<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 1-12657
DYNATECH CORPORATION
(to be renamed Acterna Corporation on or about August 29, 2000)
(Exact name of registrant as specified in its charter)
DELAWARE 04-2258582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (781) 272-6100
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _.
At July 15, 2000, there were 187,975,019 shares of common stock of the
registrant outstanding.
<PAGE>
Part I. Financial Information
------------------------------
Item 1. Financial Statements
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
------------ ----------
(In thousands, except per share data)
<S> <C> <C>
Net sales $208,171 $ 90,794
Cost of sales 89,608 30,758
------- --------
Gross profit 118,563 60,036
------- --------
Selling, general & administrative
expense 74,407 31,513
Product development expense 26,211 12,143
Recapitalization and other related costs 9,194 13,259
Purchased incomplete technology 50,000 ---
Amortization of intangibles 12,879 717
-------- --------
Total operating expense 172,691 57,632
-------- --------
Operating income (loss) (54,128) 2,404
Interest expense (18,672) (12,848)
Interest income 597 700
Other income (expense) (1,319) (39)
-------- --------
Loss from continuing operations
before income taxes and extraordinary
item (73,522) (9,783)
Benefit for income taxes (1,787) (3,492)
-------- --------
Loss from continuing
operations before extraordinary item (71,735) (6,291)
Discontinued operations:
Operating income, net of income tax
provision of $5,193 in 1999 --- 8,842
-------- --------
Income (loss) before extraordinary
item (71,735) 2,551
Extraordinary item, net of income tax
benefit of $6,524 (10,659) ---
-------- --------
Net income (loss) $(82,394) $ 2,551
======== ========
Income (loss) per common share-basic and diluted:
Continuing operations $ (0.43) $ (0.04)
Discontinued operations --- 0.06
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Extraordinary loss (0.07) ---
-------- ---------
Net income (loss) per common share-basic and diluted $ (0.50) $ 0.02
======== =========
Weighted average number of common shares:
Basic and diluted 165,427 147,221
======== =========
</TABLE>
---------------------------------
See notes to condensed consolidated financial statements.
3
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
(Unaudited)
------------ -----------
ASSETS (In thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 69,501 $ 33,839
Accounts receivable, net 176,035 78,236
Inventories:
Raw materials 32,151 11,085
Work in process 46,242 12,859
Finished goods 67,042 6,308
---------- ---------
Total inventory 145,435 30,252
Deferred income taxes 32,448 21,548
Other current assets 47,922 16,332
---------- ---------
Total current assets 471,341 180,207
---------- ---------
Property and equipment, net 80,327 27,316
Other assets:
Net assets held for sale 87,159 72,601
Intangible assets, net 528,537 58,508
Deferred income taxes 54,532 42,689
Deferred debt issuance costs, net 29,009 21,382
Other 17,395 12,135
---------- ---------
$1,268,300 $ 414,838
========== =========
LIABILITIES & SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 7,063 $ ---
Current portion of long-term
debt 17,367 7,646
Accounts payable 68,984 38,374
Accrued expenses:
Compensation and benefits 49,226 35,036
Deferred revenue 16,254 13,564
Warranty 12,431 8,297
Interest 5,382 10,055
Taxes other than income taxes 13,827 1,844
Other 34,165 7,426
Accrued income taxes 6,318 5,703
---------- ---------
Total current liabilities 231,017 127,945
Long-term debt 968,437 572,288
Deferred compensation 52,948 11,280
Deferred income taxes 58,556 ---
Shareholders' deficit:
Common stock 1,873 1,225
Additional paid-in capital 732,531 344,873
Accumulated deficit (706,323) (623,929)
Unearned compensation (71,335) (16,965)
Other comprehensive loss 596 (1,879)
---------- ---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total shareholders' deficit (42,658) (296,675)
---------- ---------
$1,268,300 $ 414,838
========== =========
</TABLE>
---------------------------------
See notes to condensed consolidated financial statements.
5
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
---------- -----------
(In thousands)
Operating activities:
<S> <C> <C>
Net income (loss) $ (82,394) $ 2,551
Adjustments for noncash items included in net income:
Depreciation 3,508 2,771
Amortization of intangibles 12,879 2,806
Amortization of unearned compensation 2,268 269
Amortization of deferred debt issuance costs, net of tax 873 808
Writeoff of deferred debt issuance costs 10,019 ---
Purchased incomplete technology 50,000 ---
Recapitalization and other related costs 9,194 ---
Change in operating assets and liabilities (94,475) (17,301)
------------ ----------
Net cash flows used in operating activities (88,128) (8,096)
Investing activities:
Purchases of property and equipment (5,496) (3,678)
Proceeds from sale of business 3,500 ---
Businesses acquired in purchase transaction, net of
cash acquired and non-cash issuance of common stock (237,426) ---
Other (156) (1,504)
------------ ----------
Net cash flows used in investing activities (239,578) (5,182)
Financing activities:
Net borrowings (repayments) of debt 190,834 (10,170)
Repayment of capital lease obligations (5) (63)
Capitalized debt issuance costs (18,519) ---
Proceeds from issuance of common stock, net of
expenses 192,466 27
------------ ----------
Net cash flows provided by (used in) financing activities 364,776 (10,206)
Effect of exchange rate change on cash (1,408) (942)
------------ ----------
Increase (decrease) in cash and cash equivalents 35,662 (24,426)
Cash and cash equivalents at beginning of year 33,839 70,362
-------------- ----------
Cash and cash equivalents at end of period $ 69,501 $ 45,936
============ ==========
</TABLE>
---------------------------------
See notes to condensed consolidated financial statements.
6
<PAGE>
DYNATECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION AND RESULTS OF OPERATIONS
Dynatech Corporation (the "Company" or "Dynatech") was organized in 1959
and its operations are conducted primarily by wholly-owned subsidiaries
located principally in the United States and Europe, with distribution and
sales offices in the Middle East, Africa, Latin America and Asia.
The Company is managed in two business segments: communications test and
inflight information systems. The communications test business develops,
manufactures and markets instruments, systems, software and services to
test, deploy, manage and optimize communications networks, equipment and
services. The inflight information systems segment, through the Company's
AIRSHOW, Inc. subsidiary, provides systems that deliver real-time news,
information and flight data to aircraft passengers. The Company also has
other subsidiaries that, in the aggregate, are not reportable as a segment
("Other Subsidiaries"). These Other Subsidiaries include da Vinci Systems,
Inc., which manufactures systems that correct or enhance the accuracy of
color during the process of transferring film-based images to videotape,
and Dataviews Corporation, which was sold in June 2000.
The Company operates on a fiscal year ending on March 31 in the calendar
year indicated (e.g., references to fiscal 2001 refers to the Company's
fiscal year which began April 1, 2000 and will end March 31, 2001).
B. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited condensed consolidated balance
sheet at June 30, 2000, and the unaudited consolidated statements of
operations and unaudited consolidated condensed statements of cash flows
for the interim periods ended June 30, 2000 and 1999 include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly these financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The year-end balance sheet data
was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. These
condensed statements should be read in conjunction with the Company's most
recent Form 10-K as of March 31, 2000 and the Company's Current Report on
Form 8-K dated May 31, 2000 and its Current Report on Form 8-K/A dated July
18, 2000 disclosing pro forma information relating to the WWG Merger.
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 purchase price allocations, allowances for
accounts receivable, net realizable value of inventories, purchased
incomplete technology, warranty accruals and tax valuation reserves. Actual
results could differ from those estimates.
7
<PAGE>
C. ACQUISITION
Wavetek Wandel Goltermann, Inc.
On May 23, 2000, the Company and its wholly-owned subsidiary DWW
Acquisition Corporation, a Delaware corporation ("MergerCo"), completed
their merger (the "WWG Merger") with Wavetek Wandel Goltermann, Inc., a
Delaware corporation ("WWG"), pursuant to which WWG became an indirect,
wholly-owned subsidiary of Dynatech.
The WWG Merger was consummated pursuant to an Agreement and Plan of WWG
Merger, dated as of February 14, 2000 (the "Merger Agreement"), among
Dynatech, MergerCo and WWG. In the WWG Merger, Dynatech paid to the former
WWG stockholders approximately $250 million in cash and issued
approximately 15 million newly-issued shares of Dynatech common stock. In
addition, Dynatech paid approximately $8 million in cash in exchange for
all outstanding WWG options.
The acquisition was accounted for using the purchase method of accounting.
As part of the purchase price allocation, the Company increased the
carrying value of the acquired inventory by $35 million in order to record
this inventory at its fair value, and also recorded a charge of $50
million for acquired incomplete technology. This purchased incomplete
technology had not reached technological feasibility and had no
alternative future use. The Company generated approximately $481 million
of excess purchase price that has not yet been allocated between specific
intangible assets and goodwill. This excess purchase price has been
amortized using a six year life. The purchase price allocations are
preliminary based on management's best estimates. The final allocation of
the purchase price has not yet been completed, and completion of the
allocation of the excess purchase price and other purchase accounting
adjustments depend upon certain valuations and other studies that are still
in progress.
In connection with the WWG Merger and the concurrent establishment of the
Company's New Credit Facility (see Note N. Debt), the Company paid Clayton,
Dubilier & Rice, Inc., an investment firm that manages Clayton, Dubilier &
Rice Fund V Limited Partnership and Clayton, Dubilier & Rice Fund VI
Limited Partnership, the Company's controlling shareholders, $6.0 million
for services provided in connection with the WWG Merger and the related
financing.
The purchase accounting is summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash in exchange for WWG stock $ 249,562
Cash in exchange for WWG options 8,248
Dynatech common stock (approximately 14,987 shares) 130,000
---------
387,810
Add: Estimated acquisition costs 10,214
---------
Total purchase price 398,024
Add: WWG net tangible liabilities acquired 134,522
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Less: Inventory step-up to fair value (35,000)
Less: In-process research and development acquired (50,000)
Add: Deferred tax liabilities 33,947
---------
Excess purchase price $ 481,493
=========
</TABLE>
D. PROBABLE ACQUISITION
Superior Electronics Group, Inc., dba Cheetah Technologies
On June 27, 2000, the Company entered into an Asset Purchase Agreement to
acquire substantially all of the assets and assume specified liabilities
of Superior Electronics Group, Inc., a Florida corporation doing business
as Cheetah Technologies ("Cheetah"). Cheetah supplies automated test,
monitoring and management systems for cable television and
telecommunications networks, and will be included in the Company's
communications test segment. This probable transaction is expected to
close in August 2000.
E. DISCONTINUED OPERATIONS
In May 2000, the Board of Directors approved a plan to divest the
industrial computing and communications segment, which consists of ICS
Advent and Itronix Corporation subsidiaries. In connection with its
decision, the Board authorized management to retain one or more investment
banks to assist the Company with respect to the divestiture. The segment's
results of operations including net sales, operating costs and expenses
and income taxes for the three month period ended June 30, 2000 have been
deferred and included in the balance sheet as net assets held for sale
within non-current assets (see below). The segment's results of operations
including net sales, operating costs and expenses and income taxes for the
three month period ended June 30, 1999 have been reclassified in the
accompanying statements of operations as discontinued operations. The
Company's balance sheets as of June 30, 2000 and March 31, 2000 reflect
the net assets of the industrial computing and communications segment as
net assets held for sale within non-current assets. The Statements of Cash
Flows for the three month periods ended June 30, 2000 and 1999 have not
been reclassified for the discontinued businesses.
Management anticipates net operating losses from the discontinued segment
through the first quarter of fiscal 2002, at which time the Company
anticipates to have sold these businesses (operating losses for the
segment for the three month period ended June 30, 2000 were $3.9
million). Management believes that the net proceeds from the disposition
of these companies will exceed the carrying amount of the net assets and
the operating losses through the date of disposition. Accordingly, the
anticipated net gain from the disposal of the segment will not be
reflected in the statements of operations until they are realized.
F. EXTRAORDINARY ITEM
In connection with the WWG Merger, the Company recorded an extraordinary
charge of $10.7 million (net of an income tax benefit of $6.6 million), of
which $7.3 million (pretax) related to a premium paid by the Company to
WWG's former bondholders to repurchase WWG's senior subordinated debt
outstanding prior to the WWG Merger. In addition the Company booked a
charge of $10.0 million (pretax) for the unamortized deferred debt
issuance costs which originated at the time of the recapitalization of the
Company in May of 1998.
G. DIVESTITURE
In June 2000, the Company sold the assets and liabilities of DataViews
Corporation ("DataViews"), a subsidiary which manufactures software for
graphical-user-interface applications, to GE Fanuc for $3.5 million. The
sale generated a loss of approximately $0.1 million. Prior to the sale,
for segment reporting purposes the results of DataViews were included in
the Company's financial statements within "Other Subsidiaries".
H. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements give effect to the following assuming that these transactions
occurred on the first day in the periods presented:
o The merger with WWG (after giving effect to certain divestitures of
WWG);
o The acquisition of Sierra Design Labs which occurred on September 10,
1999;
o The acquisition of Applied Digital Access, Inc. which occurred on
November 1, 1999;
o The exclusion of the results of operations for the full period
presented relating to the divestiture of DataViews Corporation; and
o The issuance of common stock to the CDR Funds and the Rights Offering
(see Note M. Income (Loss) per Share).
9
<PAGE>
The condensed, unaudited pro forma statement of operations data listed
below is for informational purposes only and does not necessarily represent
what the Company's results of operations would have been if the above
listed transactions had in fact occurred at the beginning of the periods
presented and are not necessarily indicative of the results of operations
for any future period.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Revenue $ 284,236 $ 201,062
Loss before extraordinary item (110,181) (30,261)
Net loss (120,840) (30,261)
Loss per share - basic and diluted:
Loss before extraordinary item $(0.59) $(0.16)
(0.65) (0.16)
</TABLE>
I. RECAPITALIZATION
On May 21, 1998, CDRD Merger Corporation, 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 "Recapitalization") with the Company continuing as the
surviving corporation. In the Recapitalization, (1) each then outstanding
share of common stock, par value $0.20 per share, of the Company 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 (2)
each then outstanding share of common stock of CDRD Merger Corporation was
converted into one share of Common Stock.
J. RECAPITALIZATION AND OTHER RELATED COSTS
Recapitalization and other related costs from continuing operations during
the first three months of fiscal 2001 of $9.2 million related to an
executive who left the Company during fiscal 2000. Recapitalization and
other related costs during the first three months of fiscal 2000 of $13.3
million related to termination expenses of certain executives including
the retirement of John F. Reno, former Chairman, President and Chief
Executive Officer of the Company, as well as other employees.
K. NEW PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin provides guidance from the staff on applying
generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB 101B which defers
the effective date for the Company to the fourth quarter of fiscal 2001.
The Company is currently in the process of assessing the impact, if any,
that the current guidance and interpretations of SAB 101 may have on the
financial statements.
10
<PAGE>
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB
Opinion No. 25 and among other issues clarifies the following: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory
plan; the accounting consequence of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000.
The Company does not expect the application of FIN 44 to have a material
impact on its results of operations and financial position.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." FAS 133
was amended by Statement of Financial Accounting Standards No. 137, which
modified the effective date of FAS 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. FAS 133, as amended, 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 FAS 133 on its results of operations and its financial
position.
L. LEGAL PROCEEDINGS
The Company is a party to various legal actions that arose in the ordinary
course of its business. The Company does not expect that resolution of
these legal actions will have, individually or in the aggregate, a
material adverse effect on the Company's financial condition or results of
operations.
Whistler Litigation. In 1994, the Company sold its radar detector business
to Whistler Corporation of Massachusetts. 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
alleging willful infringement of CMI's patent for a mute function in radar
detectors. The Company, along with Whistler, has asserted in response that
it did not infringe CMI's patent and that, in any event, the patent is
invalid and unenforceable.
The Company obtained an opinion from outside counsel that CMI's patent is
invalid. The Company intends to offer that opinion (and other evidence) to
demonstrate that any alleged infringement of CMI's patent due to the
Company's prior manufacture and sale of the Whistler series radar
detectors was not valid.
On February 14, 1997, CMI filed for bankruptcy in the United States
Bankruptcy Court for the Southern District of Ohio. Pursuant to that
filing, CMI sold its mute feature patent (and other assets) to Escort
Acquisition Corp. CMI, however, retained the right to seek past damages
from the Company.
11
<PAGE>
On March 24, 1998, CMI and its co-plaintiff Escort filed a motion for
summary judgment. The Company opposed that motion and went on to complete
discovery, which closed on June 20, 1998. The Company then filed its own
series of summary judgment motions.
A hearing on the parties' dispositive motions was held in May 1999. On May
27, 1999, Whistler filed a Chapter 11 bankruptcy petition in the United
States District Court for the District of Massachusetts. As a result of
that filing, CMI's patent infringement litigation is stayed as to
Whistler.
On February 18, 2000, the United States Magistrate issued a Report and
Recommendation on some of the pending motions, recommending that judgment
be entered in the Company's favor on half of the claims asserted by CMI.
Then, on June 9, 2000, the Magistrate issued a second Report and
Recommendation, recommending that the plaintiffs be precluded from
recovering any damages for any alleged infringement that occurred prior to
June 1996. Because the Company could not have infringed on CMI's patent
after it sold its radar detector business to Whistler in 1994, if this
Recommendation is adopted by the District Court Judge, the Company would
have no liability to CMI. The parties have filed (and will file) various
objections to the two Report and Recommendations. If necessary, trial in
this matter is scheduled for November 2000. The Company intends to
continue to defend this lawsuit vigorously and does not believe that the
outcome of this litigation will have a material adverse effect on its
financial condition, results of operation, or liquidity.
12
<PAGE>
M. INCOME (LOSS) PER SHARE
Income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
------- -------
(In thousands, except per share data)
Net income (loss):
<S> <C> <C>
Continuing operations $(71,735) $ (6,291)
Discontinued operations --- 8,842
Extraordinary item (10,659) ---
-------- --------
Net income (loss) $(82,394) $ 2,551
======== ========
BASIC AND DILUTED:
Common stock outstanding, beginning of period 122,527 120,665
Weighted average common stock issued during the period 26,186 8
-------- --------
148,713 120,673
Bonus element adjustment related to rights offering 16,714 26,548
-------- --------
Weighted average common stock outstanding, end of period 165,427 147,221
========= =========
Income (loss) per common share:
Continuing operations $ (0.43) $ (0.04)
Discontinued operations --- 0.06
Extraordinary item (0.07) ---
-------- --------
Net income (loss) per common share $ (0.50) $ 0.02
======== ========
</TABLE>
On May 23, 2000, in order to finance the WWG Merger, the Company sold
12.5 million and 30.625 million shares of common stock to Clayton,
Dubilier & Rice Fund V Limited Partnership ("CDR Fund V") and Clayton,
Dubilier & Rice Fund VI Limited Partnership ("CDR Fund VI"),
respectively, at a price of $4.00 per share. In order to reverse the
diminution of percentage ownership of all other shareholders as a result
of shares issued in connection with the WWG Merger, the Company made a
rights offering to all of its shareholders (including CDR Fund V) of
record on April 20, 2000 (the "Rights Offering"). CDR Fund V elected to
waive its right to participate in this Rights Offering. As a result, on
June 30, 2000, the Company sold 4,983,000 shares of common stock to
shareholders of record on April 20, 2000 (other than CDR Fund V) that
subscribed for shares in the Rights Offering at a price of $4.00 per
share. The closing trading price of the common stock on May 22, 2000,
immediately prior to the sale of the common stock to CDR Fund V and CDR
Fund VI (the "CDR Funds"), was $11.25.
For purposes of calculating weighted average shares and earnings per
share, the Company has treated the sale of common stock to the CDR
Funds and the sale of the 4,983,000 shares of common stock in the Rights
Offering as a rights offer. Since the common stock was offered to all
shareholders at a price that was less than that of the market trading
price (the "bonus element"), a retroactive adjustment of $1.22 per share
has been made to weighted average shares to consider this bonus element.
13
<PAGE>
During the first three months of fiscal 2001 and 2000, the Company
excluded from its diluted weighted average shares outstanding the
effect of the weighted average common stock equivalents which totalled
12.0 million shares and 8.9 million shares, respectively, as the Company
incurred a net loss from continuing operations. The inclusion of the
common stock equivalents has been excluded from the calculation of diluted
weighted average shares outstanding as inclusion would result in an
antidilutive effect on net loss per common share from continuing
operations.
N. DEBT
Long-term debt is summarized below (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------- --------
<S> <C> <C>
Senior secured credit facilities $682,295 $304,861
Senior subordinated notes 275,000 275,000
Capitalized leases and other debt obligations 28,509 73
-------- --------
Total debt 985,804 579,934
Less current portion 17,367 7,646
-------- --------
Long-term debt $968,437 $572,288
======== ========
</TABLE>
To finance the WWG Merger, the Company needed to restructure its current
debt and equity. As a result, on May 23, 2000, the Company entered into a
new credit facility with a syndicate of lenders (the "New Credit
Facility"). The Company's new senior credit agreement (the "New Senior
Credit Agreement"), which established the New Credit Facility, provided
for senior secured credit facilities in an aggregate principal amount of
up to $860 million, consisting of (1) a revolving credit facility
available to Dynatech LLC in U.S. dollars or euros, in an aggregate
principal amount of up to $175 million, which can also be used to issue
letters of credit (the "New Revolving Credit Facility"), (2) a Tranche A
term loan of $75 million to Dynatech LLC with a six year amortization (the
"Tranche A Term Loan"), (3) a Tranche B term loan of $510 million to
Dynatech LLC with a seven and one-half year amortization (the "Tranche B
Term Loan"), and (4) German term loans from certain German banks in an
aggregate amount equal to (Euro) 108.375 million to the Company's German
subsidiaries with six year amortization periods (the "German Term Loans")
(all term loans collectively, the "New Term Loans"). The New Credit
Facility also provides for the issuance of a letter of credit that the
German banks may draw upon in the event of the failure of the Company's
German subsidiaries to make payments on the (Euro) 108.375 million loans,
and the Company's German subsidiaries are required to reimburse the letter
of credit issuer for any such issuances. The amount of the letter of
credit also may be fully drawn under certain circumstances, and in such
event the amount of the draw shall convert into term loans to the
Company's German subsidiaries with similar amortization to the German term
loans.
The Company used the New Term Loans to refinance certain existing
indebtedness of the Company and as part of the financing for the WWG
merger. The New Revolving Credit Facility is available to the Company from
time to time for potential acquisitions and other general corporate
purposes.
14
<PAGE>
Principal and interest payments under the New Credit Facility and interest
payments on the Senior Subordinated Notes represent significant liquidity
requirements for the Company. The Tranche A Term Loan will be amortized in
four quarterly installments of $750 thousand commencing on June 30, 2000,
four quarterly installments of $2.0 million commencing on June 30, 2001,
four quarterly installments of $3.75 million commencing on June 30, 2002,
four quarterly installments of $7.5 million commencing on June 30, 2003,
four quarterly installments of $2.5 million commencing on June 30, 2004
and four quarterly installments of $2.25 million commencing on June 30,
2005. The Tranche B Term Loan will be amortized in 24 quarterly
installments of $2.0 million, commencing on June 30, 2000, four quarterly
installments of $77.5 million commencing on June 30, 2006, and two
quarterly installments of $76.0 million commencing on June 30, 2007. The
German Term Loans will be amortized in four quarterly installments of
(Euro) 530 thousand commencing on June 30, 2000, twelve quarterly
installments of (Euro) 790 thousand commencing on June 30, 2001, four
quarterly installments of (Euro) 7.625 million commencing on June 30, 2004,
three quarterly installments of (Euro) 15.780 million commencing on June
30, 2005 and one quarterly installment of (Euro) 18.935 million on March
31, 2006. The $275 million of Senior Subordinated Notes will mature in
2008, and bear interest at 9 3/4% per annum. As a result of the substantial
indebtedness incurred in connection with the WWG 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.
The loans under the New Credit Facility bear interest at floating rates
based upon the interest rate option elected by the Company. To fix the
interest charged on a portion of the total debt outstanding under the New
Term Loans, the Company entered into interest rate swaps that are
effective for periods ranging from two to three years which began in
September 30, 1998. After giving effects to these arrangements, $220
million of the debt outstanding is 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.
The obligations of Dynatech LLC under the New Revolving Credit Facility,
the Tranche A Term Loan, the Tranche B Term Loan and the reimbursement
obligations of the German subsidiaries under the letter of credit relating
to the German Term Loan are guaranteed by each active direct or indirect
U.S. subsidiary of Dynatech LLC and by Dynatech Corporation. The
obligations under the New Credit Facility are secured by a pledge of the
Company's equity interest in Dynatech LLC, by substantially all of the
assets of Dynatech LLC and each active direct or indirect U.S. subsidiary
of Dynatech LLC, and by a pledge of the capital stock of each such direct
or indirect U.S. subsidiary, and 65% of the capital stock of each
subsidiary of Dynatech LLC that acts as a holding company of Dynatech LLC's
foreign subsidiaries.
The Company's New Credit Facility generally permits voluntary prepayment of
loans thereunder without premium or penalty, subject to certain
limitations. Mandatory prepayments are required to be made from (a) 100% of
net proceeds from certain asset sales, casualty insurance and condemnation
awards or other similar recoveries; (b) 100% of the net proceeds from the
issuance of indebtedness by the Company, other than as permitted by the New
Credit Facility; and (c) 50% of annual excess cash flow for each fiscal
year in which the ratio of the Company's debt on the last day of such
fiscal year to the Company's EBITDA (defined as earnings before interest,
taxes, depreciation and amortization) for such fiscal year is greater than
or equal to 4.0 to 1.0.
15
<PAGE>
O. SHAREHOLDERS' DEFICIT
The following is a summary of the change in shareholders' deficit for the
period ended June 30, 2000 (in thousands).
<TABLE>
<CAPTION>
Number
Of Shares Additional Other Total
Common Common Paid-In Accumulated Unearned Comprehensive Stockholders'
Stock Stock Capital Deficit Compensation Loss Deficit
---------- -------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 2000 122,527 $ 1,225 $ 344,873 $ (623,929) $ (16,965) $ (1,879) $ (296,675)
Net loss current year (82,394) (82,394)
Translation adjustment 2,475 2,475
----------
Total comprehensive
loss (79,919)
----------
Adjustment to unearned
compensation (1,315) 1,322 7
Issuance of common stock
to CD&R 43,125 431 172,069 172,500
Issuance of common stock
in connection of rights
offering, net of fees 4,983 50 16,882 16,932
Issuance of common stock
to WWG shareholders 14,987 150 129,850 130,000
Stock option expense 9,194 9,194
Amortization of unearned
compensation 2,268 2,268
Exercise of stock
options and other
issuances 1,682 17 3,018 3,035
Unearned compensation
from stock option
grants 57,960 (57,960) ---
---------- -------- --------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 187,304 $ 1,873 $ 732,531 $ (706,323) $ (71,335) $ 596 $ (42,658)
========== ========= ========= =========== ============ ========== ===========
</TABLE>
P. SEGMENT INFORMATION
Net sales, earnings before interest, taxes and amortization ("EBITA"), and
total assets for the three months ended June 30, 2000 and 1999 is shown
below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
SEGMENT 2000 1999
---- ----
Communications test segment:
<S> <C> <C>
Net Sales $ 181,069 $ 67,281
EBITA 23,834 10,661
Total assets 977,821 79,023
Inflight information systems segment:
Net Sales 18,788 17,292
EBITA 4,003 5,957
Total assets 39,776 36,326
Other subsidiaries:
Net Sales 8,314 6,221
EBITA 1,526 1,123
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total assets 11,503 4,443
Discontinued operations:
Net assets held for sale 87,159 N/A
Total assets N/A 84,615
Corporate:
Loss before interest and taxes (1,566) (1,130)
Total assets 152,041 114,020
Total company:
Net Sales $ 208,171 $ 90,794
EBITA 27,797 16,611
Total assets 1,268,300 318,427
</TABLE>
Nonrecurring charges (including recapitalization and other related
costs and purchased incomplete technology) of $78.9 million and $13.3
million, and the amortization of unearned compensation of $2.1 million
and $0.3 million, for the first three months of fiscal 2001 and fiscal
2000, respectively, have been excluded from EBITA.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the effect of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 2000.
OVERVIEW
The Company has reported its results of operations in two business segments:
communications test and inflight information systems. The Company's
communications test business, which includes TTC and WWG, develops, manufactures
and markets instruments, systems, software and services to test, deploy, manage
and optimize communications networks, equipment and services. The Company's
inflight information systems segment, through its AIRSHOW, Inc. subsidiary, is
the leading provider of systems that deliver real-time news, information and
flight data to aircraft passengers. The Company also has other subsidiaries
that, in the aggregate, are not reportable as a segment ("Other Subsidiaries").
These Other Subsidiaries include da Vinci Systems, Inc. which manufactures
systems that correct or enhance the accuracy of color during the process of
transferring film-based images to videotape; and Dataviews Corporation, which
was sold in June 2000.
On May 23, 2000, the Company completed the merger of one of its subsidiaries
with Wavetek Wandel Goltermann, Inc. ("WWG"), a developer, manufacturer and
marketer of communications test instruments, systems, software and services in
Europe. To finance the WWG merger, the Company sold 12.5 million and 30.625
million newly-issued, but unregistered shares of Common Stock to CDR Fund V and
CDR Fund VI, respectively, for an aggregate purchase price of $172.5 million. In
addition, on June 30, 2000, the Company sold in the Rights Offering 4.983
million newly-issued registered shares of common stock to shareholders of record
on April 20, 2000, (other than CDR Fund V) at the same price per share that was
paid by CDR Fund V and CDR Fund VI. The Rights Offering provided such
shareholders with the opportunity to reverse the diminution of their percentage
equity ownership interest in the Company that resulted from the sale of common
stock to CDR Fund V and CDR Fund VI. CDR Fund V and CDR Fund VI, our controlling
shareholders, hold approximately 66% and 16%, respectively, of the outstanding
shares of common stock of the Company.
In connection with the WWG Merger, the Company also entered into a new credit
agreement for $860 million with a bank syndicate led by J.P. Morgan ("New Credit
Agreement"). The proceeds were used to finance the WWG Merger, refinance WWG and
Dynatech debt and provide for additional working capital and borrowing capacity.
In May 2000, the Board of Directors approved a plan to divest the industrial
computing and communications segment, which consists of the Company's ICS Advent
and Itronix Corporation subsidiaries. The Company's balance sheet reflects the
net assets of the industrial computing and communications
18
<PAGE>
segment as net assets held for sale within non-current assets. Management
anticipates net operating losses from the discontinued segment through the first
quarter of fiscal 2002, at which time the Company anticipates to have sold these
businesses. Management believes that the net proceeds from the disposition of
these companies will exceed the carrying amount of the net assets and the
operating losses through the date of disposition. Accordingly, the anticipated
net gains from the disposal of the segment will not be reflected in the
statements of operations until they are realized.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 as Compared to Three Months Ended June 30, 1999
Net Sales. For the three months ended June 30, 2000, consolidated sales from
continuing operations increased $117.4 million or 129.3% to $208.2 million as
compared to $90.8 million for the three months ended June 30, 1999. The increase
occurred within all business units, but the biggest increase was in the
communications test segment. Of the $117.4 million increase, $113.8 million was
attributable to businesses within the communications test segment, of which 31%
of the increase was related to core business; 12% was attributable to the
additional sales from Applied Digital Access, Inc. ("ADA") which was acquired in
November 1999; and 57% was attributable to the acquisition of WWG.
Gross Profit. Gross profit from continuing operations increased $58.5 million to
$118.6 million or 57.0% of consolidated sales for the three months ended June
30, 2000 as compared to $60.0 million or 66.1% of consolidated sales for the
three months ended June 30, 1999. The decrease in gross margin as a percentage
of sales, is, in part, a result of $8.8 million (or 4.2% of consolidated sales)
of amortization of the inventory step up from the acquisition of WWG. In
addition, WWG sold products that are complementary to the Company's products,
but are not manufactured by the Company. These products have a lower gross
margin than the Company's primary products. The Company's Airshow subsidiary
also experienced increased sales to the general aviation customer group as well
as additional service revenue, both of which carry lower gross margins than the
consolidated group.
Operating Expenses. Operating expenses from continuing operations consist of
selling, general and administrative expense; product development expense;
recapitalization and other related costs; purchased incomplete technology; and
amortization of intangibles. Total operating expenses were $172.7 million or
83.0% of consolidated sales for the three months ended June 30, 2000, as
compared to $57.6 million or 63.5% of consolidated sales for the three months
ended June 30, 1999. Excluding the impact of the write-off of in-process
research and development as well as recapitalization and other related costs,
total operating expenses were $113.5 million or 54.5% of consolidated sales and
$44.4 million or 48.9% of consolidated sales for the three months ended June 30,
2000 and 1999, respectively. The increase is primarily a result of the
acquisition of WWG, which has a higher cost structure than the Company has had
historically, as well as expenses incurred since the acquisition for the
re-branding of the products offered by the combined businesses within the
communications test segment.
Included in both cost of sales and operating expenses from continuing operations
is the amortization of unearned compensation that relates to the issuance of
stock options to employees and non-employee directors at a grant
19
<PAGE>
price lower than fair market value (defined as the closing price on the open
market at the date of issuance). The amortization of unearned compensation
during the first three months of fiscal 2001 and fiscal 2000 was $2.1 million
and $0.3 million, respectively, and has been allocated to cost of sales;
selling, general and administrative expense; and product development expense.
Selling, general and administrative expense from continuing operations was $74.4
million or 35.7% of consolidated sales for the three months ended June 30, 2000
as compared to $31.5 million or 34.7% of consolidated sales for the three months
ended June 30, 1999. The percentage increase is in part a result of expenses
relating to rebranding, severance, and additional consultants hired for the
integration of WWG with the Company's communications test segment.
Product development expense was $26.2 million or 12.6% of consolidated sales for
the three months ended June 30, 2000 as compared to $12.1 million or 13.4% of
consolidated sales for the same period a year ago. The percentage decrease is a
result of the WWG Merger as WWG has a lower percentage of product development
expense to sales than the Company has had on an historical basis.
Recapitalization and other related costs from continuing operations were $9.2
million and $13.3 million at June 30, 2000 and June 30, 1999, respectively. The
expense incurred during the first three months of fiscal 2001 of $9.2 million
related to an executive who left the Company during fiscal 2000. The expense
incurred during the first three months of fiscal 2000 related to termination
expenses of certain executives including the retirement of John F. Reno, former
Chairman, President and Chief Executive Officer of the Company, as well as other
employees.
In connection with the WWG Merger, the Company wrote off $50 million of
purchased incomplete technology during the first three months of fiscal 2001
that had not reached technological feasibility and had no alternative future
use.
Amortization of intangibles from continuing operations was $12.9 million for the
three months ended June 30, 2000 as compared to $0.7 million for the same period
a year ago. The increase was primarily attributable to increased goodwill
amortization related to the acquisitions of ADA and WWG.
Operating income (loss). Operating loss from continuing operations was $54.1
million as compared to operating income of $2.4 million for the same period a
year ago. The change was a result of the write-off of the purchased incomplete
technology, the recapitalization and other related costs, as well as expenses
relating to rebranding, severance, and additional consultants for the
integration of WWG with the Company's communications test segment.
Interest. Interest expense from continuing operations was $18.7 million for the
three months ended June 30, 2000 as compared to $12.8 million for the same
period a year ago. The increase in interest expense was attributable to the
additional debt incurred in connection with the WWG Merger.
Taxes. The effective tax rate for the three months ended June 30, 2000 was 2.4%
as compared to 35.7% for the same period a year ago. The principal reasons for
the decrease in the effective tax rate were: (1) the $50 million non-deductible
charge for purchased incomplete technology in connection with the WWG Merger;
(2) additional non-deductible goodwill amortization expected in the current
fiscal year as a result of the WWG Merger; and (3) expected
20
<PAGE>
changes in the amount of income earned in various countries with tax rates
higher than the U.S. federal rate.
Extraordinary item. In connection with the WWG Merger, the Company recorded an
extraordinary charge of approximately $10.7 million (net of an income tax
benefit of $6.6 million), of which $7.3 million (pretax) related to a premium
paid by the Company to WWG's former bondholders for the repurchase of WWG's
senior subordinated debt outstanding prior to the WWG Merger. In addition the
Company booked a charge of $10.0 million (pretax) for the unamortized deferred
debt issuance costs which originated at the time of the Recapitalization.
Net income (loss). Net loss was $82.4 million or $(0.50) per share on a diluted
basis for the three months ended June 30, 2000 as compared to net income of $2.6
million or $0.02 per share on a diluted basis for the same period a year ago.
The loss was primarily attributable to the write-off of the purchased incomplete
technology and the extraordinary charge in connection with the WWG Merger as
well as other expenses described above.
Backlog. Backlog at June 30, 2000 was $308.3 million as compared to $180.4
million at March 31, 2000, primarily a result of the addition of WWG's backlog.
SEGMENT DISCLOSURE
The Company measures the performance of its subsidiaries by their respective new
orders received ("bookings"), sales and earnings before interest, taxes and
amortization ("EBITA") which excludes non-recurring and one-time charges.
Included in each segment's EBITA is an allocation of corporate expenses. The
information below includes sales and EBITA for the two segments the Company
operates in (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
SEGMENT 2000 1999
---- ----
Communications test segment:
<S> <C> <C>
Bookings $ 182,978 $ 76,358
Net Sales 181,069 67,281
EBITA 23,834 10,661
Inflight information systems segment:
Bookings $ 17,860 $ 17,201
Net Sales 18,788 17,292
EBITA 4,003 5,957
Other subsidiaries:
Bookings $ 7,863 $ 7,620
Net Sales 8,314 6,221
EBITA 1,526 1,123
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
- Communications Test Products
Bookings for communications test products increased to $183.0 million for the
three months ended June 30, 2000 as compared to $76.4 million for the same
period a year ago, primarily due to the WWG Merger and the acquisition of ADA
21
<PAGE>
(for which no comparison existed during the first quarter of fiscal 2000) as
well as an increase in bookings for the Company's instruments, systems and
services at the Company's historical communications test businesses.
Net sales of communications test products increased $113.8 million or 169.1% to
$181.1 million for the three months ended June 30, 2000 as compared to $67.3
million for the three months ended June 30, 1999, primarily due to the WWG
Merger. In addition, the Company sold more test instruments in the first quarter
of fiscal 2001 as compared to the same period last year due primarily to the
large backlog of orders at March 31, 2000, as well as additional sales from the
acquisition of ADA. The increase is related to the following areas within the
communications test segment: 31% of the increase was related to core business;
12% was attributable to the additional sales from ADA; and 57% was attributable
to the acquisition of WWG.
EBITA for the communications test products increased $13.2 million or 123.6% to
$23.8 million for the three months ended June 30, 20000 as compared to $10.7
million for the same period a year ago. The increase in EBITA is a result of the
increases in sales offset by the expenses relating to the rebranding, severance,
and additional consultant expenses for the integration of WWG with the Company.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
- Inflight Information Systems
Bookings for the inflight information systems products increased 3.8% to $17.9
million for the three months ended June 30, 2000 as compared to $17.2 million
for the same period a year ago. The Company is currently experiencing a leveling
off of demand for these products due to a slow down in orders from the
commercial airlines offset slightly by an increase in volume in the general
aviation market.
Net sales of inflight information systems products increased 8.7% to $18.8
million for the three months ended June 30, 2000 as compared to $17.3 million
for the three months ended June 30, 1999. The slight increase was primarily due
to the slight increase in demand for products sold to the general aviation
market.
EBITA for the inflight information systems products decreased to $4.0 million
for the three months ended June 30, 2000 as compared to $6.0 million for the
same period a year ago. The decrease was in part attributable to the increase in
products shipped to the general aviation market, which are sold at margins lower
than the business as a whole. In addition, the Company incurred increased costs
due to the additional field service technicians that were hired to support
customers in the general aviation market during the fourth quarter of fiscal
2000.
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the WWG Merger and from the
funding of working capital and capital expenditures. As of June 30, 2000, the
Company had $985.8 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $682.3 million in
borrowings under the Term Loan Facility and $28.5 million under other debt
obligations.
22
<PAGE>
Cash Flows. The Company's cash and cash equivalents increased $35.7 million
during the three months ended June 30, 2000.
Working Capital. For the three months ended June 30, 2000, the Company's working
capital decreased as its operating assets and liabilities used $78.8 million of
cash. Accounts receivable increased, creating a use of cash of $12.8 million.
Inventory levels also increased, creating a use of cash of $8.7 million. Other
current assets increased, creating a use of cash of $20.5 million. Accounts
payable decreased, creating a use of cash of $5.5 million. Other current
liabilities decreased, creating a use of cash of $31.3 million. The decrease is
due in part to management incentive payments made during the first quarter of
fiscal year 2001 as well as the mandatory semiannual payment of interest
expense on the Senior Subordinated Notes.
Investing activities. The Company's investing activities totaled $239.6 million
for the three months ended June 30, 2000 primarily for the acquisition of WWG.
The Company's capital expenditures during the first three months of fiscal 2001
were $5.5 million as compared to $3.7 million for the same period last year. The
Company is, in accordance with the terms of the New Credit Agreement, subject to
maximum capital expenditure levels. At June 30, 2000, the Company was in
compliance with its covenants as indicated in the New Credit Agreement.
Debt and equity. The Company's financing activities provided $364.8 million in
cash during the first quarter of fiscal 2001, in part due to the borrowing of
cash under the New Credit Agreement as well as proceeds received from the
issuance of common stock to the CDR Funds and other shareholders.
Debt
To finance the WWG Merger, the Company needed to restructure its current debt
and equity. As a result, on May 23, 2000, the Company entered into a new credit
facility with a syndicate of lenders (the "New Credit Facility"). The Company's
new senior credit agreement (the "New Senior Credit Agreement"), which
established the New Credit Facility, provided for senior secured credit
facilities in an aggregate principal amount of up to $860 million, consisting of
(1) a revolving credit facility available to Dynatech LLC in U.S. dollars or
euros, in an aggregate principal amount of up to $175 million, which can also be
used to issue letters of credit (the "New Revolving Credit Facility"), (2) a
Tranche A term loan of $75 million to Dynatech LLC with a six year amortization
(the "Tranche A Term Loan"), (3) a Tranche B term loan of $510 million to
Dynatech LLC with a seven and one-half year amortization (the "Tranche B Term
Loan"), and (4) German term loans from certain German banks in an aggregate
amount equal to (Euro) 108.375 million to the Company's German subsidiaries with
six year amortization periods (the "German Term Loans") (all term loans
collectively, the "New Term Loans"). The New Credit Facility also provides for
the issuance of a letter of credit that the German banks may draw upon in the
event of the failure of the Company's German subsidiaries to make payments on
the (Euro) 108.375 million loans, and the Company's German subsidiaries are
required to reimburse the letter of credit issuer for any such issuances. The
amount of the letter of credit also may be fully drawn under certain
circumstances, and in such event the amount of the draw shall convert into term
loans to the Company's German subsidiaries with similar amortization to the
German term loans.
The Company used the New Term Loans to refinance certain existing indebtedness
of the Company and as part of the financing for the WWG merger.
23
<PAGE>
The New Revolving Credit Facility is available to the Company from time to time
for potential acquisitions and other general corporate purposes.
Principal and interest payments under the New Credit Facility and interest
payments on the Senior Subordinated Notes represent significant liquidity
requirements for the Company. The Tranche A Term Loan will be amortized in four
quarterly installments of $750 thousand commencing on June 30, 2000, four
quarterly installments of $2.0 million commencing on June 30, 2001, four
quarterly installments of $3.75 million commencing on June 30, 2002, four
quarterly installments of $7.5 million commencing on June 30, 2003, four
quarterly installments of $2.5 million commencing on June 30, 2004 and four
quarterly installments of $2.25 million commencing on June 30, 2005. The Tranche
B Term Loan will be amortized in 24 quarterly installments of $2.0 million,
commencing on June 30, 2000, four quarterly installments of $77.5 million
commencing on June 30, 2006, and two quarterly installments of $76.0 million
commencing on June 30, 2007. The German Term Loans will be amortized in four
quarterly installments of (Euro) 530 thousand commencing on June 30, 2000,
twelve quarterly installments of (Euro) 790 thousand commencing on June 30,
2001, four quarterly installments of (Euro) 7.625 million commencing on June 30,
2004, three quarterly installments of (Euro) 15.780 million commencing on June
30, 2005 and one quarterly installment of (Euro) 18.935 million on March 31,
2006. The $275 million of Senior Subordinated Notes will mature in 2008, and
bear interest at 9 3/4% per annum. As a result of the substantial indebtedness
incurred in connection with the WWG 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.
The loans under the New Credit Facility bear interest at floating rates based
upon the interest rate option elected by the Company. To fix the interest
charged on a portion of the total debt outstanding under the New Term Loans, the
Company entered into interest rate swaps that are effective for periods ranging
from two to three years which began in September 30, 1998. After giving effects
to these arrangements, $220 million of the debt outstanding is 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.
The obligations of Dynatech LLC under the New Revolving Credit Facility, the
Tranche A Term Loan, the Tranche B Term Loan and the reimbursement obligations
of the German subsidiaries under the letter of credit relating to the German
Term Loan are guaranteed by each active direct or indirect U.S. subsidiary of
Dynatech LLC and by Dynatech Corporation. The obligations under the New Credit
Facility are secured by a pledge of the Company's equity interest in Dynatech
LLC, by substantially all of the assets of Dynatech LLC and each active direct
or indirect U.S. subsidiary of Dynatech LLC, and by a pledge of the capital
stock of each such direct or indirect U.S. subsidiary, and 65% of the capital
stock of each subsidiary of Dynatech LLC that acts as a holding company of
Dynatech LLC's foreign subsidiaries.
The Company's New Credit Facility generally permits voluntary prepayment of
loans thereunder without premium or penalty, subject to certain limitations.
Mandatory prepayments are required to be made from (a) 100% of net proceeds from
certain asset sales, casualty insurance and condemnation awards or other similar
recoveries; (b) 100% of the net proceeds from the issuance of indebtedness by
the Company, other than as permitted by the New Credit Facility; and (c) 50% of
annual excess cash flow for each fiscal year in which the ratio of the Company's
debt on the last day of such fiscal year to the Company's EBITDA (defined as
earnings before interest, taxes,
24
<PAGE>
depreciation and amortization) for such fiscal year is greater than or equal to
4.0 to 1.0.
Future Financing Sources and Cash Flows. The amount available under the New
Revolving Credit Facility that remained unused at June 30, 2000 was $175
million. The unused portion of this facility will be available to meet future
working capital and other business needs of the Company. The Company anticipates
borrowing approximately $100 million to finance its acquisition of Cheetah,
which is expected to be completed during August 2000.
Among other potential sources of liquidity, the Company is currently considering
a public offering of its common stock. If the offering occurs, the Company
intends to use the net proceeds of the offering to reduce its bank debt and
would expect to renegotiate the terms of its New Credit Facility at that time.
There can be no assurance that the Company will make a public offering of its
common stock.
The Company believes that cash generated from operations, together with amounts
available under the New 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
New Credit Facility (including the New 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 Company's New Credit Facility contains covenants
that, among other things, restrict the Company's ability to dispose of assets,
incur additional debt, guarantee obligations or contingent liabilities, repay
its Senior Subordinated Notes, pay dividends, create liens on assets, make
investments, loans or advances, engage in mergers or consolidations, make
capital expenditures or engage in certain transactions with affiliates. The
Company's New Credit Facility contains customary events of default. 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. 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 New
Credit Facility, 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 New Credit
Facility 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.
New Pronouncements
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This bulletin provides guidance from the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B which defers the effective date for the
Company to the fourth quarter of fiscal 2001. The Company is currently in the
process of assessing the impact, if any, that the current guidance and
interpretations of SAB 101 may have on the financial statements.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among
other issues clarifies the following: the definition of an employee for purposes
of applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The Company does not expect the application of FIN 44 to have a
material impact on its results of operations and financial position.
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 was amended by
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Statement of Financial Accounting Standards No. 137, which modified the
effective date of FAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. FAS 133, as amended, 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 FAS 133 on its results of operations and
its financial position.
Quantitative and Qualitative Disclosures about Market Risk
The Company operates both manufacturing facilities and sales offices in over 80
countries. 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 facilities are located. 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.
The Company currently has three interest rate hedge 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. In addition through the acquisition of WWG, the Company
obtained three additional interest rate hedge contracts for a total of DM 20
million (approximately $9.2 million). At June 30, 2000, all of the interest rate
swap contracts had an interest rate lower 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 Company
recognized a reduction in 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 the three months of fiscal 2001 was $0.3
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 June 30, 2000, the
analysis demonstrated that such movement would cause the Company to recognize
additional interest expense of approximately $1.5 million on an annual basis,
and accordingly, would cause a hypothetical loss in cash flows of approximately
$1.5 million on an annual basis.
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PART II. Other Information
Item 1. 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.
The Company is a party to various legal actions that arose in the ordinary
course of its business. The Company does not expect that resolution of these
legal actions will have, individually or in the aggregate, a material adverse
effect on the Company's financial condition or results of operations.
Whistler Litigation. In 1994, the Company sold its radar detector business to
Whistler Corporation of Massachusetts. 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 alleging willful
infringement of CMI's patent for a mute function in radar detectors. The
Company, along with Whistler, has asserted in response that it did not infringe
CMI's patent and that, in any event, the patent is invalid and unenforceable.
The Company obtained an opinion from outside counsel that CMI's patent is
invalid. The Company intends to offer that opinion (and other evidence) to
demonstrate that any alleged infringement of CMI's patent due to the Company's
prior manufacture and sale of the Whistler series radar detectors was not valid.
On February 14, 1997, CMI filed for bankruptcy in the United States Bankruptcy
Court for the Southern District of Ohio. Pursuant to that filing, CMI sold its
mute feature patent (and other assets) to Escort Acquisition Corp. CMI, however,
retained the right to seek past damages from the Company.
On March 24, 1998, CMI and its co-plaintiff Escort filed a motion for summary
judgment. The Company opposed that motion and went on to complete discovery,
which closed on June 20, 1998. The Company then filed its own series of summary
judgment motions.
A hearing on the parties' dispositive motions was held in May 1999. On May 27,
1999, Whistler filed a Chapter 11 bankruptcy petition in the United States
District Court for the District of Massachusetts. As a result of that filing,
CMI's patent infringement litigation is stayed as to Whistler.
On February 18, 2000, the United States Magistrate issued a Report and
Recommendation on some of the pending motions, recommending that judgment be
entered in the Company's favor on half of the claims asserted by CMI. Then, on
June 9, 2000, the Magistrate issued a second Report and Recommendation,
recommending that the plaintiffs be precluded from recovering any damages for
any alleged infringement that occurred prior to June 1996. Because the Company
could not have infringed on CMI's patent after it sold its radar detector
business to Whistler in 1994, if this Recommendation is adopted by the District
Court Judge, the Company would have no liability to CMI. The parties have filed
(and will file) various objections to the two Report and Recommendations. If
necessary, trial in this matter is scheduled for November 2000. The Company
intends to
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continue to defend this lawsuit vigorously and does not believe that the outcome
of this litigation will have a material adverse effect on its financial
condition, results of operation, or liquidity.
Item 2. Changes in Securities and Use of Proceeds
To finance the WWG Merger, on May 23, 2000, the Company sold 12.5 million and
30.625 million shares of common stock in a private placement to CDR Fund V and
CDR Fund VI, respectively, for a purchase price of $4.00 per share and an
aggregate purchase price of $172.5 million. Such sales were made in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 and Regulation D thereunder.
In addition, on May 23, 2000, the Company issued approximately 15 million
newly-issued, unregistered shares of common stock to specified former WWG
stockholders in connection with the WWG Merger in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 and
Regulation D thereunder.
On June 5, 2000, pursuant to the Dynatech Corporation Directors Stock Purchase
Plan, Peter M. Wagner purchased 62,500 newly-issued, unregistered shares of
common stock in a private placement for an aggregate purchase price of $250,000.
The sale was made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 and Regulation D thereunder.
Item 4. Submission of Matters to a Vote
Pursuant to the written action of a majority of its shareholders, on May 18,
2000, the Company amended its certificate of incorporation to increase the
number of shares of authorized common stock to 350 million from 200 million
shares.
On August 9, 2000, the Company filed a Definitive Information Statement with the
SEC indicating that the Board of Directors has determined that it is advisable
and in the best interests of the Company to amend the Company's Certificate of
Incorporation in order to change the Company's name from "Dynatech Corporation"
to "Acterna Corporation." The amendment will become effective upon the written
consent of the holders of not less than a majority of the common stock and the
filing of the amendment with the Secretary of State of the State of Delaware.
The Company anticipates that CDR Fund V and CDR Fund VI, its controlling
shareholders, will give their written consent to the adoption of the amendment
and that the filing of the amendment will occur on or about August 29, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in the Exhibit Table of Item 601 of
Regulation S-K:
Exhibit Number Description
-------------- -----------
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3.1 Certificate of Incorporation (as
amended)
27 Financial Data Schedule
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K dated May 31, 2000
relating to the merger by DWW Acquisition Corporation, a
subsidiary of Dynatech Corporation, and Wavetek Wandel
Goltermann, Inc.
2. The Company filed a Current Report on Form 8-K/A dated July 18,
2000 which updated the pro forma information required by Item 7
to the initial Form 8-K relating to the merger by DWW Acquisition
Corporation, a subsidiary of Dynatech Corporation, and Wavetek
Wandel Goltermann, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATECH CORPORATION
-----------------------------------
Date August 14, 2000 /s/ ALLAN M. KLINE
--------------------------- -----------------------------------
Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
Date August 14, 2000 /s/ ROBERT W. WOODBURY, JR.
--------------------------- -----------------------------------
Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
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