million in fiscal 1996.
Sales of communications test products increased 22.8%, or $39.3 million due to
increased demand for existing products and a full year of operating results for
two acquisitions made in fiscal 1996. Sales of industrial computing and
communications products increased 35.3% or $20.4 million primarily driven by
revenue at Itronix during the fourth quarter of fiscal 1997. Sales of visual
communications products increased 15.3% or $9.7 million principally due to
continued strength in aircraft passenger video information systems and color
correction products.
Backlog from ongoing operations was $71.7 million at March 31, 1997, as compared
to $57.3 million at March 31, 1996.
International sales were 20% of consolidated sales in fiscal 1997, an increase
of 18% over consolidated sales in fiscal 1996.
Gross Profit As a percentage of consolidated sales, gross profit from
continuing operations for fiscal 1997 was 62.1%, essentially at the same level
as the prior year.
Expenses Selling, general and administrative costs increased 16.2% in fiscal
1997 as compared to fiscal 1996. As a percentage of consolidated sales, selling,
general and administrative expenses decreased to 31.6% as compared to 33.6% in
the previous year. Administrative and selling expenses increased at a rate
slower than revenue growth in the communications test products as a result of
the fiscal 1996 acquisitions.
Product development expense increased $6.8 million to 11.9% of consolidated
sales, compared to 12.4% of sales in fiscal 1996. The increase was a result of
additional investment in developing core communications test products as well as
the full year effect of product development at Tele-Path Industries, Inc.
("TPI"), a subsidiary which was purchased in September 1995. Additional expense
was incurred due to the acquisition of Itronix.
Amortization of intangibles increased $1.7 million as a result of the
acquisitions in fiscal 1997 and fiscal 1996.
During fiscal 1997 nonrecurring charges were $27.8 million as compared to $16.9
million in 1996. The 1997 charges included $20.6 million for incomplete
technology which had not reached technological feasibility and had no
alternative use, purchased as part of the acquisition of Itronix at the end of
the third quarter. In addition, the Company recorded a noncash charge of $7.1
million related to the impairment of intangible assets, principally
47
<PAGE>
related to the effects of product and distribution transitions. The charge
consisted of a $4.5 million writeoff of goodwill and a $2.6 million writeoff in
product technology.
Interest expense declined in fiscal 1997 compared to the prior year as a result
of lower average borrowings. Interest income increased in fiscal 1997 primarily
from higher average cash balances during the year.
Taxes The effective tax rate, before one-time charges, increased in fiscal 1997
to 40.5% as compared to 39.8% in fiscal 1996, primarily due to losses generated
in foreign locations without tax benefit. The effective tax rate after one-time
charges increased to 49.6% due to limited tax benefits of these charges. These
charges included $20.6 million of incomplete technology from the Itronix
acquisition which resulted only in a federal tax savings. In addition, the
majority of the $7.1 million of intangibles written off represented goodwill
which was not deductible for tax purposes.
Net Income Net income from continuing operations in fiscal 1997 was $17.8
million, or $0.99 per share, as compared to $0.86 per share in fiscal 1996. Net
income in the current year included a pretax charge of $27.8 million for
purchased incomplete technology and impaired intangible asset writeoffs with an
aftertax effect on earnings per share of ($1.10). Net income for the prior year
included a charge for of incomplete purchased technology that accounted for
$16.9 million with an aftertax effect on earnings per share of ($0.56).
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. After completion of the
Merger and related financings, the Company had $575.2 million of indebtedness,
primarily consisting of $275 million principal amount of the Senior Subordinated
Notes, $260 million in term loan borrowings under the Term Loan Facility and
$40.0 million in revolving credit borrowings under the new Revolving Credit
Facility. On May 21, 1998, the Company terminated its two credit facilities that
were in effect prior to the Merger.
Cash Flows. The Company's cash and cash equivalents increased $25.1 million
during the fiscal year ended March 31, 1998. Net cash provided by operating
activities generated $45.3 million after $13.7 million was used for the payment
of expenses related to discontinued operations.
48
<PAGE>
Working Capital. The Company's operating assets and liabilities provided a
source of cash of $4.4 million. Inventory levels increased from $40.1 million to
$48.9 million, resulting in a $8.7 million use of cash. This was primarily
attributable to the increased volume for the Company's rack-mounted computers.
Accounts receivable decreased from $70.9 million to $70.0 million, resulting in
a source of cash of approximately $1.0 million. Other current assets increased,
resulting in a use of cash of $2.4 million. This increase was primarily
attributable to expenses relating to the Merger. Accounts payable increased from
$16.9 million to $22.9 million, resulting in a source of cash of $6.0 million as
the Company continues to aggressively manage its working capital. Other current
liabilities from continuing operations increased $8.5 million due to an increase
in deferred revenue due to higher prepaid warranty costs and an increase in
accrued income taxes due to the effective tax rate increase. This increase was
offset by a decrease in discontinued operations liabilities of $13.7 million, of
which approximately $21.9 million was used for the payment of expenses
previously provided for offset by an $8.2 million deferred tax adjustment.
The Company's investing activities totaled $15.0 million primarily for the
purchase and replacement of property and equipment. The Company's historical
capital expenditures since fiscal 1996 have in substantial part resulted from
the replacement of existing property and equipment including computer systems.
The Company's capital expenditures (including acquisitions) were $15.9 million,
$10.2 million, and $8.2 million for the three fiscal years ended March 31, 1998,
1997 and 1996, respectively. The increase in expenditures for fiscal year 1998
relate principally to the Company continuing to replace existing computer
equipment. The Company estimates that for fiscal year 1999, capital expenditures
will be similar to historic levels.
During the year, the Company repaid all of its borrowings under its two existing
credit facilities. At March 31, 1998, the Company had $180 million in unused
line of credit. In addition, the Company repurchased 163 thousand shares of its
common stock for a $5.3 million use of cash and generated $4.5 million from the
exercise of stock options and issuance of common stock related to its Employee
Stock Purchase Plan.
Debt Service. 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 required to make scheduled principal
payments of the $50.0 million of tranche A term loan thereunder over its six-
year term, with substantial amortization of the $70.0 million of tranche B term
loan, $70.0 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 $51.0 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
49
<PAGE>
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 to be
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. 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 Closing of the Merger was $70.0
million. The undrawn portion of this facility will be available to meet future
working capital and other business needs of the Company and replaces the
Company's previously outstanding credit facilities totaling $180.0 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.
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, and 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
50
<PAGE>
under the Senior 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 businesses.
New Pronouncements
During the quarter ended 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.
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income in general-purpose financial statements. This Standard
is effective for fiscal periods beginning after December 15, 1997 and its
adoption is not expected to have a material impact on the Company's disclosures.
The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the reporting of operating segments in the financial statements.
This Standard is effective for fiscal periods beginning after December 15, 1997
and its adoption is not expected to have a material impact on the Company's
historical financial data.
In October, 1997, Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of April
1, 1998 and does not expect adoption to have a material impact on the Company's
financial results.
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 ensure
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
51
<PAGE>
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 warranty costs, or result in payment of
damages, which in turn could materially affect the Company.
52
<PAGE>
APPENDIX C
DYNATECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS 54
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND 1997 55
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 1998, 1997 AND 1996 57
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY 58
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
MARCH 31, 1998, 1997 AND 1996 59
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 60
53
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of Dynatech Corporation:
We have audited the accompanying consolidated balance sheets of Dynatech
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows and related
schedule of valuation and qualifying accounts for each of the three fiscal years
in the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dynatech
Corporation as of March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 28, 1998, except as to the information in the
"Subsequent Event" Note for which the date is May 21, 1998.
54
<PAGE>
Dynatech Corporation
Consolidated Balance Sheets
ASSETS
(Amounts in thousands except share data)
<TABLE>
<CAPTION> March 31,
1998 1997
- ------------------------------------------------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 64,904 $ 39,782
Accounts receivable
(net of allowance of $1,764 and $1,872,
respectively) 69,988 70,930
Inventories:
Raw materials 24,263 19,423
Work in process 11,769 11,376
Finished goods 12,850 9,326
------- -------
Total inventory 48,882 40,125
Other current assets 16,823 11,074
------- -------
Total current assets 200,597 161,911
Property and equipment:
Land, building and leasehold improvements 4,904 4,141
Machinery and equipment 51,220 47,020
Furniture and fixtures 12,351 9,940
------- -------
68,475 61,101
Less accumulated depreciation and amortization (42,110) (37,268)
------- -------
26,365 23,833
Other assets:
Intangible assets, net 39,595 43,813
Other 21,573 19,453
------- -------
$288,130 $249,010
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
55
<PAGE>
Dynatech Corporation
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
(Amounts in thousands except share data)
<TABLE>
<CAPTION> March 31,
1998 1997
- ------------------------------------------------------ -------- --------
<S> <C> <C>
Current liabilities:
Notes payable and current portion of long-term debt $ 150 $ 201
Accounts payable 22,933 16,900
Accrued expenses:
Compensation and benefits 21,750 23,912
Taxes, other than income taxes 2,071 1,850
Deferred revenue 13,868 8,876
Other 16,082 19,948
Accrued income taxes 5,196 657
Net liabilities of discontinued operations 756 9,173
-------- --------
Total current liabilities 82,806 81,517
Long-term debt 83 5,226
Deferred compensation 3,122 1,581
Commitments and contingencies
Shareholders' equity:
Serial preference stock, par value $1 per share;
Authorized 100,000 shares; none issued
Common stock, par value $0.20 per share;
Authorized 50,000,000 shares; issued 18,605,689 3,721 3,721
Additional paid-in capital 7,647 9,887
Retained earnings 237,282 195,506
Cumulative translation adjustments (1,600) (1,247)
Treasury stock, at cost; 1,741,265 and 1,812,287
Shares, respectively (44,931) (47,181)
-------- --------
Total shareholders' equity 202,119 160,686
-------- --------
$288,130 $249,010
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
56
<PAGE>
Dynatech Corporation
Consolidated Statements of Operations
(Amounts in thousands except per share data)
<TABLE>
<CAPTION> Years Ended March 31,
1998 1997 1996
- ----------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Sales $472,948 $362,412 $293,042
Cost of sales 205,522 137,254 111,436
-------- -------- --------
Gross profit 267,426 225,158 181,606
Selling, general and administrative expense 138,310 114,479 98,487
Product development expense 54,995 43,267 36,456
Nonrecurring charges --- 27,776 16,852
Amortization of intangibles 5,835 6,793 5,136
-------- -------- --------
Operating income 68,286 32,843 24,675
Interest expense (1,221) (828) (1,723)
Interest income 3,012 2,785 2,181
Other income, net 730 634 975
-------- -------- --------
Income from continuing operations before income taxes 70,807 35,434 26,108
Provision for income taxes 29,031 17,585 10,394
-------- -------- --------
Income from continuing operations 41,776 17,849 15,714
Discontinued operations:
Gain on sale of businesses net of income tax
Provision of $22,692 --- 12,000 ---
Operating loss, net of income tax
benefit of $(1,009) in 1996 --- --- (1,471)
-------- -------- --------
Net income $ 41,776 $ 29,849 $ 14,243
======== ======== ========
Income (loss) per common share - basic:
Continuing operations $ 2.49 $ 1.04 $ 0.87
Discontinued operations --- 0.70 (0.08)
-------- -------- --------
$ 2.49 $ 1.74 $ 0.79
======== ======== ========
Income (loss) per common share - diluted:
Continuing operations $ 2.40 $ 0.99 $ 0.86
Discontinued operations --- 0.67 (0.08)
-------- -------- --------
$ 2.40 $ 1.66 $ 0.78
======== ======== ========
Weighted average number of common shares
Basic 16,795 17,200 17,969
Diluted 17,434 18,028 18,315
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
Dynatech Corporation
Consolidated Statements of Shareholders' Equity
(Amounts in thousands)
<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, March 31, 1995 18,605 (1,033) $ 3,721 $ 7,432 $151,414 $ 2,659 $(10,906) $154,320
Net income - 1996 14,243 14,243
Purchases of treasury
stock (800) (19,367) (19,367)
Translation adjustments (2,317) (2,317)
Exercise of stock
options and other
issuances 812 3,688 9,170 12,858
Tax benefit from
exercise of stock 982
options 982
-------- -------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1996 18,605 (1,021) 3,721 12,102 165,657 342 (21,103) 160,719
Net income - 1997 29,849 29,849
Purchases of treasury
stock (1,021) (32,695) (32,695)
Translation adjustments (1,589) (1,589)
Exercise of stock
options and other
issuances 230 (3,533) 6,617 3,084
Tax benefit from
exercise of stock
options 1,318 1,318
-------- -------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1997 18,605 (1,812) 3,721 9,887 195,506 (1,247) (47,181) 160,686
======== ======== ======== ======== ======== ======== ======== ========
Net income - 1998 41,776 41,776
Purchases of treasury
stock (163) (5,330) (5,330)
Translation adjustments (353) (353)
Exercise of stock
options and other
issuances 234 (2,919) 7,580 4,661
Tax benefit from
exercise of stock
options 679 679
-------- -------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1998 18,605 (1,741) $ 3,721 $ 7,647 $237,282 $ (1,600) $(44,931) $202,119
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
Dynatech Corporation
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996
- ---------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income from operations $ 41,776 $ 29,849 $ 15,714
Adjustment for noncash items included in net income:
Gain on discontinued operations --- (12,000) ---
Depreciation 12,066 9,280 8,279
Amortization of intangibles 5,835 6,793 5,136
Purchased incomplete technology --- 20,627 16,852
Intangibles writeoff --- 7,149 ---
Change in net deferred income tax asset (5,575) (7,617) (5,173)
Other 580 797 457
Changes in operating assets and liabilities, net of effects
Of purchase acquisitions and divestitures 4,380 4,926 (19,556)
-------- -------- --------
Net cash provided by continuing operations 59,062 59,804 21,709
Net cash provided by (used in) discontinued operations (13,717) (52,313) 699
-------- -------- --------
Net cash flows provided by operating activities 45,345 7,491 22,408
Investing activities:
Purchases of property and equipment (15,879) (10,176) (8,198)
Disposals of property and equipment 219 214 308
Proceeds from sales of businesses --- 96,682 48,901
Businesses acquired in purchase transactions,
Net of cash acquired --- (68,930) (17,143)
Other 144 290 5,597
-------- -------- --------
Net cash flows provided by (used in) continuing operations (15,516) 18,080 29,465
Net cash flows provided by (used in) discontinued operations 507 (951) (5,487)
-------- -------- --------
Net cash flows provided by (used in) investing activities (15,009) 17,129 23,978
Financing activities:
Net borrowings (repayment) of debt (5,195) 2,522 (9,400)
Proceeds from issuance of common stock 4,513 1,693 952
Purchases of treasury stock (5,330) (32,695) (19,367)
-------- -------- --------
Net cash flows used in financing activities (6,012) (28,480) (27,815)
Effect of exchange rate on cash 798 (2,452) (272)
Increase (decrease) in cash and cash equivalents 25,122 (6,312) 18,299
Cash and cash equivalents at beginning of year 39,782 46,094 27,795
-------- -------- --------
Cash and cash equivalents at end of year $ 64,904 $ 39,782 $ 46,094
======== ======== ========
Change in operating asset and liability components:
Decrease (increase) in trade accounts receivable $ 994 $(15,833) $(10,287)
Decrease (increase) in inventories (8,739) 450 (2,007)
Increase in other current assets (2,431) (3,341) (297)
Increase (decrease) in accounts payable 6,009 2,059 (402)
Increase (decrease) in accrued expenses and taxes 8,547 21,591 (6,563)
-------- -------- --------
Change in operating assets and liabilities $ 4,380 $ 4,926 $(19,556)
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 934 $ 889 $ 1,739
Income taxes 24,307 42,340 13,798
Tax benefit of disqualifying dispositions of stock options 679 1,318 982
Noncash proceeds from sale of businesses:
Promissory notes --- 7,200 ---
Preferred stock --- 6,300 ---
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
Dynatech Corporation
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Business Dynatech is a global communications equipment company focused on
network technology solutions. Its products address communications test,
industrial computing and communications, and visual communications applications.
Subsequent/Merger Recapitalization On May 21, 1998, the Company completed its
management-led merger with Clayton, Dubilier & Rice, Inc. ("CDR") ("the
Merger"). 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 were not affected by these transactions.
Principles of Consolidation The consolidated financial statements include the
accounts of the parent company and its wholly owned domestic and international
subsidiaries. Intercompany accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform with the current
year.
Use of Estimates 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,
tax valuation reserves, nonrecurring charges, and the carrying values of
discontinued operations. Actual results could differ from those estimates.
Interest Rate Swap Agreements The Company may, from time to time, enter into
interest rate swap agreements to reduce the impact of interest rate changes on
its debt. The interest rate swap agreements involve exchanges of fixed or
floating rate interest payments without the exchange of the underlying notional
amounts. The notional amounts of such agreements are used to measure the
interest to be paid or received and do not represent the amount of exposure to
loss. The Company did not enter into any interest swap agreements during fiscal
1998, 1997 or 1996.
Cash Equivalents Cash equivalents represent highly liquid debt instruments with
a maturity of three months or less at the time of purchase. Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of short-term deposits in Europe with major banks, with
investment levels and debt ratings set to limit exposure from any one
institution.
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<PAGE>
Inventories Inventories are carried and charged to revenue at standard costs,
which is updated regularly and which approximates the lower of cost (first-in,
first-out or average) or market.
Property and Equipment Property and equipment are carried at cost and include
expenditures for major improvements which substantially increase their useful
life. Repairs and maintenance are expensed as incurred. When assets are retired
or otherwise disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
recognized in the Statement of Operations.
Depreciation and Amortization For financial reporting purposes, depreciation of
machinery, equipment, and fixtures is computed on the straight-line method over
estimated useful lives of two to ten years. Leasehold improvements are amortized
over the lesser of the lives of the leases or estimated useful lives of the
improvements.
Intangible Assets Intangible assets acquired primarily from business
acquisitions are summarized as follows:
<TABLE>
<CAPTION>
Amounts in thousands 1998 1997
- ---------------------------------------- ------- -------
<S> <C> <C>
Product technology $17,042 $17,042
Excess of cost over net assets required 32,478 30,861
Other intangible assets 13,307 13,307
------- -------
62,827 61,210
Less accumulated amortization 23,232 17,397
------- -------
Total $39,595 $43,813
======= =======
</TABLE>
At each balance sheet date, management evaluates whether there has been a
permanent impairment in the value of goodwill or intangible assets by assessing
the carrying value of the asset against the anticipated future cash flows from
related operating activities. Factors which management considers in performing
this assessment include current operating results, trends, product transition,
distribution channels and prospects, and, in addition, demand, competition, and
other economic factors. In March 1997, the Company recorded a $7.1 million
charge related to product and distribution transitions.
Product technology and other intangible assets are amortized on a straight-line
basis primarily over two to ten years, but in no event longer than their
expected useful lives. Amortization expense related to product technology was
$3.1 million in fiscal 1998, $3.1 million in fiscal 1997, and $1.9 million in
fiscal 1996, and was excluded from cost of sales. Excess of cost over fair
market value of net assets is being amortized on a straight-line basis primarily
over 15 years.
Foreign Currency Translation The functional currency for the majority of the
Company's foreign operations is the applicable local currency. The translation
from the applicable foreign currencies to U.S. dollars is performed for balance
sheet accounts using the exchange rates in effect at
61
<PAGE>
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. The gains or losses resulting from such
translation are included in shareholders' equity. Gains or losses resulting from
foreign currency transactions are included in other income.
Treasury Stock The Company delivers treasury shares upon the exercise of stock
options and issuance of shares for the Company's Employee Stock Purchase Plan
and the difference between the cost of the treasury shares, on a last-in, first-
out basis, and the exercise price of the option is reflected in additional paid-
in capital. Repurchase of treasury stock is accounted for by using the cost
method of accounting.
Revenue Recognition Sales of products and services are recorded based on product
shipment and performance of service, respectively. Proceeds received in advance
of product shipment or performance of service are recorded as deferred revenue
in the balance sheet.
Research and Development Costs relating to research and development are expensed
as incurred. Internal software development costs that qualify for capitalization
are not material.
Warranty Costs The Company generally warrants its products for one year after
delivery. A provision for estimated warranty costs is recorded at the time
revenue is recognized.
Income Taxes The Company provides for income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
New Pronouncements During the quarter ended 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>
Years Ended March 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Basic:
Common stock outstanding beginning of year 16,803 17,594 17,577
Weighted average treasury stock issued during the period 134 144 461
Weighted average treasury stock repurchased (142) (538) (69)
------ ------ ------
Weighted average common stock outstanding end of year 16,795 17,200 17,969
====== ====== ======
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Diluted:
<S> <C> <C> <C>
Common stock outstanding beginning of year 16,803 17,594 17,577
Weighted average treasury stock issued during the period 134 144 461
Weighted average common stock equivalents 639 828 346
Weighted average treasury stock repurchased (142) (538) (69)
------ ------ ------
Weighted average common stock outstanding end of year 17,434 18,028 18,315
====== ====== ======
</TABLE>
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income in general-purpose financial statements. This Standard
is effective for fiscal periods beginning after December 15, 1997 and its
adoption is not expected to have a material impact on the Company's disclosures.
The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the reporting of operating segments in the financial statements.
This Standard is effective for fiscal periods beginning after December 15, 1997
and its adoption is not expected to have a material impact on the Company's
historical financial data.
In October, 1997, Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company adopted the guidelines of SOP 97-2 as of April 1,
1998 and does not expect adoption to have a material impact on the Company's
financial results.
Discontinued Operations
A formal plan to discontinue noncore businesses was approved by the Board of
Directors on February 7, 1996. In fiscal 1997, the Company essentially completed
its disposition of the noncore businesses. Proceeds from these sales in fiscal
1997 and 1996 were $96.7 million in cash, $7.2 million in long-term promissory
notes, and Class A Preferred Stock of CMSI Holdings Corporation with an
aggregate liquidation preference of $6.3 million, and $48.9 million in cash,
respectively, which resulted in an aftertax gain of $12 million or $0.67 per
share on a diluted basis.
In connection with the sale of one of its subsidiaries, the Company agreed to
guarantee the purchaser's payment obligations under a credit facility obtained
by the purchaser. The guaranteed portion of the principal amount of this
facility is $3 million for a period of seven years from the closing date of
March 1997 and is to be used to fund the purchaser's capital expenditures.
Summary operating results of noncore businesses prior to the formal plan to
discontinue operations are as follows:
Amounts in thousands 1996
- --------------------------------------------------------------------------------
Sales $182,040
63
<PAGE>
Gross margin 79,571
Income (loss) before taxes (3,460)
Net income (loss) $(1,471)
In connection with the disposition of these subsidiaries, the Company had net
liabilities of $756 thousand and $9.2 million at March 31, 1998 and 1997,
respectively. Included in these amounts are liabilities related to severance,
legal, lease runout, taxes and warranty accruals, most of which were paid in
fiscal 1998, offset by noncash investments.
Long-Term Debt
Long-term debt is summarized below:
Amounts in thousands 1998 1997
- ------------------------------------------- -------- --------
Revolving credit and term bank loan $ --- $5,000
Capital lease obligations 233 427
-------- --------
Total debt 233 5,427
Less current portion 150 201
-------- --------
Long-term debt $ 83 $5,226
======== ========
In 1997, the Company had an unsecured $70 million revolving credit and term bank
loan agreement ("Old Agreement") with several commercial banks which allowed for
borrowings in various currencies and provided for interest to be payable at the
Eurocurrency rate, or base or money market rate quoted by the lender, depending
upon the currencies borrowed and the form of borrowing. Under the terms of the
Old Agreement, the principal borrowings would have converted to a term loan
payable in eight equal quarterly installments beginning September 30, 1998.
In April 1997, the Company entered into a new $150 million revolving credit and
term loan agreement ("New Agreement") with several commercial banks. This
agreement allows for borrowings using various instruments with interest payable
at Eurodollar rate plus an applicable margin based on the Company's leverage
ratio or base rate, quoted by the lender. Under the terms of the New Agreement,
the principal borrowings may convert to a term loan payable in eight equal
quarterly installments beginning June 30, 2000.
The terms of both the Old and New Agreement require, among other things,
specific levels of current ratio, fixed- charge coverage ratio, and minimum
tangible net worth. The Company was in compliance with all covenants at March
31, 1998.
After the Merger. After completion of the Merger and related financings, the
Company had $575.2 million of indebtedness, primarily consisting of $275 million
principal amount of the Senior Subordinated Notes, $260 million in term loan
borrowings under the Term Loan Facility and $40.0 million in revolving credit
borrowings under the new Revolving Credit Facility. On May 21, 1998, the
Company terminated it Old and New Agreements.
64
<PAGE>
Debt Service. Principal and interest payments under the new Senior Secured
Credit Facilities and interest payments on the Senior Subordinated Notes will
represent significant liquidity requirements for the Company. It is expected
that 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 required to make
scheduled principal payments of the $50.0 million of tranche A term loan
thereunder over its six-year term, with substantial amortization of the $70.0
million of tranche B term loan, $70.0 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
$51.0 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 to be 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 Facilities
bear interest at floating rates based upon the interest rate option elected by
the Company. 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 closing of the Merger was $70.0
million. The undrawn portion of this facility will be available to meet future
working capital and other business needs of the Company and replaces the
Company's previously outstanding credit facilities totaling $180.0 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.
Income Taxes
65
<PAGE>
The components of income (loss) from continuing operations before taxes are as
follows:
<TABLE>
<CAPTION>
Amounts in thousands 1998 1997 1996
- -------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Domestic $69,772 $38,486 $26,657
Foreign 1,035 (3,052) (549)
--------- --------- ---------
Total $70,807 $35,434 $26,108
========= ========= =========
</TABLE>
The components of the provision (benefit) for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
Amounts in thousands 1998 1997 1996
- -------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Provision for income taxes:
United States $22,810 $11,729 $ 9,092
Foreign 327 234 (428)
State 5,894 5,622 1,730
--------- --------- ---------
Total $29,031 $17,585 $10,394
========= ========= =========
</TABLE>
Components of income tax provision:
<TABLE>
<CAPTION>
Current:
<S> <C> <C> <C>
Federal $21,248 $19,297 $15,247
Foreign (978) 234 (423)
State 6,123 5,671 3,072
--------- --------- ----------
Total Current 26,393 25,202 17,896
--------- --------- --------
Deferred:
Federal 1,562 (7,568) (6,155)
Foreign 1,305 --- (5)
State (229) (49) (1,342)
--------- --------- ----------
Total deferred 2,638 (7,617) (7,502)
--------- --------- ----------
Total $29,031 $17,585 $10,394
========= ========= ==========
</TABLE>
Reconciliations between U.S. federal statutory rate and the effective tax rate
of continuing operations follow:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
Increases (reductions) to statutory tax rate resulting from:
Foreign income subject to tax at a rate different
than U.S. rate --- 0.6 (0.5)
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C> <C>
State income taxes, net of federal income tax
benefit 5.1 3.8 4.3
Research and development tax credit (1.3) (0.7) (0.7)
Nondeductible amortization 1.2 1.1 1.9
Other 1.0 0.7 (0.2)
----- ----- -----
Effective tax rate before certain charges 41.0% 40.5% 39.8%
Nondeductible purchased research and development --- 8.2 ---
Nondeductible writeoff of intangibles --- 0.9 ---
----- ----- -----
Total effective tax rate on continuing operations 41.0% 49.6% 39.8%
----- ----- -----
</TABLE>
The principal components of the deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
Amounts in thousands 1998 1997
- ------------------------------------------------------- ------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,608 $ 3,291
Vacation benefits 1,556 792
Bad debt allowance --- 364
Inventory capitalization 403 363
Depreciation and amortization 16,343 16,767
Other deferred assets 8,976 4,434
------- -------
31,886 26,011
Valuation allowance (4,608) (3,291)
------- -------
27,278 22,720
Deferred tax liabilities:
Depreciation and amortization 431 1,025
Other deferred liabilities 1,068 1,491
------- -------
1,499 2,516
------- -------
Net deferred tax assets $25,779 $20,204
======= =======
</TABLE>
Deferred income taxes are included in the following balance sheet accounts:
<TABLE>
<CAPTION>
Amounts in thousands 1998 1997
- ------------------------------------------------------- ------- -------
<S> <C> <C>
Other current assets $ 8,695 $ 3,846
Other assets 17,084 16,358
------- --------
$25,779 $20,204
======= ========
</TABLE>
The valuation allowance applies to state and foreign net operating loss
carryforwards that may not be fully utilized by the Company. The increase in the
valuation reserve relates to the increase in these net loss carryforwards.
Employee Retirement Plans
67
<PAGE>
The Company has a trusteed employee retirement profit sharing and 401(k) savings
plan for eligible U.S. employees. The Plan does not provide for stated benefits
upon retirement. Employees outside the U.S. are covered principally by
government-sponsored plans that are deferred contribution plans. The cost of
Company-provided plans is not material.
The Company has a nonqualified deferred compensation plan which permits certain
key employees to annually elect to defer a portion of their compensation for
their retirement. The amount of compensation deferred and related investment
earnings will be placed in an irrevocable rabbi trust and presented as assets in
the Company's balance sheet because they will be available to the general
creditors of the Company in the event of the Company's insolvency. An offsetting
liability will reflect amounts due employees.
Corporate contributions to employee retirement plans were $4.5 million in fiscal
1998, $4.0 million in fiscal 1997, and $3.3 million in 1996.
Stock Compensation and Purchase Plans
On July 30, 1996 the shareholders adopted the 1996 Employee Stock Purchase Plan
under which eligible employees may contribute up to 10% of their salary toward
semi-annual purchases of the Company's capital stock. The plan commenced October
1, 1996 and each plan period lasts six months beginning on October 1 and April 1
of each year. The purchase price for each share of stock is the lesser of 85% of
the market price on the first or last day of the plan period. A total of 600,000
shares are available for purchase under the plan. There were 44,840 shares
issued under the plan in October, 1997 and 38,692 shares were reserved for
issuance at March 31, 1998. Pursuant to the Merger, the plan has been amended
to provide that there will be no new stock purchase periods after March 31,
1998. The Employee Stock Purchase Plan terminated on May 21, 1998.
The Company maintains two Stock Option plans in which common stock is available
for grant to key employees at prices not less than fair market value (110% of
fair market value for employees holding more than 10% of the outstanding common
stock) at the date of grant determined by the Board of Directors. Incentive or
nonqualified options may be issued under the plans and are exercisable from one
to ten years after grant.
A summary of activity in the Company's option plans is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
1998 Exercise 1997 Exercise 1996 Exercise
Shares Price Shares Price Shares Price
- --------------------------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning of year 1,770,560 $21.87 1,684,580 $15.17 1,296,720 $12.09
Options granted (at an exercise price
Of $35 to $44 in 1998, $32 to $54 in
1997, and $15.50 to $20.25 in 1996) 634,800 36.25 607,550 34.51 673,700 20.01
Options exercised (148,941) 17.20 (255,690) 11.99 (126,500) 10.26
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Options canceled (120,700) 24.26 (265,880) 17.82 (159,340) 14.44
-------- --------- ---------
Shares under option, end of year 2,135,719 26.33 1,770,560 21.87 1,684,580 15.17
======== ========= =========
Shares exercisable 512,999 $18.79 300,710 $14.77 261,780 $11.52
</TABLE>
Options available for future grants under the plans were 497 thousand, 1.0
million, and 1.4 million at March 31, 1998, 1997, and 1996, respectively.
The fair market value of each option granted during 1998, 1997, and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: expected volatility of 40% in 1998,
39% in 1997 and 1996, risk-free interest rate of 6% in 1998, 6.59% in 1997, and
6.27% in 1996, expected life of 7 years and a dividend yield of 0%. The Weighted
Average Fair Value of options granted, net of forfeitures, during the years
1998, 1997, and 1996 was $19.20, $18.68, and $10.68, respectively.
The following table summarizes information about currently outstanding and
exercisable stock options at March 31, 1998:
<TABLE>
<CAPTION>
Weighted
Number of Average Weighted
Options Remaining Average
Outstanding Contractual Exercise
Range of Exercise Price At 3/31/98 Life Price
--------------------------- ----------- ----------- --------
<S> <C> <C> <C>
$9.00 - $15.00 437,540 4.62 $11.05
$15.00 - $30.00 542,860 7.14 19.08
$30.00 - $54.00 1,155,319 8.85 35.93
-----------
Total 2,135,719 7.55 $26.33
===========
</TABLE>
The Company applies ABP Opinion 25 and related interpretations in accounting for
its plans. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS123"), which is effective for transactions entered into for
fiscal years that begin after December 15, 1995. FAS123 established a fair
value-based method of accounting for stock-based compensation plans. In adopting
FAS123 in 1997, the Company elected footnote disclosure only. Accordingly, no
compensation cost has been recognized for its stock option plans and its stock
purchase plan under FAS123. Had compensation cost for the Company's stock-based
compensation plans been recorded based on the fair value of awards or grant date
consistent with the method prescribed by FAS123, the Company's net income and
earnings per share would have been changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Amounts in thousands except per share 1998 1997 1996
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
- ------------------------ -------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $41,776 $38,441 $29,849 $27,863 $14,243 $13,464
Net income per share:
Basic $ 2.49 $ 2.29 $ 1.74 $ 1.62 $ 0.79 $ 0.75
Diluted $ 2.40 $ 2.20 $ 1.66 $ 1.55 $ 0.78 $ 0.74
</TABLE>
69
<PAGE>
The effect of applying FAS123 in this pro forma disclosure is not indicative of
future amounts. FAS123 does not apply to awards prior to 1995; and additional
awards in future years are anticipated.
Shareholder Rights Plan
In February 1989 the Board of Directors adopted a Shareholder Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
Dynatech's common stock. The Plan was amended in March 1990. Each Right, when
exercisable, entitles a qualifying shareholder to buy shares of Dynatech junior
participating cumulative preferred stock. The Rights would only become
exercisable (i) ten days after a person has become the beneficial owner of 15%
or more of Dynatech's common stock, or (ii) ten business days after the
commencement of a tender offer that would result in the ownership of 15% or more
of the common stock, or (iii) upon determination by the Board of Directors that
a person who holds 10% or more of Dynatech's common stock intends to, or is
likely to, act in certain specified manners adverse to the interests of Dynatech
and its shareholders.
In the event Dynatech is acquired and is not the surviving corporation in a
merger, or in the event of the acquisition of 50% or more of the assets or
earning power of Dynatech, each Right would then entitle the qualified holder to
purchase, at the then-current exercise price, shares of common stock of the
acquiring company having a value of twice the exercise price of the Right.
Furthermore, if any party were to acquire 15% or more of Dynatech's common stock
or were determined to be an adverse person as described above, qualified holders
of the Rights would be entitled to acquire shares of Dynatech junior
participating cumulative preferred stock having a value of twice the then-
current exercise price. At the option of the Board of Directors, all of the
Rights could be exchanged into shares of common or preferred stock.
The Board of Directors of the Company contemporaneously with the execution of
the Merger Agreement amended the Rights Agreement so that (i) none of CDR, Fund
or MergerCo became an "Acquiring Person" as a result of the consummation of the
transactions contemplated by the Merger Agreement, (ii) no "Stock Acquisition
Date," "Triggering Event" or "Distribution Date" (as such terms are defined in
the Rights Agreement) occurred as a result of the consummation of the
transactions contemplated by the Agreement, and (iii) all outstanding Rights
issued and outstanding under the Rights Agreement and the Rights Agreement
terminated immediately prior to the effective time of the Merger and no shares
of Recapitalized Common Stock issued on or after the effective time of the
Merger will have any Rights associated with them under the Rights Agreement.
Commitments and Contingencies
The Company has operating leases from continuing operations covering plant,
office facilities, and equipment which expire at various dates through 2006.
Future minimum annual fixed rentals required during the years ending in fiscal
1999 through 2003 under noncancelable operating leases having an original term
of more than one year are $8.9 million, $7.4 million, $5.6 million, $4.9
million, and $4.2 million, respectively. The aggregate
70
<PAGE>
obligation subsequent to fiscal 2003 is $6.2 million. Rent expense from
continuing operations was approximately $8.1 million, $6.2 million, and $5.7
million in fiscal 1998, 1997, and 1996, respectively.
The Company is a party to several pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company's counsel and management are of the opinion that the final outcome
should not have a material adverse effect on the Company's operations or
financial position.
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. Discovery in this matter closed on June 20,
1998. 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.
Nonrecurring Charges
The components of nonrecurring expenses include the following:
<TABLE>
<CAPTION>
Amounts in thousands 1997 1996
- -------------------------------------------- -------- --------
<S> <C> <C>
Incomplete technology $20,627 $16,852
Intangible writeoffs 7,149 ---
-------- --------
Total $27,776 $16,852
======== ========
</TABLE>
Acquisitions
1997 Acquisitions In March of 1997, the Company acquired the net assets of
Advent Design, Inc. ("Advent") for $3.5 million in cash. Advent designs and
manufactures high-performance microprocessor-based systems for the computer,
medical and communications markets. This acquisition generated $3.4 million of
goodwill which is being amortized over 15 years. During fiscal 1998, the
Company incurred a $1.6 million increase in goodwill, related to a targeted
three-year earnout based on, among other things, a positive operating income.
On December 31, 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of Itronix Corporation ("Itronix") located in
Spokane, Washington, for $65.4 million in cash. Approximately $40 million of
the purchase price was borrowed pursuant to the terms of the Company's
71
<PAGE>
revolving credit and term loan agreement in effect at that time. A significant
portion of the borrowed funds was repaid during the fourth quarter of 1997.
Itronix is a manufacturer of mobile computing and communications devices,
including ruggedized laptop computers, which increase the efficiency of large,
mission-critical service groups.
Incident to this acquisition was the purchase of incomplete technology
activities which resulted in a one-time pretax charge of $20.6 million or
($0.74) per share on a diluted basis. This purchased incomplete technology that
had not reached technological feasibility and which had no alternative future
use was valued using a risk adjusted cash flow model, both in 1997 and 1996,
under which future cash flows associated with in-process research and
development were discounted considering risks and uncertainties related to the
viability of potential changes in future target markets and to the completion of
the products that will ultimately be marketed by the Company. Acquired complete
technology of $8.4 million is being amortized over two to seven years, and
goodwill of $17.9 million is being amortized over 15 years.
As a percentage of sales, the gross margin and selling, general and
administrative expenses of Itronix are lower than the consolidated financial
results of the Company prior to the acquisition. Therefore, the pro forma
income statements below reflect a lower gross margin and selling, general and
administrative expenses as a percent of consolidated sales. Hence, in order to
demonstrate the Company's operating performance versus the previous years, the
following unaudited pro forma information presents a summary of consolidated
results of operations of the Company as if the acquisition had occurred at the
beginning of fiscal 1996, with pro forma adjustments to give effect to
amortization of goodwill and intangibles, interest expense on acquisition debt,
and certain other adjustments, together with related income tax effects. (In
thousands except per share data).
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
March 31, 1997 March 31, 1996
- --------------------------------- ----------------- -----------------
<S> <C> <C>
Sales $426,234 $355,886
Cost of sales 183,076 158,602
--------- ---------
Gross profit 243,158 197,284
Selling, general & administrative expense
122,232 105,383
Product development expense 48,515 40,913
Nonrecurring charges 7,149 16,852
Amortization of intangibles 8,853 7,886
--------- ---------
Operating income 56,409 26,250
Interest expense (3,284) (4,998)
Interest income 2,785 2,181
Other income, net 633 975
--------- ---------
Income from continuing operations before income
taxes 56,543 24,408
Provision for income taxes 24,974 9,799
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
-------- --------
<S> <C> <C>
Income from continuing operations $ 31,569 $ 14,609
======== ========
Income per share:
Basic $1.84 $0.81
Diluted $1.74 $0.80
Weighted average shares:
Basic 17,200 17,969
Diluted 18,028 18,315
</TABLE>
1996 Acquisitions. On February 20, 1996 Dynatech acquired the stock of
Synergistic Solutions, Inc. ("SSI"), of Atlanta, Georgia, for approximately $5.5
million. Acquired technology and other intangible assets of approximately $4.3
million are being amortized over four to seven years. The investment in excess
of fair market value of assets purchased of $964 thousand is being amortized
over 15 years.
On September 1, 1995 Dynatech acquired substantially all of the business and
assets of Tele-Path Industries, Inc. ("TPI"), of Salem, Virginia, for $23.6
million. Approximately $12.6 million was cash, including a $2.6 million
contingent adjustment for the stock price, and 688,096 shares of the Company's
common stock at $19.91 per share. Acquired complete technology and other
intangible assets of approximately $6.7 million are being amortized over five
years.
Incident to this acquisition, the Company purchased the incomplete technology
activities of TPI, resulting in a one-time pretax charge in the second quarter
of approximately $16.9 million, or ($0.56) per share on a diluted basis. This
purchased incomplete technology that had not reached technological feasibility
and which had no alternative future use was valued using a risk adjusted cash
flow model.
Acquisitions, both in fiscal 1997 and 1996, were recorded using the purchase
method of accounting.
Subsequent Events
On June 19, 1998, the Company acquired the stock of Pacific Systems Corporation
of Kirkland, Washington ("Pacific") for a total purchase price of $20 million,
including an incentive earnout. Pacific designs and manufactures customer
specified avionics and integrated cabin management equipment for the corporate
and general aviation market.
On May 21, 1998, the Company completed its management-led recapitalization with
Clayton, Dublilier & Rice, Inc. In connection with the Merger, the Company's
shareholders received consideration consisting of $47.75 per share in cash and a
0.5 share of recapitalized common stock. In connection with the Merger, the
Company entered into a credit agreement with certain lenders providing for the
Senior Secured Credit Facilities including a $260 million term loan facility and
a $110 million revolving credit facility (the "Revolving Credit Facility"). In
connection with the Merger, the Company also completed the offering of $275
million aggregate principal amount of the Senior Subordinated Notes. On May 31,
1998 the Company had a total of $575.2
73
<PAGE>
million of debt which consisted primarily of $275 million principal amount of
Senior Subordinated Notes, $260 million in term loan borrowings under the Term
Loan Facility and $40 million in revolving credit borrowings under the Revolving
Credit Facility.
Debt Service. Principal and interest payments under the new Senior Secured
Credit Agreement and interest payments on the Senior Subordinated Notes will
represent significant liquidity requirements for the Company. It is expected
that 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 required to make
scheduled principal payments of the $50.0 million of tranche A term loan
thereunder over its six-year term, with substantial amortization of the $70.0
million of tranche B term loan, $70.0 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
$51.0 million in fiscal 1999. The Senior Secured Credit Agreement 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 to be 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. 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 closing of the Merger was $70.0
million. The undrawn portion of this facility will be available to meet future
working capital and other business needs of the Company and replaced the
Company's previously outstanding credit facilities totaling $180.0 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,
74
<PAGE>
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
The Senior Secured Credit Agreement imposes restrictions on the ability of the
Company to make capital expenditures and both the Senior Secured Credit
Agreement 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, and 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
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 businesses.
Shares of Recapitalized Common Stock trade only in the over-the-counter market.
Although prices in respect of trades may be published by the National
Association of Securities Dealers, Inc. on its electronic bulletin board, "pink
sheets," quotes for such shares may not be as readily available; accordingly, it
is anticipated that the Recapitalized Common Stock will trade much less
frequently than the Common Stock traded prior to the Merger, which may have a
material adverse effect on the market value of shares of Recapitalized Common
Stock. In addition, (depending upon certain factors) the shares of
Recapitalized Common Stock may no longer constitute "margin securities" for the
purposes of the margin regulations of the Federal Reserve Board and therefore
could no longer be used as collateral for loans made by brokers.
The Company is obligated by the Merger Agreement to continue to be a reporting
company under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and to continue to file periodic reports (including annual and quarterly
reports) for at least five years after the Merger, unless fewer than 100 record
holders of shares of Recapitalized Common Stock are non-affiliates of the
Surviving Corporation or except as otherwise provided in the Merger Agreement.
After the fifth anniversary of the effective time of the Merger, the Company may
deregister the Recapitalized Common Stock under the Exchange Act if permitted by
applicable law. If the Company were to cease to be a reporting company under
the Exchange Act and to the extent not required in connection with any other
debt or equity securities of the Company registered or required to be registered
under the Exchange Act, the information now available to stockholders of the
Company in the annual, quarterly and other reports required to be filed by the
Company with the
75
<PAGE>
Securities and Exchange Commission would not be available to them as a matter of
right.
The following unaudited pro forma condensed consolidated balance sheet of the
Company has been prepared to give effect to the Merger and related transactions
as a recapitalization for financial reporting purposes.
76
<PAGE>
Dynatech Corporation
Pro Forma Balance Sheet
(Unaudited)
<TABLE>
<CAPTION> March 31,
1998
- ------------------------------------------------ --------
<S> <C>
Current assets:
Cash and cash equivalents $ 43,619
Accounts receivable 69,988
Inventories:
Raw materials 24,263
Work in process 11,769
Finished goods 12,850
--------
Total inventory 48,882
Other current assets 16,823
--------
Total current assets 179,312
Property and equipment:
Land, building and leasehold improvements 4,904
Machinery and equipment 51,220
Furniture and fixtures 12,351
--------
68,475
Less accumulated depreciation and amortization (42,110)
--------
26,365
Other assets:
Intangible assets, net 39,595
Other 63,508
--------
$308,780
========
</TABLE>
<TABLE>
<CAPTION>
Current liabilities:
<S> <C>
Notes payable and current portion of long-term debt $ 150
Accounts payable 22,933
Accrued expenses:
Compensation and benefits 21,750
Taxes, other than income taxes 2,071
Deferred revenue 13,868
Other 16,082
Accrued income taxes 5,196
Net liabilities of discontinued operations 756
--------
Total current liabilities 82,806
Long-term debt 567,983
Deferred compensation 3,122
Commitments and contingencies
Shareholders' equity:
Recapitalized common stock, including additional
paid-in capital 304,092
Retained earnings (647,623)
Cumulative translation adjustments (1,600)
--------
Total shareholders' equity (345,131)
--------
$ 308,780
========
</TABLE>
77
<PAGE>
The pro forma balance sheet reflects:
(i) The issuance of 111,590,528 shares of Recapitalized Common Stock in
exchange for MergerCo Common Stock, net of related issuance costs of
$13,800; MergerCo is a nonsubstantive transitory merger vehicle (which was
merged into the Company at the effective time) and its only tangible
assets were $277,000 of cash and 40,804 shares of Common Stock from the
issuance of its common stock.
(ii) The issuance of Senior Secured Credit Facilities, Senior Subordinated
Notes and borrowings under the Revolving Credit Facility.
(iii) Deferred issuance costs incurred in connection with the issuance of Senior
Secured Credit Facilities, Senior Subordinated Notes and the Revolving
Credit Facility of which $2,500 was prepaid by the Company at December 31,
1997.
(iv) The net cash paid in connection with the settlement of certain stock
options in an amount equal to the excess of $49.00 over the exercise price
per share of Common Stock subject so such settled options, and the related
tax benefit.
(v) The assuming of approximately 1,100,000 Company Stock Options by the
Company held by Management Stockholders converted into equivalent options
to purchase shares of Recapitalized Common Stock (the exercise prices of
which preserve the economic value of their current Company Stock Options),
most of which will be fully vested and exercisable. Of the 1,100,000
Company Stock Options, approximately 820,618 Company Stock Options, have
revisions to the original terms, which resulted in a new measurement date
for the Company Stock Options and a non-cash charge of $10.7 million (net
of related tax benefit).
(vi) The conversion of 16,818,945 shares of Common Stock (excluding shares held
by MergerCo and held in treasury assumed to be cancelled) into the right
to receive $47.75 per share in cash and the 0.5 shares of Recapitalized
Common Stock per share of Common Stock (totaling 8,409,473 shares of the
Recapitalized Common Stock).
Also, see Notes Summary of Significant Accounting Policies, Stock Compensation
and Purchase Plans, and Shareholder Rights Plan for other matters relating to
the Merger.
Segment Information and Geographic Areas
The Corporation operates predominantly in a single industry as a global
communications equipment manufacturer focused on network technology solutions.
Its products address communications test, industrial computing and
communications, and visual communications applications. Dynatech is a multi-
national corporation with continuing operations outside the United States
consisting of distribution and sales offices in Germany, England, France and the
Pacific Rim.
Net income in fiscal 1998, 1997, and 1996 included currency gains (losses) of
approximately $12,600, $99,300, and $(90,300), respectively.
78
<PAGE>
Information by geographic areas for the years ended March 31, 1998, 1997, and
1996 is summarized below:
<TABLE>
<CAPTION>
Outside U.S.
United (principally
Amounts in thousands States Europe) Combined
- ------------------------------------------ ----------- ---------- -------
<S> <C> <C> <C>
Sales to unaffiliated customers
1998 $451,360* $21,588 $472,948
1997 340,603* 21,809 362,412
1996 268,830* 24,212 293,042
Income (loss) before taxes from continuing operations
1998 $ 69,772 $ 1,035 $ 70,807
1997 38,486 (3,052) 35,434
1996 26,657 (549) 26,108
Identifiable assets at
March 31, 1998 $250,382 $37,748 $288,130
March 31, 1997 215,218 33,792 249,010
March 31, 1996 186,186 19,003 205,189
</TABLE>
* Includes export sales of $54,552, $48,959, and $35,844 in 1998, 1997 and
1996, respectively.
79
<PAGE>
Summary of Operations by Quarter (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1998
First Second Third Fourth Year
- ---------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales $104,320 $115,856 $133,138 $119,634 $472,948
Gross profit 61,683 65,044 74,873 65,826 267,426
Net income (loss) 8,982 10,512 12,735 9,549 41,776
Income (loss) per common share
Basic $ 0.54 $ 0.63 $ 0.76 $ 0.57 $ 2.49
Diluted 0.52 0.60 0.73 0.55 2.40
Market Share Price(a) - High $ 41.88 $ 41.94 $ 47.31 $ 48.50
- Low 29.00 34.38 34.00 46.19
</TABLE>
<TABLE>
<CAPTION>
1997
First Second Third Fourth Year
- ---------------------------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales $81,122 $85,725 $92,007 $103,558 $362,412
Gross profit 50,874 54,463 58,485 61,336 225,158
Income (loss) from
Continuing operations 8,412 9,277 (2,896)(b) 3,056(c) 17,849
Net income (loss) 8,412 9,277 (2,896) 15,056(d) 29,849
Income (loss) per share continuing
operations:
Basic $ 0.48 $ 0.54 $ (0.16) $ 0.18 $ 1.04
Diluted 0.46 0.52 (0.16) 0.17 0.99
Net income (loss) per share:
Basic $ 0.48 $ 0.54 $ (0.16) $ 0.88 $ 1.74
Diluted 0.46 0.52 (0.16) 0.84 1.66
Market Share Price(a) - High $ 35.00 $ 46.88 $ 58.00 $ 54.50
- Low 23.00 30.75 40.50 28.00
</TABLE>
(a) From January 28, 1997 to May 21, 1998, shares of Common Stock of the
Company were traded on the New York Stock Exchange. Prior to January 28,
1997, shares of Common Stock of the Company were traded on the Nasdaq -
National Market. No cash dividends were paid on shares of Common Stock of
the Company.
(b) Includes charge for purchased incomplete technology of $20.6 million or
($0.74) per share on a diluted basis in 1997.
(c) Includes a charge of $7.1 million or ($0.36) per share on a diluted basis
relating to the writeoff of certain intangible assets.
(d) Includes gain on discontinued operations of $12 million or $0.67 per share
on a diluted basis.
80
<PAGE>
SCHEDULE II
Dynatech Corporation
Valuation and Qualifying Accounts
For the years ended
March 31, 1998, 1997 and 1996
Reserve for Doubtful Accounts (in thousands)
Balance, March 31, 1995 5,077 (a)
Additions charged to income 356
Write-off of uncollectible accounts, net (494)
Allowances reclassified, related to
discontinued operations (3,982)
-------
Balance, March 31, 1996 957
Additions charged to income 646
Write-off of uncollectible accounts, net (359)
Allowances reclassified 628
-------
Balance, March 31, 1997 1,872
Additions charged to income 425
Write-off of uncollectible accounts, net (533)
-------
Balance, March 31, 1998 1,764
(a) Prior year balances have not been restated to reflect elimination of
discontinued operations.
<PAGE>
EXHIBIT INDEX
Exhibit No.
2(1) Agreement and Plan of Merger, dated as of December 20, 1997 by and
between MergerCo and Registrant (included as Appendix A to the Proxy
Statement/Prospectus filed as part of this Registration Statement).
3.1 Amended and Restated Articles of Organization of Registrant.
3.2(1) By-Laws of Registrant.
10.1(1) Form of Amended and Restated Employment Agreement with John F. Reno.*
10.2(1) Form of Amended and Restated Employment Agreement with Allan M.
Kline.*
10.3(1) Form of Amended and Restated Employment Agreement with John R.
Peeler.*
10.4(1) Form of Letter Agreement with John A. Mixon and Certain Other
Officers.*
10.5(1) Form of Management Equity Agreement with Mr. Reno.*
10.6(1) Form of Management Equity Agreement with Messrs. Kline and Peeler.*
10.7(1) Form of Management Equity Agreement with Mr. Mixon and Certain Other
Officers.*
10.8(1) Form of Nondisclosure, Noncompetition and Nonsolicitation Agreement.*
10.9(2) 1992 Stock Option Plan.
10.10(3) 1994 Stock Option and Incentive Plan, as amended.
21(1) Schedule of Subsidiaries of Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule for Fiscal Year Ended March 31, 1998.
27.2 Financial Data Schedule for Quarter Ended September 30, 1997
Restated.
27.3 Financial Data Schedule for Quarter Ended June 30, 1997 Restated.
27.4 Financial Data Schedule for Fiscal Year Ended March 31, 1997
Restated.
27.5 Financial Data Schedule for Quarter Ended December 31, 1996 Restated.
27.6 Financial Data Schedule for Quarter Ended September 30, 1996
Restated.
27.7 Financial Data Schedule for Quarter Ended June 30, 1996 Restated.
27.8 Financial Data Schedule for Fiscal year Ended March 31, 1996
Restated.
* Management contract or compensatory plan or arrangement filed as an exhibit to
this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-44933).
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal year ended March 31, 1992.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-01639).
81
<PAGE>
Appendix C
The Commonwealth of Massachusetts
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL J. CONNOLLY, Secretary
ONE ASHBURTON PLACE BOSTON, MASSACHUSETTS 02108
ARTICLES OF ORGANIZATION
(Under G.L. Ch. 156B)
ARTICLE 1
The name of the corporation is:
DYNATECH CORPORATION
ARTICLE II
The purpose of the corporation is to engage
in the following business activities:
To carry on any engineering, research, consulting, development, manufacturing,
mercantile, selling, management, service or other business operation or activity
which may be lawfully carried on by a corporation organized under the Business
Corporation Law of the Commonwealth of Massachusetts.
Note: If the space provided under any article or item on this form is
insufficient additions shall be set forth on a Separate 8 1/2 x 11 sheet of
paper leaving a left hand margin at least 1 inch. Additions to more than one
article maybe continued on a single sheet so long as each article requiring each
such addition is clearly indicated.
C-1
<PAGE>
ARTICLE III
The Type and issuance of stock and the total number of shares and par value, if
any, of each type and class of stock which the corporation is authorized to
issue
WITHOUT PAR VALUE STOCKS
<TABLE>
<CAPTION>
-------------------------------------
TYPE NUMBER OF SHARES
-------------------------------------
<S> <C>
COMMON:
200,000,000
-------------------------------------
PREFERRED:
-------------------------------------
</TABLE>
WITH PAR VALUE STOCKS
<TABLE>
<CAPTION>
---------------------------------------------------
TYPE NUMBER OF SHARES PAR VALUE
---------------------------------------------------
<S> <C> <C>
COMMON:
---------------------------------------------------
PREFERRED:
100,000 $1
---------------------------------------------------
</TABLE>
ARTICLE IV
If more than one type, class or series is authorized, a description of each
_____, if any, the preferences, voting powers, qualifications, special or
relative rights or privileges as to each type and class thereof and any series
now established.
See pages 2A - 2G
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are as follows:
None
ARTICLE VI
Other lawful provisions, if any, for the conduct and regulation of business and
affairs of the corporation, for its voluntary dissolution, or for limiting,
defining, regulating the powers of the corporation, or of its directors or
stockholders or of any class of shareholders: (if there are no provisions state
"None".)
See pages 2H - 2M
Note: The preceding (6) articles are considered to be permanent and may only
be changed by filing appropriate articles of amendment.
<PAGE>
Article IV
----------
A description of each of the different classes of stock with the
preferences, voting powers, qualifications, special or relative rights or
privileges as to each class thereof is as follows:
SERIAL PREFERENCE STOCK
-----------------------
1. Issuance. The Serial Preference Stock may from time to time be
--------
divided into and issued in one or more series. The different series shall be
established and designated, and the variations in the relative rights and
preferences as between the different series shall be fixed and determined by the
Board of Directors as provided in Section 2 hereof. In all other respects all
shares of Serial Preference Stock shall be identical.
The Serial Preference Stock may be issued from time to time by
authority of the Board of Directors for such consideration as from time to time
may be fixed by vote of the Board of Directors providing for the issue of such
stock.
2. Rights and Privileges. The Board of Directors is hereby
---------------------
expressly authorized, subject to the provisions of these Articles of
Organization, to establish one or more series of Serial Preference Stock and,
with respect to such series, to fix and determine by vote providing for the
issue of such series:
(a) the number of shares to constitute such series and the
distinctive designation thereof;
(b) the dividend rate on the shares of such series and the dividend
payment dates;
(c) whether or not the shares of such series shall be redeemable,
and, if redeemable, the redemption prices which the shares of such series
shall be
2A
<PAGE>
entitled to receive and the terms and manner of redemption;
(d) the preferences, if any, and the amounts which the shares of such
series shall be entitled to receive and all other special or relative
rights of the shares of such series, upon the voluntary and involuntary
dissolution of, or upon any distribution of the assets of, the Corporation;
(e) whether or not the shares of such series shall be subject to the
operation of retirement or sinking funds to be applied for redemption of
such shares and, if such retirement or sinking fund or funds be
established, the annual amount thereof and the terms and provisions
relative to the operation thereof;
(f) whether or not the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any
other series of the same or any other class or classes of stock of the
Corporation and the conversion price or prices or ratio or ratios or the
rate or rates at which such exchange may be made, with such adjustments, if
any, as shall be stated in such vote;
(g) whether or not the shares of such series shall have voting
rights, and, if so, the conditions under which the shares of such series
shall vote as a separate class; and
(h) such other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions of such series to the full extent now or hereafter permitted
by the laws of the Commonwealth of Massachusetts.
Notwithstanding the fixing of the number of shares constituting a particular
series, the Board of Directors may at any time thereafter authorize the issuance
of additional shares of the same series.
2B
<PAGE>
3. Dividends. Holders of Serial Preference Stock shall be entitled
---------
to receive, when and as declared by the Board of Directors but only out of funds
legally available for the payment of dividends, cash dividends (which may be
cumulative) at the annual rates fixed by the Board of Directors for the
respective series and no more, payable on such dates in each year as the Board
of Directors shall fix for the respective series as provided in subsection 2(b)
(hereinafter referred to as "dividend dates"). Until all accrued dividends on
all series of Serial Preference Stock which bear cumulative dividends have been
declared and set apart for payment through the last preceding dividend date set
for all such series, no cash payment or distribution shall be made to holders of
any other class of Stock of the Corporation. Dividends on shares of Serial
Preference Stock of any series which bears cumulative dividends shall accumulate
from and after the day on which such shares are issued, but arrearages in the
payment of dividends on any shares of Serial Preference Stock shall not bear
interest. No dividend shall be declared and set apart for payment on any series
of Serial Preference Stock in respect of any dividend period unless there shall
likewise be declared and set apart for payment on all shares of Serial
Preference Stock of each series at the time outstanding such dividends as would
be payable on the said shares through the last preceding dividend date if all
dividends were declared and paid in full. Nothing herein contained shall be
deemed to limit the right of the Corporation to purchase or otherwise acquire at
any time any shares of its capital stock; provided that no shares of capital
stock shall be repurchased at any time when accrued dividends on any series of
Serial Preference Stock which bears cumulative dividends remain unpaid for any
period to any including the last preceding dividend date.
For purposes of these Articles of Organization, and of any vote fixing
the terms of any series of Serial Preference Stock the amount of dividends
"accrued" on any share of Serial Preference Stock of any series as at any
dividend date which bears cumulative dividends shall be
2C
<PAGE>
deemed to be the amount of any unpaid dividends accumulated thereon to and
including such dividend date, whether or not earned or declared, and the amount
of dividends "accrued" on any such share of Serial Preference Stock of any
series which bears cumulative dividends as at any date other than a dividend
date shall be calculated as the amount of any unpaid dividends accumulated
thereon to and including the last preceding dividend date, whether or not earned
or declared, plus an amount computed, on the basis of 360 days per annum, for
the period after such last preceding dividend date to and including the date as
of which the calculation is made at the annual dividend rate fixed for the
shares of such series.
4. Preference Upon Dissolution. Upon the dissolution of, or upon
---------------------------
any distribution of the assets of, the Corporation, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for any other class of stock, the holders of Serial
Preference Stock shall be entitled to payment of the amount of the preference
payable upon such dissolution of, or distribution of the assets of, the
Corporation fixed by the Board of Directors for the respective series as
provided in subsection 2(d), and shall be entitled to no further payment. If
upon any such dissolution or distribution the assets of the Corporation shall be
insufficient to pay in full to the holders of the Serial Preference Stock the
preferential amount aforesaid, then such assets, or the proceeds thereof, shall
be distributed among the holders of each series of Serial Preference Stock
ratably in accordance with the sums which would be payable on such distribution
if all sums payable were discharged in full. The voluntary sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property and assets of the
Corporation, the merger or consolidation of the Corporation into or with any
other Corporation, or the merger of any other corporation into it, shall not be
deemed to be a dissolution of, or a distribution of the assets of, the
Corporation, for the purpose of this Section 4.
2D
<PAGE>
5. Redemption. In the event that and during the period in which the
----------
Serial Preference Stock of any series shall be redeemable, then, at the option
of the Board of Directors, the Corporation from time to time may redeem all or
any part of the outstanding shares of such series at the redemption price and
upon the terms and conditions fixed by the Board of Directors as provided in
subsection 2(c) (the sum so payable upon any redemption of Serial Preference
Stock being herein referred to as the "redemption price"); provided, that not
less than 30 days previous to the date fixed for redemption notice of the time
and place thereof shall be mailed to each holder of record of the shares so to
be redeemed at his address as shown by the records of the Corporation; and
provided, further, that in case of redemption of less than all of the
outstanding shares of any series of Serial Preference Stock the shares to be
redeemed shall be chosen by lot or in such equitable manner as may be prescribed
by the Board of Directors. At any time after notice of redemption shall have
been mailed as above provided but before the redemption date, the Corporation
may deposit the aggregate redemption price in trust with a bank or trust company
in New York, New York, Boston, Massachusetts, or any other city in which the
Corporation shall at that time maintain a transfer agency with respect to any
class of its stock, having capital, surplus and undivided profits of at least
$5,000,000, and named in such notice. Upon the making of such deposit, or if no
such deposit is made then upon such redemption date (unless the Corporation
shall default in making payment of the redemption price), holders of the shares
of Serial Preference Stock called for redemption shall cease to be stockholders
with respect to such shares notwithstanding that any certificate for such shares
shall not have been surrendered; and thereafter such shares shall no longer be
transferable on the books of the Corporation and such holders shall have no
interest in or claim against the Corporation with respect to said shares, except
the right (a) to receive payment of the redemption price upon surrender of their
-
certificates, or (b) to exercise on or before the date fixed for redemption the
-
rights, if any, not
2E
<PAGE>
theretofore expiring, to convert the shares so called for redemption into, or to
exchange such shares for, shares of stock of any other class or classes of stock
of the Corporation. Any funds deposited in trust as aforesaid which shall not be
required for such redemption, because of the exercise of any right of conversion
subsequent to the date of such deposit or otherwise, shall be returned to the
Corporation forthwith. The Corporation shall be entitled to receive from any
such bank or trust company the interest, if any, allowed on any moneys deposited
pursuant to this Section, and the holders of any shares so redeemed shall have
no claim to any such interest. Any funds so deposited by the Corporation and
unclaimed at the end of five years from the date fixed for such redemption shall
be repaid to the Corporation upon its request, after which repayment the holders
of such shares who shall not have made claim against such moneys prior to such
repayment shall be deemed to be unsecured creditors of the Corporation, but only
for a period of two years from the date of such repayment (after which all
rights of the holders of such shares as unsecured creditors or otherwise shall
cease), for an amount equivalent to the amount deposited as above stated for the
redemption of such shares and so repaid to the Corporation, but shall in no
event be entitled to any interest.
In order to facilitate the redemption of any shares of Serial
Preference Stock, the Board of Directors is authorized to cause the transfer
books of the Corporation to be closed as to the shares to be redeemed.
6. Retirement. Any shares of Serial Preference Stock which shall at
----------
any time have been redeemed, or which shall at any time have been surrendered
for conversion or exchange or for cancellation pursuant to any retirement or
sinking fund provisions with respect to any series of Serial Preference Stock,
shall be retired and shall thereafter have the status of authorized and unissued
shares of Serial Preference Stock undesignated as to series.
2F
<PAGE>
COMMON STOCK
------------
1. Issuance. The Common Stock may be issued from time to time by
--------
authority of the Board of Directors for such consideration as from time to time
may be fixed by vote of the Board of Directors providing for the issue of such
stock.
2. Dividends. Holders of Common Stock shall be entitled to receive
---------
dividends when and as declared by the Board of Directors but only out of funds
legally available for the payment thereof and not until all accrued dividends on
all series of Serial Preference Stock which bear cumulative dividends shall have
been declared and set apart for payment through the last preceding dividend date
set for all such series.
3. Preference to Serial Preference Stock Upon Dissolution. Upon the
------------------------------------------------------
dissolution of, or upon any distribution of the assets of, the corporation, the
assets, or the proceeds thereof, which are available for distribution to
stockholders shall be distributed ratably among the holders of Common Stock
after payment to the holders of each series of Serial Preference Stock of the
amount of the preference payable upon such dissolution of, or distribution of
the assets of, the Corporation.
4. Voting Rights. The Common Stock shall have exclusive voting
-------------
rights except as otherwise required by law and except to the extent the Board of
Directors may, at the time any series of Serial Preference Stock is established,
determine that the shares of such series shall have exclusive voting rights or
shall vote together as a single class with shares of Common Stock and/or with
shares of one or more other series of Serial Preference Stock on all or certain
matters. Each share of Common Stock shall be entitled to one vote.
2G
<PAGE>
Article VI
----------
POWERS OF THE CORPORATION, DIRECTORS AND STOCKHOLDERS
-----------------------------------------------------
The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation and for the
purpose of creating, defining, limiting and regulating the powers of the
Corporation and its Directors (as defined below) and stockholders:
1. The number of Directors of the Corporation shall be fixed and may
be altered from time to time in the manner provided in the By-Laws, and
vacancies in the Board of Directors and newly created directorships resulting
from any increase in the authorized number of Directors may be filled, and
Directors may be removed, as provided in the By-Laws.
2. The election of Directors may be conducted in any manner approved
by the stockholders at the time when the election is held and need not be by
ballot.
3. All corporate powers and authority of the Corporation (except as
at the time otherwise provided by law, by these Articles of Organization or by
the By-Laws) shall be vested in and exercised by the Board of Directors.
4. No Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of his or her
fiduciary duty as a Director, provided that nothing contained in these Articles
--------
of Organization shall eliminate or limit the liability of a Director (i) for any
-
breach of the Director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
--
misconduct or a knowing violation of the law, (iii) under Section 61 or 62 of
---
the Business Corporation Law of the Commonwealth of Massachusetts (the
2H
<PAGE>
"MBCL"), or (iv) for any transaction from which the Director derived an improper
--
personal benefit.
No amendment to or repeal of this Article shall apply to or have any
effect on the liability or alleged liability of any Director of the Corporation
for or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
The provisions of this Article shall not eliminate or limit the
liability of a Director of the Corporation for any act or omission occurring
prior to the date on which this Article became effective.
If the MBCL is subsequently amended to eliminate or further limit the
personal liability of Directors or to authorize corporate action to eliminate or
further limit such liability, then the liability of the Directors of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the MBCL as so amended.
5. The By-Laws of this Corporation may provide that the Directors
may make, amend or repeal the By-Laws in whole or in part, except with respect
to any provision thereof which by law, the Articles of Organization or the By-
Laws requires action by the stockholders.
INDEMNIFICATION
---------------
1. Definitions. For purposes of these Articles:
-----------
(a) A "Director" or "Officer" means any person serving as a director
of the Corporation or in any other office filled by appointment or election by
the Directors or the stockholders and also includes (i) a Director or Officer of
-
the Corporation serving at the request of the Corporation as a director,
officer, employee, trustee, partner or other agent of another organization or
who serves at its request in any capacity with respect to any employee benefit
plan,
2I
<PAGE>
and (ii) any person who formerly served as a Director or Officer;
--
(b) "Expenses" means (i) all expenses (including attorneys' fees and
-
disbursements) actually and reasonably incurred in connection with a Proceeding,
in being a witness in a Proceeding, or in successfully seeking indemnification
under these Articles, and (ii) any judgments, awards, fines or penalties paid by
--
a Director or Officer in connection with a Proceeding or amounts paid in
settlement of a Proceeding, including any taxes or penalties imposed on such
Director or Officer with respect to any employee benefit plan under applicable
law; and
(c) A "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
and any claim which could be the subject of a Proceeding.
2. Rights to Indemnification. Except as limited by law, the
-------------------------
Corporation shall indemnify its Directors and Officers against all Expenses
incurred by them in connection with any Proceeding resulting from their serving
as an Officer or Director, except that no indemnification shall be provided
regarding any matter as to which it shall be adjudicated that such Director or
Officer did not act in good faith and in the reasonable belief that his or her
action was in the best interests of the Corporation (the "Standard"); for
purposes of this Section 2 in connection with service to an employee benefit
plan, no Director or Officer shall be deemed to have failed to have acted in
accordance with the Standard if he or she acted in good faith in the reasonable
belief that his or her action was in the best interests of the participants or
beneficiaries of said plan; and provided that as to any matter disposed of by a
compromise payment by the Director or Officer seeking indemnification hereunder,
pursuant to a consent decree or otherwise, no indemnification shall be provided
unless such compromise shall be approved (i) by a majority vote of the Directors
-
who were not parties to such Proceeding, or
2J
<PAGE>
(ii) by legal counsel (who may be the counsel regularly employed by the
--
Corporation) in a written opinion to the effect that such Director's or
Officer's actions were not contrary to the Standard or (iii) by vote of a
---
majority of stockholders present in person or by proxy at a meeting at which a
quorum is present.
The Board of Directors may, by general vote pertaining to a specific
employee or agent or class thereof, authorize indemnification of the
Corporation's employees and agents to whatever extent it may determine, which
may be in the same manner and to the same extent provided above.
3. Advance Payments. Except as limited by law, expenses of a
----------------
Director or Officer shall be paid by the Corporation in advance of the final
determination of a Proceeding, no later than 45 days after the written request
therefor by said Director or Officer, unless it is determined (i) by a majority
-
vote of a quorum consisting of the Directors who were not parties to such
Proceeding, or (ii) by legal counsel (who may be the counsel regularly employed
--
by the Corporation) in a written opinion, to the effect that such Director or
Officer did not act in accordance with the Standard; provided, however, that
such advance shall only be made upon receipt of an undertaking by the Director
or Officer to repay the advances if it is ultimately determined that he or she
is not eligible to be indemnified, which undertaking may be unsecured and
accepted without regard to the financial ability of such Director or Officer to
make repayment.
4. Insurance. The Corporation shall have the power to purchase and
---------
maintain insurance on behalf of any Director or Officer against any liability or
cost incurred by him or her as a Director or Officer or arising out of such
status, whether or not the Corporation would have the power to indemnify such
Director or Officer against such liability or cost.
2K
<PAGE>
5. Other Rights and Remedies. The provisions of these Articles
-------------------------
shall not be construed to limit the power of the Corporation to indemnify its
Officers or Directors to the full extent permitted by law or to enter into
specific agreements, commitments or arrangements for indemnification permitted
by law.
The indemnification provided hereunder shall inure to the benefit of
the heirs and personal representative of a Director or Officer.
All rights to indemnification under these Articles shall be deemed to
be in the nature of a contractual obligation of the Corporation bargained for by
each Director and Officer who serves in such capacity at any time while these
Articles or other relevant provisions of the MBCL and other applicable law, if
any, are in effect. No repeal or modification of these Articles shall adversely
affect any such rights or obligations then existing with respect to any state of
facts then or theretofore existing or any Proceeding theretofore or thereafter
brought based in whole or in part upon any such state of facts.
In the event that the laws of the Commonwealth of Massachusetts
hereafter shall be amended, the effect of which is to modify, change, expand or
contract the right or ability of a Massachusetts corporation to provide
indemnification to any or all of its Officers or Directors, the Board of
Directors of the Corporation shall be authorized to amend the By-Laws of the
Corporation to insert therein an indemnification provision not inconsistent with
the statutory law of Massachusetts then in effect and any such By-Law provision
shall not be invalid or unenforceable by reason of the fact that it is
inconsistent with the provisions of these Articles.
TRANSACTIONS WITH INTERESTED PERSONS
------------------------------------
1. In the absence of bad faith, no contract or transaction by this
Corporation shall be void, voidable or
2L
<PAGE>
in any way invalid by reason of the fact that it is with an Interested Person.
2. For this purpose, Interested Person shall mean an officer,
director, stockholder or employee of the Corporation, any person in any other
way interested in the Corporation, and a corporation or organization in which an
officer, director, stockholder or employee of this Corporation is an officer,
director, stockholder or employee or in any way interested.
3. In the absence of bad faith, no Interested Person shall be liable
because of his interest in this Corporation to the Corporation or any other
Interested Person for any loss or expense incurred by reason of such contract or
transaction or be accountable for any gain or profit realized from such contract
or transaction.
4. The provisions of this Article shall be operative notwithstanding
the fact that the presence of an Interested Person was necessary to constitute a
quorum at a meeting of Directors or stockholders of the Corporation at which
such contract or transaction was authorized or that the vote of an Interested
Person was necessary for the authorization of such contract or transaction.
The Corporation reserves the right to amend or repeal any provision
contained in these Articles of Organization in the manner now or hereafter
prescribed by the law of the Commonwealth of Massachusetts and all rights herein
conferred upon stockholders or Directors are granted subject to this
reservation.
2M
<PAGE>
ARTICLE VII
The effective date of organization of this corporation shall be the date
approved and filed by the Secretary of the Commonwealth. If a later effective
date is desired, specify such date which shall not be more than thirty days
after the date of filing.
The information continued in ARTICLE VIII is NOT a PERMANENT part of the
Articles of Organization and may be changed ONLY by filing the appropriate form
provided therefor.
ARTICLE VIII
a. The street address of the corporation IN MASSACHUSETTS is:(post office boxes
are not acceptable)
3 New England Executive Park, Burlington, Massachusetts 01803
b. The name, residence and post office address (if different) of the directors
and officers of the corporation as follows:
<TABLE>
<CAPTION>
NAME RESIDENCE POST OFFICE ADDRESS
<S> <C> <C> <C>
President:
Treasurer:
Clerk:
Director:
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of: March
d. The name and BUSINESS address of the RESIDENT AGENT of the corporation, if
any, is:
ARTICLE IX
By-laws of the corporation have been duly adopted and the president, treasurer,
clerk and directors whose names are set forth above, have been duly elected.
IN WITNESS WHEREOF and under the gains and penalties of perjury, I/WE, whose
signature(s) appear below as incorporator(s) and whose names and business or
residential address(es) ARE CLEARLY TYPED OR PRINTED beneath each signature do
hereby associate with the intention of forming this corporation under the
provisions of General Laws Chapter 1568 and do hereby sign these Articles of
Organization as incorporator(s)
this day of 19 .
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Note: If any already existing corporation is acting as incorporator, type in the
exact name of the corporation, the state or other jurisdictions where it was
incorporated, the name of the persons signing on behalf of said corporation and
the title he/she holds or other authority by which such action is taken.
3
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B, SECTION 12
==============================================
I hereby certify that, upon an examination of these articles of
organization, duly submitted to me, it appears that the provisions of the
General Laws relative to the organization of corporations have been complied
with, and I hereby approve said articles; and the filing fee in the amount of
$ having been paid, said articles are deemed to have been filed with me
this day of 19 .
Effective date
MICHAEL J. CONNOLLY
Secretary of State
FILING FEE: 1/10 of 1% of the total amount of the authorized capital stock, but
not less than $200.00. For the purpose of filing, shares of stock with a par
value less than one dollar or no par stock shall be deemed to have a par value
of one dollar per share.
PHOTOCOPY OF ARTICLES OF ORGANIZATION TO BE SENT
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
<PAGE>
Coopers & Lybrand Consent
We consent to the incorporation by reference in the registration
statements of Dynatech Corporation on Form S-3 (File Nos. 2-78465, 2-81026,
2-82260, 2-85387, 2-86457, 2-92391, 2-94757, 33-365, 33-2387, 33-5544, 33-17169,
33-24058, 33-30610 and 33-62551), on Form S-4 (File No. 333-44933) and on Form
S-8 (File Nos. 2-87779, 33-10465, 33-17243, 33-42427, 33-50768, 33-57491,
33-57495, 33-16461, and 333-01639) of our reports dated April 28, 1998, except
for the "Subsequent Event" note, for which the date is May 21, 1998, on our
audits of the consolidated financial statements and financial statement schedule
of Dynatech Corporation as of March 31, 1998 and 1997 and for each of the three
fiscal years in the period ended March 31, 1998, which reports are included in
this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 26, 1998
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0
0
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3,721
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0
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0
0
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<OTHER-EXPENSES> 191,669
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0
0
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<OTHER-EXPENSES> (552)
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<INTEREST-EXPENSE> (1,801)
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<INCOME-TAX> 11,976
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<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
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<PP&E> 52,414
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<TOTAL-ASSETS> 208,360
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0
0
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<OTHER-SE> 153,788
<TOTAL-LIABILITY-AND-EQUITY> 208,360
<SALES> 166,847
<TOTAL-REVENUES> 166,847
<CGS> 61,510
<TOTAL-COSTS> 76,974
<OTHER-EXPENSES> (422)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (945)
<INCOME-PRETAX> 29,730
<INCOME-TAX> 12,041
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<PAGE>
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