<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 September 30, 2000
Commission file number 000-07438
ACTERNA CORPORATION
(formerly known as Dynatech Corporation)
(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 October 15, 2000 there were 190,170,300 shares of common stock of the
registrant outstanding.
<PAGE>
PART I. Financial Information
------------------------------
Item 1. Financial Statements
ACTERNA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- --------- -------- ----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Net sales $305,210 $103,789 $ 513,381 $194,583
Cost of sales 141,050 34,115 230,658 64,872
--------- --------- --------- ---------
Gross profit 164,160 69,674 282,723 129,711
Selling, general & administrative
expense 115,523 34,123 189,930 65,635
Product development expense 38,672 13,194 64,883 25,338
Recapitalization and
other related costs --- --- 9,194 13,259
Purchased incomplete technology 6,000 --- 56,000 ---
Amortization of intangibles 30,763 763 43,642 1,479
--------- --------- --------- ---------
Total operating expenses 190,958 48,080 363,649 105,711
--------- --------- --------- ---------
Operating income (loss) (26,798) 21,594 (80,926) 24,000
Interest expense (27,121) (12,592) (45,793) (25,440)
Interest income 1,111 601 1,708 1,300
Other income (expense) (1,365) 15 (2,684) (24)
--------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes and
extraordinary item (54,173) 9,618 (127,695) (164)
Provision (benefit) for income
taxes (3,784) 3,976 (5,571) 260
--------- --------- --------- ---------
Net income (loss) from continuing
operations before extraordinary
item (50,389) 5,642 (122,124) (424)
Discontinued operations:
Operating income, net of income
tax provision of $2,625 and
$7,818, respectively --- 3,924 --- 12,541
--------- --------- --------- ---------
Net income (loss) before
extraordinary item (50,389) 9,566 (122,124) 12,117
Extraordinary item, net of income
tax benefit of $6,603 --- --- (10,659) ---
--------- --------- --------- ---------
Net income (loss) $(50,389) $ 9,566 $(132,783) $ 12,117
========= ========= ========= =========
Income (loss) per common share-
basic:
Continuing operations $ (0.27) $ 0.04 $ (0.69) ---
Discontinued operations --- 0.03 --- $ 0.09
Extraordinary loss --- --- (0.06) ---
--------- --------- --------- --------
Net income (loss) per common share-
basic $ (0.27) $ 0.07 $ (0.75) $ 0.09
========= ========= ========= ========
Income (loss) per common share -
diluted:
Continuing operations $ (0.27) $ 0.04 $ (0.69) ---
Discontinued operations --- 0.02 --- 0.09
Extraordinary loss --- --- (0.06) ---
--------- -------- --------- ---------
Net income (loss) per common share-
diluted $ (0.27) $ 0.06 $ (0.75) $ 0.09
========= ======== ========== ========
Weighted average number of common
shares:
Basic 189,003 147,841 177,279 147,532
Diluted 189,003 158,552 177,279 147,532
========= ========= ========= =========
</TABLE>
_______________________________
See notes to condensed consolidated financial statements.
<PAGE>
ACTERNA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 March 31,
(Unaudited) 2000
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,835 $ 33,839
Accounts receivable, net 213,804 78,236
Inventories:
Raw materials 45,416 11,085
Work in process 35,555 12,859
Finished goods 46,453 6,308
---------- ----------
Total inventory 127,424 30,252
Deferred income taxes 40,980 21,548
Other current assets 30,385 16,332
---------- ----------
Total current assets 461,428 180,207
Property and equipment, net 80,574 27,316
Other assets:
Net assets held for sale 89,415 72,601
Intangible assets, net 678,391 58,508
Deferred income taxes --- 42,689
Deferred debt issuance costs, net 27,834 21,382
Other 18,194 12,135
---------- ----------
$1,355,836 $ 414,838
========== ==========
LIABILITIES & SHAREHOLDERS' DEFICIT
Current Liabilities:
Notes payable $ 12,768 $ ---
Current portion of long-term debt 15,825 7,646
Accounts payable 83,476 38,374
Accrued expenses:
Compensation and benefits 62,627 35,036
Deferred revenue 17,900 13,564
Warranty 13,999 8,297
Interest 11,628 10,055
Taxes other than income taxes 10,953 1,844
Other 27,681 7,426
Accrued income taxes --- 5,703
---------- ----------
Total current liabilities 256,857 127,945
Long-term debt 1,074,169 572,288
Deferred income taxes 45,245 ---
Deferred compensation 55,013 11,280
Shareholders' deficit:
Common stock 1,902 1,225
Additional paid-in capital 816,613 344,873
Accumulated deficit (756,712) (623,929)
Unearned compensation (135,020) (16,965)
Other comprehensive loss (2,231) (1,879)
---------- ----------
Total shareholders' deficit (75,448) (296,675)
---------- ----------
$1,355,836 $ 414,838
========== ==========
</TABLE>
____________________________
See notes to condensed consolidated financial statements.
3
<PAGE>
ACTERNA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
2000 1999
---------- -----------
(In thousands)
<S> <C> <C>
Operating activities:
Net income (loss) $(132,783) $ 12,117
Adjustments for non-cash items included in net income:
Depreciation 9,912 5,737
Amortization of intangibles 43,642 3,157
Amortization of inventory step-up 35,188 ---
Amortization of unearned compensation 7,966 852
Amortization of deferred debt issuance costs 2,048 1,616
Writeoff of deferred debt issuance costs 10,019 ---
Purchased incomplete technology 56,000 ---
Recapitalization and other related costs 9,194 ---
Other 14,579 72
Change in deferred income tax asset --- ---
Change in operating assets and liabilities (106,072) (22,434)
---------- ----------
Net cash flows provided by (used in) operating activities (50,307) 1,117
Investing activities:
Purchases of property and equipment (13,320) (8,333)
Proceeds from sale of business 3,500 ---
Businesses acquired in purchase transactions, net of
cash acquired and non-cash items (402,149) (6,238)
Other (642) (1,424)
---------- ----------
Net cash flows used in investing activities (412,611) (15,995)
Financing activities:
Net borrowings (repayments) of debt 308,921 (15,743)
Repayment of notes payable --- ---
Repayment of capital lease obligations (11) (323)
Capitalized debt issuance costs (18,519) ---
Proceeds from issuance of common stock, net of
expenses 198,241 471
---------- ----------
Net cash flows provided by (used in) financing
activities 488,632 (15,595)
Effect of exchange rates on cash (10,718) 273
---------- ----------
Increase (decrease) in cash and cash equivalents 14,996 (30,200)
Cash and cash equivalents at beginning of year 33,839 70,362
---------- ----------
Cash and cash equivalents at end of period $ 48,835 $ 40,162
========== ==========
</TABLE>
_______________________
See notes to condensed consolidated financial statements.
4
<PAGE>
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION AND RESULTS OF OPERATIONS
Acterna Corporation (the "Company" or "Acterna") 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 September 30, 2000, and the unaudited consolidated statements of
operations and unaudited condensed consolidated statements of cash flows for
the interim periods ended September 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; its Current Report on Form 8-K/A dated July 18,
2000 disclosing pro forma information relating to the WWG Merger; its Current
Report on Form 8-K dated August 30, 2000 relating to the Company changing its
name from Dynatech Corporation to Acterna Corporation; and its Current Report
on Form 8-K dated September 22, 2000 relating to the Company changing its
CUSIP number and its NASDAQ OTC symbol.
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,
purchased incomplete technology, warranty accruals and tax valuation
reserves. Actual results could differ from those estimates.
5
<PAGE>
C. ACQUISITIONS
Wavetek Wandel Goltermann, Inc.
On May 23, 2000, the Company and its wholly-owned subsidiary DWW Acquisition
Corporation, a Delaware corporation, 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
Acterna.
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 $51 million for
acquired incomplete technology. This purchased incomplete technology had not
reached technological feasibility and had no alternative future use. The
Company generated approximately $518 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
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 Senior Secured 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 stockholders, $6.0 million
for services provided in connection with the WWG Merger and the related
financing.
Superior Electronics Group, Inc., dba Cheetah Technologies
On August 23, 2000, the Company acquired substantially all of the assets and
assumed specified liabilities of Superior Electronics Group, Inc., a Florida
corporation doing business as Cheetah Technologies ("Cheetah"). 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 $750 thousand in order to record this
inventory at its fair value, and also recorded a charge of $5 million for
acquired incomplete technology. This purchased incomplete technology had not
reached technological feasibility and had no alternative future use. The
Company generated approximately $132.5 million of excess purchase price that
is being amortized over a six-year life. 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.
The Company funded the purchase price with borrowings of $100,000 under its
Senior Secured Credit Facility (see Note N. Debt) and approximately $66,000
from its existing cash balance.
In connection with the Cheetah acquisition, options to purchase shares of
Cheetah were converted into options to purchase shares of Acterna common
stock based upon a conversion ratio designed to preserve the economic value
of each converted option. The fair value as of the announcement date of the
acquisition of all options converted has been estimated at $900 thousand
using an option-pricing model. A total of $7.0 million relates to the
unearned intrinsic value of unvested options as of the closing date of the
acquisition, and has been recorded as deferred compensation to be amortized
over the remaining vesting period of the options (the weighted average
vesting period is approximately three years).
6
<PAGE>
D. DISCONTINUED OPERATIONS
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. 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 and six month periods ended September 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 and six month periods ended September 30, 1999 have been
reclassified in the accompanying statements of operations as discontinued
operations. The Company's balance sheets as of September 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 Statement of Cash Flows for the six-month period ended September 30, 1999
has 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 having sold these businesses. The pretax operating losses for the
segment for the six-month period ended September 30, 2000 was $10.5 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.
E. 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.
F. DIVESTITURE
In June 2000, the Company sold the assets and liabilities of DataViews
Corporation ("DataViews"), a subsidiary that 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, the
results of DataViews were included in the Company's financial statements
within "Other Subsidiaries".
G. 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 fiscal period presented:
o The acquisition of Sierra Design Labs, which occurred on
September 10, 1999;
7
<PAGE>
o The acquisition of Applied Digital Access, Inc., which occurred on
November 1, 1999;
o The merger with WWG (after giving effect to certain divestitures of WWG),
which occurred on May 23, 2000;
o The divestiture of DataViews Corporation, which occurred in June 2000;
o The issuance of common stock to the CDR Funds in connection with the WWG
Merger and the Rights Offering which occurred in June 2000 (see Note L.
Income (Loss) per Share); and
o The acquisition of Cheetah, which occurred on August 23, 2000.
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> Six Months Ended
September 30,
2000 1999
---- ----
(In thousands except per share data)
<S> <C> <C>
Net sales $ 609,552 $467,858
Net operating loss before extraordinary item (154,919) (50,550)
Net loss (165,578) (50,550)
Loss per share - basic and diluted:
Net operating loss before extraordinary item $ (0.87) $ (0.34)
Net loss (0.93) (0.34)
</TABLE>
H. RECAPITALIZATION
On May 21, 1998, CDRD Merger Corporation, a nonsubstantive transitory merger
vehicle, which was organized at the direction of Clayton, Dubilier & Rice,
Inc., 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
and (2) each then outstanding share of common stock of CDRD Merger
Corporation was converted into one share of common stock.
I. RECAPITALIZATION AND OTHER RELATED COSTS
Recapitalization and other related costs from continuing operations during
the first six 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 six months of fiscal 2000 of $13.3 million related to
termination expenses of certain executives including those arising from the
retirement of John F. Reno, former Chairman, President and Chief Executive
Officer of the Company, as well as other employees.
J. NEW PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin provides guidance from the staff on applying
generally accepted accounting
8
<PAGE>
principles to revenue recognition in financial statements. In June 2000, the
SEC issued SAB 101B that 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 its 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 has adopted FIN 44
and the application of FIN 44 did not have a material impact on its results
of operations or financial position.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). 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.
K. LEGAL PROCEEDINGS
The Company is party to various legal actions that arose in the ordinary
course of our business. The Company does not expect that resolution of these
legal actions will have, individually or in the aggregate, a material adverse
effect on its financial condition or results of operations.
Whistler Litigation
In 1994, the Company sold its radar detector business to Whistler
Communications 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 Corporation,
alleging willful infringement of CMI's patent for a mute function in radar
detectors. On September 26, 2000, the Federal District Court Judge granted
the Company's motion for partial summary judgment on the affirmative defense
of laches, and the case was administratively terminated. The recent decision
was appealed by CMI on October 24, 2000. The Company does not expect that
the outcome of this action will have a material impact on the results of
operations or financial position of the Company.
9
<PAGE>
<TABLE>
<CAPTION>
L. INCOME (LOSS) PER SHARE
Income (loss) per share is calculated as follows:
Three Months Ended, Six Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------ ------
(In thousands, except per share data)
Net income (loss):
<S> <C> <C> <C> <C>
Continued operations $(50,389) $ 5,642 $(122,124) $ (424)
Discontinued operations --- 3,924 --- 12,541
Extraordinary item --- --- (10,659) ---
-------- -------- --------- --------
Net income (loss) $(50,389) $ 9,566 $(132,783) $ 12,117
======== ======== ========= ========
BASIC:
Common stock outstanding,
beginning of period 187,304 120,673 122,527 120,665
Weighted average common stock issued
during the period 1,699 508 46,441 263
-------- -------- --------- --------
189,003 121,181 168,968 120,928
Bonus element adjustment related to
rights offering --- 26,660 8,311 26,604
-------- -------- --------- --------
Weighted average common stock
outstanding, end of period 189,003 147,841 177,279 147,532
======== ======== ========= ========
Income (loss) per common share:
Continued operations $ (0.27) $ 0.04 $ (0.69) $ ---
Discontinued operations --- 0.03 --- 0.09
Extraordinary item --- --- (0.06) ---
-------- -------- --------- --------
Net income (loss) per common share $ (0.27) $ 0.07 $ (0.75) $ 0.09
======== ======== ========= ========
DILUTED:
Common stock outstanding,
beginning of period 187,304 120,673 122,527 120,665
Weighted average common stock issued
during the period 1,699 508 46,441 263
Weighted average of dilutive
potential common stock --- 8,780 --- ---
-------- -------- --------- --------
189,003 129,961 168,968 120,928
Bonus element adjustment related to
rights offering --- 28,591 8,311 26,604
-------- -------- --------- --------
Weighted average common stock
outstanding, end of period 189,003 158,552 177,279 147,532
======== ======== ========= ========
Income (loss) per common share:
Continued operations $ (0.27) $ 0.04 $ (0.69) $ (0.00)
Discontinued operations --- 0.02 --- 0.09
Extraordinary loss --- --- (0.06) ---
-------- -------- --------- --------
Net income (loss) per common share $ (0.27) $ 0.06 $ (0.75) $ 0.09
======== ======== ========= ========
</TABLE>
10
<PAGE>
As of September 30, 2000 and 1999, the Company had options outstanding to
purchase 38.4 million and 32.2 million shares of common stock, respectively.
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"; together with CDR Fund V, the "CDR
Funds"), respectively, at a price of $4.00 per share. In order to reverse the
diminution of percentage ownership of all other common shareholders as a
result of shares issued in connection with the WWG Merger, the Company made a
rights offering to all its common stock 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 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 common stock as a rights offer. Since the common stock has been
offered to all shareholders at a price that is less than that of the market
trading price (the "bonus element"), a retroactive adjustment has been made
to weighted average shares to take this bonus element into account.
For the three month period ended September 30, 2000 and the six month periods
ended September 30, 2000 and 1999, the Company excluded from its diluted
weighted average shares outstanding the effect of the weighted average common
stock equivalents which totaled 18.7 million shares, 15.4 million shares and
8.8 million shares, respectively, as the Company incurred a net loss from
continuing operations. The common stock equivalents have been excluded from
the calculation of diluted weighted average shares outstanding because their
inclusion would have an antidilutive effect by reducing the loss from
continuing operations on a per share basis.
11
<PAGE>
M. INTANGIBLE ASSETS
Intangible assets acquired primarily from business acquisitions are
summarized as follows:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------ ----------
<S> <C> <C>
Product technology $221,296 $ 9,236
Excess of cost over net assets acquired 404,655 67,328
Other intangible assets 120,247 4,177
----------- ---------
746,198 80,741
Less accumulated amortization 67,807 22,233
----------- ---------
Total $678,391 $58,508
=========== =========
</TABLE>
N. DEBT
<TABLE>
<CAPTION>
Long-term debt is summarized below:
September 30, March 31,
2000 2000
----------- ----------
<S> <C> <C>
Senior Secured Credit Facilities $ 789,258 $304,861
Senior Subordinated Notes 275,000 275,000
Capitalized leases and other debt 25,736 73
---------- ---------
Total debt 1,089,994 579,934
Less current portion 15,825 7,646
---------- ---------
Long-term debt $1,074,169 $572,288
========== =========
</TABLE>
Principal and interest payments under the Senior Secured Credit Facility and
interest payments on the Senior Subordinated Notes represent significant
liquidity requirements for the Company. As a result of the substantial
indebtedness incurred in connection with the WWG Merger and the Cheetah
acquisition, the Company expects that its interest expense will be higher and
will have a greater proportionate impact on net income in comparison to prior
periods.
Upon consummation of the WWG Merger, the Company restructured its existing
bank debt as well as the senior subordinated debt, bank debt and other debt
of WWG. As a result, on May 23, 2000, the Company entered into a new credit
facility with a syndicate of lenders (the "Senior Secured Credit Facility")
that provides for loans in an aggregate principal amount of up to $860
million, consisting of (1) a revolving credit facility available to Acterna
LLC in U.S. dollars or euros, in an aggregate principal amount of up
12
<PAGE>
to $175 million, which can also be used to issue letters of credit (the
"Revolving Credit Facility"), (2) a Tranche A term loan of $75 million to
Acterna LLC with a six year amortization (the "Tranche A Term Loan"), (3) a
Tranche B term loan of $510 million to Acterna 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 "Term Loans"). The
Company used the Term Loans to refinance certain existing indebtedness of the
Company and as part of the financing for the WWG Merger.
On August 23, 2000, the Company borrowed $100 million under the Revolving
Credit Facility to finance the Cheetah acquisition. The balance of the
Revolving Credit Facility is available to the Company from time to time for
potential acquisitions and other general corporate purposes.
The loans under the Senior Secured 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 its debt, the Company entered into interest
rate hedge agreements. After giving effect to these agreements, $220 million
of the Company's debt outstanding is subject to an effective average annual
fixed rate of 5.66% (plus an applicable margin) per annum until September
2001.
In connection with the May 1998 Recapitalization, Acterna LLC issued its
9 3/4% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes")
in an aggregate principal amount of $275 million that will mature on May 15,
2008. The Senior Subordinated Notes are guaranteed on a senior subordinated
basis by Acterna Corporation. Interest on the Senior Subordinated Notes
accrues at the rate of 9 3/4% per annum and is payable semi-annually in
arrears on each May 15 and November 15.
As of September 30, 2000, the Company was in compliance with all the
covenants as defined in the New Senior Credit Agreement.
13
<PAGE>
O. SHAREHOLDERS' DEFICIT
The following is a summary of the change in shareholders' deficit for the
period ended September 30, 2000.
<TABLE>
<CAPTION>
Number
Of Shares Additional Other Total
Common Common Paid-In Accumulated Unearned Comprehensive Shareholders'
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 (132,783) (132,783)
Translation adjustment (352) (352)
---------
Total comprehensive loss (133,135)
---------
Adjustment to unearned
compensation (1,603) 1,610 7
Issuance of common stock
to CDR Funds 43,125 431 172,069 172,500
Issuance of common stock in
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
Conversion of Cheetah
stock options 900 900
Amortization of unearned
compensation-cont ops 7,966 7,966
Amortization of unearned
compensation-disc ops 599 599
Exercise of stock option
and other issuances 4,448 46 8,765 8,811
Unearned compensation from
stock option grants 121,230 (128,230) (7,000)
Tax benefit from exercise
of stock options 14,453 14,453
--------- ------- ---------- ---------- ---------- ---------- ------------
Balance, September 30,2000 190,070 $1,902 $816,613 $(756,712) $(135,020) $(2,231) $ (75,448)
========= ======= ========== ========== ========== ========== ============
</TABLE>
14
<PAGE>
P. UNEARNED COMPENSATION
Since the time of the Recapitalization, the Company has issued non-qualified
stock options to primarily all employees and non-employee directors at an
exercise price equal to the fair market value as determined by the Company's
board of directors. The exercise price may or may not be equal to the trading
price on the over-the-counter market on the dates of the grants. During the
first six months of fiscal 2001, the Company issued approximately 10.5
million non-qualified stock options to former WWG and Cheetah employees who
became active employees of the Company at exercise prices lower than the
closing price in the over-the-counter market on the dates of grants. The
Company, therefore, incurred a charge of approximately $128.2 million for the
difference between the closing price in the over-the-counter market and the
exercise price of the options and recorded the charge as unearned
compensation within shareholders' equity. This unearned compensation charge
will be amortized to expense over the options' vesting periods.
Q. SEGMENT INFORMATION
Net sales and earnings before interest, taxes and amortization ("EBITA") for
the three and six months ended September 30, 2000 and 1999 are shown below
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
SEGMENT 2000 1999 2000 1999
---- ---- ---- -----
<S> <C> <C> <C> <C>
Communications test segment:
Net sales $ 276,787 $ 77,238 $ 457,856 $144,519
EBITA 35,456 14,446 59,290 25,107
Total assets 1,153,542 88,631 1,153,542 88,631
Inflight information
systems segment:
Net sales 19,541 18,506 38,329 35,798
EBITA 4,213 6,484 8,215 12,441
Total assets 41,809 38,388 41,809 38,388
Other subsidiaries:
Net sales 8,882 8,045 17,196 14,266
EBITA 2,753 2,588 4,279 3,711
Total assets 13,021 33,710 13,021 33,710
Discontinued operations:
Net assets held for sale 89,415 N/A 89,415 N/A
Total assets 89,415 79,915 89,415 79,915
Corporate:
Income (loss) before
interest and taxes (1,495) 302 (3,060) 336
Total assets 58,049 87,068 58,049 87,068
Total company:
Net sales $ 305,210 $103,789 $ 513,381 $194,583
EBITA $ 40,927 $ 23,820 $ 68,724 $ 41,595
Total assets $1,355,836 $327,712 $1,355,836 $327,712
The following are excluded from the calculation of EBITA:
Recapitalization and other
costs --- --- 9,194 13,259
Acquired incomplete
technology 6,000 --- 56,000 ---
Amortization of unearned
compensation 5,888 411 7,966 852
Amortization of inventory
step-up 26,438 --- 35,188 ---
Other --- --- 344 ---
</TABLE>
15
<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 impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 2000 and below.
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 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 August 23, 2000, the Company acquired substantially all the assets and
specified liabilities of Superior Electronics Group, Inc., a Florida corporation
doing business as Cheetah Technologies ("Cheetah"), for a purchase price of
approximately $166 million. The acquisition was accounted for using the
purchase method of accounting and resulted in approximately $144 million of
excess purchase price that will be amortized over 6 years. Cheetah is a leading
global supplier of automated test, monitoring and management systems for cable
television and telecommunications networks.
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 its 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 stockholders 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
stockholders 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. As of September 30, 2000, CDR Fund V and
CDR Fund VI, the Company's controlling stockholders, held approximately 65% and
16%, respectively, of the outstanding shares of common stock of the Company.
In connection with the WWG Merger, the Company entered into a new credit
facility for $860 million with a syndicate of lenders. The proceeds were used to
finance the WWG Merger, refinance WWG and Acterna 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 segment as net assets
held for sale within non-current assets. The balance sheet and statements of
cash flows for previous fiscal periods have not been reclassified for the
discontinued businesses. Management believes that the net proceeds from the
disposition of these companies will exceed the carrying amount of the net
assets.
16
<PAGE>
Accordingly, the anticipated gains from the disposal of the segment and
the operating results will not be reflected in the statements of operations
until they are realized.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2000 as Compared to Three Months Ended
September 30, 1999 on a Consolidated Basis
Net sales. For the three months ended September 30, 2000 consolidated net sales
increased $201.4 million to $305.2 million as compared to $103.8 million for the
three months ended September 30, 1999. The increase occurred within all
business units, though primarily in the communications test segment. Of the
$201.4 million increase, $199.5 million was attributable to businesses within
the communications test segment, of which 17.9% of the increase was related to
historical communications test business; 5.2% was attributable to the additional
sales from Applied Digital Access, Inc. ("ADA"), which was acquired in November
1999; 73.3% was attributable to the acquisition of WWG; and 3.6% was
attributable to the acquisition of Cheetah.
Gross profit. Consolidated gross profit increased $95.5 million to $164.2
million or 53.8% of consolidated net sales for the three months ended September
30, 2000, as compared to $69.7 million or 67.1% of consolidated net sales for
the three months ended September 30, 1999. Excluding the $26.4 million included
in cost of sales for the amortization of the inventory step-up from the
acquisitions of WWG and Cheetah, consolidated gross profit was 62.4% of
consolidated net sales. The decrease in gross margin as a percent of sales is,
in part, a result of products sold by WWG that have a lower gross margin than
the Company's primary products. The Company's Airshow subsidiary also
experienced increased net sales to the general aviation customer group, which
carries a lower gross margin 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 $191.0 million or
62.6% of consolidated net sales for the three months ended September 30, 2000,
as compared to $48.1 million or 46.3% of consolidated net sales for the three
months ended September 30, 1999. Excluding the impact of the writeoff of the
purchased incomplete technology, total operating expenses were $185.0 million or
60.6% of consolidated net sales for the three months ended September 30, 2000.
The increase is primarily a result of the acquisition of WWG, which has a higher
cost structure than the Company has had historically, increased amortization
expense, and expenses incurred since the acquisition for the rebranding of the
products offered by the combined businesses within the communications test
segment.
Included in both cost of sales ($1.9 million and $0.1 million) and operating
expenses ($3.9 million and $0.3 million) from continuing operations (for the
three months ending September 30, 2000 and 1999, respectively) is the
amortization of unearned compensation that relates to the issuance of non-
qualified stock options to employees and non-employee directors at a grant 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
second quarter of fiscal 2001 and fiscal 2000 was $5.9 million and $0.4 million,
respectively, and has been allocated to cost of sales; selling, general and
administrative expense; and product development expense. The increase in the
amortization expense is primarily a result of the non-qualified stock options
that were granted to former WWG and Cheetah employees who became active
employees of the Company. (See Note P. Unearned Compensation).
Selling, general and administrative expense was $116.5 million or 38.2% of
consolidated net sales for the three months ended September 30, 2000, as
compared to $34.1 million or 32.9% of consolidated net sales for the three
months ended September 30, 1999. The percentage increase is in part a result of
the timing of commission expense within the communications
17
<PAGE>
test segment, as well as 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 $38.7 million or 12.7% of consolidated net sales
for the three months ended September 30, 2000 as compared to $13.2 million or
12.7% of consolidated net sales for the same period a year ago. The dollar
increase is a direct result of the WWG Merger.
Amortization of intangibles was $30.8 million for the three months ended
September 30, 2000, as compared to $0.8 million for the same period a year ago.
The increase was primarily attributable to increased goodwill amortization
related to the acquisitions of Cheetah, WWG and ADA.
Operating income (loss). Operating loss was $26.8 million for the three months
ended September 30, 2000 as compared to income of $21.6 million or 20.8% of
consolidated net sales for the same period a year ago. The change was a result
of the additional amortization expense, the amortization of the inventory step-
up from the acquisitions of WWG and Cheetah, as well as expenses relating to the
integration of WWG with the Company's communications test segment and the
writeoff of in-process research and development costs.
Interest. Interest expense, net of interest income, was $26.0 million for the
three months ended September 30, 2000 as compared to $12.0 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 and the acquisition
of Cheetah.
Taxes. The effective tax rate for the three months ended September 30, 2000 was
4.4% as compared to 40% for the same period last year. The principal reasons
for the decrease in the effective tax rate were: (1) the $51 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 changes in
the amount of income earned in various countries with tax rates higher than the
U.S. federal rate.
Net income (loss). Net loss was $50.4 million or a $0.27 loss per share on a
diluted basis for the three months ended September 30, 2000 as compared to net
income of $9.6 million or $0.06 per share on a diluted basis for the same period
a year ago. The loss was attributable to the amortization of the inventory
step-up, additional intangible amortization expense, expenses relating to
rebranding, severance, and additional consultants hired for the integration of
WWG with the Company's communications test segment, additional interest expense,
and the writeoff of purchased incomplete technology.
The backlog at September 30, 2000, was $361.1 million as compared to $180.4
million at March 31, 2000, primarily the result of the acquisitions of WWG and
Cheetah.
Six Months Ended September 30, 2000 as Compared to Six Months Ended September
30, 1999 on a Consolidated Basis
Net sales. For the six months ended September 30, 2000, consolidated net sales
increased $318.8 million or 163.8% to $513.4 million as compared to $194.6
million for the six months ended September 30, 1999. Of the $318.8 million
increase, $313.3 million was attributable to businesses within the
communications test segment, of which 22.4% of the increase was related to
historical communications test business; 7.7% was attributable to the additional
sales from ADA, which was acquired in November 1999; 67.6% was attributable to
the acquisition of WWG; and 2.3% was attributable to the acquisition of Cheetah.
Gross profit. Consolidated gross profit increased $153.0 million to $282.7
million or 55.3% of consolidated net sales for the six months ended September
30, 2000 as compared to $129.7
18
<PAGE>
million or 66.7% of consolidated net sales for the six months ended September
30, 1999. Excluding the $35.2 million included in cost of sales for the
amortization of the inventory step-up from the acquisitions of WWG and Cheetah,
consolidated gross profit was 61.9% of consolidated net sales for the six months
ended September 30, 2000. The decrease in gross margin as a percentage of sales
is, in part, a result of products sold by WWG that have a lower gross margin
than the Company's primary products. The Company's Airshow subsidiary incurred
lower gross margin revenue on products sold to the general aviation customer
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 $363.6 million or 71%
of consolidated net sales for the six months ended September 30, 2000, as
compared to $105.7 million or 54.3% of consolidated net sales for the six months
ended September 30, 1999. Excluding the impact of the writeoff of the purchased
incomplete technology as well as the recapitalization and other related costs,
total operating expenses were $298.5 million or 58.1% of consolidated net sales
and $92.5 million or 47.5% of consolidated net sales for the six months ended
September 30, 2000 and 1999, respectively. The increase is primarily a result of
the higher cost structure at WWG, costs associated with the integration of WWG
with the communications test segment, as well as additional intangible
amortization expense.
Included in both cost of sales ($2.6 million and $0.1 million) and operating
expenses ($5.3 million and $0.5 million) from continuing operations (for the six
months ending September 30, 2000 and 1999, respectively) is the amortization
of unearned compensation which relates to the issuance of non-qualified stock
options to employees and non-employee directors at a grant 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 six
months of fiscal 2001 and fiscal 2000 was $8.0 million and $0.6 million,
respectively, and has been allocated to cost of sales; selling, general and
administrative expense; and product development expense. The increase in the
amortization expense during fiscal 2001 is primarily a result of the non-
qualified stock options that were granted to former WWG and Cheetah employees
who became active employees of the Company. (See Note P. Unearned Compensation).
Selling, general and administrative expense was $189.9 million or 37.0% of
consolidated net sales for the six months ended September 30, 2000 as compared
to $65.6 million or 33.7% of consolidated net sales for the six months ended
September 30, 1999. The percentage increase is in part a result of the timing of
commission expense within the communications test segment, as well as 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 $64.9 million or 12.6% of consolidated net sales
for the six months ended September 30, 2000 as compared to $25.3 million or
13.0% of consolidated sales for the same period a year ago. The dollar increase
is a result of the WWG Merger.
Recapitalization and other related costs from continuing operations were $9.2
million and $13.3 million at September 30, 2000 and September 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.
Amortization of intangibles was $43.6 million for the six months ended September
30, 2000, as compared to $1.5 million for the same period a year ago. The
increase was primarily attributable to increased goodwill amortization related
to the acquisitions of Cheetah, WWG and ADA.
19
<PAGE>
Operating income (loss). Operating loss was $80.9 million for the six months
ended September 30, 2000 as compared to operating income of $24.0 million for
the same period a year ago. The change was a result of the amortization of the
inventory step-up, additional amortization expense, purchased incomplete
technology, as well as expenses relating to rebranding, severance, and
additional consultants hired for the integration of WWG with the Company's
communications test segment.
Interest. Interest expense, net of interest income, was $44.0 million for the
six months ended September 30, 2000 as compared to $24.1 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 and the acquisition
of Cheetah.
Taxes. The effective tax rate for the six months ended September 30, 2000 was
2.4% as compared to 40% for the same period last year. The principal reasons
for the decrease in the effective tax rate were: (1) the $51 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 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 that originated at the time of the May 1998
Recapitalization.
Net income (loss). Net loss was $132.8 million or a $0.75 loss per share on a
diluted basis for the six months ended September 30, 2000 as compared to net
income of $12.1 million or $0.09 per share on a diluted basis for the same
period a year ago. The loss was primarily attributable to the amortization of
the inventory step-up, purchased incomplete technology, additional interest
expense, amortization of intangibles, and the extraordinary charge.
Segment Disclosure
The Company measures the performance of its subsidiaries by their respective new
orders received ("bookings"), net sales and earnings before interest, taxes and
amortization ("EBITA") which excludes non-recurring and one-time charges. (See
Note Q. Segment Information). Included in each segment's EBITA is an allocation
of corporate expenses. The information below includes bookings, net sales and
EBITA for the Company's two segments and its Other Subsidiaries (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
SEGMENT 2000 1999 2000 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Communications test segment:
Bookings $289,634 $80,042 $472,612 $156,400
Net sales 276,787 77,238 457,856 144,519
EBITA 35,456 14,446 59,290 25,107
Inflight information systems
segment:
Bookings 20,993 18,560 38,853 35,761
Net sales 19,541 18,506 38,329 35,798
EBITA 4,213 6,484 8,215 12,441
Other subsidiaries:
Bookings 7,748 8,209 15,611 15,829
Net sales 8,882 8,045 17,196 14,266
EBITA 2,753 2,588 4,279 3,711
</TABLE>
20
<PAGE>
Three and Six Months Ended September 30, 2000 Compared to Three and Six Months
Ended September 30, 1999 - Communications Test Products
Bookings for communications test products increased to $289.6 million for the
three months ended September 30, 2000 as compared to $80.0 million for the same
period a year ago. For the six months ended September 30, 2000, bookings for
communications test products increased to $472.6 million as compared to $156.4
million for the same period a year ago. The increase was primarily due to the
WWG Merger and the acquisitions of Cheetah and ADA (for which no comparisons
existed during the first six months of fiscal 2000) as well as an increase in
bookings for instruments, systems and services at the Company's existing
communications test businesses.
Net sales of communications test products were $276.8 million for the three
months ended September 30, 2000 as compared to $77.2 million for the same period
a year ago. For the six months ended September 30, 2000, net sales of
communications test products were $457.9 million as compared to $144.5 million
for the six months ended September 30, 1999. The increase was due primarily to
the large backlog of orders at March 31, 2000, as well as additional net sales
from the WWG Merger and the acquisitions of Cheetah and ADA. The increase is
related to the following areas within the communications test segment: 22.4% of
the increase was related to the Company's historical communications test
business; 7.7% was attributable to the additional sales from ADA; 67.6% was
attributable to the acquisition of WWG; and 2.3% was attributable to the
acquisition of Cheetah.
EBITA for the communications test products increased to $35.5 million for the
three months ended September 30, 2000 as compared to $14.4 million for the same
period a year ago. For the six months ended September 30, 2000, EBITA increased
to $59.3 million as compared to $25.1 million for the same period a year ago.
The increase in EBITA is a result of the additional sales of the Company's
historical communications test products which carry a higher gross margin offset
by sales of WWG products that carry a lower gross margin. In addition, the
increase was also offset by the integration expense as a result of the WWG
Merger.
Three and Six Months Ended September 30, 2000 Compared to Three and Six Months
Ended September 30, 1999 - Inflight Information Systems
Bookings for the inflight information systems products increased 13.1% to $21.0
million for the three months ended September 30, 2000 as compared to $18.6
million for the same period a year ago. For the six months ended September 30,
2000, bookings for this segment increased 8.6% to $38.9 million as compared to
$35.8 million for the same period a year ago. The increase in bookings was a
result of additional orders for the general aviation products.
Net sales of inflight information systems products increased 5.6% to $19.5
million for the three months ended September 30, 2000 as compared to $18.5
million for the three months ended September 30, 1999. For the six months ended
September 30, 2000, net sales for this segment increased 7.1% to $38.3 million
as compared to $35.8 million for the same period a year ago. The increase was in
part due to revenue recognized from the increased sales of general aviation
products.
EBITA for the inflight information systems products decreased 35% to $4.2
million for the three months ended September 30, 2000 as compared to $6.5
million for the same period a year ago. For the six months ended September 30,
2000, EBITA for this segment decreased 34.0% to $8.2 million as compared to
$12.4 million for the same period a year ago. The decrease was
21
<PAGE>
in part due to lower earnings from the sale of general aviation products, which
carry lower gross margins than commercial aviation products, as well as to
higher costs associated with the hiring of additional field service technicians
in 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 May 1998
Recapitalization, the WWG Merger, the acquisitions of Cheetah and ADA and from
the funding of working capital and capital expenditures.
Cash flows. The Company's cash and cash equivalents increased $15.0 million
during the six months ended September 30, 2000.
Working capital. For the six months ended September 30, 2000, the Company's
working capital increased as its operating assets and liabilities used $106.1
million of cash. Accounts receivable increased, creating a use of cash of $36.2
million primarily due to the increased sales volume during the quarter.
Inventory levels increased, creating a use of cash of $18 million. Other
current assets decreased, creating a source of cash of $4.8 million. Accounts
payable increased, creating a source of cash of $8.1 million. Other current
liabilities decreased, creating a use of cash of $47.8 million. The decrease is
due in part to management incentive payments made during the first quarter of
fiscal year 2001.
Investing activities. The Company's investing activities totaled $412.6 million
for the six months ended September 30, 2000 in part for the purchase and
replacement of property and equipment. The primary use of cash was for the WWG
Merger of approximately $236.2 million (approximately $387.8 million in gross
purchase price less $151.6 million in cash and non-cash items), and for the
acquisition of Cheetah of approximately $164.7 million.
The Company's capital expenditures during the first six months of fiscal 2001
were $13.3 million as compared to $8.3 million for the same period last year.
The increase was primarily due to the timing of certain capital expenditure
commitments at the Company's communications test business. The Company
anticipates that fiscal 2001 capital expenditures will increase from fiscal 2000
levels and return to or exceed fiscal 1999 levels as the Company anticipates
replacing certain of its Enterprise Resource Planning (ERP) systems at the
communications test business. The Company is, in accordance with the terms of
the Senior Secured Credit Agreement, subject to maximum capital expenditure
levels.
Financing activities. The Company's financing activities generated $488.6
million in cash during the first and second quarters of fiscal 2001, due mainly
to the additional borrowings of debt and the cash generated from the sale of
stock in connection with WWG Merger and the acquisition of Cheetah.
DEBT SERVICE
As of March 31, 2000, the Company had $579.9 million of debt incurred in
connection with the May 1998 Recapitalization and the acquisition of ADA. Such
debt primarily consisted of $275.0 million principal amount of the Senior
Subordinated Notes, $234.9 million in term loans and $70.0 million in borrowings
under the old revolving credit facility. The weighted-average interest rate on
the loans under the Company's old senior secured credit facility was 7.85% per
annum for fiscal 2000. Interest on the Senior Subordinated Notes accrues at the
rate of 9 3/4% per annum and is payable semi-annually in arrears on each May 15
and November 15.
In connection with the WWG Merger, the Company refinanced its debt and entered
into the new Senior Secured Credit Facility. As of September 30, 2000, the
Company had $1,090.0 million of
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debt, primarily consisting of $275.0 million principal amount of the Senior
Subordinated Notes, $789.3 million in term loans and $115.0 million under the
Revolving Credit Facility, both under the new Senior Credit Secured Facility,
and $25.7 million of other debt obligations.
The loans under the new Senior Secured Credit Facility bear interest at floating
rates based upon the interest rate option elected by the Company. To fix
interest charged on a portion of its debt, the Company entered into interest
rate hedge agreements. After giving effect to these agreements, $220 million of
the Company's debt is subject to an effective average annual fixed rate of 5.66%
(plus an applicable margin) per annum until September 2001.
Principal and interest payments under both the old credit facility and the new
Senior Secured Credit Facility and interest payments on the Senior Subordinated
Notes have represented and will continue to represent significant liquidity
requirements for the Company.
For a more detailed description of the Senior Subordinated Notes and the new
Senior Secured Credit Facility, including the applicable principal amortization
schedule and interest rates, see the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000 and its other reports filed with the SEC.
Future financing sources and cash flows. The amount under the Revolving Credit
Facility that remained undrawn at September 30, 2000 was approximately
$50.3 million. While the Company believes that cash generated from operations,
together with amounts available under the Revolving Credit Facility and other
available sources of liquidity, will be adequate to permit the Company to meet
its debt service obligations, investment and capital expenditure program
requirements, ongoing operating costs and working capital needs, the Company
cannot assure its stockholders that this will be the case. 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
Facility (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.
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 proceeds of the offering to reduce its bank debt and would
expect to renegotiate the terms of its Senior Secured Credit Facility at that
time. There can be no assurance that the Company will make a public offering of
its common stock.
Covenant restrictions. The Company's new Senior Secured Credit Facility contains
covenants that, among other things, restrict its ability to obtain additional
sources of financing and cash flows, including by disposing of assets, incurring
additional debt, guaranteeing obligations or incurring contingent liabilities,
repaying the Senior Subordinated Notes, paying dividends, creating liens on
assets, making investments, loans or investments, engaging in mergers or
consolidations, making capital expenditures or engaging in certain transactions
with affiliates. Under the Senior Secured Credit Facility, the Company is
required to comply with a minimum interest expense coverage ratio and a maximum
leverage ratio, and these financial tests will become more restrictive in future
years. The indenture governing the Senior Subordinated Notes limits the
Company's ability to incur additional indebtedness.
The restrictions in the Senior Secured Credit Facility and the Senior
Subordinated Notes 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.
As of September 30, 2000, the Company was in compliance with all the covenants
as defined in the Senior Secured Credit Agreement.
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NEW PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued 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 that 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 its 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 has adopted FIN 44 and the application of FIN 44 did not
have a material impact on its results of operations or financial position.
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company operates 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 hedge agreements. 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 September 30, 2000, the Company had $789.3 million of variable rate debt
outstanding. The Company currently has three interest rate hedge agreements with
notional amounts totaling $220 million that fix its variable rate debt to a
fixed interest rate through September 2001. Pursuant to these agreements, the
Company pays a fixed interest rate on a portion of its outstanding debt and
receives a three-month LIBOR rate. In addition, through the acquisition of WWG,
the Company obtained three additional interest rate hedge contracts for a total
of DM 20 million
24
<PAGE>
(approximately $9.0 million). At September 30, 2000, all of the interest rate
hedge agreements had an interest rate lower than the three-month LIBOR rate
quoted by its financial institutions, as variable rate three-month LIBOR
interest rates increased after the interest rate hedge agreements became
effective. Therefore, the Company recognized a reduction in interest expense
(calculated as the difference between the interest rate in the interest rate
hedge agreements and the quoted three-month LIBOR rate) during the three and six
months ended September 30, 2000 of $589 thousand and $919 thousand,
respectively. 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 September 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.
25
<PAGE>
PART II. Other Information
---------------------------
Item 1. Legal Proceedings
The Company is party to various legal actions that arose in the ordinary
course of our business. The Company does not expect that resolution of these
legal actions will have, individually or in the aggregate, a material adverse
effect on its financial condition or results of operations.
Whistler Litigation
In 1994, the Company sold its radar detector business to Whistler
Communications 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 Corporation, alleging
willful infringement of CMI's patent for a mute function in radar detectors.
On September 26, 2000, the Federal District Court Judge granted the Company's
motion for partial summary judgment on the affirmative defense of laches, and
the case was administratively terminated. The recent decision was appealed by
CMI on October 24, 2000.
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote
The Annual Meeting of Stockholders was held on September 19, 2000 in
Burlington, Massachusetts. At such meeting, 188,999,001 shares were entitled
to vote. The table below discloses the vote with respect to each proposal:
PROPOSAL I
----------
To elect three persons to the Board of Directors of the Company:
Nominees: Joseph L. Rice, III, Brian D. Finn and William O. McCoy
<TABLE>
<CAPTION>
Number of Shares/Votes
----------------------
For Authority Withheld
--- ------------------
<S> <C> <C>
Joseph L. Rice, III 182,224,439 103,302
Brian D. Finn 181,694,563 633,178
William O. McCoy 182,229,195 98,546
</TABLE>
Proposal II
-----------
To approve an amendment to the Acterna Corporation 1994 Amended and Restated
Stock Option and Incentive Plan as described in the Proxy Statement.
For 169,997,765
Against 1,932,250
Abstain 58,842
No vote 10,338,884
Proposal III
------------
To ratify the selection of PricewaterhouseCoopers L.L.P. as the Company's
independent auditors for the current fiscal year.
For 182,229,436
Against 76,474
Abstain 21,831
26
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in the Exhibit Table of Item 601 of
Regulation S-K:
Exhibit
Number Description
------- ---------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K dated August 30, 2000
relating to the Company changing its name to Acterna Corporation.
2. The Company filed a Current Report on Form 8-K dated September 22, 2000
relating to the Company changing its CUSIP number and changing its
NASDAQ OTC trading symbol.
27
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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.
ACTERNA CORPORATION
- - - - - - - - - - - - - - - - --
Date November 14, 2000 /s/ ALLAN M. KLINE
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
Date November 14, 2000 /s/ ROBERT W. WOODBURY, JR.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
28
