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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
Commission file number 000-07438
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ACTERNA 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
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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 January 15, 2000 there were 190,711,416 shares of common stock of the
registrant outstanding.
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ACTERNA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I --FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Three and Nine Months
Ended December 31, 2000 and December 31, 1999......................... 3
Condensed Consolidated Balance Sheets as of December 31, 2000 and
March 31, 2000........................................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2000 and December 31, 1999......................... 5
Notes to Condensed Consolidated Statements............................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 41
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 43
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE................................... 43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 43
2
PART I. Financial Information
Item 1. Financial Statements
ACTERNA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended December Nine Months Ended
31, December 31,
------------------ -------------------
2000 1999 2000 1999
-------- -------- --------- --------
(In thousands, except per share
data)
Net sales............................ $324,104 $122,225 $ 837,485 $316,808
Cost of sales........................ 118,925 40,892 349,583 105,764
-------- -------- --------- --------
Gross profit......................... 205,179 81,333 487,902 211,044
Selling, general & administrative ex-
pense............................... 125,561 41,378 317,105 107,014
Product development expense.......... 40,279 16,349 105,162 41,687
Recapitalization and other related
costs............................... -- -- 9,194 13,259
Purchased incomplete technology...... -- -- 56,000 --
Amortization of intangibles.......... 32,444 3,059 76,086 4,538
-------- -------- --------- --------
Total operating expenses............. 198,284 60,786 563,547 166,498
-------- -------- --------- --------
Operating income (loss).............. 6,895 20,547 (75,645) 44,546
Interest expense..................... (27,941) (12,989) (73,734) (38,429)
Interest income...................... 765 572 2,473 1,872
Other income (expense), net.......... (1,755) (16) (2,825) (40)
-------- -------- --------- --------
Income (loss) from continuing opera-
tions before income taxes and ex-
traordinary item.................... (22,036) 8,114 (149,731) 7,949
Provision (benefit) for income tax-
es.................................. (3,730) 4,180 (9,301) 4,440
-------- -------- --------- --------
Net income (loss) from continuing op-
erations before extraordinary item.. $(18,306) $ 3,934 $(140,430) $ 3,509
Discontinued operations:
Operating income, net of income tax
provision of $591 and $8,373, re-
spectively.......................... -- 819 -- 13,361
-------- -------- --------- --------
Net income (loss) before extraordi-
nary item........................... (18,306) 4,753 (140,430) 16,870
Extraordinary item, net of income tax
benefit of $6,603................... -- -- (10,659) --
-------- -------- --------- --------
Net income (loss).................... $(18,306) $ 4,753 $(151,089) $ 16,870
======== ======== ========= ========
Income (loss) per common share--basic
Continuing operations................ $ (0.10) $ 0.02 $ (0.77) $ 0.02
Discontinued operations.............. -- 0.01 -- 0.09
Extraordinary loss................... -- -- (0.06) --
-------- -------- --------- --------
Net income (loss) per common share --
basic............................... $ (0.10) $ 0.03 $ (0.83) $ 0.11
======== ======== ========= ========
Income (loss) per common share dilut-
ed:
Continuing operations.............. $ (0.10) $ 0.02 $ (0.77) $ 0.02
Discontinued operations............ -- 0.01 -- 0.08
Extraordinary loss................. -- -- (0.06) --
-------- -------- --------- --------
Net income (loss) per common share
-- diluted........................ $ (0.10) $ 0.03 $ (0.83) $ 0.10
======== ======== ========= ========
Weighted average number of common
shares:
Basic.............................. 190,300 148,914 181,634 147,998
Diluted............................ 190,300 164,150 181,634 160,267
See notes to condensed consolidated financial statements.
3
ACTERNA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
2000 March
(Unaudited) 31, 2000
------------ --------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 71,790 $ 33,839
Accounts receivable, net............................... 211,055 78,236
Inventories:
Raw materials......................................... 49,413 11,085
Work in process....................................... 39,001 12,859
Finished goods........................................ 56,941 6,308
---------- --------
Total inventory.................................... 145,355 30,252
Deferred income taxes.................................. 29,005 21,548
Other current assets................................... 50,864 16,332
---------- --------
Total current assets.................................. 508,069 180,207
Property, plant and equipment, net....................... 87,795 27,316
Other assets:
Net assets held for sale............................... 93,425 72,601
Intangible assets, net................................. 652,971 58,508
Deferred income taxes.................................. 446 42,689
Deferred debt issuance costs, net...................... 26,939 21,382
Other.................................................. 20,039 12,135
---------- --------
$1,389,684 $414,838
========== ========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable.......................................... $ 15,207 $ --
Current portion of long-term debt...................... 17,742 7,646
Accounts payable....................................... 85,623 38,374
Accrued expenses:
Compensation and benefits............................. 67,698 35,036
Deferred revenue...................................... 24,138 13,564
Warranty.............................................. 14,447 8,297
Interest.............................................. 5,213 10,055
Taxes other than income taxes......................... 12,579 1,844
Other................................................. 31,648 7,426
Accrued income taxes................................... -- 5,703
---------- --------
Total current liabilities.......................... 274,295 127,945
Long-term debt........................................... 1,086,666 572,288
Deferred income taxes.................................... 49,143 --
Deferred compensation.................................... 57,897 11,280
Stockholders' deficit:
Common stock........................................... 1,907 1,225
Additional paid-in capital............................. 805,641 344,873
Accumulated deficit.................................... (775,018) (623,929)
Unearned compensation.................................. (110,132) (16,965)
Other comprehensive loss............................... (715) (1,879)
---------- --------
Total stockholders' deficit............................ (78,317) (296,675)
---------- --------
$1,389,684 $414,838
========== ========
See notes to condensed consolidated financial statements.
4
ACTERNA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
------------------
2000 1999
--------- -------
(In thousands)
Operating activities:
Net income (loss)........................................ $(151,089) $16,870
Adjustments for non-cash items included in net income:
Depreciation........................................... 14,700 9,103
Amortization of intangibles............................ 76,086 7,053
Amortization of inventory step-up...................... 35,750 --
Amortization of unearned compensation.................. 14,123 1,451
Amortization of deferred debt issuance costs........... 2,943 2,424
Writeoff of deferred debt issuance costs............... 10,019 --
Purchased incomplete technology........................ 56,000 --
Recapitalization and other related costs............... 9,194 --
Other.................................................. 125 84
Change in deferred income taxes.......................... (4,538) --
Change in operating assets and liabilities............... (90,710) (21,283)
--------- -------
Net cash flows provided by (used in) operating activi-
ties, net of assets acquired............................ (27,397) 15,702
--------- -------
Investing activities:
Purchases of property and equipment...................... (23,474) (12,960)
Proceeds from sale of business........................... 3,500 --
Businesses acquired in purchase transactions, net of cash
acquired................................................ (407,034) (73,394)
Other.................................................... (4,709) (3,660)
--------- -------
Net cash flows used in investing activities................ (431,717) (90,014)
--------- -------
Financing activities:
Net borrowings of debt................................... 323,015 39,595
Repayment of capital lease obligations................... (17) (341)
Capitalized debt issuance costs.......................... (18,519) --
Proceeds from issuance of common stock, net of expenses.. 199,609 3,604
--------- -------
Net cash flows provided by financing activities............ 504,088 42,858
Effect of exchange rate on cash............................ (7,023) 108
--------- -------
Increase (decrease) in cash and cash equivalents........... 37,951 (31,346)
Cash and cash equivalents at beginning of year............. 33,839 70,362
--------- -------
Cash and cash equivalents at end of period................. $ 71,790 $39,016
========= =======
See notes to condensed consolidated financial statements.
5
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 continuing 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 December 31, 2000 and March 31, 2000, and the unaudited
consolidated statements of operations and unaudited condensed consolidated
statements of cash flows for the interim periods ended December 31, 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; its
Current Report on Form 8-K dated September 22, 2000 relating to the Company
changing its CUSIP number and its NASDAQ OTC symbol; and its Current Report
on Form 8-K dated November 14, 2000 relating to the Company's press release
on its second quarter earnings.
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.
6
C. Acquisitions During Fiscal 2001
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, for a purchase price of $371.2 million.
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 $521.4 million of excess purchase
price that has been allocated on a preliminary basis between specific
intangible assets and goodwill. This excess purchase price has been
amortized using a weighted average six-year life. The final allocation of
the purchase price has not yet been completed, however, 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 our
new Senior Secured Credit Facility (see Note N. Long-Term 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, of which $3.0 million has been allocated
to deferred debt issuance costs and $3.0 million allocated to additional
paid-in capital in connection with the Rights Offering. (See Note K. Income
(Loss) Per Share).
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") for
a purchase price of approximately $166 million. 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 $5.0 million for acquired
incomplete technology. This purchased incomplete technology had not reached
technological feasibility and had no alternative future use. The Company
generated a preliminary estimate of $132.7 million of excess purchase price
that has been allocated on a preliminary basis between specific intangible
assets and goodwill that is being amortized over a weighted average six-
year life. The final allocation of the purchase price has not yet been
completed, however, 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 $100.0 million
under its Senior Secured Credit Facility (see Note N. Long-Term Debt) and
approximately $66.0 million 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 preliminary 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 preliminary total of $6.7 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 two years).
D. Acquistitions During Fiscal 2000
Sierra Design Labs
On September 10, 1999, the Company purchased the outstanding stock of
Sierra Design Labs ("Sierra") for a total purchase price of $6.3 million in
cash. The acquisition was accounted for using the purchase
7
method of accounting and resulted in $4.9 million of goodwill, which is
being amortized over ten years. The operating results of Sierra have been
included in the consolidated financial statements since September 10, 1999
and is included within the Company's Other Subsidiaries.
Applied Digital Access, Inc.
On November 1, 1999, the Company acquired all the outstanding stock of
Applied Digital Access, Inc.("ADA") for a total purchase price of
approximately $81.0 million in cash. The acquisition was accounted for
using the purchase method of accounting and resulted in $46.0 million of
goodwill which is being amortized over three years. The operating results
of ADA have been included in the consolidated financial statements since
November 1, 1999 and is included within the Company's Communications Test
segment.
E. 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".
F. 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 nine month period ended December 31,
2000 was a loss of $14.2 million, and has been deferred and included in the
balance sheet as net assets held for sale within non-current assets. The
Company's balance sheets as of December 31, 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 nine-month period ended December 31, 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. 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.
G. Extraordinary Item
In connection with the refinancing of the debt related to the WWG Merger in
the first quarter of fiscal 2001, 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 writeoff of the unamortized
deferred debt issuance costs that originated at the time of the
recapitalization of the Company in May of 1998.
H. Recapitalizaton
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.
8
I. Recapitalization and Other Related Costs
Recapitalization and other related costs from continuing operations during
the first nine 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 nine 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. Taxes
The effective tax rate for the three months ended December 31, 2000 was
16.9% as compared to 40% for the same period last year. The principal
reasons for the decrease in the effective tax rate were: (1) additional
non-deductible goodwill amortization expected in the current fiscal year as
a result of the WWG Merger; and (2) expected changes in the amount of
income earned in various countries with tax rates higher than the U.S.
federal rate.
The effective tax rate for the nine months ended December 31, 2000 was 6.2%
as compared to 40% for the same period last year. The principal reasons for
the decrease in the effective tax rate were: (1) the $56 million non-
deductible charge for purchased incomplete technology in connection with
the WWG Merger and Cheetah acquisition; (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.
9
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
K. Income (Loss) Per Share
Income (loss) per share is calculated as follows (In thousands, except per
share data):
Three Months
Ended, Nine Months Ended
December 31, December 31,
----------------- ------------------
2000 1999 2000 1999
-------- ------- --------- -------
Net income (loss):
Continuing operations................. $(18,306) $ 3,934 $(140,430) $ 3,509
Discontinued operations............... -- 819 -- 13,361
Extraordinary item.................... -- -- (10,659) --
-------- ------- --------- -------
Net income (loss)..................... $(18,306) $ 4,753 $(151,089) $16,870
======== ======= ========= =======
BASIC:
Common stock outstanding, beginning of
period............................... 190,070 121,429 122,527 120,665
Weighted average common stock issued
during the period.................... 230 632 53,578 645
-------- ------- --------- -------
190,300 122,061 176,105 121,310
Bonus element adjustment related to
rights offering...................... -- 26,853 5,529 26,688
-------- ------- --------- -------
Weighted average common stock out-
standing, end of period.............. 190,300 148,914 181,634 147,998
======== ======= ========= =======
Income (loss) per common share:
Continuing operations................. $ (0.10) $ 0.02 $ (0.77) $ 0.02
Discontinued operations............... -- 0.01 -- 0.09
Extraordinary item.................... -- -- (0.06) --
-------- ------- --------- -------
Net income (loss) per common share.... $ (0.10) $ 0.03 $ (0.83) $ 0.11
======== ======= ========= =======
DILUTED:
Common stock outstanding, beginning of
period............................... 190,070 121,429 122,527 120,665
Weighted average common stock issued
during the period.................... 230 632 53,578 645
Weighted average of dilutive potential
common stock......................... -- 12,488 -- 10,056
-------- ------- --------- -------
190,300 134,549 176,105 131,366
Bonus element adjustment related to
rights offering...................... -- 29,601 5,529 28,901
-------- ------- --------- -------
Weighted average common stock out-
standing, end of period.............. 190,300 164,150 181,634 160,267
======== ======= ========= =======
Income (loss) per common share:
Continuing operations................. $ (0.10) $ 0.02 $ (0.77) $ 0.02
Discontinued operations............... -- 0.01 -- 0.08
Extraordinary loss.................... -- -- (0.06) --
-------- ------- --------- -------
Net income (loss) per common share.... $ (0.10) $ 0.03 $ (0.83) $ 0.10
======== ======= ========= =======
- --------
As of December 31, 2000 and 1999, the Company had options outstanding to
purchase 39.7 million and 32.0 million shares of common stock, respectively.
10
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
stockholders as a result of shares issued in connection with the WWG
Merger, the Company made a rights offering to all its common stock
stockholders (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 stockholders 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 both the sale of common stock to the CDR Funds and
the sale of common stock in the Rights Offering as a rights offer. Since
the common stock has been offered to all stockholders 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 and nine month periods ended December 31, 2000, the Company
excluded from its diluted weighted average shares outstanding the effect of
the weighted average common stock equivalents which totaled 12.7 million
shares and 14.5 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.
L. SEGMENT INFORMATION
Net sales and earnings before interest, taxes and amortization ("EBITA")
for the three and nine months ended December 31, 2000 and 1999 and total
assets as of December 31, 2000 and 1999 are shown below (in thousands):
Three Months
Ended Nine Months Ended
December 31, December 31,
----------------- ------------------
SEGMENT 2000 1999 2000 1999
------- --------- ------- --------- --------
Communications test segment:
Net sales............................ $ 296,244 $96,923 $ 754,100 $241,442
EBITA................................ 41,139 20,745 100,429 45,852
Total assets......................... 1,147,015 180,275 1,147,015 180,275
Inflight information systems segment:
Net sales............................ 19,079 17,257 57,408 53,055
EBITA................................ 3,870 4,030 12,085 16,471
Total assets......................... 45,099 40,074 45,099 40,074
Other subsidiaries:
Net sales............................ 8,781 8,045 25,977 22,311
EBITA................................ 2,834 1,687 7,113 5,398
Total assets......................... 12,282 11,965 12,282 11,965
Discontinued operations:
Net assets held for sale............. 93,425 N/A 93,425 N/A
Total assets......................... 93,425 75,631 93,425 75,631
11
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
SEGMENT 2000 1999 2000 1999
------- --------- -------- --------- --------
Corporate:
Income (loss) before interest
and taxes..................... (1,504) (469) (4,563) (133)
Total assets................... 91,863 99,052 91,863 99,052
Total company:
Net sales...................... $ 324,104 $122,225 $ 837,485 $316,808
EBITA.......................... 46,339 25,993 115,064 67,588
Total assets................... 1,389,684 406,997 1,389,684 406,997
The following are excluded from the calculation of EBITA:
Recapitalization and other
costs........................... -- -- 9,194 13,259
Purchased incomplete technology.. -- -- 56,000 --
Amortization of unearned compen-
sation.......................... 6,157 485 14,123 1,103
Amortization of inventory step-
up.............................. 562 -- 35,750 --
Other (a) ....................... 2,036 -- 2,380 --
(a) During the third quarter of fiscal 2001, the Company recorded a charge of
$2,036 within selling, general and administrative expense that was
related to the writeoff of all expenses capitalized in connection with
the Company's registration statement on Form S-1, which the Company filed
for a potential common stock offering in July 2000. The Company is
amending this registration statement by converting it to a universal
shelf registration statement on Form S-3 under which, upon effectiveness,
the Company may offer from time to time up to $1 billion of equity or
debt securities.
M. INTANGIBLE ASSETS
Intangible assets acquired primarily from business acquisitions are
summarized as follows:
December 31, March 31,
2000 2000
------------ ---------
Product technology.................................... $ 221,441 $ 9,236
Excess of cost over net assets acquired............... 411,939 67,328
Other intangible assets............................... 118,517 4,177
---------- --------
..................................................... 751,897 80,741
Less accumulated amortization......................... 98,926 22,233
---------- --------
Total................................................. $ 652,971 $ 58,508
========== ========
N. LONG-TERM DEBT
Long-term debt is summarized below:
December 31, March 31,
2000 2000
------------ ---------
Senior Secured Credit Facility........................ $ 802,501 $304,861
Senior Subordinated Notes............................. 275,000 275,000
Capitalized leases and other debt..................... 26,907 73
---------- --------
Total debt............................................ 1,104,408 579,934
Less current portion.................................. 17,742 7,646
---------- --------
Long-term debt........................................ $1,086,666 $572,288
========== ========
12
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 as of December 31, 2000 was $38 million and 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. At December 31, 2000, the Company had $195
million notional amount of debt subject to interest rate hedge agreements
at an average annual fixed rate of 5.785%. In addition, through the
acquisition of WWG, the Company obtained three additional interest rate
hedge contracts for a total of DM 20 million (approximately $9.0 million).
At December 31, 2000, all of the interest rate hedge agreements had an
interest rate lower than the three-month LIBOR quoted by the respective
financial institution counterparties, as variable rate three-month LIBOR
interest rates increased after the swap interest rate hedge agreements
became effective.
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 December 31, 2000, the Company was in compliance with all the
covenants as defined in the credit agreement for the Senior Secured Credit
Facility.
13
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
O. STOCKHOLDERS' DEFICIT
The following is a summary of the change in stockholders' deficit for the
period ended December 31, 2000:
Number
Of
Shares Additional Other Total
Common Common Paid-In Accumulated Unearned Comprehensive Stockholders'
Stock Stock Capital Deficit Compensation Loss Deficit
------- ------ ---------- ----------- ------------ ------------- -------------
Balance, March 31,
2000................... 122,527 $1,225 $344,873 $(623,929) $ (16,965) $(1,879) $(296,675)
Net loss current year... (151,089) (151,089)
Translation adjustment.. 1,164 1,164
---------
Total comprehensive
loss................... (149,925)
---------
Adjustment to unearned
compensation........... (1,774) 1,763 (11)
Issuance of common stock
to CDR Funds........... 43,125 431 172,069 172,500
Issuance of common stock
rights offering, net of
fees................... 4,983 50 16,882 16,932
Issuance of common stock
to WWG stockholders.... 14,987 150 129,850 130,000
Stock option expense.... 12,254 12,254
Conversion of Cheetah
stock options.......... 900 900
Amortization of unearned
compensation-continuing
operations............. 14,123 14,123
Amortization of unearned
compensation-discontin-
ued operations......... 1,072 1,072
Exercise of stock option
and other issuances.... 5,077 51 10,126 10,177
Unearned compensation
from stock option
grants................. 103,404 (110,125) (6,721)
Tax benefit from exer-
cise of stock options.. 17,057 17,057
------- ------ -------- --------- --------- ------- ---------
Balance, December 31,
2000................... 190,699 $1,907 $805,641 $(775,018) $(110,132) $ (715) $ (78,317)
======= ====== ======== ========= ========= ======= =========
14
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 public market on the dates of the grants.
During the first nine months of fiscal 2001, the Company issued
approximately 12.4 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 public market on the dates of
grants. The Company, therefore, incurred a charge of approximately $110.1
million for the difference between the closing price in the public market
and the exercise price of the options and recorded the charge as unearned
compensation within stockholders' equity. This unearned compensation charge
will be amortized to expense over the options' vesting periods, of up to
five years.
The Board of Directors voted on October 23, 2000 to issue non-qualified
stock options based on the price in the public market as of the day prior
to the date of the grant for all stock options issued after that date.
Q. 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
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.
R. 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
15
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
S. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The column captioned "Pro Forma" set forth in these Unaudited Pro Forma
Condensed Consolidated Financial Statements gives effect to the following:
. the merger with WWG (after giving effect to certain divestitures by WWG
that occurred prior to our merger with WWG);
. the sales, in connection with the WWG merger, of 43,125,000 newly-issued
but unregistered shares of our common stock to CDR Fund V and CDR Fund
VI, and the concurrent establishment of our new Senior Secured Credit
Facility;
. the sale of 4,983,048 newly-issued registered shares of common stock to
stockholders of record on April 20, 2000 (other than CDR Fund V) in the
Rights Offering completed on June 30, 2000;
. the acquisition of substantially all of the assets and specified
liabilities of Cheetah Technologies (after giving effect to the sale of a
building and the exclusion of specified assets and liabilities that were
not acquired);
. the acquisitions of Sierra and ADA; and
. the divestiture of DataViews.
The pro forma adjustments are based on currently available information and
certain adjustments that management believes are reasonable. This pro forma
financial information is presented for informational purposes only and does
not necessarily represent what our financial position or results of
operations would have been if these transactions had in fact occurred at
the beginning of the periods presented and is not necessarily indicative of
our financial position or results of operations for any future period.
The condensed, unaudited pro forma statement of operations data listed
below is for the nine months ended December 31, 1999 (in thousands except
per share data):
Nine Months
Ended
December 31,
1999
------------
Net sales........................................................ $728,619
Net operating loss before extraordinary item..................... (78,502)
Loss per share--basic and diluted:
Net operating loss before extraordinary item................... $ (0.43)
16
The unaudited, pro forma condensed consolidating statements of operations
listed below are for the nine months ended December 31, 2000 and for the
twelve months ended March 31, 2000:
ACTERNA CORPORATION
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Nine Months Ended December 31, 2000
(In thousands, except per share data)
Pro Amortization Other
Pro Forma of Pro Forma
DataViews Forma Cheetah Intangibles Adjustments
Acterna Divestiture WWG (3) (4) (5) Pro Forma
--------- ----------- ------- ------- ------------ ----------- ---------
Net sales............... $ 837,485 $(853) $76,918 $22,518 -- -- $ 936,068
Cost of sales........... 349,583 (272) 28,272 11,001 -- -- 388,584
--------- ----- ------- ------- -------- ------- ---------
Gross profit............ 487,902 (581) 48,646 11,517 -- -- 547,484
Selling, general & ad-
ministrative expense... 317,105 (587) 30,919 7,337 -- -- 354,774
Product development ex-
pense.................. 105,162 (245) 11,245 2,884 -- -- 119,046
Recapitalization and
other related costs.... 9,194 -- -- -- -- -- 9,194
Purchased incomplete
technology............. 56,000 -- 1,603 -- -- -- 57,603
Amortization of intangi-
bles................... 76,086 -- 2,352 -- 18,621 -- 97,059
--------- ----- ------- ------- -------- ------- ---------
Total operating ex-
penses................. 563,547 (832) 46,119 10,221 18,621 -- 637,676
--------- ----- ------- ------- -------- ------- ---------
Operating income
(loss)................. (75,645) 251 2,527 1,296 (18,621) -- (90,192)
Interest expense........ (73,734) -- (3,710) -- -- (11,080) (88,524)
Interest income......... 2,473 -- 63 -- -- -- 2,536
Other income (expense).. (2,825) 55 (2,483) -- -- -- (5,253)
--------- ----- ------- ------- -------- ------- ---------
Income (loss) from con-
tinuing operations be-
fore income taxes...... (149,731) 306 (3,603) 1,296 (18,621) (11,080) (181,433)
Provision (benefit) for
income taxes........... (9,301) (26) 7,475 518 (4,877) (4,432) (10,643)
--------- ----- ------- ------- -------- ------- ---------
Net income (loss) from
continuing operations.. $(140,430) $ 332 (11,078) $ 778 $(13,744) $(6,648) $(170,790)
========= ===== ======= ======= ======== ======= =========
Income (loss) per share
from continuing opera-
tions:
- - Basic................. $ (0.77) $ (0.90)
- - Diluted............... $ (0.77) $ (0.90)
Weighted average number
of shares (6):
- - Basic................. 181,634 188,724
- - Diluted............... 181,634 188,724
17
ACTERNA CORPORATION
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Twelve Months Ended March 31, 2000
(In thousands except per share data)
Other Pro Amortization Other Pro
Acquisitions/ Pro Forma of Forma
Divestitures Forma Cheetah Intangibles Adjustments
Acterna (1) WWG (2) (3) (4) (5) Pro Forma
-------- ------------- -------- ------- ------------ ----------- ---------
Net sales............... $453,239 $20,474 $475,680 $46,396 $ -- $ -- $ 995,789
Cost of sales........... 157,090 9,557 179,262 22,569 -- 368,478
-------- ------- -------- ------- -------- -------- ---------
Gross profit............ 296,149 10,917 296,418 23,827 -- 627,311
-------- ------- -------- ------- -------- -------- ---------
Selling, general & ad-
ministrative expense... 156,499 8,804 175,446 16,398 -- 357,147
Product development ex-
pense.................. 61,172 4,855 69,126 6,049 -- 141,202
Recapitalization and
other related costs.... 27,942 -- -- -- -- 27,942
Restructuring and other
non-recurring charges.. -- -- 4,400 -- -- 4,400
Amortization of intangi-
bles................... 8,789 -- 18,765 -- 99,413 -- 126,967
-------- ------- -------- ------- -------- -------- ---------
Total operating ex-
penses................. 254,402 13,659 267,737 22,447 99,413 -- 657,658
-------- ------- -------- ------- -------- -------- ---------
Operating income
(loss)................. 41,747 (2,742) 28,681 1,380 (99,413) -- (30,347)
Interest expense........ (51,916) -- (20,497) -- (35,817) (108,230)
Interest income......... 2,354 -- 769 -- -- 3,123
Other income (expense),
net.................... (68) 57 1,665 -- -- 1,654
-------- ------- -------- ------- -------- -------- ---------
Income (loss) from con-
tinuing operations be-
fore income taxes and
extraordinary item..... (7,883) (2,685) 10,618 1,380 (99,413) (35,817) (133,800)
Provision (benefit) for
income taxes........... (1,169) 121 9,093 552 (16,961) (14,327) (22,691)
-------- ------- -------- ------- -------- -------- ---------
Net income (loss) from
continuing operations.. $ (6,714) $(2,806) $ 1,525 $ 828 $(82,452) $(21,490) $(111,109)
======== ======= ======== ======= ======== ======== =========
Income (loss) per share
from continuing opera-
tions:
- - Basic................. $ (0.05) $(0.60)
- - Diluted............... $ (0.05) $(0.60)
Weighted average number
of shares (6):
- - Basic................. 148,312 184,646
- - Diluted............... 148,312 184,646
18
1. Other Acquisitions/Divestitures as of March 31, 2000 (in thousands):
Pro Forma
Other
Acquisitions/
Sierra ADA DataViews Divestitures
------- ------- --------- -------------
Net sales............................ $ 1,702 $24,594 $(5.822) $20,474
Cost of sales........................ 1,242 9,341 (1,026) 9,557
------- ------- ------- -------
Gross profit......................... 460 15,253 (4,796) 10,917
------- ------- ------- -------
Selling, general & administrative
expense............................. 1,337 10,920 (3,453) 8,804
Product development expense.......... 377 6,068 (1,590) 4,855
------- ------- ------- -------
Total operating expenses......... 1,714 16,988 (5,043) 13,659
------- ------- ------- -------
Operating income (loss).............. (1,254) (1,735) 247 (2,742)
Other income (expense), net.......... 2 -- 55 57
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes and
extraordinary item.................. (1,252) (1,735) 302 (2,685)
Provision (benefit) for income
taxes............................... -- -- 121 121
------- ------- ------- -------
Net income (loss) from continuing
operations.......................... $(1,252) (1,735) 181 $(2,806)
======= ======= ======= =======
19
2. Pro Forma WWG
Set forth below are the unaudited pro forma results of operations for WWG
for the twelve months ended March 31, 2000. The WWG results of operations have
been adjusted to exclude the historical results of operations for certain
divestitures by WWG that occurred prior to the merger with Acterna.
WWG's fiscal year ended on September 30. The WWG historical information for
the twelve months ended March 31, 2000 has been derived from the Statement of
Operations for the year ended September 30, 1999 included in WWG's Form 10-K
for the year ended September 30, 1999, then adding the Statement of Operations
for the six months ended March 31, 2000, included in WWG's Form 10-Q for the
period ended March 31, 2000, and then subtracting the Statement of Operations
for the six months ended March 31, 1999, included in WWG's Form 10-Q for the
period ended March 31, 1999. (in thousands).
Twelve Months Ended
March 31, 2000
--------------------------------
Total
Pro
WWG WWG Forma
Historical Divestitures WWG
---------- ------------ --------
Sales....................................... $519,059 $(43,379) $475,680
Cost of Sales............................... 205,598 (26,336) 179,262
-------- -------- --------
Gross Profit................................ 313,461 (17,043) 296,418
Selling, general and administrative
expense.................................... 188,711 (13,265) 175,446
Product development expense................. 71,055 (1,929) 69,126
Restructuring and other non-recurring
charges.................................... 4,400 -- 4,400
Amortization of intangibles................. 18,765 -- 18,765
-------- -------- --------
Total operating expenses.................... 282,931 (15,194) 267,737
-------- -------- --------
Operating Income........................ 30,530 (1,849) 28,681
Interest expense............................ (20,497) -- (20,497)
Interest income............................. 769 -- 769
Other income, net........................... 1,584 81 1,665
-------- -------- --------
Income (loss) from continuing operations
before income taxes........................ 12,386 (1,768) 10,618
Provision (benefit) for income taxes........ 9,773 (680) 9,093
-------- -------- --------
Net (loss) income from continuing
operations................................. $ 2,613 $ (1,088) $ 1,525
======== ======== ========
20
3. Pro Forma Cheetah and Purchase Accounting Relating to the Cheetah
Acquisition
Set forth below are the unaudited pro forma results of operations for
Cheetah for the period from April 1, 2000 through August 23, 2000 and for the
twelve months ended March 31, 2000. The Cheetah results have been adjusted to
reflect the elimination of interest expense on the debt that was not assumed
in the Cheetah acquisition and the recording of an income tax provision at
Acterna's effective statutory rate of 40% as Cheetah was not a tax paying
entity prior to the acquisition (in thousands).
For the period For the
April 1, 2000 - Twelve Months Ended
August 23, 2000 March 31, 2000
-------------------------------- --------------------------------
Cheetah Cheetah Cheetah Cheetah
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
---------- ----------- --------- ---------- ----------- ---------
Net sales............... $22,518 $ -- $22,518 $46,396 $ -- $46,396
Cost of sales........... 11,001 -- 11,001 22,569 -- 22,569
------- ------- ------- ------- ------- -------
Gross profit............ 11,517 -- 11,517 23,827 -- 23,827
Selling, general and
administrative
expense................ 6,976 (111)(a) 7,337 15,487 (279)(a) 16,398
472 (b) 1,190(b)
Product development
expense................ 2,884 -- 2,884 6,049 -- 6,049
------- ------- ------- ------- ------- -------
Total operating
expense................ 9,860 361 10,221 21,536 911 22,447
------- ------- ------- ------- ------- -------
Operating income
(loss)............... 1,657 (361) 1,296 2,291 (911) 1,380
Interest expense........ (601) 601(c) -- (1,908) 1,908(c) --
Other................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,056 240 1,296 383 997 1,380
------- ------- ------- ------- ------- -------
Provision (benefit) for
income taxes........... -- 518(d) 518 -- 552(d) 552
------- ------- ------- ------- ------- -------
Net income (loss)....... $ 1,056 $ (278) $ 778 $ 383 $ 445 $ 828
======= ======= ======= ======= ======= =======
- --------
(a) Reflects the reduction in annual depreciation expense associated with the
building that was sold prior to the Cheetah acquisition
(b) Reflects the anticipated rental expense associated with the building that
was sold prior to the Cheetah acquisition and then leased back to Acterna
under an operating lease arrangement upon the consummation of the Cheetah
acquisition
(c) Reflects the elimination of interest expense on the debt that was not
assumed in the Cheetah acquisition
(d) Reflects the application of an effective statutory income tax rate of 40%
to Cheetah's historical income from continuing operations before income
taxes of $1,056 and $383, the net increase in facilities cost of $361 and
$911, and the elimination in interest expense of $601 and $1,908, for the
periods presented
4. Purchase Accounting Relating to the WWG Merger and the Cheetah Acquisition
The estimated incremental increase related to the amortization of the
estimated intangible assets is as follows (in thousands):
For the For the
Nine Months Ended Twelve Months Ended
December 31, 2000 March 31, 2000
----------------- -------------------
Pro forma amortization expense related
to WWG................................. $65,181 $ 86,908
Pro forma amortization expense related
to Cheetah............................. 16,585 22,089
Pro forma amortization of other
acquisitions' intangible assets........ -- 9,181
Less WWG historical amortization of
intangible assets...................... (2,352) (18,765)
Less Acterna historical amortization
expense related to WWG................. (52,869) --
Less Acterna historical amortization
expense related to Cheetah............. (7,924) --
------- --------
$18,621 $ 99,413
======= ========
21
5. Restructuring of Bank Debt
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. (See Note N. Long-Term Debt) In conjunction with the
acquisition of Cheetah the Company borrowed approximately $100.0 million
under the Revolving Credit Facility.
The estimated incremental increase to interest expense due to the
restructuring of the debt and the incremental borrowing is as follows:
For the For the
Nine Months Ended Twelve Months Ended
December 31, 2000 March 31, 2000
----------------- -------------------
(in thousands)
Pro Forma Interest Expense from the
Senior Secured Credit Facility:
Revolving Credit Facility, $100
million at an interest rate of 2.75%
plus LIBOR (9.5%).................... $ 7,125 $ 9,500
Tranche A term loan, $75 million at an
interest rate of 2.75% plus LIBOR
(9.5%)............................... 5,344 7,125
Tranche B term loan, $510 million at
an interest rate of 3.25% plus LIBOR
(10%)................................ 38,250 51,000
German term loans, approximately $100
million at an interest rate of 2.75%
plus LIBOR (9.5%).................... 7,125 9,500
------- -------
$57,844 $77,125
------- -------
Pro Forma Interest Expense from
amortization of debt issuance costs
relating to the Senior Secured Credit
Facility:
Debt issuance costs related to the
Revolving Credit Facility (6 year
amortization)...................... 283 377
Debt issuance costs related to the
Tranche A term loan (6 year
amortization)...................... 213 284
Debt issuance costs related to the
Tranche B term loan (7.5 year
amortization)...................... 1,156 1,541
------- -------
1,652 2,202
------- -------
Historical Interest Expense:
Historical interest expense related to
the WWG retired debt................. (2,910) (20,497)
Historical interest expense related to
the Senior Secured Credit Facility... (43,790) (21,121)
Historical interest expense for the
amortization of the debt issuance
costs related to the retired debt.... (400) (1,892)
Historical interest expense for the
amortization of the debt issuance
costs related to the Senior Secured
Credit Facility for the period from
May 23, 2000 to December 31, 2000.... (1,316) --
------- -------
(48,416) (43,510)
------- -------
Incremental Pro Forma Interest
Expense.............................. $11,080 $35,817
======= =======
22
ACTERNA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Weighted Average Number of Common Shares
For the For the
Nine Months Ended Twelve Months Ended
December 31, 2000 March 31, 2000
----------------- -------------------
( in thousands)
Common shares outstanding beginning of
period............................... 122,527 120,665
Weighted average common shares issued
during the period.................... 3,102 886
Issuance of our common shares in the
WWG acquisition...................... 14,987 14,987
Sale of our common shares to CDR Fund
V and CDR Fund VI in connection with
the WWG acquisition.................. 43,125 43,125
Sale of our common shares in the
Rights Offering...................... 4,983 4,983
------- -------
Pro forma weighted average number of
shares............................... 188,724 184,646
======= =======
23
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 reports its results of continuing 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.
In July 2000, the Company filed a registration statement on Form S-1 for a
potential common stock offering. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities.
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 a preliminary estimate of
$132.7 million of excess purchase price that will be amortized over a weighted
average 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 for a purchase price of $371.2 million. 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 December 31, 2000,
CDR Fund V and CDR Fund VI, the Company's controlling stockholders,
collectively hold approximately 81% 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.
24
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 nine month periods ended December 31, 2000 have
been deferred and included in the balance sheet as net assets held for sale
within non-current assets. The segment's results of operations including net
sales, operating costs and expenses and income taxes for the three and nine
month periods ended December 31, 1999 have been reclassified in the
accompanying statements of operations as discontinued operations. The
Company's balance sheets as of December 31, 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 nine-month period ended December 31, 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 loss for the
segment for the nine-month period ended December 31, 2000 was $14.2 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.
RESULTS OF OPERATIONS
For the Three Months Ended December 31, 2000 as Compared to Three Months Ended
December 31, 1999 on a Consolidated Basis
Net sales. For the three months ended December 31, 2000 consolidated net
sales increased $201.9 million to $324.1 million as compared to $122.2 million
for the three months ended December 31, 1999. The increase occurred within all
business units, though primarily in the communications test segment. Of the
$201.9 million increase, $199.3 million was attributable to businesses within
the communications test segment, of which 13.0% of the increase was related to
historical communications test business; 6.6% was attributable to the
additional sales from Applied Digital Access, Inc. ("ADA"), which was acquired
in November 1999; 73.7% was attributable to the acquisition of WWG; and 6.7%
was attributable to the acquisition of Cheetah.
Gross profit. Consolidated gross profit increased $123.8 million to $205.2
million or 63.3% of consolidated net sales for the three months ended December
31, 2000, as compared to $81.3 million or 66.5% of consolidated net sales for
the three months ended December 31, 1999. The decrease in gross margin as a
percent of sales is, in part, a result of products sold by WWG, Cheetah, and
ADA which 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 as well as increased product costs in its commercial
aviation products.
Operating expenses. Operating expenses from continuing operations consist
of selling, general and administrative expense; product development expense;
and amortization of intangibles. Total operating expenses were $198.3 million
or 61.2% of consolidated net sales for the three months ended December 31,
2000, as compared to $60.8 million or 49.7% of consolidated net sales for the
three months ended December 31, 1999. 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 relating to
rebranding, severance, and additional consultants hired for the integration of
WWG with the Company's communications test segment.
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 the closing price in the public market on the date of
issuance, is included in both cost of sales ($2.1 million and $0.1 million)
and operating expenses ($4.1 million and $0.4 million) from continuing
operations (for the three months ending December 31, 2000 and
25
1999, respectively). The amortization of unearned compensation during the
third quarter of fiscal 2001 and fiscal 2000 was $6.2 million and $0.5
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 $125.6 million or 38.7% of
consolidated sales for the three months ended December 31, 2000, as compared
to $41.4 million or 33.9% of consolidated net sales for the three months ended
December 31, 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. In
addition, the Company recorded a charge of $2.0 million related to the
writeoff of all charges capitalized in connection with the Company's
registration statement on Form S-1, which the Company filed in July 2000 for a
potential common stock offering. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities.
Product development expense was $40.3 million or 12.4% of consolidated net
sales for the three months ended December 31, 2000 as compared to $16.3
million or 13.4% of consolidated sales for the same period a year ago. The
dollar increase is a direct result of the WWG Merger and the acquisition of
Cheetah.
Amortization of intangibles was $32.4 million for the three months ended
December 31, 2000, as compared to $3.1 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 income was $6.9 million for the three
months ended December 31, 2000 as compared to income of $20.5 million or 16.8%
of consolidated net sales for the same period a year ago. The change was a
result of the additional amortization expense, as well as expenses relating to
the integration of WWG with the Company's communications test segment.
Interest. Interest expense, net of interest income, was $27.2 million for
the three months ended December 31, 2000 as compared to $12.4 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 December 31, 2000
was 16.9% as compared to 40% for the same period last year. The principal
reasons for the decrease in the effective tax rate were: (1) additional non-
deductible goodwill amortization expected in the current fiscal year as a
result of the WWG Merger; and (2) 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 $18.3 million or a $0.10 loss per share on
a diluted basis for the three months ended December 31, 2000 as compared to
net income of $4.8 million or $0.03 per share on a diluted basis for the same
period a year ago. The loss was attributable to the 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 and additional interest expense.
The backlog at December 31, 2000, was $375.5 million as compared to $180.4
million at March 31, 2000, primarily the result of the acquisitions of WWG and
Cheetah.
Nine Months Ended December 31, 2000 as Compared to Nine Months Ended December
31, 1999 on a Consolidated Basis
Net sales. For the nine months ended December 31, 2000, consolidated net
sales increased $520.7 million or 164.4% to $837.5 million as compared to
$316.8 million for the nine months ended December 31, 1999. Of
26
the $520.7 million increase, $512.7 million was attributable to businesses
within the communications test segment, of which 18.6% of the increase was
related to historical communications test business; 7.3% was attributable to
the additional sales from ADA, ; 70.0% was attributable to the acquisition of
WWG; and 4.1% was attributable to the acquisition of Cheetah.
Gross profit. Consolidated gross profit increased $276.9 million to $487.9
million or 58.3% of consolidated net sales for the nine months ended December
31, 2000 as compared to $211.0 million or 66.6% of consolidated net sales for
the nine months ended December 31, 1999. Excluding the $35.8 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 62.5% of
consolidated net sales for the nine months ended December 31, 2000. The
decrease in gross margin as a percentage of sales is, in part, a result of
products sold by WWG, Cheetah and ADA that have a lower gross margin than the
Company's primary products.
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 $563.5 million or
67.3% of consolidated net sales for the nine months ended December 31, 2000,
as compared to $166.5 million or 52.6% of consolidated net sales for the nine
months ended December 31, 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 $496.3 million or 59.3% of
consolidated net sales and $152.2 million or 48.0% of consolidated net sales
for the nine months ended December 31, 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.
Amortization of unearned compensation, which relates to the issuance of
non-qualified stock options to employees and non-employee directors at an
exercise price lower than fair market value (defined as the closing price in
the public market on the date of issuance), is included in both cost of sales
($4.7 million and $0.3 million) and operating expenses ($9.4 million and $0.8
million) from continuing operations (for the nine months ending December 31,
2000 and 1999, respectively). The amortization of unearned compensation during
the first nine months of fiscal 2001 and fiscal 2000 was $14.1 million and
$1.1 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 $317.1 million or 37.9% of
consolidated net sales for the nine months ended December 31, 2000 as compared
to $107.0 million or 33.8% of consolidated net sales for the nine months ended
December 31, 1999. The percentage increase is related to rebranding,
severance, and additional consultants hired for the integration of WWG with
the Company's communications test segment. In addition, during the third
quarter of fiscal 2001, the Company recorded a charge of $2.0 million related
to the writeoff of all expenses capitalized in connection with the Company's
registration statement on Form S-1, which the Company filed for a potential
common stock offering in July 2000. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities.
Product development expense was $105.2 million or 12.6% of consolidated net
sales for the nine months ended December 31, 2000 as compared to $41.7 million
or 13.2% of consolidated sales for the same period a year ago. The dollar
increase is a result of the WWG Merger and the acquisition of Cheetah.
Recapitalization and other related costs from continuing operations were
$9.2 million and $13.3 million at December 31, 2000 and December 31, 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
27
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 $76.1 million for the nine months ended
December 31, 2000, as compared to $4.5 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.
Operating income (loss). Operating loss was $75.6 million for the nine
months ended December 31, 2000 as compared to operating income of $44.5
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 $71.3 million for
the nine months ended December 31, 2000 as compared to $36.6 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 nine months ended December 31, 2000
was 6.2% as compared to 40% for the same period last year. The principal
reasons for the decrease in the effective tax rate were: (1) the $56 million
non-deductible charge for purchased incomplete technology in connection with
the WWG Merger and Cheetah acquisition; (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 $151.1 million or a $0.83 loss per share on
a diluted basis for the nine months ended December 31, 2000 as compared to net
income of $16.9 million or $0.10 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.
28
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 L. 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):
Three Months
Ended Nine Months Ended
December 31, December 31,
----------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
SEGMENT
Communications test segment:
Bookings.............................. $309,154 $112,256 $781,766 $268,656
Net sales............................. 296,244 96,923 754,100 241,442
EBITA................................. 41,139 20,745 100,429 45,852
Inflight information systems segment:
Bookings.............................. 20,572 18,177 59,425 53,938
Net sales............................. 19,079 17,257 57,408 53,055
EBITA................................. 3,870 4,030 12,085 16,471
Other subsidiaries:
Bookings.............................. 8,810 7,957 24,421 23,786
Net sales............................. 8,781 8,045 25,977 22,311
EBITA................................. 2,834 1,687 7,113 5,398
Three and Nine Months Ended December 31, 2000 Compared to Three and Nine
Months Ended December 31, 1999 -- Communications Test Products
Bookings for communications test products increased to $309.2 million for
the three months ended December 31, 2000 as compared to $112.3 million for the
same period a year ago. For the nine months ended December 31, 2000, bookings
for communications test products increased to $781.8 million as compared to
$268.7 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 $296.2 million for the three
months ended December 31, 2000 as compared to $96.9 million for the same
period a year ago. For the nine months ended December 31, 2000, net sales of
communications test products were $754.1 million as compared to $241.4 million
for the nine months ended December 31, 1999. The increase was due to the
additional net sales from the WWG Merger and the acquisitions of Cheetah and
ADA. The increase is related to the following portions of the communications
test segment: 43.7% of the increase was related to the Company's historical
communications test business; 5.0% was attributable to the additional sales
from ADA; 48.2% was attributable to the acquisition of WWG; and 2.8% was
attributable to the acquisition of Cheetah.
During the third quarter of fiscal 2001 and on a year-to-date basis, sales
of optical transport products were $104.6 million and $278.7 million,
respectively; sales of cable networks were $40.8 million and $88.7 million,
respectively; and sales of telecommunications systems and software products
were $23.0 million and $68.8 million, respectively; and $127.8 million and
$317.9 million, respectively, in other products, as compared to the same
period last year, primarily due to the acquisitions.
EBITA for the communications test products increased to $41.1 million for
the three months ended December 31, 2000 as compared to $20.7 million for the
same period a year ago. For the nine months ended
29
December 31, 2000, EBITA increased to $100.4 million as compared to $45.9
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 Nine Months Ended December 31, 2000 Compared to Three and Nine
Months Ended December 31, 1999 -- Inflight Information Systems
Bookings for the inflight information systems products increased 13.2% to
$21.0 million for the three months ended December 31, 2000 as compared to
$18.2 million for the same period a year ago. For the nine months ended
December 31, 2000, bookings for this segment increased 10.2% to $59.4 million
as compared to $53.9 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 10.6% to $19.1
million for the three months ended December 31, 2000 as compared to $17.3
million for the three months ended December 31, 1999. For the nine months
ended December 31, 2000, net sales for this segment increased 8.2% to $57.4
million as compared to $53.1 million for the same period a year ago. The
increase was principally due to revenue recognized from the increased sales of
general aviation products.
EBITA for the inflight information systems products decreased 4.0% to $3.9
million for the three months ended December 31, 2000 as compared to $4.0
million for the same period a year ago. For the nine months ended December 31,
2000 EBITA for this segment decreased 26.6% to $12.1 million as compared to
$16.5 million for the same period a year ago. The EBITA decrease is due in
part due to lower earnings from the sale of general aviation products, which
carries a lower gross margin than commercial aviation products, as well as
increased product costs in its commercial aviation products.
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 $38.0 million
during the nine months ended December 31, 2000.
Working capital. For the nine months ended December 31, 2000, the Company's
working capital increased as its operating assets and liabilities used $90.7
million of cash. Accounts receivable increased, creating a use of cash of
$33.1 million primarily due to the increased sales volume during the quarter.
Inventory levels increased, creating a use of cash of $36.0 million. The
increase is in part due the increase in raw material inventory to support the
large backlog position at the communications test subsidiaries. In addition
the Company has a large finished goods inventory of systems solutions also at
the communications test subsidiaries which have not yet been installed at the
customers' requested sites. Other current assets increased, creating a source
of cash of $5.7 million. Accounts payable increased, creating a source of cash
of $10.2 million. Other current liabilities decreased, creating a use of cash
of $33.8 million, primarily due to the decrease in taxes payable. The decrease
is in part related to the additional tax deductions from the exercise of stock
options. In addition during fiscal 2001 the Company has operated at a loss
from continuing operations before income taxes which creates a tax benefit,
therefore decreasing taxes payable.
Investing activities. The Company's investing activities totaled $431.7
million for the nine months ended December 31, 2000 in part for the purchase
and replacement of property and equipment. The primary use of cash was for the
WWG Merger of approximately $241.2 million (approximately $387.8 million in
gross purchase price less $146.6 million in cash and non-cash items), and for
the acquisition of Cheetah for approximately
30
$164.6 million. The Company's capital expenditures during the first nine
months of fiscal 2001 were $23.5 million as compared to $13.0 million for the
same period last year. The increase was primarily due to the replacement of
certain of its Enterprise Resource Planning (ERP) systems within the Company.
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 $504.1
million in cash during the first three quarters of fiscal 2001, due mainly to
the additional borrowings of debt and the cash generated from the sale of
stock in connection with the 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 December 31, 2000,
the Company had $1,104.4 million of long-term debt (including current portion
of long-term debt), primarily consisting of $275.0 million principal amount of
the Senior Subordinated Notes and $675.5 million in term loans and $127.0
million under the Revolving Credit Facility, both under the new Senior Credit
Secured Facility, and $26.9 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) (with differing expiry dates) per
annum until September 2001. At December 31, 2000, the Company had $195 million
notional amount of debt subject to interest rate hedge agreements at an
average annual fixed rate of 5.785%. The year-to-date weighted average
interest rate on the loans under the new Senior Secured Credit Facility was
7.97%.
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 December 31, 2000 was approximately
$38.0 million including outstanding letters of credit. 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.
31
In July 2000, the Company filed a registration statement on Form S-1 for a
potential common stock offering. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities. The Company's shelf
registration statement creates additional potential sources of liquidity in
the future. However, the Company has no current plans to offer securities
pursuant to this shelf registration statement.
Covenant restrictions. The Company's 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 December 31, 2000, the Company was in compliance with all the
covenants as defined in the credit agreement for the Senior Secured Credit
Facility.
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.
32
RISK FACTORS
Set forth below and elsewhere in this quarterly report and in the other
documents the Company files with the SEC are risks and uncertainties that
could cause actual results to differ materially from the results contemplated
by the forward- looking statements contained in this quarterly report.
Risks Related to the Company's Business.
Because the Company's quarterly operating results have fluctuated in the past
and are likely to fluctuate in the future, the Company's stock price may be
volatile and may decline.
In the past, the Company has experienced fluctuations in its quarterly
results due to a number of factors beyond the Company's control. In the
future, the Company expects that its quarterly operating results may fluctuate
and will be difficult to predict given the nature of its business. Many
factors could cause the Company's operating results to fluctuate from quarter
to quarter in the future, including the following:
. the size and timing of orders from the Company's customers, in each case
exacerbated by the lengthy and unpredictable buying patterns of its
customers, and the Company's ability to ship these orders on a timely
basis;
. the degree to which the Company's customers have allocated and spent
their yearly budgets, which has, in some cases, resulted in higher net
sales in the Company's third quarter;
. the uneven pace of technology innovation, the development of products and
services responding to these technology innovations by the Company and
its competitors, and customers' acceptance of these products and
innovations;
. the varied degree of price, product and technology competition, which has
been affected by the rapid changes in the telecommunications industry and
the Company's customers' and competitors' responses to these changes;
. economic downturns or other factors reducing demand for telecommunication
equipment and services may cause the Company's customers to reduce their
spending on testing products and services;
. potential delay or deferral of customer deployment of the Company's
products and services;
. the relative percentages of the Company's products and services sold
domestically and internationally; and
. the mix of the products and services the Company sells and the varied
margins associated with these products.
A significant portion of the Company's operating expenses is fixed and if
the Company's net sales are below its expectations in any quarter, the Company
may not be able to reduce its spending in a timely manner. If the Company's
results of operations are below the expectations of investors or market
analysts, the Company's stock price is likely to decline.
The length and unpredictability of the order process for the Company's
products make it difficult to forecast quarterly revenues.
Sales of the Company's products, particularly its systems, often entail an
extended decision-making process on the part of prospective customers. The
Company may experience delays in obtaining orders following initial contact
with a prospective customer and expend substantial funds and management effort
pursuing these sales.
33
The Company's ability to forecast the timing and amount of specific sales is
therefore limited. As a result, the uneven buying patterns of the Company's
customers may cause fluctuations in its quarterly operating results, which
could cause the Company's stock price to decline.
There are other sources of delays that contribute to a long order process,
or even the loss of a potential order. These include potential customers'
internal approval and contracting procedures, procurement practices, and
testing and acceptance processes. As a result, the order process for larger
deployment of selected products typically ranges from six to 24 months for new
deployment of selected product sales, and up to six months for occasional
large selected product sales. The deferral or loss of one or more significant
orders could significantly affect operating results in a particular quarter,
especially if there are significant sales and marketing expenses associated
with the deferred or lost order.
As the Company acquires businesses, it will face the significant challenges of
integrating the operations of those businesses with its existing operations
and may encounter unanticipated difficulties or costs during the integration
process.
The Company's acquisition strategy presents it with significant challenges.
It may be difficult for the Company to expand its financial and management
controls and reporting systems and procedures to integrate those businesses.
The successful integration of acquired businesses and implementation of the
Company's operating strategy could divert substantial resources and attention
from the Company's management team. If unanticipated costs or difficulties
arise, those acquisitions could have a material adverse effect on the
Company's results of operations or competitive position.
The markets in which the Company operates are highly competitive. The Company
may not adapt as quickly as its competitors to changes in these markets.
The markets for the Company's products are highly competitive. The Company
competes directly or indirectly with Agilent Technologies, Inc., Tektronix,
Inc. and Anritsu Corporation. The Company also competes with a number of other
vendors who offer products that address discrete portions of the Company's
market, including Spirent plc, Digital Lightwave, Inc., EXFO Electro-Optical
Engineering, Inc. and Sunrise Telecom Incorporated. Due to the rapid evolution
of the markets in which the Company competes, additional competitors with
significant market presence and financial resources, including large
telecommunications equipment manufacturers, may enter the Company's markets
and further intensify competition. Increased competition could cause the
Company to reduce the price of its products or lose market share.
In addition, some of the Company's current and potential competitors have
greater name recognition and greater financial, selling and marketing,
technical, manufacturing and other resources than the Company does. To
continue to compete effectively, the Company will be required to make
significant investments in research and product development, marketing and
customer service and support. The Company may not be able to compete
effectively with its existing competitors or with new competitors, and the
Company's competitors may succeed in adapting more rapidly and effectively to
changes in technology, in the market or in developing or marketing products
that will be more widely accepted.
The markets the Company serves are characterized by rapid change and
innovation. The Company may not be able to develop and successfully market
products that account for such changes and innovations.
The market for the Company's products and services is characterized by
rapidly changing technologies, new and evolving industry standards and
protocols and product and service introductions and enhancements that may
render the Company's existing offerings obsolete or unmarketable. A shift in
customer emphasis from employee-operated communications test to automated,
remote test and monitoring systems could likewise render some of
34
the Company's existing product offerings obsolete or unmarketable, or reduce
the size of one or more of the Company's addressed markets. In particular,
incorporation of self-testing functions in the equipment currently addressed
by the Company's communications test instruments could render some of its
offerings redundant and unmarketable. Failure to anticipate or to respond
rapidly to advances in technology and to adapt its products appropriately
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends and the incurrence of substantial research and development
costs. The Company may not successfully anticipate such trends or have
sufficient free cash flow to continue to incur such costs. In addition, the
Company must carefully manage production and inventory levels to meet product
demand, new product introductions and product transitions. Inaccuracies in the
Company's demand forecasts could quickly result in either insufficient or
excessive inventories and disproportionate expenses. The Company cannot assure
its stockholders that it will successfully identify new product opportunities,
develop and bring new products to market in a timely manner and achieve market
acceptance of its products or that products and technologies developed by
others will not render the Company's products or technologies obsolete or
noncompetitive.
The Company's manufacturing efforts could be interrupted due to component
shortages, which could reduce the Company's ability to build and sell its
products.
The Company uses a number of components to build its products and systems
that are only available from a limited number of, or single-source, vendors.
Examples of these types of components include semiconductors that the Company
purchases exclusively from large manufacturers and custom application-specific
integrated circuits that are made for the Company by a single foundry. In
addition, to obtain the components the Company requires to build its products
and systems, the Company may be required to identify alternate sources of
supply, which can be time consuming and result in higher procurement costs.
The Company is currently receiving limited allocations of key components for
several of its products. To address this issue, the Company is attempting to
increase inventory levels of key components and seeking additional sources of
supply. The Company cannot assure its stockholders, however, that these
measures will be adequate to fulfill the Company's manufacturing requirements.
The Company also cannot assure its stockholders that it will be able to obtain
suitable substitutes for components that become unavailable, which could
potentially require the Company to perform costly and time consuming redesigns
of its products. If the Company is unable to obtain sufficient quantities of
these required components, or if suppliers choose to reduce the amount of
parts they make available to the Company, the Company may be unable to meet
customer demand for its products, which would negatively affect its business
and results of operations and could materially damage customer relationships.
Acquisitions by the Company of additional businesses, products or technologies
could negatively affect its business and its stock price.
The Company has acquired businesses and technologies in the past and
expects to pursue acquisitions of other companies, technologies and new and
complementary product lines in the future. Any acquisition would involve risks
to the Company's business, including:
. an inability to integrate the operations, products and personnel of the
Company's acquired businesses;
. an inability to retain key personnel of, or add key personnel to, the
acquired businesses;
. an inability to manufacture and sell the products of the acquired
businesses;
. a decline in demand by the Company's customers for products of the
acquired businesses;
. an inability to expand the Company's financial and management controls
and reporting systems and procedures to incorporate the acquired
businesses;
35
. diversion of management's time and attention;
. potential difficulties in completing projects associated with purchased
in-process research and development;
. customer dissatisfaction or performance problems with the products or
services of an acquired firm;
. risks of entering markets in which the Company has no or limited direct
prior experience and where competitors in such markets have stronger
market positions;
. assumption of unknown liabilities, or other unanticipated events or
circumstances;
. the possibility that the Company may pay too much cash or issue too much
of its stock as the purchase price for an acquired business relative to
the economic benefits that the Company ultimately derives from operating
the acquired business; and
. the need to record significant one-time charges or amortize intangible
assets, which could lower the Company's reported earnings.
Mergers and acquisitions of high-technology companies are inherently risky.
The Company cannot assure its stockholders that any business that it may
acquire will achieve anticipated net sales and operating results, which could
decrease the value of the acquisition to the Company. Any of these risks could
materially harm the Company's business, financial condition and results of
operations. Payment paid for future acquisitions, if any, could be in the form
of cash, stock, rights to purchase stock or a combination of these. Dilution
to existing stockholders and to earnings per share may result in connection
with any future acquisitions.
The Company's substantial debt could adversely affect its financial condition.
The Company has a significant amount of debt. As of December 31, 2000, the
Company's outstanding debt was approximately $1.1 billion primarily consisting
of $275 million of the Company's Senior Subordinated Notes, $675 million of
term loans outstanding and $127.0 million of revolving loans under the
Company's new Senior Secured Credit Facility, and $27 million of other debt.
The Company's Revolving Credit Facility, which permits borrowings of up to
$175 million, matures in 2006. Approximately $175 million of the Company's
indebtedness under its term loan facility matures in 2006. The remaining $510
million matures in 2007. The Company's Senior Subordinated Notes mature in
2008.
The Company's substantial level of debt and the terms of its debt
instruments may have important consequences for the Company, including, but
not limited to, the following:
. the Company's vulnerability to adverse general economic conditions is
heightened;
. the Company will be required to dedicate a substantial portion of its
cash flow from operations to repayment of debt, limiting the availability
of cash for other purposes;
. the Company is and will continue to be limited by financial and other
restrictive covenants in its ability to borrow additional funds,
guarantee obligations, pay dividends, consummate asset sales, enter into
transactions with affiliates or conduct mergers and acquisitions;
. the Company's flexibility in planning for, or reacting to, changes in its
business and industry will be limited;
. the Company is sensitive to fluctuations in interest rates because some
of its debt obligations are subject to variable interest rates; and
. the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired.
36
The Company's leverage and restrictions in its debt instruments may
materially and adversely affect its ability to finance its future operations
or capital needs or to capitalize on business opportunities.
The Company's debt agreements impose significant operating and financial
restrictions, which may prevent it from capitalizing on business
opportunities.
The Company's debt agreements impose significant restrictions on its
operations, thereby limiting the discretion of management with respect to
certain business matters. These agreements restrict, among other things, the
Company's ability to:
. incur additional indebtedness, guarantee obligations and create liens;
. pay dividends and make other distributions;
. prepay or modify the terms of other indebtedness;
. make certain capital expenditures, investments or acquisitions, or enter
into mergers or consolidations or sales of assets; and
. engage in certain transactions with affiliates.
The Company's ability to comply with the restrictions contained in its debt
agreements may be affected by events beyond its control, including prevailing
economic, financial and industry conditions, and the Company may not be able
to comply with such restrictions in the future.
Economic, political and other risks associated with international sales and
operations could adversely affect the Company's net sales.
Because the Company sells its products worldwide, the Company's business is
subject to risks associated with doing business internationally. The Company
expects its net sales originating outside the United States to be
approximately half of the Company's total net sales for its 2001 fiscal year.
In addition, many of the Company's manufacturing facilities and suppliers are
located outside the United States. Accordingly, the Company's future results
could be harmed by a variety of factors, including:
. changes in foreign currency exchange rates;
. changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
. trade protection measures and import or export licensing requirements;
. potentially negative consequences from changes in tax laws;
. challenges in staffing and managing international operations;
. differing protection of intellectual property in disparate jurisdictions;
and
. unexpected changes in regulatory requirements.
The planned divestiture of the Company's industrial computing and
communications segment may not be successful.
The Company is in the process of transitioning from a portfolio of
businesses to a company that is focused primarily on the communications test
business. In May 2000, the Company's board of directors approved a plan
37
to divest its industrial computing and communications segment, which consists
of the ICS Advent and Itronix Corporation subsidiaries. The Company cannot
assure its stockholders that it will be able to find a buyer for these
subsidiaries or that the Company will be able to obtain an attractive price.
Several of the Company's products must comply with significant governmental
and industry-based regulations, certifications, standards and protocols. Such
compliance is costly and time consuming, and the Company cannot assure its
stockholders that its products will continue to meet these standards in the
future.
Several of the Company's products must comply with significant governmental
and industry-based regulations, certifications, standards and protocols, some
of which evolve as new technologies are deployed. These regulations,
certifications, standards and protocols include those promulgated by the U.S.
Federal Communications Commission, the Underwriters Laboratories and various
foreign jurisdictions. Compliance with such regulations, certifications,
standards and protocols may prove costly and time-consuming for the Company.
In addition, regulatory compliance may present barriers to entry in particular
markets or reduce the profitability of the Company's product offerings. Such
regulations, certifications, standards and protocols may also adversely affect
the communications industry, limit the number of potential customers for the
Company's products and services or otherwise have a material adverse effect on
its business, financial condition and results of operations. Failure to
comply, or delays in compliance, with such regulations, standards and
protocols or delays in receipt of such certifications could delay the
introduction of new products or cause the Company's existing products to
become obsolete.
The Company may incur expenses to comply with environmental regulations.
There are aspects of the Company's business that involve substances that
could pose a threat of contamination to the environment. The Company may in
the future incur expenses resulting from environmental remediation activities,
or in connection with complying with current or future environmental
regulations. Environmental remediation is costly, time consuming and could
result in lengthy proceedings that could distract the Company's management. If
the Company is required to remediate any environmental hazard, its business,
results of operations and financial condition could be harmed.
Risks Related to the Company's Industry.
Industry consolidation or changes in regulation could adversely affect the
Company's business.
A substantial portion of the Company's customers are regional telephone
service operating companies, competitive access providers, wireless service
providers, competitive local exchange carriers and other communications
service providers and industrial engineers and other users of communications
test equipment. Their industries are characterized by intense competition and
consolidation. Consolidation could reduce the number of the Company's
customers, increase their buying power and create pressure on the Company to
lower its prices. In addition, governmental regulation of the communications
industry could materially adversely affect the Company's customers and, as a
result, materially limit or restrict its business. The current trend toward
deregulation of the telecommunications market, which has resulted in increased
competition among the Company's customers as well as escalating demand on the
part of such customers for the Company's technologies and services, may not
continue.
If service providers reduce their use of field technicians and successfully
implement a self-service installation model, demand for the Company's products
could decrease.
To ensure quality service, the Company's major service provider customers
typically send into the field a technician who uses its products to verify
service for installations. However, some providers have recently
38
announced plans to encourage their customers to install their own service and,
by doing so, hope to reduce their expenses and expedite installation for their
customers. To encourage self-installation, these companies offer financial
incentives. If service providers successfully implement these plans or choose
to send technicians into the field only after a problem has been reported, or
if alternative methods of verification become available, such as remote
verification service, the need for field technicians and the need for some of
the Company's communications test instruments could decrease, which would
negatively affect the Company's business and results of operations.
The Company's operating results could be harmed if the markets into which the
Company sells its products experience a downturn as a result of a reduction in
previously planned capital expenditures for infrastructure expansion.
Several significant markets into which the Company sells its products are
cyclical. For example, the telecommunications industry in general, and the
competitive local exchange carrier segment in particular, are now experiencing
a downturn that may result in a reduction in previously planned capital
expenditures for infrastructure expansion. These industry downturns have been
characterized by diminished product demand, excess manufacturing capacity and
the subsequent accelerated erosion of average selling prices. Any significant
downturn in the Company's customers' markets or in general economic conditions
would likely result in a reduction in demand for the Company's products and
services and could harm its business. The Company's customers may be unable to
pay for its products in a timely manner or they may decide to delay placing
orders with the Company.
The Company's success depends upon the quality of its key personnel. If the
Company is unable to retain some of its personnel, or if the Company is unable
to continue to hire highly-skilled personnel, its business may suffer.
The Company's success depends in large part upon its senior management, as
well as its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel, particularly engineers with
communications equipment experience. Competition for such personnel is
intense, and the Company may not be successful in retaining its existing key
personnel or attracting additional employees. Any failure of the Company to
retain its personnel, including senior management, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, continued labor market shortages of technically-
skilled personnel may lead to significant wage increases, which could
adversely affect the Company's results of operations.
Third parties may claim the Company is infringing their intellectual property
and, as a result of such claims, the Company may face significant litigation
or incur licensing expenses or be prevented from selling its products.
Third parties may claim that the Company is infringing their intellectual
property rights, and the Company may be found to infringe those intellectual
property rights. Although the Company does not believe that any of its
products infringe the valid intellectual property rights of third parties, the
Company may be unaware of the intellectual property rights of others that may
cover some of its technology, products and services.
Any litigation regarding patents or other intellectual property rights
could be costly and time consuming, and divert the attentions of the Company's
management and key personnel from its business operations.
The complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Claims of intellectual property
infringement might also require the Company to enter into costly royalty or
license agreements. However, the Company may not be able to obtain royalty or
license agreements on terms acceptable to it, or at all. The Company also may
be subject to significant damages or injunctions against development and sale
of certain of its products.
39
Third parties may infringe on the Company's intellectual property and, as a
result, the Company may be required to expend significant resources enforcing
its rights or suffer competitively.
The Company's success depends in large part on its intellectual property.
The Company relies on a combination of patents, copyrights, trademarks and
trade secrets, confidentiality provisions and licensing arrangements to
establish and protect its proprietary intellectual property. If the Company
fails to enforce successfully its intellectual property rights, the Company's
competitive position could suffer, which could have a material adverse effect
on its business, financial condition and results of operations.
The Company's pending patent and trademark registration applications may
not be allowed or competitors may challenge the validity or scope of these
patent applications or trademarks registrations. In addition, competitors may
design alternatives to the Company's technology or develop competing
technologies. Intellectual property rights may also be unavailable or limited
in some foreign countries, which could make it easier for the Company's
competitors to capture market share.
The Company's products are complex, and its failure to detect errors and
defects may subject it to costly repairs, product returns under warranty and
product liability litigation.
The Company's products are complex and may contain undetected defects or
errors when first introduced or as enhancements are released. These errors may
occur despite the Company's testing and may not be discovered until after a
product has been shipped and used by its customers. This risk is compounded by
the fact that the Company offers many products, with multiple hardware and
software configurations, which makes it more difficult to ensure high
standards of quality control in the manufacturing process. The existence of
these errors or defects could result in costly repairs and/or returns of
products under warranty, diversion of development resources and, more
generally, in delayed market acceptance of the product or damage to the
Company's reputation and business, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Risks Related to the Company's Common Stock.
The Company's current principal stockholders have effective control over the
Company's business and could delay, deter or prevent a change of control or
other business combination.
As of December 31, 2000, the Clayton, Dubilier & Rice funds, the Company's
controlling stockholders, together held approximately 81% of the outstanding
shares of the Company's common stock. In addition, three of the ten directors
who serve on the Company's board are currently affiliated with the Clayton,
Dubilier & Rice funds. By virtue of such stock ownership and board
representation, the Clayton, Dubilier & Rice funds have effective control over
all matters submitted to the Company's stockholders, including the election of
the Company's directors, and exercise significant control over the Company's
policies and affairs. Such concentration of voting power could have the effect
of delaying, deterring or preventing a change in control or other business
combination that might otherwise be beneficial to the Company's stockholders.
Clayton, Dubilier & Rice Fund V Limited Partnership has agreed, pursuant to
certain employment agreements with Messrs. Allan M. Kline, the Company's
Corporate Vice President, Chief Financial Officer and Treasurer, and John R.
Peeler, the President and Chief Executive Officer of the Company's
Communications Test Business, to vote its shares to elect both men as
directors so long as they are employed by the Company.
Only approximately 11% of the Company's common stock trades publicly and the
market for technology stocks is extremely volatile.
Only approximately 11% of the Company's common stock has been trading on
the over-the-counter-market since May 21, 1998 and on The Nasdaq Stock
Market's National Market since November 9, 2000, and the public market for the
Company's common stock has been and remains limited. The stock market in
general, and the
40
market for technology stocks in particular, have experienced extreme
volatility and this volatility has often been unrelated to the operating
performance of particular companies. The market price of the Company's common
stock could fluctuate significantly at any time in response to any of the
following:
. changes in financial estimates or investment recommendations relating to
the Company by securities analysts;
. the Company's quarterly operating results falling below securities
analysts' or investors' expectations in any given period;
. changes in economic conditions for companies serving the Company's
markets;
. changes in market valuations of, or earnings and other announcements by,
companies serving the Company's markets;
. declines in the market prices of stocks generally, particularly those of
technology companies;
. announcements by the Company or its competitors of new products,
acquisitions or strategic relationships;
. changes in business or regulatory conditions; and
. trading volume of the Company's common stock.
In the past, following periods of market volatility, stockholders have
instituted securities class action litigation. If the Company were involved in
securities litigation, it could have a substantial cost and divert resources
and the attention of executive management from the Company's business.
41
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 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 primarily 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 December 31, 2000, the Company had $789.3 million of variable rate debt
outstanding. The Company currently has two interest rate hedge agreements with
notional amounts totaling $195 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 (approximately $9.0 million). At December 31, 2000, all
of the interest rate hedge agreements had an interest rate lower than the
three-month LIBOR quoted by the respective financial institution
counterparties, as variable rate three-month LIBOR interest rates increased
after the swap 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 nine months ended
December 31, 2000 of $559 thousand and $1,478 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 December 31, 2000, the analysis
demonstrated that such movement would cause the Company to recognize
additional interest expense of approximately $1.3 million on an annual basis,
and accordingly, would cause a hypothetical loss in cash flows of
approximately $1.3 million on an annual basis.
42
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
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
None.
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 November 15,
2000 relating to the Company's press release on second quarter
earnings.
43
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
February 14, 2001 /s/ ALLAN M. KLINE
_____________________________________ _____________________________________
Date Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
February 14, 2001 /s/ ROBERT W. WOODBURY, JR.
_____________________________________ _____________________________________
Date Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
44