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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, 1999
Commission file number 1-12657
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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, 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 incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At May 20, 1999, the aggregate market value of the Common Stock of the
registrant held by non-affiliates was $33,352,688.25.
At May 20, 1999 there were 120,673,048 shares of Common Stock of the
registrant outstanding.
Documents Incorporated By Reference:
Portions of the proxy statement for the 1999 Annual Meeting of Shareholders
are incorporated by reference in Part III.
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Item 1. Business
Incorporated in Massachusetts in 1959, Dynatech Corporation 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 "Old 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 "Common Stock") and (ii) each then
outstanding share of common stock of MergerCo was converted into one share of
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 91.8% of the Common Stock. John F. Reno, the former Chairman,
President and Chief Executive of the Company together with two family trusts
holds approximately 1.0% of the Common Stock and other stockholders hold
approximately 7.2% of the Common Stock.
On May 19, 1999, the Company's then Chairman, President and Chief Executive
Officer, John F. Reno, announced his retirement. Ned C. Lautenbach, a
principal of CDR, was named to replace Mr. Reno as Chairman, President and
Chief Executive Officer.
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 that the TTC division ("TTC")
of Dynatech LLC (formerly known as Telecommunication Techniques Co.,
LLC), a subsidiary of the Company, is the third 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 46% of the Company's sales
(or approximately $239.0 million) for the fiscal year ended March 31,
1999.
. Industrial Computing and Communications. The Company addresses two areas
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, scientists and
production managers through its widely recognized Industrial Computer
Source-Book catalogs. Itronix Corporation ("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 37% of
the Company's sales (or approximately $193.3 million) for the fiscal
year ended March 31, 1999.
. Visual Communications. The Company's visual communications business
consists principally of two market-leading niche-focused subsidiaries:
(i) Airshow, Inc. ("AIRSHOW") is a leader in passenger cabin video
information display systems and information services for the general and
commercial aviation markets; and (ii) da Vinci Systems, Inc. ("da
Vinci") is a leader in digital color enhancement
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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 17% of the
Company's sales (or approximately $90.6 million) for the fiscal year
ended March 31, 1999.
For the fiscal year ended March 31, 1999, the Company generated sales of
$522.9 million.
Industry Overview
Communications Test
Market Overview. Test instruments are used in the design, manufacturing,
installation and maintenance of communications equipment and networks. Test and
monitoring systems automate the process of detecting, isolating and resolving
faults within a communications network. TTC currently addresses the test
instruments market, primarily in North America, and has begun to address
segments within the 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. 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.
and Wavetek Wandel Goltermann.
Industrial Computing and Communications
The Company's industrial computing and communications business addresses two
markets: (i) the market for ruggedized rack-mounted computers, which is
characterized by thousands of smaller customers who typically order fewer than
ten units each, and (ii) the market for ruggedized portable computers, which is
characterized by a more concentrated group of larger customers that typically
order large quantities of units.
Ruggedized Rack-Mounted Computers. The Company believes that the global
market for ruggedized industrial computer products is split roughly evenly
between North America and the rest of the world. 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. 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. 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
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is a 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. AIRSHOW has a leadership 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) data services testing by
both service providers and users of a broad range of technologies and services
delivered principally to business customers. In addition, TTC continues to
expand 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, DWDM (Dense Wave Division Multiplexing) 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 $2,000 for a handheld unit to $45,000 for
a fully-featured portable instrument to $70,000 for a test system.
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Service providers use TTC's local loop test products to install and maintain
voice telephone services, ISDN, ADSL, digital data system ("DDS"), T1 lines,
and fiber optic facilities between the service providers' local 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.
Data Services Testing. TTC's data 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, Internet Protocol ("IP") 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 such as Voice-Over-IP ("VoIP"). 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 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 $211.3 million in fiscal 1997, $240.4 million in fiscal
1998, and $238.9 million in fiscal 1999.
Industrial Computing and Communications
Overview. The Company's industrial computing and communications business
consists of two subsidiaries addressing different areas 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 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.
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.
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ICS also uses its in-house CPU design capabilities to sell customized modular
products and subsystems to systems integrators.
Growth at ICS during fiscal 1999 lagged behind historical growth rates, and
as a result, the Company implemented a change in senior management at ICS as
well as modified the way it markets and sells its products. For example, ICS
implemented a web site for on-line ordering designed to better match the
current market demands and to assist ICS in returning to growing at its
historical rates.
Itronix. Itronix supplies 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.
During fiscal 1997 and 1998 Itronix was facing significant manufacturing and
marketing challenges. Management implemented a plan to (i) reduce
manufacturing costs by renegotiating component costs, outsourcing non-core
manufacturing activities and redesigning its products and (ii) reposition its
premium niche against new market competition from "semi-rugged" and mass
market products. During the third quarter of fiscal 1999 Itronix received
orders totaling more than $72 million, primarily from two RBOCs. As a result,
Itronix's performance during the third and fourth quarters of fiscal 1999
significantly improved. However, results of operations for Itronix are
expected to continue to vary widely because of the relatively small number of
potential customers with large field-service work forces and the irregularity
of timing and size of such customers' orders.
Industrial Computing and Communications businesses sales were $142.2 million
in fiscal 1997 on a pro forma basis, $155.0 million in fiscal 1998 and $193.3
million in fiscal 1999.
Visual Communications
Overview. The Company's principal visual communications businesses are
AIRSHOW and da Vinci. The Company's total visual communications sales were
$72.8 million in fiscal 1997, $77.5 million in fiscal 1998, and $90.6 million
in fiscal 1999.
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.
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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.,
and Gulfstream Aerospace Corporation. The AIRSHOW TV service provides for
reception of direct broadcast satellite TV aboard general aviation aircraft
which operate within the continental U.S.
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. At March 31, 1999, the Company's other visual
communications subsidiary is: DataViews, which provides tools for software
developers. During fiscal year 1999, two other subsidiaries ceased operating:
ComCoTec, which was sold in June 1998; and Parallax Graphics, Inc., which
ceased full operation in December 1997, was closed in December 1998.
Product Development
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 1997 through fiscal 1999, consolidated product development expense was
approximately $152.3 million, representing an average of 11.2% of sales per
year. Consolidated product development expense was 11.9% of sales ($43.3
million) in fiscal 1997, 11.6% of sales ($55.0 million) in fiscal 1998 and
10.3% of sales ($54.0 million) in fiscal 1999. The Company anticipates product
development expense in future years to continue at an average historical rate
of approximately 11% of consolidated sales per year.
From the beginning of fiscal 1997 through fiscal 1999, the Company invested
approximately $94.9 million in the development of communications test
products. In fiscal 1999, the Company introduced a significant number of new
products at its communications test business including the TB 109XC (a
subscriber loop analyzer) that enhances the service providers ability to
provide their customers with higher speed internet access and improved service
quality, a series of service analyzers for the international market in the TTC
2230 (a services module for the TTC 2000 Test Pad) and TPI 750E (ATM field
analyzer), the first CAP and DMT based ADSL analyzer in the TPI 350DSL, and
the first hand-held, battery-operated DSO through OC12 SONET Analyzer in the
T-BERD 2310.
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.
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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 $17.5 million, $19.3 million, and
$9.8 million in fiscal 1997, 1998, and 1999, 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.
In fiscal 1997 and fiscal 1998, no single customer accounted for more than
10% of sales. In fiscal 1999, however, the Company recognized revenue equal to
approximately 13% of consolidated sales from BellSouth Telecommunications
("BellSouth"). Due to the high level of BellSouth backlog at March 31, 1999
(approximately $40 million), the Company anticipates shipments to BellSouth in
fiscal 2000 could be approximately 10% of consolidated sales. The Company does
not, however, anticipate sales from BellSouth to continue at this rate in
future years.
Communications Test. In the United States, TTC markets and sells its
communications test and analysis products primarily through a 160-person
direct sales team comprised predominantly of engineers and technical
professionals who undergo intensive initial training on TTC's and its
competitors' products. Internationally, TTC employs a 50+-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. See
"Risk Factors--Highly Competitive Markets"
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 North America directly to foreign
customers) were approximately 20%, 16% and 14% of consolidated net sales in
fiscal 1997, 1998 and 1999, respectively.
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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 summary
of the Company's sales, earnings and long-lived 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 which began in 1994
and ended 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."
In addition, on June 30, 1998 the Company sold the assets of ComCoTec, Inc.
("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc. for $21
million. ComCoTec is a supplier of pharmacy management software and services
and was a subsidiary within the Company's visual communications products
group.
Backlog
The Company's backlog of orders at March 31, 1998 and 1999 was $79.1 million
and $170.1 million, respectively, reflecting a 115% increase. The largest
increase in backlog is a result of a significant increase in bookings for the
Company's ruggedized laptop computers. In addition, the Company has an
increased backlog for the Company's communications test products and airplane
passenger video displays.
The backlog at March 31, 1999, related to BellSouth Telecommunications, a
Dynatech customer that contributed approximately 13% of total sales in fiscal
1999, was $40 million. Of the $170.1 million backlog at March 31, 1999,
approximately 87% is expected to ship in fiscal 2000.
Employees
At March 31, 1999, the Company employed approximately 2,349 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.
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.
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.
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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
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.
RISK FACTORS
Control by CDR Fund V
CDR Fund V currently controls approximately 91.8% of the outstanding shares
of 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 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 incurring of additional indebtedness, the issuance of preferred
stock and the declaration of dividends. Moreover, concentration of ownership
by CDR Fund V of Common Stock of the Company will have the effect of requiring
a third party to negotiate any acquisition of control of the Company with CDR
Fund V. There can be no assurance that the interests of CDR Fund V will not
conflict with the interests of investors with respect to any such transaction
or otherwise.
Lack of Trading Market
Shares of 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
10
<PAGE>
"pink sheets," quotes for such shares may not be readily available;
accordingly, the Common Stock has traded and is anticipated to continue to
trade much less frequently than the Old Common Stock traded prior to the
Merger, which may have a material adverse effect on the market value of Common
Stock.
Termination of Exchange Act Reporting
In connection with the Merger, the Company has agreed to continue to file
periodic reports (including annual and quarterly reports) under the Securities
Exchange Act of 1934, as amended, until May 21, 2003 (the "Exchange Act")
unless fewer than 100 record holders of shares of Common Stock are non-
affiliates of the Company or except as otherwise provided in the Agreement and
Plan of Merger (the "Merger Agreement"). When the Company ceases to be
obligated to be an Exchange Act reporting company under the Merger Agreement,
the information now available to investors of the Company in the reports
required to be filed by the Company with the Securities and Exchange
Commission would not be available to them as a matter of right, although the
Company may be required to report under other agreements or otherwise.
Substantial Indebtedness; 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 thousand at
March 31, 1998). Although the Company repaid $8 million mandatory principal
payments under its term loan facility (the "Term Loan Facility") and repaid
all of the $40 million of indebtedness outstanding under its $110 million
revolving credit facility (the "Revolving Credit Facility") in fiscal year
1999, at March 31, 1999 the Company had a total of $527 million of debt,
outstanding. This outstanding debt consisted primarily of $275 million of the
Company's 9 3/4% Senior Subordinated Notes due 2008 (the "Senior Subordinated
Notes"), $252 million from term loan borrowings under the Company's Term Loan
Facility, and no borrowings under the Company's Revolving Credit Facility
(collectively, the "Senior Secured Credit Facilities"). The Term Loan Facility
and Revolving Credit Facility 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. Outstanding term loan borrowings must be repaid (or
prepaid in some cases) over the remaining life of the loans. All outstanding
Revolving Facility Credit borrowings will become due on March 31, 2004.
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. See "Management
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's high debt levels 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 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. The Company's performance, in turn, will be subject to prevailing
economic and competitive conditions and to financial, business, legislative,
regulatory, industry, economic and other factors, many of which are beyond the
Company's control. These factors could include
11
<PAGE>
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
Agreement 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
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.
12
<PAGE>
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 1997 through fiscal 1999, the Company has expended on
average 11.2% of its sales (or approximately $152.3 million) on product
development and although the Company expects to continue product development
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
13
<PAGE>
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 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.
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
14
<PAGE>
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,
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 Risks
Generally, certain computer programs may not be read to reach the year 2000,
because these programs use only two digits to refer a year. While the Company
expects to make the necessary modifications of changes to both its internal
information technology ("IT") and non-IT systems and existing product base in
a timely fashion, there can be no assurance that the Company's internal
systems and existing or installed base of products will not be materially
adversely affected by the advent of Year 2000. Certain of the Company's
products are used, in conjunction with products of other companies, in
applications that may be critical to the operations of its customers. Any
product non-readiness, whether standing alone or used in conjunction with the
products of other companies, may expose the Company to claims from its
customers or others, and could impair market acceptance of the Company's
products and services, increase service and warranty costs, or result in
payment of damages, which in turn could materially adversely affect the
Company.
In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. Similarly,
in the event of a failure as a result of Year 2000 issues in any systems of
third parties with whom the Company interacts, the Company could lose or have
trouble accessing or receive inaccurate third party data, experience internal
and external communications difficulties or have difficulty obtaining
components that are Year 2000 compliant from its vendors. The Company could
also experience a slowdown or reduction of sales if customers such as
telecommunications companies or commercial airlines are adversely affected by
Year 2000 issues. See "Management Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
15
<PAGE>
Item 2. Properties.
The Company's policy is generally to lease real property for its
manufacturing and sales operations. Principal operating facilities are as
follows:
<TABLE>
<CAPTION>
Square Lease
Location Feet Termination
-------- ------- -----------
<S> <C> <C>
Burlington, Massachusetts................................ 14,600 2002
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
Kirkland, Washington..................................... 50,500 2004
Northampton, Massachusetts............................... 22,500 1999
Tustin, California....................................... 52,000 2004
Salem, Virginia.......................................... 35,900 2004
San Diego, California.................................... 130,000 2005
Spokane, Washington...................................... 66,400 2001
</TABLE>
The Company has other leases for manufacturing space and sales offices, but
in each case the total leased space is under 15,000 square feet.
At March 31, 1999 the Company has leases totaling approximately 275,000
square feet of space in various facilities as a result of divested or
discontinued companies, as well as facilities vacated in the normal course of
business. The last of these leases expires in August 2000.
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 case is scheduled for trial in August 1999 and the
Company intends to defend the lawsuit vigorously. On May 27, 1999 Whistler
filed a Chapter 11 bankruptcy case in the United States Bankruptcy Court for
the District of Massachusetts. The Company 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 Old Common Stock was quoted on the Nasdaq
National Market. From January 28, 1997 to May 21, 1998, the Old Common Stock
was traded on the New York Stock Exchange. As a
16
<PAGE>
result of the Merger on May 21, 1998, trading in the Old Common Stock was
halted and the Common Stock is traded only in the over-the-counter market. On
May 20, 1999, the last reported price of the Common Stock was $3.375.
The following table shows, for the fiscal periods indicated, the high and
low close prices of a share of Old Common Stock or Common Stock as reported by
the New York Stock Exchange and in the over-the-counter market, as applicable.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ -------
<S> <C> <C>
March 31, 1999(b)............................................. $3.500 $2.7180
December 31, 1998(b).......................................... 3.000 2.3750
September 30, 1998(b)......................................... 3.438 2.6870
June 30, 1998(b).............................................. 4.312 3.1250
June 30, 1998(a).............................................. 50.125 48.1875
March 31, 1998(a)............................................. 48.500 46.1900
December 31, 1997(a).......................................... 47.310 34.0000
September 30, 1997(a)......................................... 41.940 34.3800
June 30, 1997(a).............................................. 41.880 29.0000
</TABLE>
- --------
(a) Old Common Stock reported by the New York Stock Exchange
(b) Common Stock reported by the over-the-counter market
There were approximately 945 stockholders of record as of May 20, 1999.
Since April 1, 1995, the Company has not declared or paid cash dividends on
its Old Common Stock or 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 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 7A. Quantitative and Qualitative Disclosure About Market Risk.
The information requested by this Item is included in 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.
Reference is made to the information responsive to items 401 and 405 of
Regulation S-K contained in the Company's definitive Proxy Statement relating
to its 1999 Annual Meeting of Shareholders which will be filed with the U.S.
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year ended March 31, 1999, pursuant to Rule 14a-6(b) under
the Securities and Exchange Act of 1934, as amended; said information is
incorporated herein by reference.
17
<PAGE>
Item 11. Executive Compensation.
Reference is made to the information responsive to Item 402 of Regulation S-
K contained in the Company's definitive Proxy Statement relating to its 1999
Annual Meeting of Shareholders which will be filed with the U.S. Securities
and Exchange Commission within 120 days after the close of the Company's
fiscal year ended March 31, 1999, pursuant to Rule 14a-6(b) under the
Securities Exchange Act of 1934, as amended; said information is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the information responsive to Item 403 of Regulation S-
K contained in the Company's definitive Proxy Statement relating to its 1999
Annual Meeting of Shareholders which will be filed with the U.S. Securities
and Exchange Commission within 120 days after the close of the Company's
fiscal year ended March 31, 1999, pursuant to Rule 14a-6(b) under the
Securities Exchange Act of 1934, as amended; said information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
Reference is made to the information responsive to Item 404 of Regulation S-
K contained in the Company's definitive Proxy Statement relating to its 1999
Annual Meeting of Shareholders which will be filed with the U.S. Securities
and Exchange Commission within 120 days after the close of the Company's
fiscal year ended March 31, 1999, pursuant to Rule 14a-6(b) under the
Securities Exchange Act of 1934, as amended; said information is incorporated
herein by reference.
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, 1999 and 1998.
II. Consolidated Statements of Income--Fiscal Years ended March 31, 1999,
1998, and 1997.
III. Consolidated Statements of Shareholders' Equity (Deficit)--Fiscal
Years ended March 31, 1999, 1998, and 1997.
IV. Consolidated Statements of Cash Flows--Fiscal Years ended March 31,
1999, 1998, and 1997.
V. Notes to Consolidated Financial Statements.
(2) Financial statement schedule
II. 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
None
(c) Exhibits
The exhibits that are filed with this report or that are incorporated herein
by reference are set forth in Appendix D.
18
<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
/s/ Ned C. Lautenbach
By: _________________________________
Chairman, President and
Chief Executive Officer
June 14, 1999
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.
<TABLE>
<S> <C>
</TABLE>
Signature Title Date
/s/ Ned C. Lautenbach Chairman of the June 10, 1999
- ------------------------------------- Board, President
Ned C. Lautenbach and Chief Executive
Officer, Director
/s/ Allan M. Kline Corporate Vice June 14, 1999
- ------------------------------------- President,
Allan M. Kline Director, Chief
Financial Officer,
and Treasurer
(Principal
Financial Officer)
/s/ Robert W. Woodbury, Jr. Corporate Vice June 14, 1999
- ------------------------------------- President,
Robert W. Woodbury, Jr. Controller
(Principal
Accounting Officer)
/s/ Joseph L. Rice, III Director June 14, 1999
- -------------------------------------
Joseph L. Rice, III
/s/ Brian D. Finn Director June 14, 1999
- -------------------------------------
Brian D. Finn
/s/ Charles P. Pieper Director June 14, 1999
- -------------------------------------
Charles P. Pieper
/s/ John R. Peeler Director June 14, 1999
- -------------------------------------
John R. Peeler
/s/ Marvin L. Mann Director June 14, 1999
- -------------------------------------
Marvin L. Mann
/s/ Brian H. Rowe Director June 14, 1999
- -------------------------------------
Brian H. Rowe
<TABLE>
<S> <C>
</TABLE>
19
<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, 1999
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.
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Results of operations
Sales...................... $ 522,854 $472,948 $362,412 $293,042 $243,078
Cost of sales.............. 228,572 205,522 137,254 111,436 91,412
--------- -------- -------- -------- --------
Gross profit............... 294,282 267,426 225,158 181,606 151,666
Selling, general &
administrative expense.... 149,006 138,310 114,479 98,487 86,329
Product development
expense................... 54,023 54,995 43,267 36,456 30,585
Recapitalization-related
costs..................... 43,386 -- -- -- --
Nonrecurring charges....... -- -- 27,776 16,852 --
Amortization of
intangibles............... 6,228 5,835 6,793 5,136 5,106
Amortization of unearned
compensation.............. 1,519 -- -- -- --
--------- -------- -------- -------- --------
Operating income........... 40,120 68,286 32,843 24,675 29,646
Interest expense........... (46,198) (1,221) (828) (1,723) (3,919)
Interest income............ 3,398 3,012 2,785 2,181 1,518
Other income, net.......... 15,959 730 634 975 850
--------- -------- -------- -------- --------
Income from continuing
operations before income
taxes..................... 13,279 70,807 35,434 26,108 28,095
Provision for income
taxes..................... 6,834 29,031 17,585 10,394 11,671
--------- -------- -------- -------- --------
Income from continuing
operations................ 6,445 41,776 17,849 15,714 16,424
Discontinued operations,
net of income taxes....... -- -- 12,000 (1,471) 3,763
Extraordinary charge, net
of taxes.................. -- -- -- -- (1,019)
--------- -------- -------- -------- --------
Net income................. $ 6,445 $ 41,776 $ 29,849 $ 14,243 $ 19,168
========= ======== ======== ======== ========
Income (loss) per common
share--basic:
Continuing operations.... $ 0.06 $ 2.49 $ 1.04 $ 0.87 $ 0.92
Discontinued operations.. -- -- 0.70 (0.08) 0.21
Extraordinary charge..... -- -- -- -- (0.06)
--------- -------- -------- -------- --------
$ 0.06 $ 2.49 $ 1.74 $ 0.79 $ 1.07
========= ======== ======== ======== ========
Income (loss) per common
share--diluted:
Continuing operations.... $ 0.06 $ 2.40 $ 0.99 $ 0.86 $ 0.92
Discontinued operations.. -- -- 0.67 (0.08) 0.21
Extraordinary charge..... -- -- -- -- (0.06)
--------- -------- -------- -------- --------
$ 0.06 $ 2.40 $ 1.66 $ 0.78 $ 1.07
========= ======== ======== ======== ========
Weighted average number of
shares:
Basic.................... 106,212 16,795 17,200 17,969 17,846
Diluted.................. 111,464 17,434 18,028 18,315 17,971
========= ======== ======== ======== ========
Balance sheet data
Net working capital........ $ 55,498 $117,791 $ 80,394 $105,861 $ 91,513
Total assets............... $ 348,104 $288,130 $249,010 $205,189 $256,392
Long-term debt............. $ 504,151 $ 83 $ 5,226 $ 1,800 $ 7,915
Shareholders' equity
(deficit)................. $(316,440) $202,119 $160,686 $160,719 $154,320
Shares of stock
outstanding............... 120,665 16,864 16,793 17,585 17,573
Shareholders' equity
(deficit) per share....... $ (2.62) $ 11.99 $ 9.57 $ 9.14 $ 8.78
</TABLE>
A-1
<PAGE>
APPENDIX B
Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of the results of operations, financial condition
and liquidity of the Company should be read in conjunction with the
information contained in the consolidated financial statements and notes
thereto included elsewhere in this Form 10-K. These statements have been
prepared in conformity with generally accepted accounting principles and
require management to make estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from these estimates. 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 statements contained in this report (other than Company's consolidated
financial statements and other statements of historical fact) are forward-
looking statements, as described below in greater detail in "Forward-Looking
Statements."
Overview
The Merger. On May 21, 1998 the Company was merged with CDRD Merger
Corporation ("MergerCo"), a nonsubstantive transitory merger vehicle organized
at the direction of Clayton, Dubilier & Rice, Inc. ("CDR"), a private
investment firm, with the Company continuing as the surviving corporation (the
"Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
In the Merger, (i) each then outstanding share of common stock, par value
$0.20 per share, of the Company (the "Old 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 "Common Stock") and (ii) each then outstanding
share of common stock of MergerCo was converted into one share of 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 91.8% of the Common Stock. John F. Reno, the former Chairman,
President and Chief Executive Officer of the Company (who retired from the
Company on May 19, 1999), together with two family trusts, holds approximately
1.0% of the Common Stock and other stockholders hold approximately 7.2% of the
Common Stock.
In connection with the Merger and related transactions, Dynatech LLC
(formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to indebtedness
of Dynatech Corporation, including the 9 3/4% Senior Subordinated Notes due
2008 (the "Senior Subordinated Notes") and the Senior Secured Credit
Facilities referred to elsewhere in this report.
Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with
no independent operations and no significant assets other than its membership
interest in Dynatech LLC. See "Capital Resources and Liquidity." Accordingly,
the condensed consolidated financial statements of Dynatech Corporation,
presented in this report, are not materially different from those of Dynatech
LLC. Management has not included separate financial statements of Dynatech LLC
because management has determined that they would not be material to holders
of the Senior Subordinated Notes or to the holders of Dynatech Corporation's
Common Stock. Dynatech LLC is subject, under the agreements governing its
indebtedness, to prohibitions on its ability to make distributions to Dynatech
Corporation (with limited exceptions) and other significant restrictions on
its operations. See "Capital Resources and Liquidity."
B-1
<PAGE>
On May 19, 1999, the Company's then Chairman, President and Chief Executive
Officer, John F. Reno, announced his retirement. Ned C. Lautenbach, a
principal of CDR, was named to replace Mr. Reno as Chairman, President and
Chief Executive Officer.
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 (purchased in December 1996), 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 sold 25 non-core businesses for gross proceeds of approximately $212
million pursuant to a plan to focus on businesses that enjoy leading positions
in their respective markets, strong profitability and good growth prospects.
During the same period the Company, in turn, has purchased six complementary
businesses for a total purchase price of $120 million.
Current and Historical Trends
Growth rates of enterprises engaged in the manufacture and provision of
telecommunications equipment and services will likely be affected by the
current trend of consolidation among such enterprises. In addition,
particularly in the near term, recent capital market volatility and reduced
financing availability may have affected and continue to affect growth rates
for certain customers, particularly those that may be highly leveraged with
significant capital requirements and those that are located in emerging
markets, as well as growth of the economy in general. Any resulting slowdown
in such growth could result in delays or reductions of orders for the
Company's products, and accordingly affect the Company's own growth.
In the shorter term, the Company believes that such consolidation is being
reflected in delays in orders for certain of the Company's test products as
consolidating companies integrate or coordinate their purchasing practices.
Conversely, the Company has experienced a recent influx of large orders from
certain of the Regional Bell Operating Companies ("RBOCs") for the Company's
ruggedized laptop computers as the RBOCs initiated a program to replace their
field-based workforce computing systems with more up-to-date ruggedized
computing solutions.
In the Company's largest business, communications test, sales have been
relatively flat during fiscal 1999 (a decrease of 0.6%) compared to the same
period a year ago. The flattening of sales can be attributed to (1) global
economic events, especially within Asia, (2) service providers diverting
capital spending from the communications test products to product upgrades
that are Year 2000 compliant, and (3) merger activity in the service providers
industry. The Company cannot predict whether growth will continue at
historical rates in either its own business or in the markets in which it
participates, due in part to recent global economic events.
During fiscal 1998 and the first quarter of fiscal 1999, Itronix had been
facing significant manufacturing and marketing challenges. The Company took
several steps designed to improve the operating performance of Itronix,
including programs designed to reduce costs and streamline manufacturing, as
well as a change in Itronix senior management. During the third quarter of
fiscal 1999 Itronix received orders totaling more than $72 million, primarily
from two RBOCs. As a result, Itronix's performance during the third and fourth
quarters of fiscal 1999 significantly improved. However, results of operations
for Itronix are expected to continue to vary widely because of the relatively
small number of potential customers with large field-service work forces and
the irregularity of timing and size of such customers' orders.
B-2
<PAGE>
Growth at ICS during fiscal 1999 lagged behind historical growth rates, and
as a result, the Company implemented a change in senior management at ICS as
well as modified the way it markets and sells its products. For example, ICS
implemented a web site for on-line ordering designed to better match the
current market demands and to assist ICS in returning to growing at its
historical rates.
Operating Income. From fiscal 1997 to 1999 the Company increased operating
income (defined as earnings before interest, taxes, and other income/
expense), by a compound annual growth of 10.5% driven primarily by sales
growth and the Company's acquisitions during this period. Excluding non-
recurring charges, expenses related to the Merger, and amortization of
unearned compensation, the compound annual growth rate was 18.4%. The non-
recurring charges in fiscal 1997 included a charge of $27.8 million for
purchased incomplete technology and impaired intangible asset writeoffs.
Operating income at the communications test business, the Company's largest
segment, decreased by 16.0% from fiscal 1998 to fiscal 1999 as a result of a
flattening of the order volume as well as an increase in selling, general and
administrative expense. This decrease was offset by an increase in operating
income in the industrial computing and communications segment and visual
communications segment, respectively.
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 1997 through March
31, 1999, the Company has spent an aggregate of $152.3 million on product
development or approximately 11.2% of sales, and the Company expects to
continue product development spending at similar levels as a percentage of
consolidated sales per year. See "Item 1 The Business--Risk Factors--Rapid
Technological Change; Challenges of New Product Introductions" and
"Substantial Leverage: Liquidity."
Recent Acquisitions And Dispositions And Discontinued Operations.
Fiscal 1999 Activity:
Acquisitions. On June 19, 1998, the Company, through one of its indirect
wholly owned subsidiaries, acquired all of the outstanding capital stock of
Pacific Systems Corporation of Kirkland, Washington ("Pacific") for a total
purchase price of $20 million, including an incentive earnout. This
acquisition resulted in approximately $18 million of goodwill which is being
amortized over 30 years. The acquisition was accounted for using the purchase
method of accounting. Pacific designs and manufactures customer-specified
avionics and integrated cabin management.
B-3
<PAGE>
In February 1999, the Company, through one of its wholly-owned subsidiaries,
acquired Flight TECH, a Hillsboro, Oregon based inflight entertainment
manufacturer specializing in equipment for small and medium jets, and
turboprop aircraft. The acquisition was accounted for using the purchase
method of accounting at a purchase price of $2 million. This acquisition
resulted in approximately $1.9 million of goodwill which is being amortized
over 30 years.
Divestiture. On June 30, 1998, the Company sold the assets of ComCoTec,
Inc.("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc. for
$21 million. ComCoTec is a supplier of pharmacy management software and
services and was a subsidiary within the Company's visual communications
products group. The Company recognized a gain of $15.9 million from the sale
of ComCoTec and recorded it in other income.
The Company has not presented separate pro forma financial statements for
the recent acquisitions or divestiture due to the immateriality of such pro
forma effects on the consolidated financial statements of the Company.
Fiscal 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 1999 and 1998, the
Company incurred a $3.5 million and $1.6 million, respectively, increase in
goodwill, related to a targeted and renegotiated three-year earnout based on,
among other things, a targeted sales growth.
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.
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.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998 on a Consolidated Basis
Sales. For the fiscal year ended March 31, 1999 consolidated sales increased
$49.9 million or 10.6% to $522.9 million as compared to $472.9 million for the
fiscal year ended March 31, 1998. The increase was primarily attributable to
increased demand for the Company's ruggedized laptop computers and aircraft
cabin video information services offset by slightly lower sales of the
Company's communications test products.
International sales (defined as sales outside of North America) were $75.5
million or 14.4% of consolidated sales for the fiscal year ended March 31,
1999, as compared to $76.1 million or 16% of consolidated sales for the fiscal
year ended March 31, 1998. The slight decrease in international sales is
primarily a result of decreased demand for the Company's communication test
products due in part to the economic slowdown in Asia.
Gross Profit. Consolidated gross profit increased $26.9 million to $294.3
million or 56.3% of consolidated sales for the fiscal year ended March 31,
1999 as compared to $267.4 million or 56.5% of consolidated sales for the
fiscal year ended March 31, 1998. The percentage decrease was attributable to
a change in the sales mix within the consolidated group along with lower gross
margins for the Company's rack-mounted computers.
B-4
<PAGE>
Operating Expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; recapitalization-related
costs; amortization of intangibles; and amortization of unearned compensation.
Total operating expenses were $254.2 million or 48.6% for the fiscal year
ended March 31, 1999, as compared to $199.1 million or 42.1% of consolidated
sales for the fiscal year ended March 31, 1998. Excluding the impact of the
recapitalization-related costs and the amortization of unearned compensation,
total operating expenses were $209.3 million or 40% of consolidated sales in
fiscal 1999. The percentage decrease in total operating expenses excluding
Merger related expenses is due primarily due to lower level operating expenses
as a percentage of sales at the Company's industrial computing and
communications segment which has overall lower operating expenses than the
communications test or visual communications segments.
Selling, general and administrative expense was $149.0 million or 28.5% of
consolidated sales for the fiscal year ended March 31, 1999, as compared to
$138.3 million or 29.2% of consolidated sales for the fiscal year ended March
31, 1998. The percentage decrease is a result of lower operating expenses
within the industrial computing and communications segment as well as the
Company's focus on ensuring that selling, general and administrative expenses
increase at a rate slower than sales growth.
Product development expense was $54.0 million or 10.3% of consolidated sales
for the fiscal year ended March 31, 1999 as compared to $55.0 million or 11.6%
of consolidated sales for the same period a year ago. The Company continues to
invest in product development and enhancement within all three segments.
However, the decrease is primarily due to the timing of expenses related to
ongoing research and development programs. The Company anticipates product
development expense in fiscal 2000 to return to its average historical rate of
approximately 11% of consolidated sales per year.
Recapitalization-related costs totaling $43.4 million were incurred in
connection with the Merger, consisting of $39.9 million (including a $14.6
million non-cash charge) for the cancellation payments of employee stock
options and compensation expense due to the acceleration of unvested stock
options, and $3.5 million for certain other expenses resulting from the
Merger, including employee termination expense. The Company incurred an
additional $41.3 million in expenses, of which $27.3 million was capitalized
and will be amortized over the life of the Senior Secured Credit Facilities
and Senior Subordinated Notes, and $14.0 million was charged directly to
shareholders' equity.
Amortization of intangibles was $6.2 million for the fiscal year ended March
31, 1999 as compared to $5.8 million for the same period a year ago. The
increase was primarily attributable to increased goodwill amortization related
to the acquisition of Pacific in June, 1998.
Amortization of unearned compensation of $1.5 million relates to the
amortization of the $9.7 million recorded within shareholders' equity related
to the 14.3 million options that were issued in July, 1998 at a grant price
lower than fair market value.
Operating income. Operating income decreased 41.2% to $40.1 million or 7.6%
of consolidated sales for the fiscal year ended March 31, 1999 as compared to
$68.3 million or 14.4% of consolidated sales for the same period a year ago.
The decrease was primarily a result of the Recapitalization-related costs in
connection with the Merger. Excluding these expenses, the Company generated
operating income of $85.0 million or 16.3% of consolidated sales. The
percentage increase was primarily the result of lower operating expenses
described above.
Interest. Interest expense, net of interest income, was $42.8 million for
the fiscal year ended March 31, 1999 as compared to interest income, net of
interest expense of $1.8 million for the same period a year ago. The increase
in net interest expense was attributable to the debt incurred in connection
with the Merger on May 21, 1998. Also included in interest expense is $2.7
million of amortization expense related to deferred debt issuance costs.
Other income. Other income was $16.0 million for the fiscal year ended March
31, 1999 as compared to $0.7 million for the same period last year. The
increase is a result of the sale of assets of ComCoTec for $21 million in
gross proceeds which resulted in a gain of $15.9 million.
B-5
<PAGE>
Taxes. The effective tax rate increased for the fiscal year ended March 31,
1999 to 51.5% as compared to 41.0% for the fiscal year ended March 31, 1998
due to permanent differences arising in connection with the accounting for the
Merger, and a smaller amount of income before income taxes, which magnified
the effect of such permanent differences.
Net income. Net income from continuing operations was $6.4 million or $0.06
per share on a diluted basis for the fiscal year ended March 31, 1999 as
compared to $41.8 million or $2.40 per share on a diluted basis for the same
period a year ago. The decrease was primarily attributable to the
Recapitalization-related expenses and the higher interest expense in
connection with the Merger. In addition, the weighted average number of shares
outstanding significantly increased in connection with the Merger, resulting
in a lower earnings per share.
Backlog. Backlog at March 31, 1999 was $170.1 million, an increase of 115%
from $79.1 million at March 31, 1998. The increase is a result of additional
bookings within all three business segments.
Adoption of Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131")
During the fourth quarter of fiscal 1999 the Company adopted FAS 131 which
establishes standards for the reporting of operating segments in the financial
statements. The Company measures the performance of its subsidiaries by the
their respective earnings before interest and taxes ("EBIT"). See "Appendix
C--Notes to Consolidated Financial Statements--Note T. Segment Information and
Geographic Areas." The discussion below includes sales and EBIT (excluding
non-recurring items and gain on sale of subsidiary) for the three segments in
which the Company participates in: communications test, industrial computing
and communications, and visual communications. Segment information "on a pro
forma basis" relates to the twelve month fiscal year ended March 31, 1997,
which presents a summary of bookings and results of operations of the
industrial computing and communications segment as if the acquisition of
Itronix had occurred at the beginning of fiscal 1997.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
Segment 1999 1998 1997
- ------- -------- -------- --------
<S> <C> <C> <C>
Communications test:
Bookings.......................................... $260,722 $233,934 $214,227
Sales............................................. 238,942 240,432 211,310
EBIT.............................................. 40,656 48,395 42,811
Industrial computing & communications:
Bookings.......................................... $253,818 $162,784 $ 82,449
Bookings on a pro forma basis..................... 146,271
Sales............................................. 193,322 154,993 78,342
Sales on a pro forma basis........................ -- -- 142,164
EBIT.............................................. 18,793 3,479 3,856
EBIT on a pro forma basis......................... -- -- 6,795
Visual communications:
Bookings.......................................... $ 95,785 $ 82,385 $ 77,790
Sales............................................. 90,590 77,523 72,760
EBIT.............................................. 29,259 20,171 17,820
</TABLE>
Fiscal 1999 Compared to Fiscal 1998--Communications Test Products
Bookings for communications test products increased 11.5% to $260.7 million
for the fiscal year ended March 31, 1999 as compared to $233.9 million for the
same period a year ago.
B-6
<PAGE>
Sales of communications test products decreased $1.5 million or 0.6% to
$238.9 million for the fiscal year ended March 31, 1999 as compared to $240.4
million for the fiscal year ended March 31, 1998. The Company has been
experiencing a decrease in demand for its core instruments in part due to the
RBOC's consolidating their purchasing practices as well as the economic
slowdown in Asia. This decrease had been partially offset by an increase in
demand for the Company's systems and services.
EBIT for the communications test products decreased $7.7 million to $40.7
million for the fiscal year ended March 31, 1999 as compared to $48.4 million
for the same period a year ago. The reduction in EBIT is in part due to the
sales volume decrease as well as reorganizing and investing in the Company's
sales force.
The backlog for the Company's communications test products was $60.6 million
and $38.9 million for the fiscal years ended March 31, 1999 and 1998,
respectively.
Fiscal 1999 Compared to Fiscal 1998--Industrial Computing and Communications
Products
Bookings for the industrial computing and communications products increased
55.9% to $253.8 million for the fiscal year ended March 31, 1999 as compared
to $162.8 million for the same period a year ago. The increase is primarily
attributable to a few very large contracts received during the third and
fourth quarters of fiscal 1999 from certain of the RBOCs for ruggedized
laptops as the RBOCs initiated a program to replace their field-based
workforce computing systems with more up-to-date ruggedized computing
solutions.
Sales of industrial computing and communications products increased $38.3
million or 24.7% to $193.3 million for the fiscal year ended March 31, 1999 as
compared to $155.0 million for the fiscal year ended March 31, 1998. The
increase was primarily due to increased shipments of the Company's ruggedized
laptop computers to the RBOCs.
EBIT for the industrial computing and communications products increased
440.2% to $18.8 million for the fiscal year ended March 31, 1999 as compared
to $3.5 million for the same period a year ago. The increase was primarily
attributable to the additional shipments of the ruggedized laptop computers.
The backlog for the Company's industrial computing and communications
products was $79.2 million and $18.8 million for the fiscal years ended March
31, 1999 and 1998, respectively.
Fiscal 1999 Compared to Fiscal 1998--Visual Communications Products
Bookings for the visual communications products increased $13.4 million or
16.3% to $95.8 million for the fiscal year ended March 31, 1999 as compared to
$82.4 million for the same period a year ago. The increase was primarily a
result of a continued increased demand for the Company's real-time flight
information passenger video displays, as well as an increase in sales from the
acquisition of Pacific.
Sales for the Company's visual communications products increased $13.1
million or 16.9% to $90.6 million for the year ended March 31, 1999 as
compared to $77.5 million for the same period a year ago. The increase in
shipments is a result of the order volume as described above.
EBIT for the visual communications products increased $9.1 million or 45.1%
to $29.3 million for the fiscal year ended March 31, 1999 as compared to $20.2
million for the same period a year ago. The increase in EBIT is a result of
the increased shipments as well as reducing redundant functions at Pacific.
The backlog for the Company's visual communications products was $30.2 and
$21.5 million for the fiscal years ended March 31, 1999 and 1998,
respectively. The increase was primarily attributable to increase in bookings
as described above.
B-7
<PAGE>
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 "Pro Forma
Income Statement" 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.
Fiscal 1998 Compared to Fiscal 1997 on a Consolidated 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.
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% of consolidated sales 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 forma
basis.
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 interest expense, net of
interest income, 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.
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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.
Backlog. Backlog at March 31, 1998 was $79.1 million, an increase of 10.3%
from $71.7 million at March 31, 1997.
Fiscal 1998 Compared to Fiscal 1997--Industrial Computing and Communications
Products on a Pro Forma Basis
Bookings for the Company's industrial computing and communications products
increased $16.5 million or 11.3% to $162.8 million for the year ended March
31, 1998 as compared to $146.3 million for the same period in 1997. The
increase was primarily attributable to increased order-volume for the
Company's rack-mounted computers received primarily from customers within the
Original Equipment Manufacturer (OEM) Market.
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 the increase in orders
as described above. 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.
EBIT for the industrial computing and communications products decreased $3.3
million or 48.8% to $3.5 million for the fiscal year ended March 31, 1998 as
compared to $6.8 million for the fiscal year ended March 31, 1997 on a pro
forma basis. The decrease was in part due to (i) additional sales to the OEM
market which contributes a lower gross margin as well as (ii) an operating
loss at the Company's Itronix subsidiary. Itronix had been facing significant
manufacturing and marketing challenges during fiscal 1998.
The backlog for the Company's industrial computing and communications
products was $18.8 million and $9.8 million for the fiscal years ended March
31, 1998 and 1997, respectively.
Historical Financial Statements
The following discussion relates to the actual results 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.
Fiscal 1998 Compared to Fiscal 1997 on a Consolidated 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.
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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
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. 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 write-off 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 $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 1998 Compared to Fiscal 1997--Communications Test Products
Bookings for the Company's communications test products increased $19.7
million or 9.2% to $233.9 million for the fiscal year ended March 31, 1998 as
compared to $214.2 million for the fiscal year ended March 31, 1997. The
increase was attributable to 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.
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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 a
result of the increased order volume.
EBIT for the communications test products increased $5.6 million or 13.0% to
$48.4 million for the fiscal year ended March 31, 1998 as compared to $42.8
million for the fiscal year ended March 31, 1997. The increase in EBIT was due
to the increase in sales.
The backlog for the Company's communications test products was $38.9 million
and $45.4 million for the fiscal years ended March 31, 1998 and 1997,
respectively.
Fiscal 1998 Compared to Fiscal 1997--Industrial Computing and Communications
Products on a Historical Basis
Bookings for the Company's industrial computing and communications products
increased $80.3 million or 97.4% to $162.8 million for the year ended March
31, 1998 as compared to $82.4 million for the same period in 1997. The
increase was primarily attributable to a full-year of operations of Itronix in
fiscal 1998 as compared to only three months in fiscal 1997.
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 operations in fiscal 1997. In
addition, the Company had an increase in sales for its rack-mounted computers.
EBIT for the industrial computing and communications products decreased $0.4
million or 9.8% to $3.5 million for the fiscal year ended March 31, 1998 as
compared to $3.9 million for the fiscal year ended March 31, 1997. The
decrease was primarily a result of an operating loss including an increase in
amortization of goodwill at Itronix during fiscal 1998 as well as sales to the
OEM market which contributes a lower gross margin. Itronix had been facing
significant manufacturing and marketing challenges during fiscal 1998.
The backlog for the Company's industrial computing and communications
products was $18.8 million and $9.8 million for the fiscal years ended March
31, 1998 and 1997, respectively.
Fiscal 1998 Compared to Fiscal 1997--Visual Communications Products
Bookings for the Company's visual communications products increased $4.6
million or 5.9% to $82.4 million for the fiscal year ended March 31, 1998 as
compared to $77.8 million for the fiscal year ended March 31, 1997. Orders for
the Company's real-time flight information passenger video displays increased
as more airlines integrated this product into their in-flight entertainment
systems.
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. The increase in sales was a
result of additional sales of its entertainment systems to airlines as well as
improved 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.
EBIT for the company's visual communications products increased $2.4 million
or 13.2% to $20.2 million for the fiscal year ended March 31, 1998 as compared
to $17.8 million for the fiscal year ended March 31, 1997. The increase in
EBIT was directly a result of the increase in sales.
The backlog for the Company's visual communications products was $21.5
million and $16.6 million for the fiscal years ended March 31, 1998 and 1997,
respectively.
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Capital Resources and Liquidity
The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments.
In addition, liquidity includes the ability to obtain appropriate debt and
equity financing and to convert into cash those assets that are no longer
required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist
of current or potentially available funds for use in achieving long-range
business objectives and meeting debt service commitments.
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of working capital and capital expenditures. As of March 31, 1999, the
Company had $527.3 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $252.0 million in
borrowings under the Term Loan Facility and no borrowings under the new
Revolving Credit Facility.
Cash Flows. The Company's cash and cash equivalents increased $5.5 million
during the fiscal year ended March 31, 1999.
Working Capital. For the fiscal year ended March 31, 1999, the Company's
working capital increased as its operating assets and liabilities provided a
$53.3 million source of cash, excluding the acquisition of Pacific. Accounts
receivable increased, creating a use of cash of $1.1 million. Inventory levels
decreased, creating a source of cash of $2.5 million, due primarily to better
inventory management throughout the organization. Other current assets
decreased, creating a source of cash of $2.1 million, mainly due to the
recognition of expenses capitalized in fiscal 1998 in connection with the
Merger. Accounts payable increased, creating a source of cash of $11.0 million
as the Company continues to manage its working capital. Other current
liabilities increased, creating a source of cash of $38.8 million. This is due
to an increase in deferred service contract revenue, the accrual of interest
on the debt incurred in connection with the Merger, and an increase in accrued
taxes.
Investing activities. The Company's investing activities totaled $20.1
million for the fiscal year ended March 31, 1999 in part for the purchase and
replacement of property and equipment and the payment of an earnout incentive
related to the fiscal 1998 and 1999 operating results of Advent Design, Inc.,
a subsidiary purchased in March 1997. Also included are the proceeds received
from the sale of ComCoTec, offset by the cash purchase price for Pacific and
Flight TECH.
The Company's capital expenditures in fiscal 1999 were $11.3 million as
compared to $15.9 in fiscal 1998. The reduction was primarily due to the
timing of certain capital expenditure commitments at the Company's
communications test and industrial computing and communications businesses.
The Company anticipates that fiscal 2000 capital expenditures will increase
from fiscal 1999 levels and return to or exceed fiscal 1998 levels as the
Company anticipates replacing certain of its Enterprise Resource Planning
(ERP) systems at the communications test and industrial computing and
communications businesses. The Company is, per the terms of the Senior Secured
Credit Agreement, subject to maximum capital expenditures of up to $25 million
per year.
Debt and Equity. The Company's financing activities used $41.7 million in
cash during fiscal 1999, due mainly to the Merger.
Debt
Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. With respect to the $260
million initially borrowed under the Term Loan Facility (which is divided into
four tranches, each of which has a different term and repayment schedule), the
Company is required to make scheduled principal payments of the $50 million of
tranche A term loan thereunder during its six-year term, with substantial
amortization of the $70 million tranche B term loan, $70 million tranche C
term loan and $70 million tranche D term loan thereunder occurring after six,
seven and eight years, respectively. During fiscal 1999 the Company repaid $8
million of
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<PAGE>
mandatory principal payments and repaid $40 million of indebtedness under its
$110 million Revolving Credit Facility. The $275 million of Senior
Subordinated Notes will mature in 2008, and bear interest at 9 3/4% per annum.
Total interest expense including the amortization of deferred debt issuance
costs was $46.2 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 or other dispositions by the
Company or any of its subsidiaries, and (iii) property insurance or
condemnation awards received by the Company or any of its subsidiaries, and
(b) 50% of the Company's excess cash flow (the "Recapture") (as defined in the
Senior Secured Credit Agreement) for each fiscal year in which the Company
exceeds a certain leverage ratio. The Senior Subordinated Notes are subject to
certain mandatory prepayments under certain circumstances.
The Company is required, under the terms of the Recapture, to repay $15
million in Term Loan borrowing on June 30, 1999. The Company, may, in its sole
discretion, use the $15 million in part to prepay the mandatory $8 million
amortization due in fiscal 2000. The Company will determine, prior to June 30,
1999, whether or not to elect this option.
The Company's $110 million Revolving Credit Facility matures in 2004, with
all amounts then outstanding becoming due. The Company expects that its
working capital needs will require it to obtain new revolving credit
facilities at the time that the Revolving Credit Facility matures, by
extending, renewing, replacing or otherwise refinancing the Revolving Credit
Facility. No assurance can be given that any such extension, renewal,
replacement or refinancing can be successfully accomplished or accomplished on
acceptable terms.
The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 8.25% per annum for the period commencing May 21, 1998 and
ending March 31, 1999. However, the Company has entered into interest rate
swap contracts which will be effective for periods ranging from two to three
years beginning September 30, 1998 to fix the interest charged on a portion of
the total debt outstanding under the Term Loan Facility. After giving effect
to these arrangements, approximately $220 million of the debt outstanding will
be subject to an effective average annual fixed rate of 5.66%. This average
annual interest rate does not include a margin payable to the lenders
participating in the Senior Secured Credit Facilities. See Note L. Interest
Rate Swaps. As a result of the substantial indebtedness incurred in connection
with the Merger, it is expected that the Company's interest expense will be
higher and will have a greater proportionate impact on net income in
comparison to preceding periods.
Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn following the May, 1998 closing of the
Recapitalization was $70 million. The undrawn portion of this facility will be
available to meet future working capital and other business needs of the
Company. At March 31, 1999, the Company had no outstanding borrowings under
the Revolving Credit Facility. Therefore, the undrawn portion of this facility
was $110 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
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<PAGE>
market conditions, to meet its capital-spending program, to provide for
unanticipated capital investments, or to take advantage of business
opportunities. The covenants contained in the Senior Secured Credit Agreement
also, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur guarantee obligations, prepay other
indebtedness, make restricted payments, create liens, make equity or debt
investments, make acquisitions, modify terms of the indenture governing the
Senior Subordinated Notes, engage in mergers or consolidations, change the
business conducted by the Company and its subsidiaries taken as a whole or
engage in certain transactions with affiliates. These restrictions, among
other things, preclude Dynatech LLC from distributing assets to Dynatech
Corporation (which has no independent operations and no significant assets
other than its membership interest in Dynatech LLC), except in limited
circumstances. In addition, under the Senior Secured Credit Agreement, the
Company is required to comply with a minimum interest expense coverage ratio
and a maximum leverage ratio. These financial tests become more restrictive in
future years. The term loans under the Senior Secured Credit Facilities (other
than the $50 million tranche A term loan) are governed by negative covenants
that are substantially similar to the negative covenants contained in the
indenture governing the Senior Subordinated Notes, which also impose
restrictions on the operation of the Company's business.
The Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their existing sovereign currencies (the "legacy currencies") and the
euro. The participating countries agreed to adopt the euro as their common
legal currency on that date. The euro now trades on currency exchanges for
non-cash transactions.
As of January 1, 1999, the participating countries no longer controlled
their own monetary policies by directing independent interest rates for the
legacy currencies. Instead, the authority to direct monetary policy, including
money supply and official interest rates for the euro, is exercised by the new
European Central Bank.
Following introduction of the euro, the legacy currencies remain legal
tender in the participating countries as denominations of the euro between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy currency.
The impact of the euro is not expected to materially affect the results of
operations of the Company. The Company operates primarily in U.S. dollar-
denominated purchase orders and contracts, and the Company neither has a large
customer nor vendor base within the countries participating in the euro
conversion.
Year 2000
Broadly speaking, Year 2000 issues may arise when certain computer programs
use only two digits to refer to a year or to recognize a year. As a result,
computers that are not Year 2000 compliant may read the date 2000 as 1900. The
Company is aware that Year 2000 issues could adversely impact its operations,
and as detailed below, previously commenced and continues with a process
intended to address Year 2000 issues that the Company has been able to
identify. The Company's program for addressing Year 2000 issues at each of its
businesses generally comprises the following phases: inventory, assessment,
testing and remediation. The scope of this program includes the review of the
Company's products, information technology ("IT") systems, non-IT and embedded
systems, and vendors/supply chain.
State of Readiness. Management at each of the Company's businesses is in the
final stages of a review of its computer systems and products to assess
exposure to Year 2000 issues. The review process has been conducted by
employees with expertise in information technology as well as engineers
familiar with non-IT systems, and focuses on both the Company's internal
systems and its existing and installed base of products. The Company
previously formed a Year 2000 committee which is responsible for coordinating
and facilitating activities across the Company. Progress of the Year 2000
committee is reported regularly to the Audit Committee of the Company's Board
of Directors. Although the Company has used the services of consultants in
connection with its assessment of some Year 2000 issues, it has not used
independent verification and validation processes
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<PAGE>
in the testing of its systems and products. As of March 31, 1999, the Company
had conducted an inventory and test of its existing significant internal
systems with regard to Year 2000 issues, and where necessary, identified
proposed solutions to non-conforming systems. The Company anticipates that
additional testing and remediation of these systems will continue through
June, 1999.
As of March 31, 1999, the Company had conducted an inventory of its existing
and installed base of products. In particular, significant focus and resources
will be required for the continuing assessment, testing and remediation
process for the Industrial Computer Source existing product line and installed
base of products. In determining state of readiness the Company has adopted
the following definition:
Year 2000 readiness means the intended functionality of a product, when used
in accordance with its associated documentation, will correctly process,
provide and/or receive date-data in and between the years 1999 and 2000,
including leap year calculations, provided that all other products and systems
(for example, hardware, software and firmware) used with the product properly
exchange accurate date-data with it.
Most of the Company's existing product lines, and the installed base of
products, already meet this definition of Year 2000 readiness (i.e., they are
"Year 2000 Ready"). These products do not have Year 2000 readiness issues
because they do not contain date-sensitive functions. Certain existing
products which are date-sensitive are being made Year 2000 Ready by making
upgrades (i.e., hardware modifications and/or new software versions, as
appropriate) available to customers. A few of the Company's older, installed
base of products, primarily at the Company's communications test business,
cannot reasonably be upgraded; customers using these products are being
offered trade-in packages for newer, Year 2000 Ready products. As part of its
assessment phase, the Company is in the process of communicating with its
significant suppliers and customers to determine the extent to which the
Company is vulnerable to any failure by those third parties to remediate their
own Year 2000 issues. In addition, the Company is evaluating the extent to
which Year 2000 issues may arise as a result of some combinations of certain
of its products with other companies' products. If any such suppliers to
customers or product combinations do not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be materially
adversely affected. There can be no assurances that the Company's assessment
of its suppliers and customers will be accurate.
The targeted completion date for the review and remediation process for the
communications test business, the Company's largest, is June, 1999. As of
March 31, 1999, the communications test business had completed the inventory,
assessment and testing of its existing products. Management does not consider
data time fields to be critical to the functionality of most of the Company's
communications test products. For the Company's other product categories,
which may employ data time fields in areas that are critical to product
functionality, completion dates are targeted on or prior to June, 1999 for
testing and remediation. In those limited product lines where Year 2000
readiness issues have been recently identified, the remediation process
(generally, the distribution and implementation of software upgrades) will not
be completed until after June, 1999.
Costs. The Company's historical and estimated costs of remediation have not
been and are not anticipated to be material to the Company's financial
position or results of operations, and will be funded through operating cash
flows. Total costs associated with remediation of Year 2000 issues (including
systems, software, and non-IT systems replaced as a result of Year 2000
issues) are currently estimated at approximately $2 million to $3 million, of
which approximately $700 thousand has already been incurred. Estimated
remediation costs are based on management's best estimates. There can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those anticipated, particularly if unanticipated Year
2000 issues arise. The costs do not include estimates for potential
litigation. Many commentators believe that there will be a significant amount
of litigation arising out of Year 2000 readiness issues. Because of the
unprecedented nature of this litigation, it is not possible for the Company to
predict the impact of such litigation.
Year 2000 Risks and Related Plans. While the Company expects to make the
necessary modifications or changes to both its internal IT and non-IT systems
and existing product base in a timely fashion, there can be no assurance that
the Company's internal systems and existing or installed base of products will
not be materially
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adversely affected by the advent of Year 2000. Certain of the Company's
products are used, in conjunction with products of other companies, in
applications that may be critical to the operations of its customers. Any
product non-readiness, whether standing alone or used in conjunction with the
products of other companies, may expose the Company to claims from its
customers or others, and could impair market acceptance of the Company's
products and services, increase service and warranty costs, or result in
payment of damages, which in turn could materially adversely affect the
Company.
In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. In an
effort intended to minimize potential disruption to its internal systems, the
Company intends to perform additional hard-disk back-up of its rudimentary
systems and critical information in advance of the Year 2000.
Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could
lose or have trouble accessing or receive inaccurate third party data,
experience internal and external communications difficulties or have
difficulty obtaining components that are Year 2000 compliant from its vendors.
The Company could also experience a slowdown or reduction of sales if
customers such as telecommunications companies or commercial airlines are
adversely affected by Year 2000 issues.
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.
In the quarter ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires, among other
things, foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity to be included in other
comprehensive income.
In the quarter ended June 30, 1998, the Company adopted Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides
guidance on applying generally accepted accounting principals in recognizing
revenue on software transactions.
At March 31, 1999, the Company adopted Financial Accounting Standards Board
issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the
reporting of operating segments in the financial statements. The Company has
included in its Management Discussion and Analysis disclosure within its three
operating segments: communications test, industrial computing and
communications, and visual communications.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company is assessing the impact of the adoption
of SFAS 133 on its results of operations and its financial position.
B-16
<PAGE>
Quantitative And Qualitative Disclosures About Market Risk
The Company operates both manufacturing facilities and sales offices within
the United States and primarily sales offices outside the United States. The
Company is subject to business risks inherent in non-U.S. activities,
including political and economic uncertainty, import and export limitations,
and market risk related to changes in interest rates and foreign currency
exchange rates. The Company believes the political and economic risks related
to its foreign operations are mitigated due to the stability of the countries
in which its sales offices are located, as well as the low percentage of
overall sales outside the United States (approximately 14%, 16% and 20% in
fiscal 1999, 1998, and 1997, respectively of consolidated sales relate to
foreign sales including exports from the United States). The Company's
principal currency exposures against the U.S. dollar are in the major European
currencies and in Canadian currency. The Company does not use foreign currency
forward exchange contracts to mitigate fluctuations in currency. The Company's
market risk exposure to currency rate fluctuations is not material. The
Company does not hold derivatives for trading purposes.
The Company uses derivative financial instruments consisting solely of
interest rate swap contracts. The Company's objective in managing its exposure
to changes in interest rates (on its variable rate debt) is to limit the
impact of such changes on earnings and cash flow and to lower its overall
borrowing costs.
At March 31, 1999, the Company had $252 million of variable rate debt
outstanding. At March 31, 1999 the Company had four interest rate swap
contracts with notional amounts totaling $220 million which fixed its variable
rate debt to a fixed interest rate for periods of two to three years in which
the Company pays a fixed interest rate on a portion of its outstanding debt
and receives three-month LIBOR. At March 31, 1999, three of the four interest
rate swap contracts had an interest rate higher than the three-month LIBOR
quoted by its financial institutions, as variable rate three-month LIBOR
interest rates declined after the swap contracts became effective. Therefore,
the additional interest expense (calculated as the difference between the
interest rate in the swap contracts and the three-month LIBOR rate) recognized
by the Company during fiscal 1999 was $0.5 million. The Company has performed
a sensitivity analysis assuming a hypothetical 10% adverse movement in the
floating interest rate on the interest rate sensitive instruments described
above. The Company believes that such a movement is reasonably possible in the
near term. As of March 31, 1999, the analysis demonstrated that such movement
would cause the Company to recognize additional interest expense of
approximately $1.1 million, and accordingly, would cause a hypothetical loss
in cash flows of approximately $1.1 million.
Forward-Looking Statements
This report (other than the Company's consolidated financial statements of
historical fact) contains forward-looking statements, including, without
limitation:
1. the statement in "Business-Products and Services--Industrial Computing
and Communications", "Business-Seasonality", "Management Discussion
and Analysis of Financial Condition and Results of Operations--Current
and Historical Trends" and "Management Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality" concerning
the Company's belief that the results of operations of Itronix are
expected to continue to vary widely because of the relatively small
number of potential customers with large field-service work forces and
the irregularity of timing and size of such customers' orders;
2. the statements in
a. "Management Discussion and Analysis of Financial Condition and
Results of Operations--Capital Resources and Liquidity" that the
Company anticipates that fiscal 2000 capital expenditures will
increase from fiscal 1999 levels and return to or exceed fiscal
1998 levels as the Company anticipates replacing certain of its
Enterprise Resource Planning (ERP) systems at the communications
test and industrial computing and communications businesses, and
b. "Business--Product Development" and "Management Discussion and
Analysis of Financial Condition and Results of Operations--Results
of Operations" that the Company anticipates product development
expense in future years to continue at an average to its
historical rate of
B-17
<PAGE>
approximately 11% of consolidated sales per year, and "Risk
Factors--Rapid Technological Change: Challenges of New Product
Introductions" and "Management Discussion and Analysis of Financial
Condition and Results of Operations--Product Development" that the
Company expects to continue product development spending at levels
similar as a percentage of consolidated sales per year to that
expended from the beginning of fiscal 1997 through fiscal 1999;
3. The statements in "Business--Customers and Marketing" that the Company
anticipates shipments to BellSouth in fiscal 2000 could be
approximately 10% of consolidated sales and does not anticipate sales
from BellSouth to continue at a rate of approximately 13% of
consolidated sales in future years;
4. the statement in "Business--Seasonality" and "Management Discussion
and Analysis of Financial Condition and Results of Operations--
Seasonality" concerning the Company's belief that its results of
operations are expected to vary significantly on a quarterly basis;
5. the statement in "Business--Intellectual Property" that the Company
does not believe that the expiration of any patent or group of patents
would materially effect its business;
6. the statement in "Business--Environmental Matters" that the Company
does not foresee that federal, state and local laws or regulations
which have been enacted or adopted regarding the discharge of
materials into the environment will have a material adverse effect on
capital expenditures, earnings or the competitive position of the
Company;
7. the statement in "Risk Factors--Lack of Trading Market" concerning the
Company's belief that the Common Stock is anticipated to continue to
trade much less frequently than the Old Common Stock traded prior to
the Merger, which may have a material adverse effect on the market
value of the Common Stock;
8. the statements in "Risk Factors--Year 2000 Risks and Related Plans"
and "Management Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000" that the Company expects to make the
necessary modification of changes to both its internal IT and non-IT
systems and existing product base in a timely fashion;
9. the statements in "Legal Proceedings--Litigation" and "Financial
Statements and Supplementary Data-Note Q. Commitments and
Contingencies":
a. concerning the Company's belief that the resolution of routine
legal matters incidental to the Company's business in which the
Company is involved from time to time will not have a material
adverse effect on the Company's financial condition or results of
operations and
b. that the Company does not believe that the outcome of current
litigation is likely to have a material adverse effect on the
Company's financial condition, results of operations or liquidity;
10. the statement in "Market for Registrant's Common Stock and Related
Security Holder Matters" that the Company intends to retain earnings
for use in the operation and expansion of its business;
11. the statements in "Management Discussion and Analysis of Financial
Condition and Results of Operations--Capital Resources--and Liquidity"
and "Financial Statements and Supplementary Data-Note K. Debt" that:
a. the Company will determine prior to June 30, 1999, whether or not
to elect the option to prepay the mandatory $8 million amortization
due in fiscal 2000 under the terms of the Recapture,
b. the Company expects that its working capital needs will require it
to obtain new revolving credit facilities at the time that the
Revolving Credit Facility matures, by extending, renewing,
replacing or otherwise refinancing the Revolving Credit Facility,
c. the Company expects that its interest expense will be higher and
will have a greater proportionate impact on net income in
comparison to preceding periods and
d. 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
B-18
<PAGE>
permit the Company to meet its debt service obligations, capital
expenditure program requirements, ongoing operating costs and
working capital needs;
12. the statement in "Management Discussion and Analysis of Financial
Condition and Results of Operations--The Euro Conversion" concerning
the Company's belief that the impact of the euro is not expected to
materially effect the results of operations of the Company,
13. the statements in "Management Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000":
a. that the Company anticipates that additional testing and
remediation of internal systems will continue through June, 1999,
b. concerning the Company's belief that the targeted completion date
for the review and remediation process for the communications test
business is June, 1999,
c. concerning the Company's belief that completion dates are targeted
on or prior to June 1999 for testing and remediation for other
product categories, which may employ data time fields in areas that
are critical to product functionality,
d. concerning the Company's belief that those limited product lines
where Year 2000 readiness issues have been recently identified, the
remediation process (generally, the distribution and implementation
of software upgrades) will not be completed until after June, 1999,
e. concerning the Company's belief that the Company's estimated costs
of remediation are not anticipated to be material to the Company's
financial position or results of operations, and will be funded
through operating cash flows,
f. concerning the Company's belief that total costs associated with
remediation of Year 2000 issues (including systems, software, and
non-IT systems replaced as a result of Year 2000 issues) are
currently estimated at approximately $2 million to $3 million, and
g. the Company intends to perform additional hard-disk back-up of its
rudimentary systems and critical information in advance of the Year
2000,
14. the statement in "Quantitative and Qualitative Disclosures about
Market Risk" concerning the Company's belief that the political and
economic risks related to its foreign operations are mitigated due to
the stability of the countries in which its sales offices are located,
as well as the low percentage of overall sales outside the United States
and
15. other statements as to management's or the Company's expectations or
beliefs presented in "Management Discussion and Analysis of Financial
Condition and Results of Operations."
Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with management's expectations or that the effect of
future developments on the Company will be those anticipated by management.
The Company's actual results may be affected (and in some cases, have been
affected) or could differ materially from estimates or expectations reflected
in such forward-looking statements as a result of the factors described under
"Business--Risk Factors", and as a result of important factors described
elsewhere in this report (including, without limitation, those discussed in
"--Business--Industry Overview," "--Products and Services," "--Customers and
Marketing," "--International," "--Intellectual Property," "--Suppliers," and
"--Environmental Matters," "Properties," "Legal Proceedings," "Management
Discussion and Analysis of Financial Condition and Results of Operations--
Current and Historical Trends," "--Results of Operations," "--Capital
Resources and Liquidity," "--The Euro Conversion," and "--Year 2000"), or as a
result of important factors described in other Securities and Exchange
Commission filings of the Company.
While the Company periodically reassesses material trends and uncertainties
affecting the operations and financial condition in connection with its
preparation of Management Discussion and Analysis of Financial Condition and
Results of Operations contained in its quarterly and annual reports, the
Company does not intend to review or revise any particular forward-looking
statement referenced in this report in light of future events.
B-19
<PAGE>
APPENDIX C
DYNATECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS.......................................... C-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND 1998................ C-3
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 1999,
1998 AND 1997........................................................... C-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS
ENDED MARCH 31, 1999, 1998 AND 1997..................................... C-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1999,
1998 AND 1997........................................................... C-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... C-7
</TABLE>
C-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Dynatech Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Dynatech Corporation and its subsidiaries (the "Company") at March 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the fiscal period ended March 31, 1999, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 26, 1999
C-2
<PAGE>
DYNATECH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
-------------------
1999 1998
--------- --------
(Amounts in
thousands except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 70,362 $ 64,904
Accounts receivable (net of allowance of $1,634 and
$1,764, respectively).................................. 70,996 69,988
Inventories:
Raw materials......................................... 16,680 24,263
Work in process....................................... 13,644 11,769
Finished goods........................................ 16,947 12,850
--------- --------
Total inventory..................................... 47,271 48,882
Other current assets.................................... 22,150 16,823
--------- --------
Total current assets................................ 210,779 200,597
Property and equipment:
Leasehold improvements.................................. 6,170 4,904
Machinery and equipment................................. 51,893 51,220
Furniture and fixtures.................................. 14,748 12,351
--------- --------
72,811 68,475
Less accumulated depreciation and amortization.......... (47,192) (42,110)
--------- --------
25,619 26,365
Other assets:
Intangible assets, net.................................. 56,768 39,595
Other................................................... 54,938 21,573
--------- --------
$ 348,104 $288,130
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt..... $ 23,191 $ 150
Accounts payable........................................ 34,317 22,933
Accrued expenses:
Compensation and benefits............................. 24,420 21,750
Taxes, other than income taxes........................ 2,626 2,071
Deferred revenue...................................... 27,141 13,868
Interest.............................................. 10,129 --
Other................................................. 22,685 16,838
Accrued income taxes.................................... 10,772 5,196
--------- --------
Total current liabilities........................... 155,281 82,806
Long-term debt............................................ 504,151 83
Deferred compensation..................................... 5,112 3,122
Commitments and contingencies (Note Q)
Shareholders' equity (deficit):
Serial preference stock, par value $1 per share;
Authorized 100,000 shares; none issued
Common stock, 1999 and 1998, respectively:
par value $0.00 and $0.20
Authorized 200,000,000 and 50,000,000 shares........... -- --
Outstanding 120,665,048 and 18,605,689 shares.......... -- 3,721
Additional paid-in capital.............................. 322,746 7,647
Retained earnings (deficit)............................. (629,941) 237,282
Unearned compensation................................... (7,563) --
Other comprehensive loss................................ (1,682) (1,600)
Treasury stock, at cost; 0 and 1,741,265 shares,
respectively........................................... -- (44,931)
--------- --------
Total shareholders' equity (deficit)................ (316,440) 202,119
--------- --------
$ 348,104 $288,130
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-3
<PAGE>
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Amounts in thousands
except
per share data)
<S> <C> <C> <C>
Sales............................................ $522,854 $472,948 $362,412
Cost of sales.................................... 228,572 205,522 137,254
-------- -------- --------
Gross profit..................................... 294,282 267,426 225,158
Selling, general and administrative expense...... 149,006 138,310 114,479
Product development expense...................... 54,023 54,995 43,267
Recapitalization-related costs................... 43,386 -- --
Nonrecurring charges............................. -- -- 27,776
Amortization of intangibles...................... 6,228 5,835 6,793
Amortization of unearned compensation............ 1,519 -- --
-------- -------- --------
Total operating expenses......................... 254,162 199,140 192,315
-------- -------- --------
Operating income............................... 40,120 68,286 32,843
Interest expense................................. (46,198) (1,221) (828)
Interest income.................................. 3,398 3,012 2,785
Other income, net................................ 15,959 730 634
-------- -------- --------
Income from continuing operations before income
taxes........................................... 13,279 70,807 35,434
Provision for income taxes....................... 6,834 29,031 17,585
-------- -------- --------
Income from continuing operations................ 6,445 41,776 17,849
Discontinued operations:
Gain on sale of businesses net of income tax
provision of $22,692.......................... -- -- 12,000
-------- -------- --------
Net income....................................... $ 6,445 $ 41,776 $ 29,849
======== ======== ========
Income per common share--basic:
Continuing operations.......................... $ 0.06 $ 2.49 $ 1.04
Discontinued operations........................ -- -- 0.70
-------- -------- --------
$ 0.06 $ 2.49 $ 1.74
======== ======== ========
Income per common share--diluted:
Continuing operations.......................... $ 0.06 $ 2.40 $ 0.99
Discontinued operations........................ -- -- 0.67
-------- -------- --------
$ 0.06 $ 2.40 $ 1.66
======== ======== ========
Weighted average number of common shares
Basic.......................................... 106,212 16,795 17,200
Diluted........................................ 111,464 17,434 18,028
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-4
<PAGE>
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Number of Shares Other Share-
----------------- Additional Retained Compre- holders'
Common Treasury Common Paid-In Earnings Unearned hensive Treasury Equity
Stock Stock Stock Capital (Deficit) Comp Loss Stock (Deficit)
------- -------- ------- ---------- --------- -------- ------- -------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Translation
adjustment............ (1,589) (1,589)
---------
Total comprehensive
income................ 28,260
---------
Purchases of treasury
stock................. (1,021) (32,695) (32,695)
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 0 (1,247) (47,181) 160,686
======= ====== ======= ======== ========= ======= ======= ======== =========
Net income--1998....... 41,776 41,776
Translation
adjustment............ (353) (353)
---------
Total comprehensive
income................ 41,423
---------
Purchases of treasury
stock................. (163) (5,330) (5,330)
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 0 (1,600) (44,931) 202,119
======= ====== ======= ======== ========= ======= ======= ======== =========
Net income--1999....... 6,445 6,445
Translation
adjustment............ (82) (82)
---------
Total comprehensive
income................ 6,363
---------
Exercise of stock
options and other
issuances............. 414 59 (111) 1,946 1,835
Tax benefit from
exercise of stock
options............... 609 609
Recapitalization-related
costs:
Common stock
repurchased........... (18,605) 1,682 (3,721) (7,269) (873,668) 42,985 (841,673)
Issuance of new stock,
net of fees........... 120,251 298,148 298,148
Stock options expense.. 14,640 14,640
Unearned compensation.. 9,082 (9,082) --
Amortization of
unearned
compensation.......... 1,519 1,519
------- ------ ------- -------- --------- ------- ------- -------- ---------
Balance, March 31,
1999................... 120,665 0 $ 0 $322,746 $(629,941) $(7,563) $(1,682) $ 0 $(316,440)
======= ====== ======= ======== ========= ======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-5
<PAGE>
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1999 1998 1997
--------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Operating activities:
Net income from operations..................... $ 6,445 $ 41,776 $ 29,849
Adjustment for noncash items included in net
income:
Gain on discontinued operations................ -- -- (12,000)
Depreciation................................... 11,741 12,066 9,280
Amortization of intangibles.................... 6,228 5,835 6,793
Purchased incomplete technology................ -- -- 20,627
Intangibles writeoff........................... -- -- 7,149
Gain on sale of subsidiary..................... (15,900) -- --
Recapitalization-related costs................. 14,640 -- --
Amortization of unearned compensation.......... 1,519 -- --
Amortization of deferred debt issuance costs... 2,693 -- --
Change in net deferred income tax asset........ (12,289) (5,575) (7,617)
Other.......................................... 612 580 797
Changes in operating assets and liabilities,
net of effects of purchase acquisitions and
divestitures.................................. 53,309 4,380 4,926
--------- -------- --------
Net cash provided by continuing operations..... 68,998 59,062 59,804
Net cash used in discontinued operations....... (1,328) (13,717) (52,313)
--------- -------- --------
Net cash flows provided by operating activi-
ties.......................................... 67,670 45,345 7,491
Investing activities:
Purchases of property and equipment............ (11,323) (15,879) (10,176)
Disposals of property and equipment............ 369 219 214
Proceeds from sales of businesses.............. 21,000 -- 96,682
Businesses acquired in purchase transactions,
net of cash acquired.......................... (21,365) -- (68,930)
Incentive earnout related to the purchase of
Advent........................................ (3,845) -- --
Other.......................................... (4,915) 144 290
--------- -------- --------
Net cash flows provided by (used in) continuing
operations.................................... (20,079) (15,516) 18,080
Net cash flows provided by (used in) discontin-
ued operations................................ -- 507 (951)
--------- -------- --------
Net cash flows provided by (used in) investing
activities.................................... (20,079) (15,009) 17,129
Financing activities:
Borrowings of debt............................. 575,000 (5,000) 3,200
Repayment of debt.............................. (48,000) -- (678)
Repayment of notes payable..................... (2,192) -- --
Repayment of capital lease obligations......... (159) (195) --
Financing fees................................. (38,631) -- --
Proceeds from issuance of common stock......... 277,035 4,513 1,693
Proceeds from exercise of stock options........ 1,800 -- --
Purchases of treasury stock and stock outstand-
ing........................................... (806,508) (5,330) (32,695)
--------- -------- --------
Net cash flows used in financing activities.... (41,655) (6,012) (28,480)
Effect of exchange rate on cash................. (478) 798 (2,452)
--------- -------- --------
Increase (decrease) in cash and cash equiva-
lents.......................................... 5,458 25,122 (6,312)
Cash and cash equivalents at beginning of year.. 64,904 39,782 46,094
--------- -------- --------
Cash and cash equivalents at end of year........ $ 70,362 $ 64,904 $ 39,782
========= ======== ========
Change in operating asset and liability compo-
nents:
Decrease (increase) in trade accounts receiv-
able.......................................... $ (1,114) $ 994 $(15,833)
Decrease (increase) in inventories............. 2,503 (8,739) 450
Increase (decrease) in other current assets.... 2,089 (2,431) (3,341)
Increase in accounts payable................... 11,025 6,009 2,059
Increase in accrued expenses and taxes......... 38,806 8,547 21,591
--------- -------- --------
Change in operating assets and liabilities..... $ 53,309 $ 4,380 $ 4,926
========= ======== ========
Supplemental disclosures of cash flow informa-
tion:
Cash paid during the year for:
Interest....................................... $ 33,376 $ 934 $ 889
Income taxes................................... 16,013 24,307 42,340
Tax benefit of disqualifying dispositions of
stock options................................. 609 679 1,318
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.
C-6
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. FORMATION AND BACKGROUND
Dynatech Corporation was formed in 1959 and is a global communications
equipment company focused on network technology solutions. The Company's
operations are conducted primarily by wholly-owned subsidiaries located
principally in the United States with other operations, primarily sales
offices, located in Europe and the Far East. The Company is managed in
three business segments: communications test, industrial computing and
communications, and visual communications.
The communications test segment manufactures products for communications
service providers (such as 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 systems.
The industrial computing and communications segment provides computer
products and systems designed to withstand excessive temperatures, dust,
moisture and vibration in harsh operating environments. In addition, the
Company 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 visual communications segment primarily provides (i) airplane cabin
video information display systems and information services for the general
and commercial aviation markets, and (ii) 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.
B. RECAPITALIZATION AND MERGER
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 "Old 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 "Common Stock")
and (ii) each then outstanding share of common stock of MergerCo was
converted into one share of 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 91.8% of the Common Stock. John F. Reno, the Chairman,
President and Chief Executive of the Company (who retired from the Company
on May 19, 1999) together with two family trusts holds approximately 1.0%
of the Common Stock and other stockholders hold approximately 7.2% of the
Common Stock. The Merger and related transactions were treated as a
recapitalization for financial reporting purposes. Accordingly, the
historical basis of the Company's assets and liabilities were not affected
by these transactions.
In connection with the Merger, the Company incurred a charge of $43.4
million, consisting of $39.9 million (including a $14.6 million non-cash
charge) for the cancellation payments of employee stock options and
compensation expense due to the acceleration of unvested stock options, and
$3.5 million for certain other expenses resulting from the Merger,
including employee termination expense. The Company incurred an additional
$41.3 million in expenses, of which $27.3 million was capitalized and will
be amortized over the life of the Senior Secured Credit Facilities and
Senior Subordinated Notes, and $14.0 million was charged directly to
shareholders' equity.
C-7
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
C. RELATED PARTY
The Company will pay an annual management fee of $0.5 million to CDR. In
return for the annual management fee, CDR will provide management and
financial consulting services to the Company and its subsidiaries. During
fiscal 1999, the Company paid CDR $0.5 million in management fees and
expenses.
On May 19, 1999, Ned C. Lautenbach, a principal of CDR, became the
Company's Chairman, President and Chief Executive Officer. Mr. Lautenbach
will not receive compensation for these services, which will be provided in
connection with an agreement between the Company and CDR.
D. FINANCIAL POSITION OF DYNATECH CORPORATION AND DYNATECH LLC
In connection with the Merger and related transactions, Dynatech LLC
(formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to
indebtedness of Dynatech Corporation, including the 9 3/4% Senior
Subordinated Notes due 2008 (the "Senior Subordinated Notes") and the
Senior Secured Credit Facilities referred to elsewhere in this report.
Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company
with no independent operations and no significant assets other than its
membership interest in Dynatech LLC. See Note K. Debt. Accordingly, the
condensed consolidated financial statements of Dynatech Corporation,
presented in this report, are not materially different from those of
Dynatech LLC. Management has not included separate financial statements of
Dynatech LLC because management has determined that they would not be
material to holders of the Senior Subordinated Notes or to the holders of
Dynatech Corporation's common stock. Dynatech LLC is subject, under
agreements governing its indebtedness, to prohibitions on its ability to
make distributions to Dynatech Corporation (with limited exceptions) and
other significant restrictions on its operations. See Note K. Debt.
E. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Cash Equivalents. Cash equivalents represent highly liquid debt
instruments with a maturity of three months or less at the time of
purchase.
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
cash investments, accounts receivable and interest rate swap contracts.
The Company maintains its cash accounts primarily with one institution
and places its cash investments in prime quality certificates of deposit,
commercial paper, or mutual funds.
C-8
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit risk related to its accounts receivable are limited due to the
large number of customers and their dispersion across many business and
geographic areas. However, a significant amount of trade receivables are
with customers within the telecommunications industry. The Company extends
credit to its customers based upon an evaluation of the customer's
financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. In
fiscal 1999 the Company provided approximately $0.5 million for doubtful
accounts ($0.4 million in fiscal 1998 and $0.6 million if fiscal 1997).
In fiscal 1999 the Company recognized revenue equal to approximately 13%
of consolidated sales from one telecommunications customer. At March 31,
1999 approximately 10% of the accounts receivable balance related to this
customer.
The Company's counterparties to the agreements relating to the Company's
investments and interest rate swap contracts consist of various major
corporations and financial institutions of high credit standing. The
Company does not believe there is significant risk of non-performance by
these counterparties.
Inventories. Inventories are carried and charged to cost of sales 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. 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 1997, $3.1 million in fiscal 1998 and
$3.0 million in fiscal 1999, and was excluded from cost of sales. Excess of
cost over fair market value of net assets (goodwill) is being amortized on
a straight-line basis over 15 to 30 years.
Other Assets. In connection with the Merger, the Company incurred
financing fees which will be amortized over the life of the Senior Secured
Credit Facilities and Senior Subordinated Notes. See Note K. Debt. In
addition, the deferred tax asset increased primarily as a result of certain
compensation charges relating to stock options in connection with the
Merger.
Other comprehensive income (loss). 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 the balance sheet
C-9
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date and for revenue and expense accounts using a weighted average exchange
rate during the period. The unrealized gains or losses resulting from such
translation are included in shareholders' equity. The realized gains or
losses resulting from foreign currency transactions are included in other
income.
Unearned compensation. On July 15, 1998, the Company granted non-
qualified options to certain key employees to purchase 14.3 million shares
of common stock at an exercise price lower than closing market price. The
Company has historically granted options at a price equal to the closing
market price on the date of the grant. During fiscal 1999 the amortization
of unearned compensation was $1.5 million.
Unearned compensation related to these options of $9.7 million was
recorded within shareholders' equity (deficit) and will be charged to
expense over a five-year vesting period. As of March 31, 1999, the
unamortized portion of the total compensation expense was $7.6 million.
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. On May 21, 1998, the
Company retired all of its treasury stock in connection with the Merger.
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.
Year 2000 Costs. Costs of modifying computer software for Year 2000
compliance are expensed as incurred.
Interest Rate Swap Contracts. The Company uses interest rate swap
contracts to effectively fix a portion of its variable rate Term Loan
Facility to a fixed rate in order to reduce the impact of interest rate
changes on future income. The Company does not hold or issue financial
instruments for trading or speculative purposes. The differential to be
paid or received under these agreements will be recognized as an adjustment
to interest expense related to the debt. See Note L. Interest Rate Swap
Contracts.
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
C-10
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
In the quarter ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting
Comprehensive Income." SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components. SFAS 130 requires,
among other things, foreign currency translation adjustments, which prior
to adoption were reported separately in stockholders' equity to be included
in other comprehensive income.
In the quarter ended June 30, 1998, the Company adopted Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2
provides guidance on applying generally accepted accounting principals in
recognizing revenue on software transactions.
At March 31, 1999, the Company adopted Financial Accounting Standards
Board issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the
reporting of operating segments in the financial statements. The Company
has included in its Management's Discussion and Analysis disclosure within
its three operating segments: communications test, industrial computing and
communications, and visual communications.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company is assessing the impact of the adoption of SFAS 133 on its
results of operations and its financial position.
F. ACQUISITIONS AND DIVESTITURES
Fiscal 1999 Activity:
Acquisitions. On June 19, 1998, the Company, through one of its indirect
wholly owned subsidiaries, acquired all of the outstanding capital stock of
Pacific Systems Corporation of Kirkland, Washington ("Pacific") for a total
purchase price of $20 million, including an incentive earnout. This
acquisition resulted in approximately $18 million of goodwill which is
being amortized over 30 years. The acquisition was accounted for using the
purchase method of accounting. Pacific designs and manufactures customer-
specified avionics and integrated cabin management.
In February 1999, the Company, through one of its wholly owned
subsidiaries, acquired Flight TECH, a Hillsboro, Oregon based inflight
entertainment manufacturer specializing in equipment for small and medium
jets, and turboprop aircraft. The acquisition was accounted for using the
purchase method of accounting at a purchase price of $2 million. This
acquisition resulted in approximately $1.9 million of goodwill which is
being amortized over 30 years.
Divestiture. On June 30, 1998, the Company sold the assets of ComCoTec,
Inc.("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc.
for $21 million. ComCoTec is a supplier of pharmacy management software and
services and was a subsidiary within the Company's visual communications
products group. The Company recognized a gain of $15.9 million from the
sale of ComCoTec and recorded it in other income.
C-11
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has not presented separate pro forma financial statements for
the recent acquisitions or divestiture due to the immateriality of such pro
forma effects on the consolidated financial statements of the Company.
Fiscal 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 1999 and 1998, the
Company incurred a $3.5 million and $1.6 million, respectively, increase in
goodwill, related to a targeted and renegotiated three-year earnout based
on, among other things, a targeted sales growth.
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 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.
G. 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 was reduced from $3 million to $1.4 million in
fiscal 1999. The guarantee will expire in June 1999.
In connection with the disposition of these subsidiaries, the Company had
net liabilities of $1.2 million and $756 thousand at March 31, 1999 and
1998, 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.
C-12
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. INTANGIBLE ASSETS
Intangible assets acquired primarily from business acquisitions are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Amounts in thousands
<S> <C> <C>
Product technology.................................... $ 17,042 $ 17,042
Excess of cost over net assets acquired............... 55,878 32,478
Other intangible assets............................... 13,307 13,307
---------- ----------
86,227 62,827
Less accumulated amortization......................... 29,459 23,232
---------- ----------
Total............................................... $ 56,768 $ 39,595
========== ==========
</TABLE>
I. OTHER ASSETS
The detail of Other Assets is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Amounts in thousands
<S> <C> <C>
Deferred financing fees............................... $ 24,614 $ --
Deferred tax asset.................................... 23,852 17,084
Other assets.......................................... 6,472 4,489
---------- ----------
Total other assets.................................. $ 54,938 $ 21,573
========== ==========
</TABLE>
J. EARNINGS PER SHARE
The computation for earnings per share is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net income:
Continuing operations........................ $ 6,445 $41,776 $17,849
Discontinued operations...................... -- -- 12,000
-------- ------- -------
Consolidated net income........................ $ 6,445 $41,776 $29,849
======== ======= =======
BASIC:
Common stock outstanding, net of treasury
stock, beginning of period.................... 16,871 16,803 17,594
Weighted average common stock and treasury
stock issued during the period................ 104,324 134 144
Weighted average common stock and treasury
stock repurchased............................. (14,983) (142) (538)
-------- ------- -------
Weighted average common stock outstanding, net
of treasury stock, end of period.............. 106,212 16,795 17,200
======== ======= =======
Net income per common share:
Continuing operations........................ $ 0.06 $ 2.49 $ 1.04
Discontinued operations...................... -- -- .70
-------- ------- -------
Consolidated net income........................ $ 0.06 $ 2.49 $ 1.74
======== ======= =======
</TABLE>
C-13
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
DILUTED:
Common stock outstanding, net of treasury
stock, beginning of period.................... 16,871 16,803 17,594
Weighted average common stock and treasury
stock issued during the period................ 104,324 134 144
Weighted average common stock equivalents...... 5,252 639 828
Weighted average common stock and treasury
stock repurchased............................. (14,983) (142) (538)
-------- ------- -------
Weighted average common stock outstanding, net
of treasury stock, end of period.............. 111,464 17,434 18,028
======== ======= =======
Net income per common share:
Continuing operations........................ $ 0.06 $ 2.40 $ 0.99
Discontinued operations...................... -- -- .67
-------- ------- -------
Consolidated net income........................ $ 0.06 $ 2.40 $ 1.66
======== ======= =======
</TABLE>
K. DEBT
Long-term debt is summarized below:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Amounts in thousands
<S> <C> <C>
Senior secured credit facilities...................... $ 252,000 $ --
Senior subordinated notes............................. 275,000 --
Capital lease obligations............................. 342 233
---------- ----------
Total debt.......................................... 527,342 233
Less current portion.................................. 23,191 150
---------- ----------
Long-term debt...................................... $ 504,151 $ 83
========== ==========
</TABLE>
In fiscal 1998, the Company had two credit facilities totaling $180
million. At March 31, 1998, the Company had $180 million available under
these facilities. These facilities were terminated at the time of the
Merger.
In connection with the Merger, the Company entered into a senior secured
credit agreement (the "Senior Secured Credit Agreement") consisting of a
$260 million term loan facility (the "Term Loan Facility") and a $110
million revolving credit facility (the "Revolving Credit Facility")
(collectively, the "Senior Secured Credit Facilities"). In addition, the
Company incurred $275 million of debt through the sale of its 9 3/4% Senior
Subordinated Notes (the "Senior Subordinated Notes").
In connection with the Merger and related transactions, Dynatech LLC
became the primary obligor with respect to the Senior Secured Credit
Facility and the Senior Subordinated Notes. See Note D. Financial Position
of Dynatech Corporation and Dynatech LLC. Dynatech Corporation has
guaranteed the Senior Secured Credit Facilities and the Senior Subordinated
Notes.
Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. With respect to the
$260 million initially borrowed under the Term Loan Facility (which is
divided into four tranches, each of which has a different term and
repayment schedule), the Company is required to make scheduled principal
payments of the $50 million of tranche A term loan thereunder during its
six-year term, with
C-14
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
substantial amortization of the $70 million tranche B term loan, $70
million tranche C term loan and $70 million tranche D term loan thereunder
occurring after six, seven and eight years, respectively. During fiscal
1999 the Company repaid $8 million of mandatory principal payments and
repaid $40 million of indebtedness under its $110 million Revolving Credit
Facility. The $275 million of Senior Subordinated Notes will mature in
2008, and bear interest at 9 3/4% per annum. Total interest expense
including the amortization of deferred debt issuance costs was $46.2
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 or other
dispositions by the Company or any of its subsidiaries, and (iii) property
insurance or condemnation awards received by the Company or any of its
subsidiaries, and (b) 50% of the Company's excess cash flow (the
"Recapture") (as defined in the Senior Secured Credit Agreement) for each
fiscal year in which the Company exceeds a certain leverage ratio. The
Senior Subordinated Notes are subject to certain mandatory prepayments
under certain circumstances.
The Company is required, under the terms of the Recapture, to repay $15
million in Term Loan borrowing on June 30, 1999. The Company, may, in its
sole discretion, use the $15 million in part to prepay the mandatory $8
million amortization due in fiscal 2000. The Company will determine, prior
to June 30, 1999, whether or not to elect this option.
At March 31, 1999, the Company had no outstanding borrowings under the
Revolving Credit Facility. The Revolving Credit Facility matures in 2004,
with all amounts then outstanding becoming due. The Company expects that
its working capital needs will require it to obtain new revolving credit
facilities at the time that the Revolving Credit Facility matures, by
extending, renewing, replacing or otherwise refinancing the Revolving
Credit Facility. No assurance can be given that any such extension,
renewal, replacement or refinancing can be successfully accomplished or
accomplished on acceptable terms.
The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company.
The Company's weighted-average interest rate on the loans under the Senior
Credit Agreement was 8.25% per annum for the period commencing May 21, 1998
and ending March 31, 1999. However, the Company has entered into interest
rate swaps which will be effective for periods ranging from two to three
years beginning September 30, 1998 to fix the interest charged on a portion
of the total debt outstanding under the Term Loan Facility. After giving
effects to these arrangements, approximately $220 million of the debt
outstanding will be subject to an effective average annual fixed rate of
5.66% (plus an applicable margin). The terms of one interest rate swap
contract provide upon termination for a one-year option to renew 50% of the
notional amount at the discretion of the lender. See Note L. Interest Rate
Swaps. As a result of the substantial indebtedness incurred in connection
with the Merger, it is expected that the Company's interest expense will be
higher and will have a greater proportionate impact on net income in
comparison to preceding periods.
Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn following the May, 1998 closing of
the Recapitalization was $70 million. The undrawn portion of this facility
will be available to meet future working capital and other business needs
of the Company. At March 31, 1999, the Company had no outstanding
borrowings under the Revolving Credit Facility. Therefore, the undrawn
portion of this facility was $110 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
C-15
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The mandatory repayment schedule of the Term Loan Facility over the next
five years and thereafter is as follows: $8.0 million in fiscal 2000, $8.0
million in fiscal 2001, $11.5 million in fiscal 2002, $14.5 million in
fiscal 2003, $18.0 million in fiscal 2004, and $192.0 million in fiscal
years subsequent to fiscal 2004.
The Company is also required, under the Terms of the Senior Secured
Credit Facility, to pay a commitment fee based on the unused amount of the
revolving credit facility. The rate is an annual rate, paid quarterly, and
ranges from 0.30% to 0.50%, and is based on the Company's leverage ratio in
effect at the beginning of the quarter.
Covenant Restrictions. The Senior Secured Credit Agreement imposes
restrictions on the ability of the Company to make capital expenditures,
and both the Senior Secured Credit Facilities and the indenture governing
the Senior Subordinated Notes limit the Company's ability to incur
additional indebtedness. Such restrictions, together with the highly
leveraged nature of the Company, could limit the Company's ability to
respond to market conditions, to meet its capital-spending program, to
provide for unanticipated capital investments, or to take advantage of
business opportunities. The covenants contained in the Senior Secured
Credit Agreement also, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur guarantee
obligations, prepay other indebtedness, make restricted payments, create
liens, make equity or debt investments, make acquisitions, modify terms of
the indenture governing the Senior Subordinated Notes, engage in mergers or
consolidations, change the business conducted by the Company and its
subsidiaries taken as a whole or engage in certain transactions with
affiliates. These restrictions, among other things, preclude Dynatech LLC
from distributing assets to Dynatech Corporation (which has no independent
operations and no significant assets other than its membership interest in
Dynatech LLC), except in limited circumstances. In addition, under the
Senior Secured Credit Agreement, the Company is required to comply with a
minimum interest expense coverage ratio and a maximum leverage ratio. These
financial tests become more restrictive in future years. The term loans
under the Senior Secured Credit Facilities (other than the $50 million
tranche A term loan) are governed by negative covenants that are
substantially similar to the negative covenants contained in the indenture
governing the Senior Subordinated Notes, which also impose restrictions on
the operation of the Company's business.
L. INTEREST RATE SWAP CONTRACTS
The Company uses interest rate swap contracts to effectively fix a
portion of its variable rate Term Loan Facility to a fixed rate in order to
reduce the impact of interest rate changes on future income. The
differential to be paid or received under these agreements will be
recognized as an adjustment to interest expense related to the debt. At
March 31, 1999 the Company had four interest rate swap contracts in which
the Company pays a fixed interest rate and the Company receives a three-
month LIBOR interest rate.
<TABLE>
<CAPTION>
Swap No. Notional Amount Term Fixed Interest Rate
-------- --------------- ---- -------------------
<S> <C> <C> <C>
1 $25,000 October 16, 1998--October 16, 2000 4.7150%
2 $65,000 September 30, 1998--September 30, 2001 5.8450%
3 $65,000 September 30, 1998--September 30, 2001 5.8500%
4 $65,000 September 30, 1998--September 28, 2001 5.8375%
</TABLE>
C-16
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 6, 1999 the Company renegotiated two of its interest rate swap
contracts (swap numbers 3 and 4 above). These two agreements, with notional
amounts totaling $130 million, a weighted-average interest rate of 5.84375%
and original termination dates of September 28, 2001 and September 30, 2001
were replaced. The notional amount of the new swap contract is $130 million
with a fixed interest rate of 5.755%, terminating on September 28, 2001. In
addition there is a one-year option to renew for 50% of the notional amount
($65 million) at the discretion of the lender. All other terms of the swap
contract remained the same. The Company did not incur any additional
expense to renegotiate this contract.
M. INCOME TAXES
The components of income (loss) from continuing operations before taxes
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
Amounts in thousands
<S> <C> <C> <C>
Domestic........................................... $13,900 $69,772 $38,486
Foreign............................................ (621) 1,035 (3,052)
------- ------- -------
Total............................................ $13,279 $70,807 $35,434
======= ======= =======
</TABLE>
The components of the provision (benefit) for income taxes from
continuing operations are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
Amounts in thousands
<S> <C> <C> <C>
Provision for income taxes:
United States....................................... $6,268 $22,810 $11,729
Foreign............................................. (125) 327 234
State............................................... 691 5,894 5,622
------ ------- -------
Total............................................. $6,834 $29,031 $17,585
====== ======= =======
</TABLE>
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
Amounts in thousands
<S> <C> <C> <C>
Current:
Federal........................................ $ 18,901 $21,248 $19,297
Foreign........................................ (125) (978) 234
State.......................................... 301 6,123 5,671
-------- ------- -------
Total Current................................ 19,077 26,393 25,202
-------- ------- -------
Deferred:
Federal........................................ (12,626) 1,562 (7,568)
Foreign........................................ -- 1,305 --
State.......................................... 383 (229) (49)
-------- ------- -------
Total deferred................................. (12,243) 2,638 (7,617)
-------- ------- -------
Total........................................ $ 6,834 $29,031 $17,585
======== ======= =======
</TABLE>
C-17
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliations between U.S. federal statutory rate and the effective tax
rate of continuing operations follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<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............................................. (0.8) -- 0.6
State income taxes, net of federal income tax benefit.. 5.2 5.1 3.8
Research and development tax credit.................... -- (1.3) (0.7)
Nondeductible amortization............................. 3.4 1.2 1.1
Nondeductible compensation............................. 4.8 -- --
Other.................................................. 3.9 1.0 0.7
---- ---- ----
Effective tax rate before certain charges............ 51.5% 41.0% 40.5%
Nondeductible purchased research and and development... -- -- 8.2
Nondeductible writeoff of intangibles.................. -- -- 0.9
---- ---- ----
Total effective tax rate on continuing operations.... 51.5% 41.0% 49.6%
==== ==== ====
</TABLE>
The principal components of the deferred tax assets and liabilities
follow:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Amounts in thousands
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 4,758 $ 4,608
Vacation benefits.................................. 1,109 1,556
Depreciation and amortization...................... 16,349 16,343
Reserves, primarily inventory...................... 8,174 5,791
Deferred revenue................................... 6,705 1,747
Compensation-related to stock options.............. 5,126 --
Other deferred assets.............................. 3,326 1,841
---------- ----------
45,547 31,886
Valuation allowance.................................. (4,758) (4,608)
---------- ----------
40,789 27,278
Deferred tax liabilities:
Depreciation and amortization...................... -- 431
Other deferred liabilities......................... 1,016 1,068
---------- ----------
1,016 1,499
---------- ----------
Net deferred tax assets............................ $ 39,773 $ 25,779
========== ==========
</TABLE>
Deferred income taxes are included in the following balance sheet
accounts:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Amounts in thousands
<S> <C> <C>
Other current assets................................... $ 15,921 $ 8,695
Other assets........................................... 23,852 17,084
---------- ----------
$ 39,773 $ 25,779
========== ==========
</TABLE>
C-18
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
On March 31, 1999 the Company has foreign and state net operating loss
carryforwards of $9.1 million and $31.3 million respectively. The foreign
loss carryforwards begin to expire in the year ending March 31, 2003, and
the state net operating losses begin to expire in the year ending March 31,
2004.
N. EMPLOYEE RETIREMENT PLANS
The Company has a trusteed employee 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 $4.9 million in
fiscal 1999, $4.5 million in fiscal 1998 and $4.0 million in fiscal 1997.
O. 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.
There were 38,692 shares issued on April 17, 1998. The plan commenced
October 1, 1996 and 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.
The Company maintains a third Stock Option plan in which common stock is
available for grant to non-employee directors. Each eligible director is
automatically granted a stock option to purchase 25,000 shares of stock
when he or she is first elected to the Board of Directors.
At the time of the Merger, each Company stock option became fully vested
and exercisable, other than 20,737 Company stock options held by John F.
Reno. Any Company stock option that was outstanding immediately prior to
the effective time of the Merger, was cancelled and each holder received an
option cancellation payment. Stock options held by certain key executives
were converted into equivalent options to purchase shares of Common Stock
and were not cancelled.
C-19
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of activity in the Company's option plans is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
1999 Exercise 1998 Exercise 1997 Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option,
beginning of year...... 2,135,719 $26.33 1,770,560 $21.87 1,684,580 $15.17
Impact of converting
shares on date
of Merger.............. 18,479,093
Options granted (at an
exercise price of $2.50
to $3.187 in 1999, $35
to $44 in 1998, and $32
to $54 in 1997......... 16,439,511 2.54 634,800 36.25 607,550 34.51
Options exercised....... (860,120) 15.15 (148,941) 17.20 (255,690) 11.99
Options canceled........ (2,290,959) 9.68 (120,700) 24.26 (265,880) 17.82
---------- --------- ---------
Shares under option, end
of year................ 33,903,244 $ 1.85 2,135,719 $26.33 1,770,560 $21.87
========== ========= =========
Shares exercisable...... 18,420,794 $ 1.30 512,999 $18.79 300,710 $14.77
</TABLE>
Options available for future grants under the plans were 4.2 million, 497
thousand, and 1.0 million at March 31, 1999, 1998, and 1997, respectively.
The fair market value of each option granted during 1999, 1998, and 1997
is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: expected volatility
of 45% in 1999, 40% in 1998 and 39% in 1997, risk-free interest rate of
5.38% in 1999, 6% in 1998 and 6.59% in 1997, expected life of 5 years in
1999, 7 years in 1998 and 1997, and a dividend yield of 0%. The Weighted
Average Fair Value of options granted, net of forfeitures, during the years
1999, 1998 and 1997 was $1.673, $19.20 and $18.68, 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 3/31/99 Life Price
----------------------- ----------- ----------- --------
<S> <C> <C> <C>
$0.00 - $1.00............................... 6,914,880 4.926 $0.737
$1.00 - $2.00............................... 11,507,153 7.490 1.597
$2.00 - $3.25............................... 15,481,211 9.197 2.542
----------
Total..................................... 33,903,244 7.746 $1.853
==========
</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
C-20
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
1999 1998 1997
---------------- ---------------- ----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------- -------- ------- -------- -------
Amounts in thousands except per share
<S> <C> <C> <C> <C> <C> <C>
Net income.............. $6,445 $(7,510) $41,776 $38,441 $29,849 $27,863
Net income per share:
Basic................. $ 0.06 $ (0.07) $ 2.49 $ 2.29 $ 1.74 $ 1.62
Diluted............... $ 0.06 $ (0.07) $ 2.40 $ 2.20 $ 1.66 $ 1.55
</TABLE>
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.
P. 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 as amended entitled a qualifying
shareholder to buy shares of Dynatech junior participating cumulative
preferred stock in the case of an acquisition of, or tender offer for, more
than a specified percentage of Dynatech's common stock.
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 Common Stock issued on or after the
effective time of the Merger have or will have any Rights associated with
them under the Rights Agreement.
Q. 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 2000 through 2004 under noncancelable operating leases
having an original term of more than one year are $8.9 million, $7.5
million, $6.2 million, $5.1 million, and $4.2 million, respectively. The
aggregate obligation subsequent to fiscal 2004 is $2.7 million. Rent
expense was approximately $9.2 million, $8.1 million, and $6.2 million in
fiscal 1999, 1998, and 1997, 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,
C-21
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 case is scheduled for trial in August 1999 and the Company
intends to defend the lawsuit vigorously. On May 27, 1999 Whistler filed a
Chapter 11 bankruptcy case in the United States Bankruptcy Court for the
District of Massachusetts. The Company 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.
R. NONRECURRING CHARGES
The components of nonrecurring expenses include the following:
<TABLE>
<CAPTION>
1997
--------------------
Amounts in thousands
<S> <C>
Incomplete technology................................... $20,627
Intangible writeoffs.................................... 7,149
-------
Total................................................. $27,776
=======
</TABLE>
S. PRO FORMA INCOME STATEMENT
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. 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>
1997
--------------------
Amounts in thousands
<S> <C>
Sales................... $426,234
Cost of sales........... 183,076
--------
Gross profit............ 243,158
Selling, general & ad-
ministrative expense... 122,232
Product development ex-
pense.................. 48,515
Nonrecurring charges.... 7,149
Amortization of intangi-
bles................... 8,853
--------
Operating income........ 56,409
Interest expense........ (3,284)
Interest income......... 2,785
Other income, net....... 633
--------
Income from continuing
operations before in-
come taxes............. 56,543
Provision for income
taxes.................. 24,974
--------
Income from continuing
operations............. $ 31,569
========
</TABLE>
C-22
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997
--------------------
Amounts in thousands
<S> <C>
Income per share:
Basic................................................. $ 1.84
Diluted............................................... $ 1.74
Weighted average shares:
Basic................................................. 17,200
Diluted............................................... 18,028
</TABLE>
T. SEGMENT INFORMATION AND GEORGRAHIC AREAS
Segment Information. The Company operates in three business segments:
communications test, industrial computing and communications, and visual
communications applications. The communications test segment, through the
Company's TTC subsidiary, provides communications test instruments to
communications service providers, long-distance companies, and competitive
access providers, among others. TTC's broad test and analysis product line
ranges from portable units to centralized test and monitoring systems
installed in telephone company central offices.
The industrial computing and communications segment provides computer
products to the ruggedized computer market. The Company's ICS subsidiary
provides computer products and systems designed to withstand excessive
temperatures, dust, moisture, and vibration in harsh operating
environments. The Company's Itronix subsidiary sells ruggedized portable
communications and computing devices used by field service workers.
The Company's visual communications segment is comprised primarily by
Airshow, a subsidiary that manufactures passenger cabin video information
display systems and information services; and da Vinci, which manufactures
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.
Corporate EBIT is comprised of corporate general and administrative
expense that has not been allocated to each segment. Corporate expenses
exclude any non-recurring items such as recapitalization-related costs,
non-recurring expenses, amortization of unearned compensation, and gain on
sale of subsidiary. Corporate assets are comprised primarily of cash,
deferred financing fees, and deferred taxes.
The Company 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.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies. See "Note E. Summary of
Significant Accounting Policies."
In fiscal 1997 and fiscal 1998, no single customer accounted for more
than 10% of sales. In fiscal 1999, however, the Company recognized revenue
equal to approximately 13% of consolidated sales from one customer.
C-23
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Information. During the fourth quarter of fiscal 1999 the Company
adopted FAS 131 which establishes standards for the reporting of operating
segments in the financial statements. The Company measures the performance
of its subsidiaries by the their respective earnings before interest and
taxes ("EBIT"). The information below includes sales and EBIT (excluding
non-recurring items) for the three segments the Company participates in:
communications test, industrial computing and communications, and visual
communications.
<TABLE>
<CAPTION>
SEGMENT 1999 1998 1997
------- -------- -------- --------
<S> <C> <C> <C>
Communications test:
Bookings.................................... $260,722 $233,934 $214,227
Sales....................................... 238,942 240,432 211,310
Earnings before interest & taxes............ 40,656 48,395 42,811
Total assets................................ 71,453 78,586 70,857
Capital expenditures........................ 5,147 8,898 6,461
Industrial computing & communications:
Bookings.................................... $253,818 $162,784 $ 82,449
Bookings on a pro forma basis............... 146,271
Sales....................................... 193,322 154,993 78,342
Sales on a pro forma basis.................. -- -- 142,164
Earnings before interest & taxes............ 18,793 3,479 3,856
EBIT on a pro forma basis................... -- -- 6,795
Total assets................................ 93,753 94,724 90,469
Capital expenditures........................ 2,967 4,586 1,653
Visual communications:
Bookings.................................... $ 95,785 $ 82,385 $ 77,790
Sales....................................... 90,590 77,523 72,760
Earnings before interest & taxes............ 29,259 20,171 17,820
Total assets................................ 41,748 16,869 20,405
Capital expenditures........................ 3,029 2,349 1,973
Corporate:
Loss before interest & taxes (a)............ $ (3,624) $ (3,029) $ (3,234)
Total assets................................ 141,150 97,951 67,279
Capital expenditures........................ 180 46 89
Total Company:
Bookings.................................... $610,325 $479,103 $374,466
Sales....................................... 522,854 472,948 362,412
Earnings before interest & taxes (a)........ 85,084 69,016 61,253
Total assets................................ 348,104 288,130 249,010
Capital expenditures........................ 11,323 15,879 10,176
</TABLE>
--------
(a) Excludes recapitalization-related costs, non-recurring expenses,
amortization of unearned compensation, and gain on sale of subsidiary;
includes corporate general and administrative expense not allocated to
each segment.
C-24
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Information. Information by geographic areas for the years
ended March 31, 1999, 1998, and 1997 is summarized below:
<TABLE>
<CAPTION>
Outside U.S.
United (principally
States Europe) Combined
-------- ------------ --------
Amounts in thousands
<S> <C> <C> <C>
Sales to unaffiliated customers
1999..................................... $502,611* $20,243 $522,854
1998..................................... 451,360* 21,588 472,948
1997..................................... 340,603* 21,809 362,412
Income (loss) before taxes from continuing
operations
1999..................................... $ 13,900 $ (621) $ 13,279
1998..................................... 69,772 $ 1,035 $ 70,807
1997..................................... 38,486 (3,052) 35,434
Long-lived assets (a) at
March 31, 1999........................... $112,662 $ 811 $113,473
March 31, 1998........................... 69,584 865 70,449
March 31, 1997........................... 70,985 781 71,766
</TABLE>
--------
* Includes export sales of $55,219, $54,552, and $48,959 in 1999, 1998 and
1997, respectively.
(a) Excludes deferred taxes.
Currency Income. Net income in fiscal 1999, 1998, and 1997 included
currency gains (losses) of approximately $9,800, $12,600, and $99,300,
respectively.
U. SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
FY 1999
First Second Third Fourth Year
-------- -------- -------- -------- --------
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Sales......................... $109,143 $123,601 $136,781 $153,329 $522,854
Gross profit.................. 62,989 70,936 76,731 83,626 294,282
Net income (loss)............. (11,933) 3,661 6,949 7,768 6,445
Income (loss) per common share
Basic....................... $ (0.19) $ 0.03 $ 0.06 $ 0.06 $ 0.06
Diluted..................... (0.19) 0.03 0.05 0.06 0.06
Market Share Price(b)--High... $ 4.312 $ 3.438 $ 3.000 $ 3.500
--Low................ 3.125 2.687 2.375 2.718
</TABLE>
C-25
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
FY 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 9,547 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>
--------
(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) As a result of the Merger on May 21, 1998, trading in the Old Common
Stock was halted and the Common Stock is traded only in the over-the-
counter market. The market share prices reflect the high and low close
prices after May 21, 1998.
C-26
<PAGE>
SCHEDULE II
DYNATECH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 1999, 1998, and 1997
Reserve for Doubtful Accounts (in thousands)
<TABLE>
<S> <C>
Balance, March 31, 1996................................................. $ 957
Additions charged to income........................................... 646
Writeoff of uncollectible accounts, net............................... (359)
Allowances reclassified............................................... 628
------
Balance, March 31, 1997................................................. 1,872
Additions charged to income........................................... 425
Writeoff of uncollectible accounts, net............................... (533)
------
Balance, March 31, 1998................................................. 1,764
Additions charged to income........................................... 483
Writeoff of uncollectible accounts, net............................... (613)
------
Balance, March 31, 1999................................................. $1,634
======
</TABLE>
<PAGE>
APPENDIX D
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of December 20, 1997, by
and between CDRD Merger Corporation and Dynatech Corporation.(3)
2.2 Agreement and Plan of Merger, dated May 18, 1998, between TTC
Reorg Corp. and Telecommunications Techniques Co., LLC.(2)
2.3 Agreement and Plan of Merger, dated May 21, 1998, between TTC
Merger Co. LLC and Telecommunications Techniques Co., LLC.(2)
3.1 Restated Articles of Organization of Dynatech Corporation.
3.2 Bylaws of Dynatech Corporation.(1)
4.1 Indenture, dated May 21, 1998, among Dynatech Corporation, TTC
Merger Co. LLC and State Street Bank and Trust Company, as
Trustee.(2)
4.2 Form of 9 3/4% Senior Subordinated Note due 2008 (included in
Exhibit 4.1).
4.3 First Supplemental Indenture, dated May 21, 1998, between
Telecommunications Techniques Co., LLC and State Street Bank and
Trust Company, as Trustee.(2)
4.4 Registration Rights Agreement, dated May 21, 1998, by and Among
Dynatech Corporation, Telecommunications Techniques Co., LLC,
Credit Suisse First Boston Corporation and J.P. Morgan Securities
Inc. (2)
10.1 Agreement and Plan of Merger, dated as of December 20, 1997, by
and between CDRD Merger Corporation and Dynatech Corporation.(3)
10.2 Agreement and Plan of Merger, dated May 18, 1998, between TTC
Reorg Corp. and Telecommunications Techniques Co., LLC.(2)
10.3 Agreement and Plan of Merger, dated May 21, 1998, between TTC
Merger Co., LLC and Telecommunications Techniques Co., LLC.(2)
10.4 Credit Agreement, dated May 21, 1998, among Dynatech Corporation,
TTC Merger Co. LLC, the lenders named therein, Morgan Guaranty and
Trust Company of New York, as administrative agent, Credit Suisse
First Boston, as syndication agent, and The Chase Manhattan Bank,
as documentation agent.(2)
10.5 Guarantee and Collateral Agreement, dated as of May 21, 1998,
among Dynatech Corporation, Telecommunications Techniques Co., LLC
and certain of its subsidiaries and Morgan Guaranty and Trust
Company of New York.(2)
10.6 Indemnification Agreement, dated May 21, 1998, among Dynatech
Corporation, Telecommunications Techniques Co., LLC, Clayton,
Dubilier & Rice, Inc. and Clayton, Dubilier & Rice Fund V Limited
Partnership.(2)
10.7 Consulting Agreement, dated May 21, 1998, by and among Dynatech
Corporation, Telecommunications Techniques Co., LLC and Clayton,
Dubilier & Rice, Inc.(2)
10.8 Tax Sharing Agreement, dated May 21, 1998, between Dynatech
Corporation and Telecommunications Techniques Co., LLC.(2)
10.9 Registration Rights Agreement, dated May 21, 1998, by and among
Dynatech Corporation, Clayton, Dubilier & Rice Fund V Limited
Partnership, Mr. Reno, the Suzanne D. Reno Trust and the John F.
Reno Trust.(2)
10.10 Assignment and Assumption Agreement, dated May 21, 1998, between
Dynatech Corporation and Telecommunications Techniques Co., LLC.(2)
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
10.11 Purchase Agreement, dated May 14, 1998, among Dynatech
Corporation, TTC Merger Co., LLC, Credit Suisse First Boston
Corporation and J.P. Morgan Securities, Inc.(2)
10.12 Purchase Agreement Supplement, dated May 21, 1998, between
Dynatech Corporation, Telecommunications Techniques Co., LLC.,
Credit Suisse First Boston Corporation and J.P. Morgan Securities,
Inc.(2)
10.13 Assumption Agreement, dated May 21, 1998, among Dynatech
Corporation, TTC Merger Co., LLC, and Telecommunications
Techniques Co., LLC and consented to by Morgan Guaranty Trust
Company of New York, as administrative agent.(1)
10.14 Amended and Restated Employment Agreement, entered into November
1, 1998, by and between Dynatech Corporation and John F. Reno.(4)
10.15 Amended and Restated Employment Agreement, entered into November
1, 1998, by and between Dynatech Corporation and Allan M.
Kline.(4)
10.16 Amended and Restated Employment Agreement, entered into November
1, 1998, by and between Dynatech Corporation and John R.
Peeler.(4)
10.17 Form of Letter Agreement with John A. Mixon and Certain Other
Officers.(1)
10.18 Form of Management Equity Agreement with Mr. Reno.(1)
10.19 Form of Management Equity Agreement with Messrs. Kline and
Peeler.(1)
10.20 Form of Management Equity Agreement with Mr. Mixon and Certain
Other Officers.(1)
10.21 Form of Nondisclosure, Noncompetition and Nonsolicitation
Agreement.(1)
10.22 Amendment No. 1, dated as of December 20, 1997, to the Shareholder
Rights Agreement, dated as of February 16, 1989, as amended and
restated as of March 12, 1990, between Dynatech Corporation and
BankBoston, N.A., as Rights Agent.(7)
10.23 Dynatech Corporation 1992 Stock Option Plan.(5)
10.24 Dynatech Corporation Amended and Restated 1994--Stock Option and
Incentive Plan.(6)
10.25 Dynatech Corporation Non-Employee Directors Stock--Incentive
Plan.(6)
10.26 Retirement Agreement between Dynatech Corporation and John F.
Reno, dated as of May 19, 1999
21 Subsidiaries of Dynatech Corporation
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to Dynatech Corporation Form 10-K for the fiscal
year ended March 31, 1998 (File No. 001-12657).
(2) Incorporated by reference to Dynatech Corporation's Registration Statement
on Form S-4 (Registration No. 333-60893).
(3) Incorporated by reference to Dynatech Corporation's Registration Statement
on Form S-4 (File No. 333-44933).
(4) Incorporated by reference to Dynatech Corporation Form 10-Q for the
quarter ended December 31, 1998 (File No. 1-12657).
(5) Incorporated by reference to Dynatech Corporation Form 10-K for the fiscal
year ended March 31, 1992.
(6) Incorporated by reference to Dynatech Corporation's Registration Statement
on Form S-8 (File No. 333-75797).
(7) Previously filed.
D-2
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-2258582
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
We, Mark, V.B. Tremallo, *Vice President, and Peter B. Tarr, *Clerk of Dynatech
Corporation located at Three New England Executive Park, Burlington, MA 01803 do
hereby certify that the following Restatement of the Articles of Organization
was duly adopted at a meeting held on May 21, 1998 by a vote of the
directors/or: 12,795,431 shares of Common of 16,864,434 shares outstanding, 0
shares of Preferred Series A., Jr. Participating Cumulative Preferred of 0
shares outstanding, and ___ shares of __________ of __________ shares
outstanding, /**/
being at least a majority of each type, class or series outstanding and entitled
to vote thereon: / /**/ being at least two-thirds of each type, class or series
outstanding and entitled to vote thereon and of each type, class or series of
stock whose rights are adversely affected thereby:
ARTICLE I
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.*
* Delete the inapplicable words. ** Delete the inapplicable clause.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper with a left margin of at least 1 inch. Additions to more than one article
may be made on a single sheet so long as each article requiring each addition is
clearly indicated.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common: 200,000,000 Common:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred: Preferred: 100,000 $1.00
- --------------------------------------------------------------------------------
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
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: None.
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders: See pages 2H-2M.*
** If there are no provisions state "None".
Note: The preceding six (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>
Description of Amendments
-------------------------
Article 2: Amended to update the purposes of the corporation.
Article 3: Amended to increase the number of shares authorized and to change
the par value of the shares.
Article 4: Headings have been added. Cash dividends paid to holders of
Serial Preference Stock may be, but are no longer required to be,
cumulative.
Article 6: The order of sections has changed. Old section 6(c), describing
the permissible places for Stockholder meetings, has been
eliminated. A provision has been added whereby the Company
preserves the right to amend or repeal portions of the Articles
of Organization. A provision has been added describing the powers
of the Board of Directors.
2N
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the 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.
ARTICLE VII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is: Three New England Executive
Park, Burlington, MA 01803
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C>
President: John F. Reno 31 Prospect St., Winchester, MA 01890
Treasurer: Allan M. Kline 34 Phillips Rd., Sudbury, MA 01776
Clerk: Peter B. Tarr 3 Brooks Circle, Beverly, MA 01915
Directors: William R. Cook 937 Macclesfield Rd., Furlong, PA 18925
O. Gene Gabbard 102 Marsaille Place, Cary, NC 27511
L. Dennis Kozlowski 59 Harbor Rd., Rye, NH 03870
Richard K. Lochridge 191 Commonwealth Ave., Boston, MA 02116
Peter Van Cuylenburg 12620 Zappettini Crt., Los Altos Hills, CA 94022
Robert G. Paul 1965 Mornington Lane, #14, Cleveland Heights, OH 44106
John F. Reno 31 Prospect St., Winchester, MA 01890
</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, if any, of the
corporation is:
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below. See Page 2N.
SIGNED UNDER THE PENALTIES OF PERJURY, this 21st day of May, 1998
/s/ Mark V.B. Tremallo , *Vice President
- ----------------------------------------- Mark V.B. Tremallo
/s/ Peter B. Tarr , *Clerk
- ----------------------------------------- Peter B. Tarr
** Delete the inapplicable words. ** If there are no amendments, state 'None'
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
(General Laws, Chapter 156B, Section 74)
================================================================================
I hereby approve the within Restated Articles of
Organization and, the filing fee in the amount of
$150,500 having been paid, said articles are
deemed to have been filed with me this 21st day
of May, 1998.
Effective Date:____________________________________
/s/ William Francis Galvin
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of documents to be sent to:
Mary C. Kelly Burke
Ropes & Gray
One International Place, Boston, MA 02110
Telephone: 617-951-7545
<PAGE>
RETIREMENT AGREEMENT (the "Agreement"), by and between Dynatech
Corporation, a Massachusetts corporation (the "Company"), and John F. Reno
("Executive") dated as of May 19, 1999.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Executive is currently employed as President and Chief
Executive Officer of the Company and serves as Chairman of the Board of
Directors of the Company pursuant to an Amended and Restated Employment
Agreement, dated as of November 1, 1998, by and between the Company and
Executive (the "Employment Agreement");
WHEREAS, Executive has options (collectively, the "Options") to
purchase 7,687,120 shares of common stock (the "Common Stock"), no par value, of
the Company (the "Option Shares") pursuant to the Employment Agreement and a
Management Equity Agreement, dated as of May 21, 1998, between the Company, the
Clayton, Dubilier & Rice Fund V Limited Partnership (the "Fund") and Executive
(the "Equity Agreement");
WHEREAS, Executive has decided to retire from employment with the
Company and each of its direct or indirect subsidiaries (the "Subsidiaries"),
effective as of July 30, 1999 (the "Retirement Date");
WHEREAS, the Company and Executive wish to agree upon the consequences
of Executive's retirement;
WHEREAS, pursuant to the terms of the Employment Agreement and the
Equity Agreement, effective upon any termination of Executive's employment, the
Company has the right to repurchase the Options and/or Option Shares;
WHEREAS, as of the Retirement Date, pursuant to the terms of the
Equity Agreement, Executive's rights with respect to the portion of the Option
covering 7,289,181 Option Shares (the "Vested Options") have become vested and
Executive's
<PAGE>
rights with respect to the remaining portion of the Option, covering 397,939
Option Shares (the "Unvested Options"), remain unvested; and
WHEREAS, pursuant to the terms of the Equity Agreement, effective upon
the Retirement Date, the Unvested Options will terminate and will be canceled
and the Company will have the right to repurchase the Vested Options.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises contained herein and for other good and valuable
consideration, the Company, the Fund and Executive hereby agree as follows:
1. Certain Definitions. For purposes of this Agreement, all capitalized
-------------------
terms used herein without definition shall have the respective meanings assigned
to such terms in the Employment Agreement.
2. Retirement; Resignation from Offices. In accordance with Section 7(h)
------------------------------------
of the Employment Agreement and in connection with his retirement, effective as
of the date hereof, Executive hereby resigns from his positions as President and
Chief Executive Officer of the Company and Chairman and member of the Board of
Directors of the Company and from all other offices, positions and Board
memberships with the Company or any Subsidiary currently held by Executive.
Executive shall continue in the employment of the Company, without title, until
the Retirement Date, having such duties as shall be assigned to him from time to
time by the Chairman of the Board of the Company, which shall be commensurate
with his position and status with the Company immediately prior to the date
hereof. In furtherance of the foregoing, Executive hereby agrees to promptly
deliver such letters of resignation as may reasonably be requested by the
Company.
3. Payments and Benefits Pursuant to the Employment Agreement.
----------------------------------------------------------
(a) Termination of Employment Period. Effective on the Retirement Date,
--------------------------------
the Employment Period shall expire and all of the rights and obligations of the
Company and Executive under the Employment Agreement will terminate, except as
provided in this Section 3. With regard to the Employment Agreement, the
provisions of each of Sections
2
<PAGE>
4(c) (relating to indemnity for ISO adjustment), 7(h) (Resignation upon
Termination), 7(i) (Limits on Payments by the Company), 8 (Unauthorized
Disclosure), 9 (Non-Competition), 10 (Non-Solicitation of Employees), 11 (Non-
Solicitation of Customers), 12 (Return of Documents), 13 (Injunctive Relief with
Respect to Covenants; Forum; Venue and Jurisdiction), 16 (Indemnification) and
17 (Miscellaneous) (A) shall survive Executive's termination of employment, the
-
expiration of the Employment Period and the termination of the Employment
Agreement, (B) are incorporated herein by reference and (C) shall continue in
- -
full force and effect. With regard to the Equity Agreement, the provisions of
each of Sections 3 (Tag-Along Rights), 4 (Take-Along Rights), 7 (Lock-Up
Agreement) and 8 (Miscellaneous) and, to the extent any of the defined terms in
the Equity Agreement are used in any of the foregoing Sections, the provisions
of Section 1 (Definitions) (A) shall survive Executive's termination of
-
employment, the expiration of the Employment Period and the termination of the
Equity Agreement, (B) are incorporated herein by reference and (C) shall
- -
continue in full force and effect. The parties agree and understand that
references to the number of Shares (as defined in such Equity Agreement) in
sections 3 and 4 of the Equity Agreement include Shares held by Executive's wife
and by any and all trusts (including charitable trusts) established by Executive
and to which Shares have been transferred by Executive and/or his wife in
accordance with the Equity Agreement.
(b) Payment of Accrued Obligations. Executive shall be entitled to
------------------------------
payment of his Base Salary (at the current annual rate thereof of $530,000)
through the Retirement Date and to any benefits payable to or in respect of
Executive under any applicable employee benefit plan, policy or practice of the
Company in accordance with the generally applicable provisions thereof, based on
Executive's employment with the Company prior to the Retirement Date, other than
any such plan, policy or practice providing for severance or termination
benefits. On the Retirement Date, Executive shall be paid the amount of
$152,000 in lieu of a pro-rated annual bonus for the period from April 1, 1999
through the Retirement Date.
(c) Continued Payments of Base Salary. Subject to Section 3(g), the
---------------------------------
Company shall continue to make periodic payments to Executive of his Average
Base Salary in accordance with the Company's regular payroll practices from the
Retirement Date until
3
<PAGE>
May 31, 2001 (the "Salary Continuance Period"). The Average Base Salary is equal
to $520,000.
(d) Continued Payments in Respect of Bonus. Subject to Section 3(g), the
--------------------------------------
Company shall pay to Executive, in 22 monthly installments, commencing on August
31, 1999 and on the last day of the next 21 succeeding months, an amount equal
to one-twelfth of the Average Annual Bonus (the "Bonus Payment"). The Average
Annual Bonus is equal to $920,814, so that, subject to Section 3(g), each
monthly payment will be $76,734.50.
(e) Continued Welfare Benefits. During the period commencing on the
--------------------------
Retirement Date and ending on the earlier of (i) Executive's 65th birthday and
(ii) the date of Executive's death (the "Benefits Continuation Period"), subject
- ---
to Section 3(g), Executive shall be entitled to continue his current
participation in each of the Company's medical benefits plans in which Executive
is an active participant immediately prior to the Retirement Date in accordance
with the terms and conditions of each such plan (including, without limitation,
the provisions thereof regarding deductibles and co-payments) as in effect from
time to time during the Benefits Continuation Period. Medical coverage shall
also be made available to Executive=s dependents, during the Benefits
Continuation Period, to the extent available under, and subject to the terms and
conditions of, each such medical plan as in effect from time to time.
Notwithstanding the foregoing, to qualify for the medical benefits made
available hereunder, Executive must pay any premiums and make any contributions
that he would have been required to pay or make under the terms of such plan as
in effect from time to time during the Benefits Period if Executive were then
still a senior officer of the Company. If such continued participation is either
not legally permissible or otherwise allowed under the terms of the applicable
plan or any insurance policy or other arrangement under which such benefits are
provided, the Company will provide equivalent coverage from its general assets
or another available source.
(f) Other Benefits. Set forth on Schedule A are statements of the amount
--------------
credited to Executive's account on the date specified therein under the
Company's 401(k) Savings Plan and the Company's Supplemental 401(k) Savings
Plan. The Company confirms that
4
<PAGE>
Executive is fully vested in Executive's account balance under each such savings
plan and supplemental savings plan. Nothing is this Agreement shall modify or
reduce Executive's accrued benefits under all employee pension benefit plans
from those in effect immediately prior to the date hereof.
(g) Mitigation. If Executive obtains new employment (including self-
----------
employment and services as a consultant) that is not of a type prohibited by
Section 9 of the Employment Agreement (Non-Competition), (i) during the Salary
Continuation Period, any salary continuation payments or Bonus Payments to which
Executive is entitled pursuant to Section 3(c) or 3(d) shall be reduced by the
amount of any compensation earned by Executive (whether paid currently or
deferred) from any subsequent employer or other Person for which Executive
performs services, including but not limited to consulting services, and (ii)
--
during the Benefits Continuation Period, the continued medical benefits coverage
to which Executive is entitled pursuant to Section 3(e) shall be secondary to
any other medical benefit coverage available to Executive from any subsequent
employer or other Person for which Executive performs services, including, but
not limited to, consulting services, at any time after the Retirement Date.
Notwithstanding subclause (i) in the preceding sentence, no offset shall be made
to any payment under Section 3(c) or 3(d) for any compensation paid for services
(A) as a non-employee director of a corporation (or any comparable position in
-
another business organization) under any arrangement which is generally
applicable to all non-employee directors of such corporation (or to all persons
holding comparable positions in any such other business organization) or (B) by
-
any organization which is exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "Code").
4. Options; Exercise and Repurchase and Cancellation.
-------------------------------------------------
(a) Outstanding Options. Each of the Options that are currently
-------------------
outstanding and that constitute Vested Options is listed on Schedule B under the
heading "Vested Options." Each of the Options that are currently outstanding and
that constitute Unvested Options is listed on Schedule B under the heading
"Unvested Options."
5
<PAGE>
(b) Exercise. At the date of the wire transfer set forth in Section
--------
4(f), Executive shall be deemed to exercise the Options listed on Schedule B
under the heading "Options to be Exercised," each of which constitutes part of
the Vested Options. Payment of the aggregate exercise price in respect of such
Vested Options ($399,971.07) shall be paid by a debit against the amount to be
transferred pursuant to such Section 4(f). The Company and, by signing the
acknowledgment of this Agreement where noted below, the Fund each waives its
rights under the Equity Agreement to purchase the Option Shares issuable in
respect of the exercise of such Options to be Exercised and the 407,680 shares
of Common Stock issued to Executive upon the exercise of Options in 1998.
Executive agrees that he shall not exercise any Vested Options not listed under
the heading "Options to be Exercised" on Schedule B. The portion of Executive's
Vested Options not listed under the heading "Options to be Exercised" on
Schedule B shall hereafter be referred to as the Remaining Vested Options.
(c) Election to Repurchase. The Company hereby notifies Executive that,
----------------------
in connection with Executive's termination of employment, the Company hereby
exercises its right pursuant to Section 5 of the Equity Agreement to purchase
the Remaining Vested Options.
(d) Purchase and Sale of the Vested Options. Effective as of the date of
---------------------------------------
the wire transfer determined under Section 4(f) below, Executive hereby agrees
to sell to the Company and the Company hereby agrees to purchase from Executive
the Remaining Vested Options, at the purchase price set forth in Section 4(e)
below, payable as set forth in Section 4(f) below.
(e) Purchase Price. The Company and Executive each agrees that the
--------------
aggregate purchase price for the Remaining Vested Options is $14,427,039.30 (the
"Purchase Price"), based on a price per share of $3.25, which is the price
determined by the Company's Board of Directors in accordance with the terms and
provisions of the Equity Agreement. The portion of the Purchase Price payable
in respect of each separate option that is part of the Remaining Vested Options
is equal to the product of (i) the excess of (A) such per share price over (B)
the exercise price per Option Share under the Option multiplied by (ii) the
--
number of Options Shares covered by the relevant Option.
6
<PAGE>
(f) Payment of Purchase Price. The Company shall, not later than the
-------------------------
Retirement Date, wire to an account identified to the Company by Executive in
writing an amount equal to (x) the Purchase Price reduced by (y) all applicable
- -
federal, state and local income and employment taxes required to be withheld
from such payment. Schedule B hereto reflects the amount to be paid in respect
of the purchased options and the amount of any taxes to be withheld therefrom.
The amount of any such wire transfer shall be reduced by the amount payable by
Executive in respect of the exercise price of the Vested Options to be exercised
in accordance with Section 4(b).
(g) Cancellation of Unvested Options. Executive hereby acknowledges and
--------------------------------
agrees that his rights with respect to the Unvested Options which have not
become vested on or prior to the Retirement Date shall automatically be canceled
and terminated effective as of the Retirement Date.
5. Executive's Cooperation. Executive hereby agrees that, from time to
-----------------------
time upon the reasonable request of the Company, Executive shall assist the
Company in connection with any pending or future dispute, litigation,
arbitration or similar proceeding or investigation instituted or commenced by
the Company or any Subsidiary or instituted or commenced by any other person
against or involving the Company or any Subsidiary.
6. Termination of Agreements. Effective as of the Retirement Date, the
-------------------------
Employment Agreement and the Equity Agreement will each terminate in its
entirety without any further liability or obligation on the part of the Company,
any of the Subsidiaries, the Fund or Executive thereunder, except for the
provisions of the Employment Agreement and the Equity Agreement that are
incorporated herein by reference pursuant to Section 3(a).
7. Release of Claims. Executive and the Company shall, simultaneously
-----------------
with the execution hereof, execute and deliver to the other party the
Confidential General Release Agreement attached hereto as Exhibit A.
8. Entire Agreement; Related Documents. This Agreement (including Exhibit
-----------------------------------
A hereto) constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof. All prior correspondence and proposals (including
summaries of
7
<PAGE>
proposed terms) and all prior promises, representations, understandings,
arrangements and agreements relating to such subject matter (including but not
limited to those made to or with Executive by any other person or entity) are
merged herein and superseded hereby.
9. Miscellaneous.
-------------
(a) Binding Effect; Assignment. This Agreement shall be binding on and
--------------------------
inure to the benefit of the Company and their respective successors and
permitted assigns. This Agreement shall also be binding on and inure to the
benefit of Executive and his heirs, executors, administrators and legal
representatives. This Agreement shall not be assignable by any party hereto
without the prior written consent of the other parties hereto. Each of the
Company and the Fund may effect such an assignment without prior written
approval of Executive upon the transfer of all or substantially all of its
business and/or assets (whether by purchase, merger, consolidation or
otherwise).
(b) Governing Law. This agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to its principles or rules of conflict of laws to the extent such
principles or rules would require or permit the application of the laws of
another jurisdiction.
(c) Taxes. The Company may withhold from any payments made under this
-----
Agreement all federal, state, city or other applicable taxes as shall be
required by law. Each of the parties (and, by its signed acknowledgment, the
Fund) hereby represents to the other party (or to the Fund, if applicable) that
the facts and circumstances leading to Executive's retirement are not related in
any way to the consummation of the transaction whereby the Fund acquired the
majority of the voting securities of the Company . Each of the parties
represents and covenants that it will file any applicable tax returns and/or
reports on the basis that none of the payments made hereunder constitute a
"parachute payment" within the meaning of Section 280G(b)(2) of the Code. The
parties represent to each other that, prior to May 1, 1999, there was no
discussion between the parties with respect to the cessation of Executive's
employment, and that the events that have led to Executive's election to retire
are independent of, and unrelated to, the acquisition by the Fund of a
controlling interest in the Company during 1998.
8
<PAGE>
(d) Amendments. No provision of this Agreement may be modified, waived
----------
or discharged unless such modification, waiver or discharge is approved by the
Board of Directors of the Company and is agreed to in writing by Executive and,
in the case of any such modification, waiver or discharge affecting the rights
or obligations of the Fund, is approved by the Fund. No waiver by any party
hereto at any time of any breach by any other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No waiver of any provision of
this Agreement shall be implied from any course of dealing between or among the
parties hereto or from any failure by any party hereto to assert its rights
hereunder on any occasion or series of occasions.
(e) Severability. In the event that any one or more of the provisions of
------------
this Agreement shall be or become invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not be affected thereby.
(f) Notices. Any notice or other communication required or permitted to
-------
be delivered under this Agreement shall be (i) in writing, (ii) delivered
--
personally, by courier service or by certified or registered mail, first-class
postage prepaid and return receipt requested, (iii) deemed to have been received
---
on the date of delivery or on the third business day after the mailing thereof,
provided that the party giving such notice or communication shall have attempted
- --------
to telephone the party or parties to which notice is being given during regular
business hours on or before the day such notice or communication is being sent,
to advise such party or parties that such notice is being sent, and (iv)
--
addressed as follows (or to such other address as the party entitled to notice
shall hereafter designate in accordance with the terms hereof):
9
<PAGE>
(A) if to the Company, to it at:
Dynatech Corporation
3 New England Executive Park
Burlington, Massachusetts 01803
Attention: General Counsel
(B) if to Executive, to him at:
31 Prospect Street
Winchester, Massachusetts 01890
Copies of any notices or other communications given under this Agreement shall
also be given to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention: Mr. Brian Finn
---------
and
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Franci J. Blassberg, Esq.
---------
(g) Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original and all of which together shall constitute one
and the same instrument.
10
<PAGE>
(h) Headings. The section and other headings contained in this Agreement
--------
are for the convenience of the parties only and are not intended to be a part
hereof or to affect the meaning or interpretation hereof.
IN WITNESS WHEREOF, the Company has duly executed this Agreement by its
authorized representatives and Executive has hereunto set his hand, in each case
effective as of the date first above written.
DYNATECH CORPORATION
By: /s/ Allan M. Kline
---------------------------------------
Name: Allan M. Kline
Title: Vice President, Chief Financial
Officer and Treasurer
/s/ John F. Reno
---------------------------------------
John F. Reno
Agreed and Acknowledged:
Clayton Dubilier & Rice Fund V Limited Partnership
/s/ Brian D. Finn
- -------------------------------------------------
By: Brian D. Finn
11
<PAGE>
EXHIBIT A
Confidential General Release Agreement
THIS CONFIDENTIAL GENERAL RELEASE AGREEMENT (hereinafter "Agreement")
is made and entered into this 19th day of May, 1999 by and between Dynatech
Corporation, a Massachusetts corporation (the "Company"), and John F. Reno
("Executive") (collectively, hereinafter the "Parties").
-W-I-T-N-E-S-S-E-T-H-
WHEREAS, the Parties have determined that it is in their mutual
interest for Executive's employment with the Company and each of its direct or
indirect subsidiaries (the Company and such subsidiaries collectively referred
to as the "Companies") to terminate, effective as of the date hereof;
WHEREAS, in connection with the termination of his employment and the
election by the Company to repurchase certain options to purchase shares of the
Company's common stock granted to Executive, Executive is entitled to certain
payments and benefits under the terms of (x) an Amended and Restated Employment
-
Agreement, dated as of November 1, 1998, by and between the Company and
Executive (the "Employment Agreement") and (y) a Management Equity Agreement,
-
dated as of May 21, 1998, among the Company, Clayton, Dubilier & Rice Fund V
Limited Partnership, a Cayman Islands limited partnership (the "Fund"), and
Executive, (the "Equity Agreement");
WHEREAS, the Company, the Fund, Executive have entered into an
Agreement, dated as of the date hereof, to which this Confidential General
Release Agreement is attached as Exhibit A (the "Retirement Agreement"),
providing for, among other things, certain additional compensation, benefits and
rights of and to
<PAGE>
Executive identified therein in connection with the termination of his
employment (such additional compensation, benefits and rights, the "Additional
Benefits");
IN CONSIDERATION THEREOF, the Companies desire to settle, conclude and
obtain the final release of all possible matters and claims which Executive has
now or may have in the future, whether known or unknown against any of the
Companies;
NOW, THEREFORE, in consideration of the Company's promise to provide
the Additional Benefits to Executive pursuant to the Retirement Agreement, the
premises and promises herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, IT
IS AGREED AS FOLLOWS:
1. The Company shall provide the Additional Benefits to Executive.
2. In return for the receipt of such Additional Benefits, Executive,
on his own behalf and on behalf of each of his agents, representatives, assigns,
heirs, executors and administrators (the "Releasors"), does hereby fully and
generally release, settle, cancel, discharge and acknowledge to be fully
satisfied, and covenant not to sue any Releasee (as defined below) in respect
of, any and all claims, contractual or otherwise, demands, costs, rights, causes
of action, charges, complaints, losses, damages and all liability of whatever
kind and nature, whether known or unknown, which he may have at the time of
signing this Agreement, or had at any time prior thereto, against any of the
Company, any subsidiary or affiliate of the Company, any successor or assign of
any such entity or any of their respective current or former employees,
directors, officers, attorneys, agents or other representatives (collectively,
the "Releasees") which may in any way be connected with or related to (i)
Executive's employment with the Company or any of their respective subsidiaries
or the severing or permanent discontinuance of that employment or any of the
events or circumstances leading thereto, (ii) Executive's purchase or holding of
--
shares (the "Shares") of common stock of the Company (the
2
<PAGE>
"Common Stock"), (iii) the grant to Executive of options (the "Options") to
---
purchase additional shares of Common Stock (the "Option Shares") pursuant to the
Equity Agreement and the Employment Agreement, the vesting, exercisability or
other right or obligation of any Releasor in connection with the Options, the
Option Shares or the Equity Agreement, the Employment Agreement or the Company's
purchase of the Remaining Vested Options pursuant to the Retirement Agreement
and the cancellation of the Unvested Options pursuant to the Equity Agreement
and the Retirement Agreement, (iv) the Employment Agreement, (v) the Equity
-- -
Agreement (collectively, the "Claims"), other than the Excluded Claims (as
defined below). This release specifically includes Claims in respect of all
personal injuries and consequences thereof, including death and pain and
suffering, and any injuries which may now exist but which, at this time, are
unknown, unknowable, or unanticipated, or which may or may not develop further
at some time in the future, and all potential Claims concerning any
unforeseeable or unanticipated further development or consequences of known
injuries, other than the Excluded Claims.
Without limiting the generality of the foregoing, it is expressly
agreed and understood that this release includes, but is not limited to, any
Claim before any court, government agency or in any other forum, including but
not limited to, Claims under Title VII of the Civil Rights Act of 1964, as
amended, 42 U.S.C. (S) 2000 et seq. (Race and sex discrimination); the Age
-- ----
Discrimination in Employment Act 29 U.S.C. (S) 621 et seq. (age discrimination),
-- ----
the National Labor Relations Act, as amended, 29 U.S.C. (S) 141 et seq. (union
-- ----
and collective activity), the Equal Pay Act of 1963, 29 U.S.C. (S) 201 et seq.
-- ----
(equal pay), the Americans with Disabilities Act, 42 U.S.C. (S) 12101
(disability discrimination), the Rehabilitation Act of 1973, 29 U.S.C. (S) 701
(disability discrimination), the Civil Rights Acts of 1866 and 1871, as amended,
29 U.S.C. (S) 1981 et seq. (civil rights), the Consolidated Omnibus Budget
-- ----
Reconciliation Act of 1985, as amended, (COBRA-group health insurance), the
Employee Retirement and Income Security Act, as amended, 29 U.S.C. (S) 1001
et seq. (employee benefits), the Fair Labor Standards Act, as amended, 29 U.S.C.
(S) 201 et seq. (minimum wage, overtime pay and working hours), the Family
Medical Leave Act of 1993, as amended, 42 U.S.C. (S) 2601 et seq. (leaves of
-- ----
absence), the Massachusetts Human Rights Act, as amended, actions for race,
color, religion, age,
3
<PAGE>
sex, national origin and handicap discrimination or for work-related injuries or
payment of wages arising under state law, for wrongful discharge based upon an
implied contract or public policy, and any other federal, state or local
statute, public policy, order, regulation, tort or contract claim, in each case,
other than the Excluded Claims.
For purposes of this Agreement, the term "Excluded Claims" means (i)
Claims under the terms of the Retirement Agreement (including, without
limitation, those sections of the Employment Agreement or the Equity Agreement
that are incorporated by reference into the Retirement Agreement) or this
Agreement and (ii) any Claims for indemnification or contribution with respect
--
to any liability incurred by Executive as a director, officer or employee of the
Company.
3. Executive understands, agrees and acknowledges that this Agreement
is intended to include in its effect, without limitation, claims and causes of
action which he does not know of or suspect to exist in his favor at the time of
executing this Agreement, and that this Agreement contemplates extinguishment of
all such claims and causes of action.
4. Executive understands, agrees and acknowledges that by signing
this Agreement he is not relying on any representation, promise or statement,
either oral or written, not contained in this Agreement or the Retirement
Agreement.
5. Executive understands, agrees and acknowledges that:
A. he has been encouraged by representatives of the Company to have
this Agreement reviewed by legal counsel of his own choosing and
that he has been given ample time to do so prior to signing it;
B. he has had the opportunity to negotiate concerning the terms of
this Agreement;
4
<PAGE>
C. he has been provided the opportunity to take up to twenty-one
(21) days to consider this Agreement, but has elected to waive
such full 21 day period by executing this Agreement;
D. he shall have the right to revoke this Agreement within seven
(7) days following the date he executes this Agreement. Any
revocation of this Agreement must be in writing and received by
the Company by the close of business on the seventh day following
the execution of this Agreement and shall be delivered to Mark
V.B. Tremallo, Esq., General Counsel, c/o Dynatech Corporation, 3
New England executive Park, Burlington, Massachusetts 01803. Upon
any revocation in accordance herewith, Executive's right to the
Additional Benefits shall terminate, the Retirement Agreement
will be rendered void and without effect and the Employment
Agreement and Equity Agreement will continue in full force and
effect unamended by the Retirement Agreement and this Agreement;
and
E. by signing this Agreement, he represents that he fully
understands the terms and conditions stated in it and intends to
be legally bound by them.
6. Executive represents and warrants to the Company that he has not
engaged in any acts of dishonesty or in willful and serious misconduct, which
misconduct has caused or is reasonably expected to result in direct or indirect
material injury to the Company or any of its Affiliates (as defined in the
Employment Agreement). For and in consideration of the representations and
promises made by Executive herein and other good and valuable consideration,
except as otherwise expressly provided herein, the Company hereby waives,
releases and forever discharges Executive and Executive's heirs, successors and
assigns of and from all actions, causes of actions, suits, debts sums of money,
accounts, bonds, bills, covenants, contracts, controversies, agreements,
promises, damages, judgments, claims and demands whatsoever, in law in equity,
whether known or
5
<PAGE>
unknown, of every kind and nature whatsoever, including any claims that may be
brought on the Company's behalf by any third party, relating to Executive's
employment with or services (including as a director) for the Company and any of
its Subsidiaries, or under the Employment Agreement or the Equity Agreement
("Company Claims"), provided, however, that the foregoing release shall not
-------- -------
apply to any Company Claim arising out of or under the Retirement Agreement
(including, without limitation, the portions of the Employment Agreement or the
Equity Agreement incorporated therein by reference) or this Agreement.
7. Executive and the Company each represents to the other that he or
it has not heretofore assigned or transferred or purported to assign or
transfer, to any person or entity, any of the Claims or Company Claims, any
portion thereof, or any interest therein.
8. Executive agrees that he will not make any untruthful and
disparaging statements about the Company or any of its Affiliates or any
clients, competitors, suppliers, employees or former employees of the Company or
of any of its Affiliates to any such person or any other persons (including but
not limited to the press or other media). The Company agrees that it will not
make any untruthful and disparaging statements about Executive to any person
(including but not limited to the press or other media). The Company and
Executive have agreed on the wording of a joint press release, a copy of which
is attached.
9. Any breach by Executive or the Company of a condition of this
Agreement with an attendant failure to remedy the breach within ten (10) days of
receiving notice of it from the other Party shall subject the breaching Party to
any and all equitable and/or monetary relief required to prevent further damage
to the other Party and to compensate same for any damages suffered as a
consequence of the breach of this Agreement.
10. Executive and the Company are of the mutual understanding and
agreement that the provisions of the Retirement Agreement provide Executive with
rights and benefits in addition to those otherwise committed to him under any
other agreement
6
<PAGE>
with the Company or any Affiliate (including, without limitation, the Employment
Agreement and the Equity Agreement).
11. Nothing in the Retirement Agreement or this Agreement shall be
construed as an admission of any improper action or conduct by Executive or by
the Company, the Fund or any of their respective Affiliates, subsidiaries, joint
venturers, or directors, officers, employees, agents, representatives or assigns
of any violation or noncompliance with any obligation, legal or otherwise.
12. This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts, without giving effect to its
principles or rules of conflict of laws to the extent such principles or rules
would require or permit the application of the laws of another jurisdiction..
13. The Parties intend that the invalidity or unenforceability of any
provision of this Agreement shall not affect or render invalid or unenforceable
any other provision.
7
<PAGE>
14. This Agreement shall be binding upon and inure to the benefit of
the Parties hereto and their respective heirs, administrators, representatives,
executors, successors and assigns.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed as of the day and year first above written.
IN THE PRESENCE OF: DYNATECH CORPORATION
/s/ Mark V.B. Tremallo By: /s/ Allan M. Kline
- ------------------------------------ ------------------------------------
Date: May 19, 1999 Name: Allan M. Kline
------------------------------- ---------------------------------
Title: VP, CFO and Treasurer
---------------------------------
IN THE PRESENCE OF: /s/ John F. Reno
---------------------------------------
John F. Reno
/s/ Richard J. Schnall
- ------------------------------------
Date: May 19, 1999
-------------------------------
Agreed and Acknowledged:
Clayton Dubilier & Rice Fund V Limited Partnership
/s/ Brian D. Finn
- -----------------------------------------------
By: Brian D. Finn
8
<PAGE>
Attachment
Dynatech Corporation
News
Contact: Chris Tofalli
Broadgate Consultants, Inc.
212-232-2222
For Immediate Release
- ---------------------
Dynatech Corporation's Ceo, John Reno, Announces Retirement
BURLINGTON, Mass., May 19, 1999 . . . John F. Reno today announced his
retirement as chairman, president and chief executive officer of Dynatech
Corporation.
"Some time ago I promised myself that when I turned 60, I would assess my
personal situation and make decisions about spending time on other endeavors.
After 25 years with Dynatech, that time has come. After consulting with our
directors about succession to my leadership, Mr. Ned Lautenbach, from Clayton,
Dubilier and Rice, has been named to replace me as chief executive officer,"
said Mr. Reno.
"I have many outside interests which I enjoy and on which I want to focus.
I feel I owe it to myself and my family to take this step which we all must at
one time or another. Proudly, I am leaving Dynatech at record performance
levels," he continued. "Our management team is extremely competent and together
with the support of our equity partner, Clayton, Dubilier & Rice, I am certain
they will continue to bring the company to even greater financial heights. I
look forward to, and will applaud, their continued success."
Mr. Reno joined Dynatech in 1974. In 1991, he was named president, and in
1993, he was appointed chief executive officer. In 1996, Mr. Reno assumed the
role of chairman of the board while still actively serving as president and CEO.
Mr. Reno initiated Dynatech's management-led recapitalization in 1998,
inviting Clayton, Dubilier & Rice to become the company's equity partner. During
his period as chief executive the company has grown 18.4% per year and its
enterprise value has risen from $250 million to over $950 million.
<PAGE>
"We are pleased with the many changes Jack has implemented during CD&R's
first year of equity ownership, particularly the installment of a strong
management team. Dynatech is now better positioned to achieve long-term
financial success and we thank him for his accomplishments," said Joseph L.
Rice, III, chairman of Clayton, Dubilier & Rice. "We are confident that Ned's
background with a technology-oriented company will enable him to lead Dynatech
effectively."
Prior to joining Clayton, Dubilier & Rice, Mr. Lautenbach served as senior
vice president and group executive of worldwide sales and services at IBM
Corporation. During his extensive tenure with IBM, he held a variety of senior
executive positions, including President of the National Distribution division
of the U.S.; President, Asia Pacific; as well as Chairman, IBM World Trade
Corporation. Mr. Lautenbach received his MBA from Harvard University after
having completed his undergraduate studies in economics at the University of
Cincinnati.
Dynatech Corporation (OTC-BB: DYNA) is a global communications equipment
company focused on network technology solutions. Its products address
communications test, industrial computing and communications, and visual
communications applications. Headquartered in Burlington, Massachusetts,
Dynatech sells its products worldwide through subsidiaries located throughout
the Americas, Europe and Asia. (Internet URL: www.dynatech.com)
This press release may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect the Company's current
judgement on certain issues. Because such statements apply to future events,
they are subject to risks and uncertainties that could cause the actual results
to differ materially. Important factors which could cause actual results to
differ materially are described in the Company's reports on Form 10-K and 10-Q
on file with the Securities and Exchange Commission.
1
<PAGE>
Schedule A
Account balance in Dynatech Corporation 401(k) Savings Plan
as of May 13, 1999: $1,507,262
Account balance in Dynatech Corporation Supplemental Savings Plan
as of May 13, 1999: $1,246,631
<PAGE>
Schedule B
Vested Options
--------------
Exercise Options
Type Grant Date Price Granted
- ---- ---------- -------- -------
NQ 12/21/92 $0.5676 1,630,720
ISO 7/26/94 $0.5357 517,440
NQ 1/26/95 $0.8929 1,813,980
NQ 7/27/95 $1.0332 1,215,200
NQ 7/30/96 $1.6964 1,021,023
NQ 7/30/97 $1.8335 1,056,793
ISO 1/26/95 $0.8929 25,519
ISO 1/26/95 $0.8929 8,506
------- ---------
7,289,181
Unvested Options
----------------
Exercise Options
Type Grant Date Price Granted
- ---- ---------- -------- -------
ISO 7/26/94 $0.5357 172,480*
ISO 1/26/95 $0.8929 111,995
ISO 7/30/96 $1.6964 58,937
ISO 7/30/97 $1.8335 54,527
------- -------
397,939
- ---------------------
* These options will vest prior to the Retirement Date in the ordinary course
based on Executive's continued employment with the Company. From and after
the date on which they become vested (July 25, 1999), they shall for all
purposes of the Agreement be treated as Vested Options.
<PAGE>
Options to Be Exercised
-----------------------
Exercise Options Cost to
Type Grant Date Price Granted Exercise
---- ---------- -------- ------- --------
ISO 7/26/94 $0.5357 517,440 $277,192.60
ISO 1/26/95 $0.8929 25,519 22,785.92
ISO 1/26/95 $0.8929 8,506 7,595.01
ISO 7/26/94 $0.5357 172,480 92,397.54
------- -----------
723,945 $399,971.07
Payment in Cancellation of Vested Options
-----------------------------------------
Spread at Aggregate Option
Exercise Options $3.25 Cancellation
Grant Date Price Granted Per Share Payment
---------- -------- ------- --------- ----------------
12/21/92 $0.5676 1,630,720 $2.6824 $4,374,243.30
1/26/95 $0.8929 1,813,980 2.3571 4,275,732.20
7/27/95 $1.0332 1,215,200 2.2168 2,693,855.30
7/30/96 $1.6964 1,021,023 1.5536 1,586,261.30
7/30/97 $1.8335 1,056,793 1.4165 1,496,947.20
-------------
$14,427,039.30
Withholding Rates
-----------------
Federal income tax: 28.00%
FICA 1.45%
Massachusettes 5.95%
2
<PAGE>
Exhibit 21
Subsidiaries of Dynatech Corporation
<TABLE>
<CAPTION>
Name of Parent or
Subsidiary Organization* State or Other Jurisdiction
- ------------------------ ---------------------------
<S> <C>
Dynatech Corporation
(Parent)............... Massachusetts
Dynatech LLC............ Delaware
Airshow, Incorporated... Delaware
DataViews Corporation... Massachusetts
DaVinci Systems, Inc. .. Florida
Industrial Computer
Source................. California
Itronix Corporation..... Washington
Pacific Systems
Corporation............ Washington
Parallax Graphics,
Inc. .................. Delaware
Synergistic Solutions,
Inc. .................. Georgia
Tele-Path Instruments,
Inc. .................. Delaware
TTC International
Holdings, Inc. ........ Delaware
Dynatech Export Barbados,
Incorporated........... West Indies
TTC Belgium B.V.B.A. ... Belgium
TTC Canada Ltd. ........ Canada
Dynatech Corporation
Ltd. .................. England
Industrial Computer
Source Europe.......... France
TTC Telecommunications
France SARL............ France
Dynatech Gesellschaft
Fur Datenveravbeitung,
GmbH................... Germany
TTC Federal Systems,
Inc. .................. Delaware
Dynatech Holdings Guernsey,
Ltd. .................. Channel Islands
Dynatech Investments, Guernsey,
Ltd. .................. Channel Islands
TTC Asia Pacific
Limited................ Hong Kong
DataViews Scandanavia
A.B. .................. Sweden
</TABLE>
- --------
* Excludes nonmaterial subsidiaries.
<PAGE>
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements 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, and 333-75797) of Dynatech Corporation of our reports dated
April 26, 1999 relating to the financial statements and financial statement
schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 14, 1999
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and
Shareholders of Dynatech Corporation:
Our audits of the consolidated financial statements referred to in our
report dated April 26, 1999 included in this Annual Report on Form 10-K also
included an audit of the financial statement schedule, Valuation and
Qualifying Accounts, for each of the three fiscal years in the period ended
March 31, 1999, which is also included in this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 70,362
<SECURITIES> 0
<RECEIVABLES> 72,630
<ALLOWANCES> 1,634
<INVENTORY> 47,271
<CURRENT-ASSETS> 22,150
<PP&E> 72,811
<DEPRECIATION> 47,192
<TOTAL-ASSETS> 348,104
<CURRENT-LIABILITIES> 155,281
<BONDS> 275,000
0
0
<COMMON> 0
<OTHER-SE> (316,440)
<TOTAL-LIABILITY-AND-EQUITY> 348,104
<SALES> 522,854
<TOTAL-REVENUES> 522,854
<CGS> 128,281
<TOTAL-COSTS> 228,572
<OTHER-EXPENSES> 254,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,198
<INCOME-PRETAX> 13,279
<INCOME-TAX> 6,834
<INCOME-CONTINUING> 6,445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,445
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
