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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 2001
Commission file number 000-07438
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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At May 31 , 2001, the aggregate market value of the Common Stock of the
registrant held by non-affiliates was $183,346,152.00
At May 31, 2001, there were 191,319,866 shares of Common Stock of the
registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2001 Annual Meeting of Stockholders are
incorporated by reference in Part III.
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ITEM 1. BUSINESS.
GENERAL
Acterna Corporation (the "Company" or "Acterna"), formerly Dynatech Corporation,
was formed in 1959 and is a global communications equipment company focused on
network technology solutions. The Company's operations are conducted primarily
by wholly owned subsidiaries located principally in the United States of America
and Europe with other operations, primarily sales offices, located in Asia and
Latin America. The Company is managed in one business segment: communications
test. The Company also has other subsidiaries that, in the aggregate, are not
reportable as a segment.
The information presented in Item 1 of this Report reflects the combined
businesses of the Company giving effect from the acquisition dates of: Wavetek
Wandel Goltermann, Inc. ("WWG"), which merged with one of the Company's
subsidiaries on May 23, 2000; and Superior Electronics Group, Inc., doing
business as Cheetah Technologies ("Cheetah"), which was acquired on August 23,
2000. In addition, the information presented herein includes the effect of the
Company's decision to discontinue its industrial computing and communications
business segment.
The communications test business develops, manufactures and markets instruments,
systems and services used to test, deploy, manage and optimize communications
networks, equipment and services. In addition the Company operates two other
subsidiaries: AIRSHOW, Inc. and da Vinci Systems. AIRSHOW is the leading
provider of systems that deliver real-time news, information and flight data to
aircraft passengers. da Vinci manufactures systems that correct or enhance the
accuracy of color during the process of transferring film-based images to
videotape.
On May 23, 2000, the Company globalized its business by completing the merger of
one of its subsidiaries with WWG, a developer, manufacturer and marketer of
communications test instruments, systems, software and services in Europe and
Latin America (the "WWG Merger"). To finance the WWG Merger, the Company sold
12.5 million and 30.625 million newly-issued but unregistered shares of Common
Stock to Clayton, Dubilier & Rice Fund V Limited Partnership ("CDR Fund V") and
Clayton, Dubilier & Rice Fund VI Limited Partnership ("CDR Fund VI"),
respectively, for an aggregate purchase price of $172.5 million, and established
a new credit facility with a syndicate of lenders that provides for borrowings
of up to $860 million. In addition, on June 30, 2000, the Company completed a
rights offering (the "Rights Offering") of 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 Acterna that resulted from the sale of common stock to CDR Fund V
and CDR Fund VI.
2
In May 2000, the Board of Directors of the Company approved a plan to divest the
Company's industrial computing and communications business segment, which
segment consists of the Company's ICS Advent and Itronix Corporation
subsidiaries. In connection with such decision, the Company hired, prepared and
distributed a descriptive memorandum to qualified buyers and has received
letters of interest from certain buyers. The Company is currently undergoing
presentations and data review with these potential buyers and expects to divest
these two subsidiaries, either separately or together, during the first half of
the 2002 fiscal year. The businesses to be divested have been treated as
discontinued operations for accounting purposes.
The Company has its principal offices at 3 New England Executive Park,
Burlington, Massachusetts 01803. Unless the context otherwise requires, the
"Company" or "Acterna" refers to Acterna Corporation and its subsidiaries. CDR
Fund V and CDR Fund VI, each of which are investment partnerships managed by
Clayton, Dubilier and Rice, Inc. ("CDR"), collectively hold approximately 81% of
the Company's Common Stock.
COMMUNICATIONS TEST SEGMENT
The Company develops, manufactures and markets a broad range of instruments,
systems, software and services used by communications service providers,
equipment manufacturers and service users to optimize the development,
manufacture, deployment and management of advanced communications networks. The
Company's extensive knowledge of communications technologies, combined with the
broad capabilities of its test and management products and services, enable the
Company to provide integrated test and management systems to its customers.
Integrated test and management systems enable its customers to simplify and
automate the deployment and maintenance of modern, converged networks by
combining multiple functions historically found in discrete instruments into a
single platform.
The Company's test and management systems currently support a wide array of
transmission technologies, protocols and standards, including:
. optical transmission, including SONET/SDH and DWDM equipment;
. broadband access technologies, including xDSL and HFC cable;
. data services, including IP, ATM and frame relay;
. wireless telephony and wireless broadband access; and
. traditional voice and time division multiplexed (TDMA) services.
The Company's products are designed to address the customers' desire to deploy
new technologies and provide new services rapidly, decrease operating and
maintenance costs and improve service reliability. The Company's products
address the challenges of deploying and managing a variety of technologies and
segments of a network including optical transmission systems, data services,
voice services, wireless service, cable services, and video delivery.
3
The Company markets to three primary groups of customers: communications service
providers, communications equipment manufacturers and service users.
Communications service providers rely on the Company's products and services to
configure, test and manage network elements and the traffic that runs across
them. Equipment manufacturers rely on these products to shorten the product
development phase and verify the proper functioning of their products during
final assembly and to monitor the performance of their products during
installation and maintenance in their customers' networks. Finally, service
users rely on these products to ensure the proper functioning of their
communications networks. The instruments, systems, and services described below
offer focused solutions to these customer-specific needs.
Instruments. Instruments are devices that perform specific communications test
and monitoring functions. Designed to be mobile devices, these products assist
technicians in assessing the performance of devices and network segments or
verifying the integrity of the information being transmitted across the network.
These instruments incorporate high levels of intelligence and have user
interfaces that are designed to simplify the operation of these products and
decrease the training required to use them. The Company currently markets more
than 100 instruments, including products to address the performance of optical
transmission equipment, broadband access technologies (xDSL and cable modems),
data, voice, wireless and cable networks. The Company's instruments are used by
service providers, equipment manufacturers and service users.
Systems. The Company's systems are test and management devices that reside in
its customers' communication networks. They can be accessed remotely using an
intelligent terminal and allow multiple users to simultaneously perform specific
communications test and management functions. Typically, these systems consist
of hardware and software components that are derived from core instrument
products. Using an integrated test and management system, the customers are able
to analyze a variety of network elements, transmission technologies and
protocols from a single console, thereby simplifying the process of deploying,
provisioning and managing network equipment and services. From a centralized
location, technicians in their network operations center can have access to the
test systems within the network and perform simultaneous test and monitoring
functions on one or more systems, either manually or in an automated fashion.
These capabilities decrease the need for technicians to make on-site service
calls and allow service providers to respond to potential network faults
proactively. In tandem with the core instrument products, the Company's software
components help assess the quality of the services, or QoS, delivered. QoS
refers to the achievement of specific performance benchmarks defined by
agreements between communications service providers and the customer. These
agreements are commonly called service level agreements, or SLAs, and specify
such things as network availability, maximum allowable transmission latencies,
guaranteed levels of bandwidth or maximum acceptable data loss. The Company's
applications allow service providers and users to tracks SLAs more readily.
Customers typically begin using the Company's instruments for initial
deployments and start using systems within a year of the completion of
deployment. By reusing the technology from its instrument
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products, the Company is able to enter new markets rapidly with new test and
monitoring functionality that is very similar, in scope, to the existing
instrument functions. The Company expects that a growing proportion of sales
will be derived from its systems products.
Services. The Company offers a range of product support and professional
services geared to address comprehensively the customers' requirements. The
Company provides repair, calibration and software support services for its
products and also provides technical assistance on a global basis for a wide
array of test equipment. In addition, the Company offers customers training
services that are aimed at both product and technology areas. Project management
services are an integral part of the professional services offerings. These
services are provided in conjunction with system integration projects that
include installation and implementation services. Custom software and interface
development are key offerings that build upon process consulting and software
development expertise. The Company provides both product and process consulting
to its customers.
OTHER SUBSIDIARIES
AIRSHOW, Inc.
AIRSHOW is the leading supplier of inflight video information systems and
services for passengers of private and commercial aircraft. The Company markets
AIRSHOW products to airlines, aircraft manufacturers, avionics installation
centers and owners and operators of corporate aircraft. AIRSHOW's key products
are:
. The Airshow moving map system, which provides passengers with a graphical
representation of the aircraft's location, heading, altitude and other
information displayed in real time;
. The Airshow Network, which delivers to passengers of private aircraft text-
based network broadcasts of stock quotes, news briefs, business updates, and
customized financial reports; AIRSHOW currently has agreements to provide up-
to-the-minute content from CNN, Wall Street Journal Interactive, Bloomberg,
SportsTicker and Intellicast weather products; and
. Airshow TV, which provides direct broadcast satellite TV to corporate
aircraft.
da Vinci Systems
da Vinci manufactures and sells digital color correction systems used by video
post-production and commercial production facilities to correct and enhance
color saturation levels as video images are transferred from film to video tape
for editing and distribution. da Vinci systems are sold worldwide through its
direct sales force in the United States, as well as in conjunction with
manufacturers of related products.
5
da Vinci has benefited from the transition from analog to digital production
systems and digital high-definition television, or HDTV, broadcast standards.
Many post-production facilities worldwide have begun retooling in advance of the
widespread availability of HDTV programming by purchasing new equipment such as
HDTV-compatible color enhancement systems such as da Vinci's new "2K" product.
No class of products or services accounted for 10% or more of the Company's
consolidated revenue in any of the last three fiscal years.
MANUFACTURING
The Company manufactures a portion of its products and outsources to third
parties a portion of its manufacturing activities, such as the assembly of
printed circuit boards and the fabrication of some mechanical parts. The Company
generally performs its own final assembly and testing of its products. The
Company operates 14 manufacturing and assembly facilities worldwide. Twelve of
these facilities are certified as ISO 9002-compliant, and 10 are certified ISO
9001 facilities. In addition, in 1996, the Company received ISO 14001
certification, which relates to environmental compliance in Germany.
The components used to build the Company's products are generally available from
a number of suppliers. The Company relies on a number of limited-source
suppliers for certain specific components and parts. Although the Company has
entered into long-term purchasing contracts with some of these suppliers, the
Company cannot assure that these suppliers will be able to meet the Company's
needs or that component shortages will not be experienced. If the Company was
required to locate new suppliers or additional sources of supply, a disruption
in operations could occur or additional costs could be incurred in procuring
required materials.
COMPETITION
The markets for communications test products and services are rapidly evolving
and highly competitive. The principal competitive factors affecting the business
include:
. quality and breadth of product offerings;
. adaptability to evolving technologies and standards;
. speed of new product introductions;
. depth and breadth of customer relationships;
. price and financing terms;
. research and design capabilities;
. scale of installed base;
. technical support training and customer service and training;
. strength of distribution channels; and
. product scalability and flexibility.
6
The Company believes it competes favorably with respect to the above factors.
Its principal competitors in the communications test and management markets
include Agilent Technologies, Tektronix and Anritsu. The Company also competes
with a number of other companies that offer products that address discrete
portions of its markets, including Spirent, Digital Lightwave, EXFO Electro-
Optical Engineering and Sunrise Telecom, Inc. Some of these competitors have
greater sales, marketing, research and financial resources than the Company
does. In addition, new competitors with significant market presence and
financial resources may enter markets that the Company competes in and reduce
its market share.
CUSTOMERS
The Company markets its products to three primary groups of customers:
communications service providers, equipment manufacturers and service users.
Communications Service Providers
Communications service providers offer telecommunications, wireless and,
increasingly, data communication services to end users, enterprises or other
service providers. Typically, communications service providers utilize a variety
of network equipment and software to originate, transport and terminate
communications sessions. Communications service providers rely on the Company's
products and services to configure, test and manage network elements and the
traffic that runs across them. Also, the Company's products help to ensure
smooth operation of networks and increase the reliability of services to
customers.
The Company's products and services are sold to virtually all inter-exchange
carriers, or IXCs; incumbent local exchange carriers, or ILECs; competitive
local exchange carriers, or CLECs; internet service providers, or ISPs;
integrated communications providers, or ICPs; wireless network operators; cable
service providers; international post, telephone and telegraph companies, or
PTTs; and other service providers.
Equipment Manufacturers
Communications equipment manufacturers design, develop, install and maintain
voice, data and video communications equipment. These products include switches,
routers, voice gateways, cellular base stations, cable headends, optical access
and multiplexing devices and other types of communications systems. Network
equipment manufacturers rely on the Company's products to verify the proper
functioning of their products during final assembly and testing. Increasingly,
because communications service providers are choosing to outsource installation
and maintenance functions to the equipment manufacturers themselves, equipment
manufacturers are using the Company's instruments and systems to assess the
performance of their products during installation and maintenance of a
customer's network.
7
Service Users
The Company also sells test and management instruments, systems, and services to
large corporate customers, government operators and educational institutions.
AIRSHOW products are marketed to airlines, aircraft manufacturers, avionics
installation centers and owners and operators of corporate aircraft.
da Vinci systems are sold to video post-production and commercial production
facilities.
None of the Company's customers represented more than 10 percent of its sales
during fiscal 2001. The Company is not dependent upon any one customer, or
group of customers, to the extent that the loss of such customers would have a
material adverse effect on the Company.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company's products and services are primarily sold through its direct sales
force. In addition, the Company's products and services are sold through third
party distributors and sales representatives in areas where direct sales efforts
are less developed. Through distributors, sales representatives and its direct
sales force, the Company has a presence in over 80 countries. In addition, the
Company uses the Internet, advertisements in the trade press, direct mail,
seminars, trade shows and quarterly newsletters to raise awareness of its
products.
The Company's sales and marketing staff consists primarily of engineers and
technical professionals. They undergo extensive training and ongoing
professional development and education. The skill level of the sales and
marketing staff has been instrumental in building longstanding customer
relationships. In addition, the Company's frequent dialogue with its customers
provides it with valuable input on systems and features they desire in future
products. The Company's consultative sales approach and product and market
knowledge differentiates its sales force from those of its primary competitors.
The local sales forces are highly knowledgeable of their respective markets,
customer operations and strategies, and regulatory environments. In addition,
the representatives' familiarity with local languages and customs enables them
to build close relationships with the Company's customers.
The Company provides installation, repair and training services to enable its
customers to improve performance of their networks. Service centers are located
near many of the Company's major customers. The Company also offers on-line
support services to supplement its on-site application engineering support.
Customers can also access the Company's products remotely through its technical
assistance center.
8
SEASONALITY; BACKLOGS
As a result of purchasing patterns of the Company's telecommunications
customers, which tend to place large orders periodically, typically at the end
of the Company's second and fourth fiscal quarters, the Company expects that its
results of operations may vary on a quarterly basis, as they have in the past.
The Company estimates that its backlog of orders at March 31, 2001 and 2000 was
approximately $392.2 million and $180.4 million, respectively. The increase is a
result of additional bookings due to the WWG Merger and the acquisition of
Cheetah. The Company expects it will be able to fill all such orders during
fiscal 2002.
PRODUCT DEVELOPMENT
For the year ended March 31, 2001, the Company invested approximately $150.1
million in research and development activities of which approximately $131.5
million was applied to the Company's communications test segment.
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. Automation in the Company's
targeted markets for communications test equipment or a shift in customer
emphasis from employee-operated communications test to automated test and
monitoring systems could likewise render the Company's existing product
offerings obsolete or unmarketable, or reduce the size of one or more of its
targeted markets. In particular, incorporation of self-testing functions in the
equipment currently addressed by the Company's communications test instruments
could render some of the Company's offerings redundant and unmarketable. 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.
INTERNATIONAL
The Company maintains manufacturing facilities and sales subdivisions or
branches for its communications test business in major countries in Europe, and
sales subdivisions in Latin America and Asia and has distribution agreements in
other countries where sales volume does not warrant a direct sales organization.
The Company's foreign sales from continuing operations (excluding WWG in fiscal
2000 and 1999 and including exports from North America directly to foreign
customers) were approximately 19%, 14%, and 41% of consolidated net sales in
fiscal 1999, 2000 and 2001, respectively. Accordingly, the Company's domestic
sales from continuing operations were 81%, 86% and 59% of consolidated net sales
in fiscal 1999, 2000 and 2001, respectively.
9
Because the Company sells its products worldwide, the Company's business is
subject to risks associated with doing business internationally. 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, and potentially negative consequences from changes in
tax laws and other regulatory requirements.
PATENTS AND PROPRIETARY RIGHTS
The Company relies primarily on trade secrets, trademark laws, confidentiality
procedures and contractual restrictions to establish and protect its proprietary
rights. The Company owns a number of U.S. and foreign patents and patent
applications that are collectively important to its business. The Company does
not believe, however, that the expiration of any patent or group of patents
would materially affect its business.
GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS
The Company designs its products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, these products must comply with various
regulations defined by the U.S. Federal Communications Commission and
Underwriters Laboratories as well as industry standards established by Telcordia
Technologies, Inc., formerly Bellcore, and the American National Standards
Institute. Internationally, these products must comply with standards
established by the European Committee for Electrotechnical Standardization, the
European Committee for Standardization, the European Telecommunications
Standards Institute, telecommunications authorities in various countries as well
as with recommendations of the International Telecommunications Union. The
failure of the Company's products to comply, or delays in compliance, with the
various existing and evolving standards could negatively impact the ability to
sell products.
ENVIRONMENTAL MATTERS
Federal, state and local laws or regulations concerning the discharge of
materials into the environment have not had and, under present conditions, the
Company does not foresee that they will have, a material adverse effect on
capital expenditures, earnings or the competitive position of the Company.
EMPLOYEES
As of March 31, 2001, the Company employed approximately 5,300 persons in
continuing operations. Some of the European employees are members of
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a workers' council, principally due to applicable legal requirements in the
jurisdictions in which they work. However, none of the Company's other employees
are represented by labor unions and the Company believes its employee relations
are good.
ITEM 2. PROPERTIES.
The following table describes the Company's largest design and manufacturing
facilities. The Company also has sales offices and facilities in Europe, South
America and elsewhere.
Location Square Title
-------- ------ -----
Feet
----
Eningen, Germany 779,000 Owned
Germantown, Maryland 272,000 Leased
Indianapolis, Indiana 140,000 Leased
Bradenton, Florida 124,000 Leased
Research Triangle Park, North Carolina 93,100 Leased
Plymouth, United Kingdom 86,400 Owned
San Diego, California 62,368 Leased
Tustin, California 52,000 Leased
Munich, Germany 51,000 Leased
Research Triangle Park, North Carolina 50,800 Leased
Kirkland, Washington 50,500 Leased
The Company believes its facilities are in good operating condition. In
addition, the Company leases approximately 231,000 square feet of manufacturing
facilities related to discontinued operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to several pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company's management is of the opinion that the final outcome should not
have a material adverse effect on the Company's operations or financial
position.
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 to the Court of Appeals for the Federal
Circuit by CMI on October 24, 2000. The appeal has been fully briefed and the
Company is awaiting a hearing date. The Company's management believes the final
outcome should not have a material adverse effect on the Company's operations or
financial position.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2001.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's common stock is traded on the NASDAQ National Market under the
symbol "ACTR". From May 21, 1998 to November 8, 2000, the common stock was
traded on the over-the-counter market under the symbol "DYNA". Since November 9,
2000, the common stock has been trading on the NASDAQ National Market. As of
March 30, 2001, there were 581 registered holders of the common stock and the
price of the common stock on the NASDAQ was $6.00. The following table sets
forth the high and low sales prices of the Company's common stock on the over-
the-counter market and the NASDAQ National Market for each quarterly period
within the two most recent fiscal years.
Quarter Ended High Low
------------- ---- ---
March 31, 2001 $21.438 $ 6.000
December 31, 2000 29.125 7.813
September 30, 2000 41.375 16.437
June 30, 2000 20.250 8.000
March 31, 2000 15.937 6.875
December 31, 1999 8.000 4.875
September 30, 1999 5.031 3.437
June 30, 1999 4.062 3.125
Since April 1, 1995, the Company has not declared or paid cash dividends to the
holders of common stock. The Company intends to retain earnings for use in the
operation and expansion of its business. In addition, certain restrictions in
the Company's credit agreements limit the Company's ability to pay cash
dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The information requested by this Item is attached as Appendix A.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The information requested by this Item is attached as Appendix B.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
12
The information requested by this Item is included in Appendix B.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information requested by this Item is attached as Appendix C.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information responsive to Items 401 and 405 of
Regulation S-K contained in the Company's definitive Proxy Statement relating to
its fiscal 2001 Annual Meeting of Stockholders which will be filed with the U.S.
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year ended March 31, 2001, pursuant to Rule 14a-6(b) under the
Securities Exchange Act of 1934, as amended; said information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information responsive to Item 402 of Regulation S-K
contained in the Company's definitive Proxy Statement relating to its fiscal
2001 Annual Meeting of Stockholders which will be filed with the U.S. Securities
and Exchange Commission within 120 days after the close of the Company's fiscal
year ended March 31, 2001, pursuant to Rule 14a-6(b) under the Securities
Exchange Act of 1934, as amended; said information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the information responsive to Item 403 of Regulation S-K
contained in the Company's definitive Proxy Statement relating to its fiscal
2001 Annual Meeting of Stockholders which will be filed with the U.S. Securities
and Exchange Commission within 120 days after the close of the Company's fiscal
year ended March 31, 2001, pursuant to Rule 14a-6(b) under the Securities
Exchange Act of 1934, as amended; said information is incorporated herein by
reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information responsive to Item 404 of Regulation S-K
contained in the Company's definitive Proxy Statement relating to its fiscal
2001 Annual Meeting of Stockholders which will be filed with the U.S. Securities
and Exchange Commission within 120 days after the close of the Company's fiscal
year ended March 31, 2001, pursuant to Rule 14a-6(b) under the Securities
Exchange Act of 1934, as amended; said information is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM
8-K.
(a) (1) Financial statements
The following financial statements and schedules of the Company are included as
Appendix C to this Report.
I. Report of Independent Accountants.
II. Consolidated Balance Sheets-March 31, 2001 and 2000.
III. Consolidated Statements of Income-Fiscal Years ended March 31, 2001,
2000, and 1999.
IV. Consolidated Statements of Stockholders' Equity (Deficit)-Fiscal Years
ended March 31, 2001, 2000, and 1999.
V. Consolidated Statements of Cash Flows-Fiscal Years ended March 31,
2001, 2000, and 1999.
VI. Notes to Consolidated Financial Statements.
(2) Financial Statements schedule - Schedule II
Schedules other than those listed above have been omitted because they are
either not required or not applicable or because the required information has
been included elsewhere in the financial statements or notes thereto.
(b) Reports on Form 8-K
I. Current Report on Form 8-K concerning the Company's press release
regarding its third quarter results of operations, filed with the SEC
on February 14, 2001.
(c) Exhibits
The exhibits that are filed with this report or that are incorporated herein by
reference are set forth in Appendix D.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACTERNA CORPORATION
June 29, 2001 By: /s/ Ned C. Lautenbach
-----------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Ned C. Lautenbach Chairman of the Board, President June 29, 2001
- -------------------------------- and Chief Executive Officer,
Ned C. Lautenbach Director
/s/ Allan M. Kline Corporate Vice President, June 29, 2001
- -------------------------------- Director, Chief Financial
Allan M. Kline Officer, and Treasurer
(Principal Financial Officer)
/s/ Robert W. Woodbury, Jr. Corporate Vice President, June 29, 2001
- -------------------------------- Controller (Principal
Robert W. Woodbury, Jr. Accounting Officer)
/s/ John R. Peeler Director June 29, 2001
- --------------------------------
John R. Peeler
/s/ Brian D. Finn Director June 29, 2001
- --------------------------------
Brian D. Finn
/s/ Marvin L. Mann Director June 29, 2001
- --------------------------------
Marvin L. Mann
/s/ William O. McCoy Director June 29, 2001
- --------------------------------
William O. McCoy
/s/ Victor A. Pelson Director June 29, 2001
- --------------------------------
Victor A. Pelson
/s/ Brian H. Rowe Director June 29, 2001
- --------------------------------
Brian H. Rowe
/s/ Richard J. Schnall Director June 29, 2001
- --------------------------------
Richard J. Schnall
/s/ Peter M. Wagner Director June 29, 2001
- --------------------------------
Peter M. Wagner
15
APPENDIX A
Selected Historical Consolidated Financial Data
The following tables set forth selected consolidated historical financial data
of the Company for the five fiscal years ended March 31, 2001 which, as of March
31, 2001 and 2000 and for the three years in the period ended March 31, 2001,
have been derived from, and should be read in conjunction with, the audited
historical Consolidated Financial Statements, and related notes thereto, of the
Company contained herein.
Years Ended March 31,
2001* 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Amounts in thousands)
RESULTS OF OPERATIONS
Net sales $1,167,815 $ 453,239 $ 329,532 $ 317,955 $ 284,070
Cost of sales 468,542 157,090 108,618 103,923 90,401
---------- --------- --------- --------- ---------
Gross profit 699,273 296,149 220,914 214,032 193,669
Selling, general & administrative expense 439,404 156,499 113,469 106,328 95,203
Product development expense 150,061 61,172 42,472 42,919 39,037
Recapitalization and other related costs 9,194 27,942 40,767 --- ---
Nonrecurring charges --- --- --- --- 5,063
Purchased incomplete technology 56,000 --- --- --- ---
Amortization of intangibles 109,788 8,789 2,726 2,357 3,882
---------- --------- --------- --------- ---------
Operating income (loss) (65,174) 41,747 21,480 62,428 50,484
Interest expense (102,066) (51,916) (46,178) (1,184) (679)
Interest income 3,155 2,354 3,392 3,013 2,675
Other income (expense), net (5,455) (68) 15,703 551 540
---------- --------- --------- --------- ---------
Income (loss) from operations before
income taxes (169,540) (7,883) (5,603) 64,808 53,020
Provision (benefit) for income taxes (8,382) (1,169) (69) 26,521 24,092
---------- --------- --------- --------- ---------
Income (loss) from continuing operations (161,158) (6,714) (5,534) 38,287 28,928
Discontinued operations, net of income
taxes --- 12,726 11,979 3,489 921
---------- --------- --------- --------- ---------
Net income (loss) before extraordinary item (161,158) 6,012 6,445 41,776 29,849
Extraordinary item, net of income tax
benefit of $6,603 (10,659) --- --- --- ---
---------- --------- --------- --------- ---------
Net income (loss) $ (171,817) $ 6,012 $ 6,445 $ 41,776 $ 29,849
========== ========= ========= ========= =========
Net income (loss) per common share-basic:
Continuing operations $ (0.87) $ (0.05) $ (0.04) $ 1.87 $ 1.38
Discontinued operations --- 0.09 0.09 0.17 0.04
Extraordinary loss (0.06) --- --- --- ---
---------- --------- --------- --------- ---------
$ (0.93) $ 0.04 $ 0.05 $ 2.04 $ 1.42
========== ========= ========= ========= =========
Net income (loss) per common share-diluted:
Continuing operations $ (0.87) $ (0.05) $ (0.04) $ 1.80 $ 1.32
Discontinued operations --- 0.09 0.09 0.16 0.04
Extraordinary loss (0.06) --- --- --- ---
---------- --------- --------- --------- ---------
$ (0.93) $ 0.04 $ 0.05 $ 1.96 $ 1.36
========== ========= ========= ========= =========
Weighted average number of shares:
Basic 183,881 148,312 129,596 20,493 20,987
Diluted 183,881 148,312 129,596 21,272 21,997
========== ========= ========= ========= =========
BALANCE SHEET DATA
Net working capital $ 177,947 $ 52,262 $ 55,498 $ 117,791 $ 80,394
Total assets $1,343,140 $ 414,838 $ 348,104 $ 288,130 $ 249,010
Long-term debt $1,056,383 $ 572,288 $ 504,151 $ 83 $ 5,226
Stockholders' equity (deficit) $ (80,977) $(296,675) $(316,440) $ 202,119 $ 160,686
Shares of stock outstanding 190,953 122,527 120,665 16,864 16,793
Stockholders' equity (deficit) per share $ (0.42) $ (2.42) $ (2.62) $ 11.99 $ 9.57
* The Results of Operations for fiscal 2001 include the results of operations of
Wavetek Wandel Goltermann, Inc. since May 23, 2000, the date of its acquisition,
and the results of operations of Cheetah Technologies since August 23, 2000, the
date of its acquisition.
A-1
APPENDIX B
Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of the results of operations, financial condition and
liquidity of the Company should be read in conjunction with the information
contained in the consolidated financial statements and notes thereto included
elsewhere in this Form 10-K. These statements have been prepared in conformity
with generally accepted accounting principles and require management to make
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Actual results could differ from these
estimates.
Unless otherwise noted, the information presented in this Appendix B reflects
the business of the Company and its subsidiaries, including the results of
operations of the businesses the Company has acquired during fiscal 2001.
Wavetek Wandel Goltermann, Inc. ("WWG")'s results of operations are included in
the statements of operations since May 23, 2000; Cheetah Technologies
("Cheetah")'s results of operations are included since August 23, 2000. Applied
Digital Access, Inc. ("ADA")'s results of operations are included since November
3, 1999. The statements contained in this report (other than the Company's
consolidated financial statements and other statements of historical fact)
include forward-looking statements, as described below in greater detail in
"Forward-Looking Statements."
OVERVIEW
The Company reports its results of continuing operations in one business segment
that the Company refers to as communications test. This segment develops,
manufactures and markets instruments, systems, and services to test, deploy,
manage and optimize communications networks, equipment and services. The Company
also has other subsidiaries that, in the aggregate, are not reportable as a
segment ("Other Subsidiaries"). These Other Subsidiaries include AIRSHOW, Inc.,
a leading provider of systems that deliver real-time news, information and
flight data to aircraft passengers; 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's controlling stockholders are Clayton, Dubilier & Rice Fund V
Limited Partnership ("CDR Fund V") and Clayton, Dubilier & Rice Fund VI Limited
Partnership ("CDR Fund VI"), (collectively the "CDR Funds"). The CDR Funds are
managed by Clayton, Dubilier & Rice, Inc. ("CDR"), an investment management
firm, and collectively hold approximately 81% of the outstanding shares of
common stock of the Company.
B-1
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
$171.5 million. 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 (the "WWG 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 (the "WWG Merger"), for a purchase price of $402.0
million. As a result of the WWG Merger, WWG became an indirect, wholly-owned
subsidiary of Acterna.
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 a rights offering (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 the CDR Funds. 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 the CDR Funds.
In connection with the WWG Merger, the Company entered into a new credit
facility for $860 million with a syndicate of lenders. The proceeds were used to
finance the WWG Merger, refinance WWG and Acterna debt and provide for
additional working capital and borrowing capacity.
In May 2000, the Board of Directors approved a plan to divest the industrial
computing and communications business segment, which segment consists of the
Company's ICS Advent and Itronix Corporation subsidiaries. In connection with
such decision, the Company hired, prepared and distributed a descriptive
memorandum to qualified buyers and has received letters of interest from certain
buyers. The Company is currently undergoing presentations and data review with
these potential buyers and expects to divest these two subsidiaries, either
separately or together, during the first half of the 2002 fiscal year. The
businesses to be divested have been treated as discontinued operations for
accounting purposes. The Statement of Cash Flows for fiscal years ended March
31, 2001, 2000 and 1999 have not been reclassified for the discontinued
operations.
The results of operations of the discontinued businesses for the fiscal year
ended March 31, 2001 have been deferred and included in the balance sheet at
March 31, 2001, within net assets held for sale within non-current assets.
Management anticipates net operating losses from the discontinued operations to
continue through the first half of fiscal 2002, at which time the Company
anticipates having sold these businesses. The pretax operating losses for the
segment for fiscal year ended March 31, 2001 was $14.5 million, of which $10.4
million was related to amortization of intangibles. 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
B-2
deferred 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 realized.
In accordance with the terms of the Company's new Senior Secured Credit
Facility, the proceeds from the sale of assets, including those of the
discontinued operations, must be used to repay any outstanding term loans, to
the extent the proceeds received are less than the total balance of the
outstanding term loans.
Seasonality
As a result of purchasing patterns of the Company's telecommunications
customers, which tend to place large orders periodically, typically at the end
of the Company's second and fourth fiscal quarters, the Company expects that its
results of operations may vary on a quarterly basis, as they have in the past.
Product Development
For the year ended March 31, 2001, the Company invested approximately $150.1
million in research and development activities of which $131.5 million was
applied to the communications test segment.
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 render the Company's
existing offerings obsolete or unmarketable. Automation in addressed markets for
communications test equipment or a shift in customer emphasis from employee-
operated communications test to automated test and monitoring systems could
likewise render the Company's existing product offerings obsolete or
unmarketable, or reduce the size of one or more of its addressed markets. In
particular, incorporation of self-testing functions in the equipment currently
addressed by the Company's communications test instruments could render product
offerings redundant and unmarketable. 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.
RECENT ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS DURING FISCAL 2001
- -------------------------------
Wavetek Wandel Goltermann, Inc.
On May 23, 2000, the Company merged one of its wholly owned subsidiaries with
WWG for consideration of $402.0 million, which includes $14.2 million of
acquisition costs. The WWG Merger was accounted for using the purchase method of
accounting. As part of a fair value exercise, the Company increased the
carrying value of acquired inventory by $35 million in order to record this
inventory at its fair value, increased the carrying value of acquired land and
buildings by $27 million to record them at fair value, and determined the
B-3
fair value of acquired incomplete technology to be $51 million. This purchased
incomplete technology had not reached technological feasibility, had no
alternative future use and was written off to the income statement during the
year. The WWG Merger generated approximately $488.9 million of excess purchase
price which, based upon an independent valuation, was allocated to other
intangibles on a basis as follows: $162.2 million to core technology (which is
being amortized over six years), $45.2 million to workforce (which is being
amortized over five years), and $6.8 million to backlog (which is being
amortized over 12 months). The unallocated excess purchase price or goodwill of
$274.8 million is being amortized over six years.
Superior Electronics Group, Inc., doing business as Cheetah Technologies
On August 23, 2000, the Company acquired Cheetah for a purchase price of $171.5
million. The acquisition was accounted for using the purchase method of
accounting. As part of a fair value exercise, the Company increased the
carrying value of the acquired inventory by $750 thousand to reflect its fair
value, and determined the fair value of acquired incomplete technology to be
$5.0 million. This purchased incomplete technology had not reached
technological feasibility, had no alternative future use and was written off to
the income statement during the year. The acquisition generated approximately
$143.9 million of excess purchase price which was allocated to other intangibles
on a preliminary basis as follows: $48.3 million to core technology (which is
being amortized over six years), $3.9 million to workforce (which is being
amortized over five years), $3.3 million to backlog (which is being amortized
over 12 months), and $0.7 million to trademarks (which is being amortized over 6
years). The unallocated excess purchase price or goodwill of $87.7 million is
being amortized over six years.
The Company funded the purchase price with borrowings of $100 million under its
Senior Secured Credit Facility (See notes to the Consolidated Financial
Statements: Note I. Notes Payable and Debt) and approximately $65.7 million from
its existing cash balances.
In connection with the Cheetah acquisition, options to purchase shares of
Cheetah were converted into options to purchase shares of Acterna common stock.
The fair value as of the announcement date of the acquisition of all options
converted was $5.8 million using an option-pricing model. A 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 three years).
DIVESTITURES DURING FISCAL 2001
DataViews Corporation
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
B-4
results of DataViews were included in the Company's financial statements within
"Other Subsidiaries".
OTHER ACQUISITIONS AND DIVESTITURES
The Company has, in the normal course of business, entered into acquisitions
and divestitures of small companies that, in the aggregate, do not have a
material impact on the financial results of the Company.
RESULTS OF OPERATIONS
Fiscal 2001 Compared to Fiscal 2000 on a Consolidated Basis
Sales. For the fiscal year ended March 31, 2001 consolidated sales from
continuing operations increased $714.6 million to $1.17 billion as compared to
$453.2 million for the fiscal year ended March 31, 2000. The increase occurred
primarily within the communications test segment. Of the $714.6 million
increase, $702.8 million related to the communications test segment of which
15.0% resulted from core growth, 3.8% from additional sales at ADA; 77.2% from
the WWG Merger; and 4.0% from the acquisition of Cheetah.
The Company's international sales (excluding WWG in fiscal 2000 and including
exports from North America directly to foreign customers) from continuing
operations were $473.2 million or 40.5% of consolidated sales for the fiscal
year ended March 31, 2001, as compared to $65.8 million or 14.5% of consolidated
sales for the fiscal year ended March 31, 2000 due primarily to the WWG Merger.
WWG's operations are principally in Europe with significant sales offices in
Asia and Latin America, as well as in the United States.
Gross Profit. Consolidated gross profit from continuing operations increased
$403.1 million to $699.3 million or 59.9% of consolidated sales for the fiscal
year ended March 31, 2001 as compared to $296.2 million or 65.3% of consolidated
sales for the fiscal year ended March 31, 2000. Included in the fiscal 2001
gross profit is a purchase accounting charge of $35.7 million related to the
amortization of inventory step-up as a result of the acquisitions of WWG and
Cheetah. Excluding this step-up, gross profit was $735.0 million or 62.9% of
consolidated sales. The decrease in gross margin as a percent of sales is, in
part, a result of some products sold by WWG, Cheetah, and ADA, which have a
lower gross margin than the Company's primary products. This includes products
that the Company sells that are purchased and resold to the customer at a lower
gross margin than products manufactured directly or indirectly by the Company.
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 $764.4 million or
65.5% of consolidated sales for the fiscal year ended March 31, 2001, as
compared to $254.4 million or 56.1% of consolidated sales for the fiscal year
ended March 31, 2000. Excluding the impact of the writeoff of the purchased
incomplete technology of $56 million and the recapitalization and other related
costs of $9 million, total operating expenses were $699.3
B-5
million or 59.9% of consolidated net sales during fiscal 2001. The increase is
primarily a result of the WWG Merger, which has a higher cost structure than the
Company has had historically, increased intangible amortization expense,
increased amortization of unearned compensation, and expenses relating to the
rebranding and additional consultants hired for the integration of WWG with the
Company's communications test segment.
Amortization of unearned compensation 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. The
amortization of unearned compensation expense during fiscal 2001 was $18.3
million and has been allocated to cost of sales ($1.2 million), product
development expense ($3.8 million), and selling, general and administrative
expense ($13.3 million). The amortization expense during fiscal 2000 of $1.9
million was allocated to cost of sales ($0.4 million), product development
expense ($0.1 million) and selling, general and administrative expense ($1.4
million).
The increase in the amortization of unearned compensation 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 at the time of the
acquisitions. (See Notes to the Consolidated Financial Statements: Note E.
Summary of Significant Accounting Policies: Unearned Compensation).
Selling, general and administrative expense from continuing operations was
$439.4 million or 37.6% of consolidated sales for the fiscal year ended March
31, 2001. The percentage increase is in part a result of expenses totaling $25.2
million, which related to the rebranding and additional consultants hired for
the integration of WWG with the Company's communications test segment (the
"integration expenses"). In addition, the Company recorded a charge of $2.0
million during the third quarter of fiscal 2001 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 amended this registration statement by converting it to a
universal shelf registration statement on Form S-3 under which the company may
offer from time to time up to $1 billion of equity or debt securities.
Excluding the amortization of unearned compensation of $18.3 million, the
integration expenses of $25.2 million, and the writeoff of the S-1 charges of
$2.0 million, selling, general and administrative expense was $393.9 million in
fiscal 2001, or 33.7% of consolidated sales, which is comparable to the results
for fiscal 2000.
Product development expense from continuing operations was $150.1 million or
12.9% of consolidated sales for the fiscal year ended March 31, 2001 as compared
to $61.2 million or 13.5% 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.
Recapitalization and other related costs from continuing operations during
fiscal 2001 were $9.2 million as compared to $27.9 million in fiscal 2000. The
expense incurred during the first three months of fiscal 2001 of $9.2
B-6
million related to an executive who left the Company during fiscal 2000. The
expense incurred during fiscal 2000 related to termination expenses of certain
executives including the retirement of John F. Reno, former Chairman, President
and Chief Executive Officer of the Company, as well as other employees.
During fiscal 2001, the Company recorded a total charge of $56 million for
acquired incomplete technology, of which $51 million related to the WWG Merger
and $5 million related to the acquisition of Cheetah. This purchased incomplete
technology had not reached technological feasibility and had no alternative
future use.
Amortization of intangibles from continuing operations was $109.8 million for
the fiscal year ended March 31, 2001 as compared to $8.8 million for the same
period a year ago. The increase was primarily attributable to increased
goodwill and other intangible amortization related to the acquisitions of
Cheetah, WWG and ADA.
Interest. Interest expense, net of interest income from continuing operations,
was $98.9 million for the fiscal year ended March 31, 2001 as compared to $49.6
million for the same period a year ago. The increase in net interest expense
during fiscal 2001 resulted from the additional debt incurred for the WWG Merger
and the acquisition of Cheetah.
Other income (expense). During fiscal 2001, the Company incurred approximately
$5.5 million of losses in connection with changes in foreign currencies.
Taxes. The effective tax rate changed for the fiscal year ended March 31, 2001
to a benefit of 4.9% as compared to a benefit of 14.9% for the fiscal year ended
March 31, 2000. The principal reasons for the decrease in the effective tax
rate were: (1) additional non-deductible goodwill amortization in fiscal 2001
as a result of the WWG Merger and (2) an increase in the amount of income earned
in various countries with tax rates higher than the U.S. federal rate, primarily
Germany.
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.
Fiscal 2000 Compared to Fiscal 1999 on a Consolidated Basis
Sales. For the fiscal year ended March 31, 2000 consolidated sales from
continuing operations increased $123.7 million or 37.5% to $453.2 million as
compared to $329.5 million for the fiscal year ended March 31, 1999. The
increase was primarily attributable to increased demand for the Company's
communications test products as this business segment experienced a recovery
from fiscal 1999's reduced order volume. In addition, the Company also
B-7
recognized additional revenue due to the acquisitions of ADA within the
communications test segment and Sierra within Other Subsidiaries. These
acquisitions contributed to approximately 7.5% of the total sales growth.
International sales (defined as sales outside of North America) from continuing
operations were $65.8 million or 14.5% of consolidated sales for the fiscal year
ended March 31, 2000, as compared to $63.4 million or 19.2% of consolidated
sales for the fiscal year ended March 31, 1999.
Gross Profit. Consolidated gross profit from continuing operations increased
$75.2 million to $296.2 million or 65.3% of consolidated sales for the fiscal
year ended March 31, 2000 as compared to $220.9 million or 67.0% of consolidated
sales for the fiscal year ended March 31, 1999. The dollar increase was
directly related to the increase in sales; the percentage decrease is a result
of the change in sales mix due to the shipment of additional lower-margin
products in fiscal 2000 than in fiscal 1999 as well as certain purchase
accounting effects from the acquisition of ADA.
Operating Expenses. Operating expenses from continuing operations consist of
selling, general and administrative expense; product development expense;
recapitalization and other related costs; and amortization of intangibles.
Total operating expenses were $254.4 million or 56.1% for the fiscal year ended
March 31, 2000, as compared to $199.4 million or 60.5% of consolidated sales for
the fiscal year ended March 31, 1999. Excluding the impact of the
recapitalization and other related costs, total operating expenses were $226.5
million or 50.0% of consolidated sales in fiscal 2000, as compared to $158.7
million or 48.1% of consolidated sales in fiscal 1999. The increase in total
operating expenses excluding recapitalization and other related costs is due in
part to an increase in research and development expenses as the Company invested
in the next generation of communications test equipment. The Company also
incurred additional expenses relating to improvements in the subsidiaries'
customer service departments, enterprise resource plan implementation, failed
acquisitions, and additional consulting costs.
Included in both cost of sales and operating expenses from continuing operations
is the amortization of unearned compensation which relates to the issuance of
stock options to employees and non-employee directors at a grant price lower
than fair market value (defined as the closing price on the open market at the
date of issuance). The amortization of unearned compensation in fiscal 2000 and
1999 was $1.9 million and $1.2 million, respectively, and has been allocated to
cost of sales; selling, general and administrative expense; and product
development expense.
Selling, general and administrative expense from continuing operations was
$156.5 million or 34.3% of consolidated sales for the fiscal year ended March
31, 2000, as compared to $113.5 million or 34.4% of consolidated sales for the
fiscal year ended March 31, 1999. The marginal percentage increase is in part a
result of the increase in sales as well as the timing of sales commission
expense.
Product development expense from continuing operations was $61.2 million or
13.5% of consolidated sales for the fiscal year ended March 31, 2000 as compared
to $42.5 million or 12.9% of consolidated sales for the same period a year ago.
During fiscal 2000, the Company invested in the next generation
B-8
of high-speed test equipment as well as data services all within the
communications test segment.
Recapitalization and other related costs from continuing operations during
fiscal 2000 were $27.9 million, most of which related to the retirement of John
F. Reno, former Chairman, President and Chief Executive Officer of the Company,
as well as other employees.
Recapitalization and other related costs from continuing operations totaling
$40.8 million were incurred during fiscal 1999 in connection with the
Recapitalization, consisting of cancellation payments of employee stock options,
compensation expense due to the acceleration of unvested stock options, and
certain other expenses resulting from the Recapitalization.
Amortization of intangibles from continuing operations was $8.8 million for the
fiscal year ended March 31, 2000 as compared to $2.7 million for the same period
a year ago. The increase was primarily attributable to increased goodwill
amortization related to the acquisitions in fiscal years 1999 and 2000.
Interest. Interest expense, net of interest income from continuing operations
was $49.6 million for the fiscal year ended March 31, 2000 as compared to $42.8
million for the same period a year ago. The increase in net interest expense
during fiscal 2000 was a result of the debt incurred in connection with the
Recapitalization which was outstanding for 12 months during fiscal 2000 and
outstanding for slightly more than 10 months during fiscal 1999. Also included
in interest expense is amortization expense of $3.2 million and $2.7 million in
fiscal 2000 and 1999, respectively, related to deferred debt issuance costs
which are being amortized over the life of the Senior Secured Credit Agreement.
See Capital Resources and Liquidity - Debt Service.
Other income. During fiscal 1999, the Company sold the net assets of ComCoTec
for $21 million in gross proceeds that resulted in a gain of $15.9 million.
Taxes. The effective tax rate changed for the fiscal year ended March 31, 2000
to a benefit of 14.9% as compared to 1.2% for the fiscal year ended March 31,
1999, primarily due to nondeductible compensation incurred in connection with
the Recapitalization during fiscal 1999, and lower foreign and states taxes
incurred in fiscal 2000.
Business Segment
The Company measures the performance of its subsidiaries by their respective
new orders received ("bookings"), net sales and earnings before interest, taxes,
and amortization of intangibles and amortization of unearned compensation
("EBITA"), which excludes non-recurring and one-time charges (See Appendix C --
Notes to Consolidated Financial Statements: Note Q. Segment Information and
Geographic Areas.)
B-9
Included in the segment's EBITA is an allocation of corporate expenses. The
information below includes bookings, net sales and EBITA for the communications
test segment and the Company's Other Subsidiaries:
Years ending March 31,
2001 2000 1999
---- ---- ----
(Amounts in thousands)
Communications test segment:
Bookings $1,248,465 $430,254 $260,722
Net sales 1,052,746 349,886 238,942
EBITA 139,498 62,447 42,800
Other subsidiaries:
Bookings $ 112,862 $103,802 $ 95,785
Net sales 115,068 103,354 90,590
EBITA 26,499 27,718 29,841
Fiscal 2001 Compared to Fiscal 2000 - Communications Test
Bookings for the communications test products increased 190.2% to $1.25 billion
for the fiscal year ended March 31, 2001, as compared to $430.3 million for the
same period a year ago. The increase was primarily due to the WWG Merger and
the acquisition of Cheetah and ADA as well as an increase in bookings for
instruments, principally in the optical transport products, systems and services
at the Company's existing communications test businesses.
Net sales of communications test products increased 200.9% to $1.05 billion for
the fiscal year ended March 31, 2001, as compared to $349.9 million for the same
period a year ago. The increase in sales 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: 15.0% was
attributable to core growth, 3.8% was attributable to the additional sales from
ADA; 77.2% was attributable to the WWG Merger; and 4.0% was attributable to the
acquisition of Cheetah.
For the fiscal years ended March 31, 2001 and March 31, 2000, respectively,
sales of optical transport products were $420.3 million and $154.1 million;
sales of cable products were $129.6 million and $0 million; and sales of
telecommunications systems and software products were $90.3 million and $47.3
million.
EBITA for the communications test products increased 123.4% to $139.5 million
for fiscal 2001 as compared to $62.4 million for the same period a year ago.
The increase in EBITA is a result of the WWG Merger and the acquisition of
Cheetah, which was offset by integration expenses.
Fiscal 2000 Compared to Fiscal 1999 - Communications Test
B-10
Bookings for the communications test products increased 65.0% to $430.3 million
for the fiscal year ended March 31, 2000, as compared to $260.7 million for the
same period a year ago. The increase is due to a recovery from fiscal 1999's
reduced order volume. The Company received an increase in orders for its
transmission test equipment (transport loops) as well as an increase in bookings
due to the acquisition of ADA. The Company experienced a decrease in bookings
during fiscal 1999 for its core instruments in part due to the Regional Bell
Operating Companies ("RBOC's") consolidation of their purchasing practices as
well as the economic slowdown in Asia.
Sales of communications test products increased 46.4% to $349.9 million for the
fiscal year ended March 31, 2000, as compared to $238.9 million for the same
period a year ago. The increase in sales is a direct result of the increase in
bookings. The Company shipped an increased amount of orders for its
transmission test equipment (transport and loop) as well as orders for its
training and software development.
EBITA for the communications test products increased 45.9% to $62.4 million for
fiscal 2000 as compared to $42.8 million for the same period a year ago. The
increase in EBITA is a result of the increase in sales.
Fiscal 2001 Compared to Fiscal 2000 - Other Subsidiaries
Included in other subsidiaries are two of the Company's operating business
units: AIRSHOW, Inc. and daVinci Systems. The trend in these businesses
collectively shows an increase in revenues and bookings during the three years
presented but a declining EBITA. This trend is primarily the result of
increased shipments of Airshow's products to the general aviation market, which
carry a lower gross margin than commercial aviation products, as well as
increased product costs in its commercial aviation products. da Vinci's
revenues and EBITA have increased 33% and 26% as compared to the same period
last year, respectively, partially as a result of two small acquisitions.
Capital Resources and Liquidity
The Company broadly defines liquidity as its ability to generate sufficient cash
flow from operating activities to meet its obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot
be considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Recapitalization in May
1998, the acquisition of ADA in November 1999, the WWG Merger in May 2000, the
acquisition of Cheetah in August 2000, and from the funding of working capital
and capital expenditures. The increased working capital balances of the Company
at March 31, 2001 following these acquisitions are expected to continue at
similar levels for the foreseeable future.
B-11
The Statement of Cash Flows for all periods presented includes the cash flows
from the industrial computing and communications segment on a fully-consolidated
basis and have not been restated to reflect discontinued operations.
Cash Flows. The Company's cash and cash equivalents increased $27.3 million
during the fiscal year ended March 31, 2001.
Working Capital. For the fiscal year ended March 31, 2001, the Company's net
working capital increased as its operating assets and liabilities used $67.7
million of cash, excluding acquisitions. Accounts receivable increased,
creating a use of cash of $48.1 million, primarily due to the increase in
shipments during the last month of the fiscal year. Inventory levels increased,
creating a use of cash of $40.8 million, due in part to 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 use of cash of $2.2 million. Accounts
payable increased creating a source of cash of $25.2 million as the Company
continues to manage its working capital. Other current liabilities decreased
creating a use of cash of $1.8 million.
Investing activities. The Company's investing activities totaled $464.1 million
for the fiscal year ended March 31, 2001 in part for the purchase and
replacement of property and equipment. The primary use of cash was for the WWG
Merger and the acquisition of Cheetah during fiscal 2001 for a total cash
purchase price of approximately $422.1 million (approximately $578.2 million in
gross purchase price less $156.1 million in cash and non-cash items).
The Company's capital expenditures in fiscal 2001 were $45.9 million as compared
to $21.9 million in fiscal 2000. The increase during fiscal 2001 was primarily
due to additional purchases at WWG. The Company is subject to annual maximum
capital expenditure covenants under the Senior Secured Credit Facility.
Debt and equity. The Company's financing activities generated $474.6 million in
cash during 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
In connection with the WWG Merger, the Company refinanced a portion of its debt
and entered into a new senior secured credit facility with a syndicate of
lenders (the "Senior Secured Credit Facility") that provided for term loans and
a revolving credit facility (the "Revolving Credit Facility"). As of March 31,
2001, the Company had $1,078.6 million of debt (excluding notes payable of $10.9
million), primarily consisting of $275.0 million principal amount of the
Company's 9 3/4% Senior Subordinated Notes (the "Senior Subordinated Notes"),
$668.4 million in the term loan borrowings and $108.0 million in revolving
credit borrowings under the Senior Secured Credit
B-12
Facility, and $27.2 million in other debt obligations. As of March 31, 2000, the
Company had $579.9 million of debt.
The annual weighted-average interest rate on the loans under the Company's
senior secured credit facilities was 9.8% and 7.85% for the fiscal years ended
March 31, 2001 and 2000, respectively. Due to the recent reduction in the prime
interest rate, the Company's 90-day LIBOR borrowing rate (plus the applicable
margin) was 7.65% at March 31,2001. 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 through 2008.
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
interest charged on a portion of its debt, the Company entered into interest
rate hedge agreements. After giving effect to these hedge agreements, $195
million of the Company's debt is currently subject to an effective average
annual fixed rate of 5.718% per annum until September 2002.
Interest on the loans outstanding under the Senior Secured Credit Facility is
payable quarterly in arrears on each June 30, September 30, December 31 and
March 31 through maturity.
The Company is also required to pay a commitment fee based on the unused amount
of the Revolving Credit Facility. The rate is an annual rate, paid quarterly,
and ranges from 0.30% to 0.50%, and is based on the Company's leverage ratio in
effect at the beginning of the quarter. The Company paid $0.3 million and $0.3
million in fiscal 2001 and 2000, respectively, in commitment fees.
The mandatory principal repayment schedule of the Senior Secured Credit Facility
over the next five years and thereafter is: $18.8 million in fiscal 2002, $25.8
million in fiscal 2003, $40.8 million in fiscal 2004, $44.8 million in fiscal
2005, $75.2 million in fiscal 2006, and $462.0 million in fiscal years
subsequent to fiscal 2006.
In addition, on June 29, 2001, the Company entered into an unsecured, short-term
revolving credit facility (the "Short-Term Credit Facility") with Credit Suisse
First Boston and The Chase Manhattan Bank, which provides for revolving credit
loans in an aggregate principal amount not to exceed $40 million. The Company
arranged the facility to provide additional funds for general corporate purposes
including short-term working capital needs, which have increased in part, as a
result of the growth of the Company's business. Loans under the facility bear
interest at floating rates based upon the interest rate option elected by the
Company. The Short-Term Credit Facility matures on December 31, 2001. Interest
and any loans outstanding from time to time under the Short-Term Credit Facility
are expected to be repaid from cash generated by the Company's operations.
At March 31, 2001, approximately $43.7 million remained undrawn under the
Revolving Credit Facility including outstanding letters of credit which reduce
the borrowing capacity of the Company under the Revolving Credit Facility. As
of June 29, 2001, the Company had an aggregate of approximately $40 million of
borrowing capacity under the Revolving Credit Facility and the Short-Term Credit
Facility.
Principal and interest payments under the Company's credit facilities and
interest payments on the Senior Subordinated Notes have represented and will
continue to represent significant liquidity requirements for the Company. (See
Appendix C -Notes to the Consolidated Financial Statements: Note I. Notes
Payable and Debt.)
Future financing sources and cash flows. While the Company believes that cash
generated from operations, together with amounts available from time to time
under the Revolving Credit Facility and the Short-Term 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 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) and the Short-Term 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.
In July 2000 the Company filed a registration statement on Form S-1 for a
potential common stock offering. In February 2001, the Company amended this
registration statement by converting it to a universal shelf registration
statement on Form S-3 under which the Company may offer from time to time up to
$1 billion of equity or debt securities. The shelf registration statement was
declared effective by the Securities and Exchange Commission on April 4, 2001.
The Company's shelf registration statement creates additional potential sources
of liquidity in the future.
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 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
B-13
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 March 31, 2001 and June 29, 2001, the Company was in compliance with all
covenants under the Senior Secured Credit Facility and the Senior Subsordinated
Notes and was in compliance with the terms of the Short-Term Credit Facility as
of June 29, 2001.
For a more detailed description of the Senior Subordinated Notes,the Senior
Secured Credit Facility and the Short-Term Credit Facility, including the
applicable principal amortization schedule and interest rates,and the Short Term
Credit Facility, see Appendix C - Notes to the Consolidated Financial
Statements: Note I. Notes Payable and Debt.
New Pronouncements
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 assessed the impact
of the adoption of FAS 133 on April 1, 2001, and determined that it will not
have a significant impact on the results of operations and financial position.
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 Euro 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.
B-14
The Company uses derivative financial instruments consisting primarily of
interest rate hedge agreements to manage exposures to interest rate changes.
The Company's objective in managing its exposure to changes in interest rates
(on its variable rate debt) is to limit the impact of such changes on earnings
and cash flow and to lower its overall borrowing costs.
At March 31, 2001, the Company had $776.4 million of variable rate debt
outstanding. The Company currently has two interest rate swap contracts with
notional amounts totaling $195 million which fixed its variable rate debt to a
fixed interest rate for periods of two years in which the Company pays a fixed
interest rate on a portion of its outstanding debt and receives interest at the
three-month LIBOR rate.
At March 31, 2001, the two swap contracts had a fixed interest rate higher than
the three-month LIBOR quoted by its financial institutions. However, the 3-month
LIBOR rate was higher than the fixed interest rate during the first three
quarters of fiscal 2001 that created a reduction in interest expense (calculated
as the difference between the interest rate in the swap contracts and the three-
month LIBOR rate). The reduction in interest expense recognized by the Company
during fiscal 2001 and fiscal 2000 was $1.8 million and $0.4 million,
respectively. The Company performed a sensitivity analysis assuming a
hypothetical 10% adverse movement in the floating interest rate on the interest
rate sensitive instruments described above. The Company believes that such a
movement is reasonably possible in the near term. As of March 31, 2001, the
analysis demonstrated that such movement would cause the Company to recognize
additional interest expense of approximately $1.0 million, and accordingly,
would cause a hypothetical loss in cash flows of approximately $1.0 million.
During fiscal 2001 economic factors have caused a significant interest rate
reduction, which in turn resulted in lower borrowing costs for the Company. At
March 31, 2001 and 2000, the Company's variable rate debt was borrowed at a
LIBOR rate of 4.9025% and 6.3125%, respectively. A hypothetical 10% adverse
movement in LIBOR based on the rate at March 31, 2001 would cause the Company to
recognize an additional interest expense of approximately $2.9 million, and
would cause a hypothetical loss in cash flows of approximately $2.9 million.
Risk Factors
Set forth below and elsewhere in this annual 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 annual 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.
B-15
The Company has experienced in the past and expects to experience in the future
fluctuations in its quarterly results due to a number of factors beyond the
Company's control. Many factors could cause the Company's operating results to
fluctuate from quarter to quarter, including the following:
. the size and timing of orders from the Company's customers;
. 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 fourth quarter;
. the uneven buying patterns of the Company's customers;
. the uneven pace of technology innovation; and.
. economic downturns or other factors reducing demand for telecommunication
equipment and services.
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.
The markets for the Company's products are highly competitive. 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. In addition, 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.
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 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
B-16
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. The Company cannot assure you 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. 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 also cannot assure 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 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 and diversion of management's time and
attention;
. an inability to expand the Company's financial and management controls and
reporting systems and procedures to incorporate the acquired businesses;
. potential difficulties in completing projects associated with purchased in-
process research and development;
B-17
. 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 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, and 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's substantial level of debt and the terms of its debt instruments
may have important consequences for the Company including 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 to capitalize on business opportunities may be impaired.
Economic, political and other risks associated with international sales and
operations could adversely affect the Company's net sales.
B-18
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 2002 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; and
. potentially negative consequences from changes in tax laws and other
regulatory requirements.
The planned divestiture of the Company's industrial computing and communications
segment may not be successful.
In May 2000, the Company's board of directors approved a plan to divest its
industrial computing and communications segment, which consists of the ICS
Advent and Itronix Corporation subsidiaries. The Company cannot assure 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, some of
which evolve as new technologies are deployed. Compliance with such regulations,
certifications, standards and protocols may prove costly and time-consuming for
the Company, and the Company cannot assure that its products will continue to
meet these standards in the future. 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.
Risks Related to the Company's Industry.
Industry consolidation or changes in regulation could adversely affect the
Company's business.
B-19
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 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.
B-20
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 it is unable to
continue to attract and retain 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 business, results of
operations or financial condition.
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. 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. 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.
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 protect
or 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.
B-21
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. 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.
As of March 31, 2001, the CDR 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 CDR Funds. By virtue of such stock
ownership and board representation, the CDR 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. In
addition, CDR Fund V 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.
The public market for the Company's common stock is limited as only
approximately 11% of the outstanding stock trades publicly. The small size of
the Company's float tends to increase the volatility of the Company's stock
price. In addition, the stock market in general, and the 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 such factors as:
. 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;
B-22
. announcements by the Company or its competitors of new products, acquisitions
or strategic relationships; and
. general market conditions and domestic and international economic factors
unrelated to the Company's performance.
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.
Forward-Looking Statements
This report (other than the Company's consolidated financial statements and
other statements of historical fact) contains forward-looking statements.
The Company has based these forward-looking statements on its current
expectations and projections about future events. Although the Company believes
that its assumptions made in connection with the forward-looking statements are
reasonable, the Company cannot assure that its assumptions and expectations will
prove to have been correct. These forward-looking statements are subject to
various risks, uncertainties and assumptions including, the risk factors
described elsewhere in this report and the Company's other Securities and
Exchange Commission filings.
The Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this report might not occur and actual results may
differ materially from the estimates or expectations reflected in the Company's
forward-looking statements.
B-23
APPENDIX C
ACTERNA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS C-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND 2000 C-3
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
MARCH 31, 2001, 2000 AND 1999 C-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999 C-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
MARCH 31, 2001, 2000 AND 1999 C-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS C-8
C-1
Report of Independent Accountants
To the Board of Directors and Stockholders of Acterna Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) present fairly, in all material respects, the
financial position of Acterna Corporation and its subsidiaries (the
"Company") at March 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion the financial statement
schedule listed in the index appearing under Item 14 (a)(2) presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 10, 2001, except for the last
paragraph of Note I, as to which
the date is June 29, 2001
C-2
Acterna Corporation
Consolidated Balance Sheets
March 31,
2001 2000
-------- --------
Assets (Amounts in thousands except
share and per share data)
Current assets:
Cash and cash equivalents $ 61,886 $ 33,839
Accounts receivable, net
of allowance of $8,997 and $1,952,
respectively 215,067 78,236
Inventories, net:
Raw materials 43,726 11,085
Work in process 45,772 12,859
Finished goods 43,889 6,308
---------- --------
Total inventory 133,387 30,252
Deferred income taxes 37,961 21,548
Other current assets 36,627 16,332
---------- --------
Total current assets 484,928 180,207
Property, plant and equipment:
Land and buildings 55,123 ---
Leasehold improvements 11,956 5,843
Machinery and equipment 66,325 62,361
Furniture and fixtures 54,650 18,908
---------- --------
188,054 87,112
Less accumulated depreciation and amortization (71,167) (59,796)
---------- --------
Property, plant and equipment, net 116,887 27,316
Other assets:
Net assets of discontinued operations held
for sale 99,244 72,601
Intangible assets, net 593,663 58,508
Deferred income taxes --- 42,689
Deferred debt issuance costs, net 25,908 21,382
Other 22,510 12,135
---------- --------
$1,343,140 $414,838
========== ========
Current liabilities:
Notes payable $ 10,919 $ ---
Current portion of long-term debt 22,248 7,646
Accounts payable 97,024 38,374
Accrued expenses:
Compensation and benefits 69,841 35,036
Deferred revenue 26,823 13,564
Warranty 11,914 8,297
Interest 11,476 10,055
Other 31,902 7,426
Taxes other than income taxes 12,843 1,844
Accrued income taxes 11,991 5,703
---------- ---------
Total current liabilities 306,981 127,945
Long-term debt 1,056,383 572,288
Deferred income taxes 2,915 ---
Deferred compensation 57,838 11,280
Commitments and contingencies (Note N.)
Stockholders' deficit:
Serial preference stock, par value $1 per share;
authorized 100,000 shares; none issued --- ---
Common stock, par value $0.01, 2001 and 2000,
respectively, authorized 350,000,000 and
200,000,000 shares; issued and outstanding
190,953,052 and 122,526,750 shares 1,910 1,225
Additional paid-in capital 801,080 344,873
Accumulated deficit (795,746) (623,929)
Unearned compensation (90,986) (16,965)
Other comprehensive income (loss) 2,765 (1,879)
---------- ---------
Total stockholders' deficit ( 80,977) (296,675)
---------- ---------
$1,343,140 $ 414,838
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
C-3
Acterna Corporation
Consolidated Statements of Income
Years Ended March 31,
2001 2000 1999
-------- -------- --------
(Amounts in thousands
except per share data)
Net sales $1,167,815 $453,239 $329,532
Cost of sales 468,542 157,090 108,618
---------- -------- --------
Gross profit 699,273 296,149 220,914
Selling, general and administrative expense 439,404 156,499 113,469
Product development expense 150,061 61,172 42,472
Recapitalization and other related costs 9,194 27,942 40,767
Purchased incomplete technology 56,000 --- ---
Amortization of intangibles 109,788 8,789 2,726
---------- -------- --------
Total operating expenses 764,447 254,402 199,434
---------- -------- --------
Operating income (loss) (65,174) 41,747 21,480
Interest expense (102,066) (51,916) (46,178)
Interest income 3,155 2,354 3,392
Other income (expense), net (5,455) (68) 15,703
---------- -------- --------
Loss from continuing operations before
income taxes and extraordinary item (169,540) (7,883) (5,603)
Benefit for income taxes (8,382) (1,169) (69)
---------- -------- --------
Net loss from continuing operations before
extraordinary item (161,158) (6,714) (5,534)
Discontinued operations:
Operating income, net of income tax provision of
$7,967 in 2000, and $6,903 in 1999 --- 12,726 11,979
---------- -------- --------
Net income (loss) before extraordinary item (161,158) 6,012 6,445
Extraordinary item, net of income tax benefit
of $6,603 (10,659) --- ---
---------- -------- --------
Net income (loss) $ (171,817) $ 6,012 $ 6,445
========== ======== ========
Income per common share - basic and diluted:
Continuing operations $ (0.87) $ (0.05) $ (0.04)
Discontinued operations --- 0.09 0.09
Extraordinary loss (0.06) --- ---
---------- -------- --------
$ (0.93) $ 0.04 $ 0.05
========== ======== ========
Weighted average number of common shares
Basic and diluted 183,881 148,312 129,596
The accompanying notes are an integral part of the consolidated financial
statements.
C-4
Acterna Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Retained
Number of Shares Additional Earnings/
Common Treasury Common Paid - In (Accumulated
Stock Stock Stock Capital Deficit)
------ ------ ------ -------- -------
(Amounts in thousands)
Balance, March 31, 1998 18,605 (1,741) $ 3,721 $ 7,647 $ 237,282
Net income - 1999 6,445
Translation adjustment
Total comprehensive income
Exercise of stock options and
other issuances 414 59 (111)
Tax benefit from exercise of
stock options 609
Recapitalization and other related
costs:
Common stock repurchased (18,605) 1,682 (3,721) (7,269) (873,668)
Issuance of new stock, net of fees 120,251 298,148
Stock options expense 14,640
Unearned compensation 9,082
Amortization of unearned compensation
-------- -------- --------- --------- ----------
Balance, March 31, 1999 120,665 0 0 322,746 (629,941)
-------- -------- --------- --------- ----------
Net income - 2000 6,012
Translation adjustment
Total comprehensive income
Exercise of stock options and
other issuances 1,862 11 4,725
Adjustment to unearned compensation (1,143)
Stock option expense 12,327
Redemption of stock options (6,980)
Unearned compensation from stock option
grants 12,951
Change in par value of common stock 1,214 (1,214)
Amortization of unearned compensation
Tax benefit from exercise of
stock options 1,461
-------- -------- -------- --------- ----------
Balance, March 31, 2000 122,527 0 1,225 344,873 (623,929)
-------- -------- -------- --------- ----------
Net loss 2001 (171,817)
Translation adjustment
Total comprehensive loss
Issuance of common stock to CDR Funds 43,125 431 172,069
Issuance of common stock rights
offering, net of fees 4,983 50 16,882
Issuance of common stock to
WWG stockholders 14,987 150 129,850
Stock option expense 12,255
Conversion of Cheetah stock options 5,754
Amortization of unearned compensation-
continued operations
Amortization of unearned compensation -
discontinued operations
Exercise of stock option and other
issuances 5,331 54 10,919
Unearned compensation from stock option
grants 98,726
Adjustment to unearned compensation (11,567)
Tax benefit from exercise of stock
options 21,319
-------- -------- -------- -------- ----------
Balance, March 31, 2001 190,953 0 $ 1,910 $801,080 $(795,746)
======== ======== ======== ======== ==========
C-5
Acterna Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Total
Other Stockholders'
Unearned Comprehensive Treasury Equity
Compensation Loss Stock (Deficit)
-------- ---- ----- -------
(Amounts in thousands)
Balance, March 31, 1998 $ 0 $(1,600) $(44,931) $ 202,119
Net income - 1999 6,445
Translation adjustment (82) (82)
----------
Total comprehensive income 6,363
----------
Exercise of stock options and
other issuances 1,946 1,835
Tax benefit from exercise of
stock options 609
Recapitalization and other related
costs:
Common stock repurchased 42,985 (841,673)
Issuance of new stock, net of fees 298,148
Stock options expense 14,640
Unearned compensation (9,082) ---
Amortization of unearned compensation 1,519 1,519
-------- --------- -------- ---------
Balance, March 31, 1999 (7,563) (1,682) 0 (316,440)
-------- --------- -------- ---------
Net income - 2000 6,012
Translation adjustment (197) (197)
---------
Total comprehensive income 5,815
---------
Exercise of stock options and
other issuances 4,736
Adjustment to unearned compensation 1,130 (13)
Stock option expense 12,327
Redemption of stock options (6,980)
Unearned compensation from stock option
grants (12,951) ---
Change in par value of common stock ---
Amortization of unearned compensation 2,419 2,419
Tax benefit from exercise of stock options 1,461
-------- --------- -------- ---------
Balance, March 31, 2000 (16,965) (1,879) 0 (296,675)
-------- --------- -------- ---------
Net loss 2001 (171,817)
Translation adjustment 4,644 4,644
---------
Total comprehensive loss (167,173)
Issuance of common stock to CDR Funds 172,500
Issuance of common stock rights
offering, net of fees 16,932
Issuance of common stock to WWG
stockholders 130,000
Stock option expense 12,255
Conversion of Cheetah stock options (6,721) (967)
Amortization of unearned compensation-
continued operations 18,266 18,266
Amortization of unearned compensation -
discontinued operations 1,574 1,574
Exercise of stock option and other
issuances 10,973
Unearned compensation from stock option
grants (98,726) ---
Adjustment to unearned compensation 11,586 19
Tax benefit from exercise of stock
options 21,319
-------- --------- -------- ---------
Balance, March 31, 2001 $(90,986) $ 2,765 $ 0 $ (80,977)
======== ========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
C-6
Acterna Corporation
Consolidated Statements of Cash Flows
Years Ended March 31,
2001 2000 1999
-------- --------- ---------
(Amounts in thousands)
Operating activities:
Net income (loss) from operations $(171,817) $ 6,012 $ 6,445
Adjustment for noncash items included in net income:
Depreciation 23,852 13,082 11,741
Amortization of intangibles and goodwill 109,788 12,327 6,228
Amortization of inventory step-up 35,750
Amortization of unearned compensation 18,266 2,419 1,519
Amortization of deferred debt issuance costs 3,974 3,232 2,693
Writeoff of deferred debt issuance costs 10,019 --- ---
Purchased incomplete technology 56,000 --- ---
Gain on sale of subsidiary --- --- (15,900)
Recapitalization and other related costs 9,194 12,327 14,640
Tax benefit from stock option exercises 21,319 1,461 609
Other 2,047 56 3
Change in deferred income taxes (31,309) (2,840) (12,289)
Changes in operating assets and liabilities, net of effects
of purchase acquisitions and divestitures (67,713) 9,334 51,981
--------- --------- ---------
Net cash flows provided by operating activities 19,370 57,410 67,670
--------- --------- ---------
Investing activities:
Purchases of property and equipment (45,905) (21,859) (11,323)
Proceeds from sale of property and equipment 2,433
Proceeds from sales of businesses 6,381 --- 21,000
Businesses acquired in purchase transactions,
net of cash and noncash items (422,137) (113,227) (21,365)
Other (4,863) (7,165) (8,391)
---------- --------- ---------
Net cash flows used in investing activities (464,091) (142,251) (20,079)
---------- --------- ---------
Financing activities:
Borrowings under revolving credit facility, net 108,000 70,000 ---
Borrowings of term loan debt 683,566 --- 535,000
Repayment of term loan debt (12,944) (17,139) (8,000)
Borrowings (repayments) of notes payable and other debt 31,735 (212) (2,351)
Repayment of debt under old Senior Secured Credit Facility (304,861) --- ---
Repayment of WWG term debt (118,594) --- ---
Redemption of WWG bonds (94,148) --- ---
Financing fees (18,519) --- (38,631)
Proceeds from issuance of common stock, net of expenses 200,405 4,736 278,835
Purchases of treasury stock, common stock and stock options --- (6,980) (806,508)
--------- --------- ---------
Net cash flows provided by (used in) financing activities 474,640 50,405 (41,655)
--------- --------- ---------
Effect of exchange rates on cash (2,635) (157) (478)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 27,284 (34,593) 5,458
Cash and cash equivalents at beginning of year 35,769 70,362 64,904
--------- --------- ---------
Cash and cash equivalents at end of year $ 63,053 $ 35,769 $ 70,362
========= ========= =========
Change in operating asset and liability components:
Decrease (increase) in trade accounts receivable $ (48,080) $ (18,176) $ (1,114)
Decrease (increase) in inventories (40,817) 7,185 2,503
Decrease (increase) in other current assets (2,224) (7,324) 2,089
Increase (decrease) in accounts payable 25,175 12,397 11,025
Increase (decrease) in accrued expenses, taxes and other (1,767) 15,252 37,478
--------- --------- ---------
Change in operating assets and liabilities $ (67,713) $ 9,334 $ 51,981
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 105,115 $ 48,791 $ 33,376
Income taxes 13,036 14,737 16,013
The accompanying notes are an integral part of the consolidated financial
statements.
C-7
ACTERNA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. FORMATION AND BACKGROUND
Acterna Corporation (the "Company" or "Acterna"), formerly Dynatech
Corporation), was formed in 1959 and is a global communications equipment
company focused on network technology solutions. The Company's operations
are conducted primarily by wholly owned subsidiaries located principally in
the United States of America and Europe with other operations, primarily
sales offices, located in Asia and Latin America. The Company is managed in
one business segment: communications test. The Company also has other
subsidiaries that, in the aggregate, are not reportable as a segment.
The communications test business develops, manufacturers and markets
instruments, systems, software and services used to test, deploy, manage
and optimize communications networks, equipment and services. In addition
the Company also operates two subsidiaries, AIRSHOW, Inc., and da Vinci
Systems. AIRSHOW is the leading provider of systems that deliver real-time
news, information and flight data to aircraft passengers. da Vinci
manufactures systems that correct or enhance the accuracy of color during
the process of transferring film-based images to videotape.
The Company operates on a fiscal year ended March 31 in the calendar year
indicated (e.g., references to fiscal 2001 are references to the Company's
fiscal year which began April 1, 2000 and ended March 31, 2001).
B. DISCONTINUED OPERATIONS
In May 2000, the Board of Directors approved a plan to divest the
industrial computing and communications segment, which segment consists of
ICS Advent and Itronix Corporation subsidiaries. In connection with such
decision, the Company has hired, prepared and distributed a descriptive
memorandum to qualified buyers and has received letters of interest from
certain buyers. The Company is currently undergoing presentations and data
review with these potential buyers and expects to divest these two
subsidiaries, either separately or together, during the first half of the
2002 fiscal year. The businesses to be divested have been treated as
discontinued operations for accounting purposes.
The segment's results of operations including net sales, operating costs
and expenses, other income and expense and income taxes for fiscal 2000 and
1999, have been presented in the accompanying statements of operations as
discontinued operations. The Company's balance sheet for fiscal 2001 and
2000 reflect the net assets of the industrial computing and communications
segment as net assets held for sale within non-current assets. The
Statements of Cash Flows for fiscal years 2001, 2000 and 1999 have not been
presented on a discontinued basis. Management believes that the net
proceeds from the disposition of these companies will exceed the carrying
amount including any net operating losses from the discontinued segment
through the first half of fiscal 2002, at which time the Company
anticipates to have sold these businesses. Accordingly, the anticipated
gains
C-8
from the disposal of the segment and the operating results will not be
reflected in the statements of operations until they are realized.
In accordance with the terms of the Company's new Senior Secured Credit
Facility, the proceeds from the sale of assets, including those of the
discontinued operations, must be used to repay any outstanding term loans.
Summary operating results and balance sheet information of the discontinued
operations are as follows:
Year Ended March 31,
2001 2000 1999
----- ----- -----
(Amounts in thousands)
Sales $198,443 $203,361 $193,322
Operating income (1,914) 21,304 18,638
Net income (loss) (14,795) 12,726 11,979
Accounts receivable, net 31,969 23,524
Inventories 36,941 28,453
Intangible assets, net 49,468 62,464
Accounts payable (22,176) (20,054)
Deferred revenue (20,920) (28,812)
Other, net --- 7,026
C. RECAPITALIZATION
On May 21, 1998, CDRD Merger Corporation, a nonsubstantive transitory
merger vehicle, which was organized at the direction of Clayton, Dubilier &
Rice, Inc. ("CDR"), a private investment firm, was merged with and into the
Company (the "Recapitalization" or the "Transaction") 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 (the "Old Common Stock") was converted into the right to receive
$47.75 in cash and 0.5 shares of common stock, no par value, of the Company
(the "Common Stock") and (2) each then outstanding share of common stock of
CDRD Merger Corporation was converted into one share of Common Stock.
Upon consummation of the Recapitalization, Clayton, Dubilier & Rice Fund V
Limited Partnership, an investment partnership managed by CDR ("CDR Fund
V"), held approximately 91.8% of the Company's Common Stock and other
stockholders held approximately 8.2% of the Common Stock. The Transaction
was treated as a recapitalization for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities
were not affected by these transactions. As of March 31, 2001, CDR Fund V
and Clayton, Dubilier & Rice Fund VI Limited Partnership ("CDR Fund VI")
held approximately 81% of the Common Stock outstanding.
In connection with the Recapitalization, the Company incurred a charge of
$40.8 million from continuing operations, for the cancellation payments of
employee stock options and compensation expense due to the acceleration of
unvested stock options, and $3.5 million for certain other expenses
resulting from the Recapitalization, including employee termination
expense. The Company incurred an additional $41.3 million in expenses, of
which $27.3 million was capitalized and
C-9
is being amortized over the life of the Senior Secured Credit Facilities
and Senior Subordinated Notes. The remaining $14.0 million was charged
directly to stockholders' equity. (See Note I. Notes Payable and Debt.)
Recapitalization and other related costs from continuing operations during
fiscal 2001 and 2000 totaled $9.2 million and $27.9 million, respectively,
most of which related to termination expenses of certain executives
including the retirement of John F. Reno, former Chairman, President and
Chief Executive Officer of the Company, as well as other employees.
D. RELATED PARTY
The Company paid an annual management fee to CDR totaling $0.5 million in
each of the three fiscal years ending March 31, 2001. In return for the
annual management fee, CDR provides management and financial consulting
services to the Company and its subsidiaries.
In connection with the merger (the "WWG Merger") between a subsidiary of
the Company and Wavetek Wandel Goltermann, Inc. ("WWG") in May 2000 and the
concurrent establishment of the new Senior Secured Credit Facility, the
Company paid CDR $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 to the
Company's other stockholders undertaken by the Company in June 2000.
On May 19, 1999, Ned C. Lautenbach, a principal of CDR, became the
Company's Chairman, President and Chief Executive Officer. Mr. Lautenbach
has not received direct compensation from the Company for these services.
However, his compensation for any services is covered in the above
mentioned management agreement.
E. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the parent company and its wholly owned domestic and
international subsidiaries. Intercompany accounts and transactions have
been eliminated. Certain prior year amounts have been reclassified to
conform to the current year.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Significant estimates in these
financial statements include allowances for accounts receivable, net
realizable value of inventories, tax valuation reserves, nonrecurring
charges, and the carrying values of discontinued operations. Actual results
could differ from those estimates.
Fair Value of Financial Instruments. The fair value of cash and cash
equivalents, accounts receivable and accounts payable approximated book
value at March 31, 2001 and 2000. Other financial instruments include debt
and interest
C-10
rate swaps. (See Note I. Notes Payable and Debt and Note J. Interest Rate Swap
Contracts.)
Concentration of Credit Risk. Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash investments,
accounts receivable and interest rate swap contracts.
The Company maintains its cash accounts in various institutions worldwide and
places its cash investments in prime quality certificates of deposit, commercial
paper, or mutual funds.
Credit risk related to its accounts receivable are limited due to the large
number of customers and their dispersion across many business and geographic
areas. However, a significant amount of trade receivables are with customers
within the telecommunications industry. The Company extends credit to its
customers based upon an evaluation of the customer's financial condition and
credit history and generally does not require collateral. The Company has
historically incurred insignificant credit losses. At March 31, 2001, the
Company provided approximately $9.0 million for doubtful accounts ($2.0 million
at March 31, 2000 and $1.6 million at March 31, 1999). The fiscal 2001 provision
is significantly higher than previous years due primarily to the WWG Merger as
well as risk and uncertainty of competitive local exchange carriers' (or CLEC)
customers.
The Company's counterparties to the agreements relating to the Company's
investments and interest rate swap contracts consist of various major
corporations and financial institutions of high credit standing. The Company
does not believe there is significant risk of non-performance by these
counterparties.
Cash Equivalents. Cash equivalents represent highly liquid investment
instruments with an original maturity of three months or less at the time of
purchase.
Inventories. Inventories are stated at the lower of cost (first-in, first-out)
or market, not in excess of net realizable value.
Property, Plant and Equipment. Property, plant and equipment is principally
recorded at cost and depreciated on a straight-line basis over the estimated
useful lives of the assets as follows:
Buildings 30 years
Leasehold improvements Remaining life of lease
Machinery and equipment 7 to 10 years
Furniture and fixtures 5 years
Computer software/hardware 3 years
Tooling 3 years
Vehicles 3 years
Maintenance and repairs' expenditures are expensed when incurred. When a fixed
asset is disposed of, the cost of the asset and any related accumulated
depreciation is written off and any gain or loss is recognized.
C-11
Intangible Assets. Intangible assets consist primarily of goodwill and product
technology acquired in business combinations. The excess of cost over the fair
market value of net assets (goodwill) is primarily amortized on a straight-line
basis over 3 to 30 years though averaging 6 years. Product technology and other
intangible assets are amortized on a straight-line basis primarily over six
years, but in no event longer than their expected useful lives. Amortization
expense from continuing operations related to product technology was $31.7
million in fiscal 2001, $1.6 million in fiscal 2000 and $1.5 million in fiscal
1999. Amortization expense from continuing operations related to goodwill was
$59.6 million in fiscal 2001, $8.8 million in fiscal 2000, and $2.7 million in
fiscal 1999. Amortization expense from continuing operations related to other
intangibles was $18.5 million in fiscal 2001, $1.9 million in fiscal 2000 and
$2.0 million in fiscal 1999.
Long-Lived Assets. The Company periodically evaluates the recoverability of
long-lived assets, including intangibles, whenever events and changes in
circumstances indicate that carrying amount of an asset may not be fully
recoverable. When indicators of impairment are present, the carrying values of
the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of the
underlying assets is adjusted to fair value if the sum of the expected
undiscounted cash flows is less than book value. Fair values are based on quoted
market prices and assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
Deferred Debt Issuance Costs. In connection with the Recapitalization and the
new Senior Secured Credit Facility, the Company incurred financing fees that are
being amortized over the life of the Senior Secured Credit Facilities and Senior
Subordinated Notes. (See Note I. Notes Payable and Debt.)
Other Comprehensive Income (Loss). The functional currency for the majority of
the Company's foreign operations is the applicable local currency. The
translation from the local foreign currencies to U.S. dollars is performed for
balance sheet accounts using the exchange rates in effect at the balance sheet
date and for revenue and expense accounts using a weighted average exchange rate
during the period. The unrealized gains or losses resulting from such
translation are included in stockholders' equity (deficit). The realized gains
or losses resulting from foreign currency transactions are included in other
income.
Other comprehensive income (loss) that is shown in the Statement of
Stockholders' Equity (Deficit) consists only of foreign currency translation
adjustments.
Stock-Based Compensation. The Company accounts for stock-based awards to its
employees using the intrinsic value-based method as prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company has adopted the pro forma
footnote disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which prescribes
the recognition of compensation expense based on the fair value of options on
the grant date using the Black-Scholes valuation model with compensation costs
recognized ratably over the vesting period.
Unearned Compensation. From the time of the Recapitalization through October
2000, the Company issued non-qualified stock options to primarily all employees
and non-employee directors at an exercise price equal to the fair market value
as
C-12
determined by the Company's board of directors. The exercise price may or may
not have been equal to the trading price in the public market on the dates of
the grants. The Company recorded a charge equal to the difference between the
closing price in the public market and the exercise price of the options within
unearned compensation within stockholders' deficit. This unearned compensation
charge is being 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 average of the highest and lowest trading prices in the
public market as of the day of the grant for all stock options issued after that
date.
The Company adjusts unearned compensation for employees and non-employee
directors who have terminated employment with the Company whose options, which
were granted at an exercise price lower than the trading price on the open
market, were not fully vested at the time of departure. The adjustment reverses
any amortization charge recognized for unvested options and eliminates any
related remaining unearned compensation.
Revenue Recognition. The Company has adopted the recommendations of Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"), effective April 1, 2000. The application of SAB 101 did not have any
impact on its Financial Statements.
The Company's revenues are primarily derived from product sales. The Company
recognizes revenue when it is realized or realizable and earned. The Company
considers revenue realized or realizable and earned when it has persuasive
evidence of an arrangement, the product has been shipped or the services have
been provided to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured.
Revenue from product sales is generally recognized at the time the products are
shipped to the customer. In certain cases where the Company has not transferred
the risks and rewards of ownership, revenue recognition is deferred. Upon
shipment, the Company also provides for estimated costs that may be incurred for
product warranties and sales returns. Service revenue is deferred and recognized
over the contract period or as services are rendered.
Revenue on long-term contracts is recognized using the completed contract basis
or the percentage of completion basis, as appropriate. Profit estimates on long-
term contracts are revised periodically based on changes in circumstances and
any losses on contracts are recognized in the period that such losses become
known. Generally, the terms of long-term contracts provide for progress billing
based on completion of certain phases of work.
Revenue from software sales is generally recognized upon delivery provided that
a contract has been executed, there are no uncertainties regarding customer
acceptance and that collection of the related receivable is probable.
Product Development Expense. Costs relating to research and development are
expensed as incurred. Internal software development costs that qualify for
capitalization are not significant.
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Warranty Costs. The Company generally warrants its products for one to
three years after delivery. A provision for estimated warranty costs is
recorded at the time revenue is recognized.
Interest Rate Swap Contracts. The Company uses interest rate swap contracts
to effectively fix a portion of its variable rate Term Loan Facility to a
fixed rate to reduce the impact of interest rate changes on future income.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The differential to be paid or received under these
agreements is recognized within interest expense. (See Note J. Interest
Rate Swap Contracts.)
Income Taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of assets and liabilities that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the tax bases of assets and liabilities and their reported amounts
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Tax credits are generally recognized as reductions of
income tax provisions in the year in which the credits arise. (See Note K.
Income Taxes.)
The Company does not provide for U.S. income tax liabilities on
undistributed earnings of its foreign subsidiaries which are considered
indefinitely reinvested and accordingly no provision has been made for
taxes that might be payable upon remittance of such non-U.S. earnings.
However, at the point in time that the Company determines that such non-
U.S. earnings are not permanently invested, provision would be made for
U.S. income taxes that would be due upon remittance of such dividends.
New Pronouncements
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 assessed the impact of the adoption
of FAS 133 on April 1, 2001, and determined that it will not have a
significant impact on its results of operations and its financial position.
F. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS DURING FISCAL 2001
-------------------------------
Wavetek Wandel Goltermann,Inc.
On May 23, 2000, the Company merged one of its wholly owned subsidiaries
with WWG for consideration of $402.0 million. The WWG Merger was accounted
for using the purchase method of accounting. Purchased incomplete
technology of $51 million had
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not reached technological feasibility, had no alternative future use and
was written off to the income statement in the fiscal year 2001. The excess
purchase price, based upon an independent valuation, was allocated to other
intangibles.
The purchase accounting is summarized as follows:
Aggregate purchase price:
Cash in exchange for WWG stock $249,562
Cash in exchange for WWG options 8,248
Acterna common stock, 14,987 shares 130,000
Acquisition costs 14,228
--------
Total purchase price 402,038
Plus net tangible liabilities acquired 150,504
--------
Total purchase price in excess of net assets
acquired $552,542
========
Allocations of purchase price:
Inventory step-up to fair value $ 35,000
In-process research and development acquired 51,000
Allocation to land and buildings 27,000
Deferred tax liabilities (49,447)
Core technology 162,180
Workforce 45,151
Backlog 6,841
Goodwill 274,817
--------
$552,542
========
Superior Electronics Group, Inc., doing business as Cheetah Technologies
On August 23, 2000, the Company acquired Superior Electronics Group, Inc.,
a Florida corporation doing business as Cheetah Technologies ("Cheetah")
for a purchase price of $171.5 million. The acquisition was accounted for
using the purchase method of accounting. The Company funded the purchase
price with borrowings of $100 million under its Senior Secured Credit
Facility (See Note I. Notes Payable and Debt) and approximately $65.7
million from its existing cash balance. Purchased incomplete technology of
$5 million had not reached technological feasibility, had no alternative
future use and was written off to the income statement in the fiscal year
2001. The excess purchase price was allocated to other intangibles based
upon an independent valuation.
In connection with the Cheetah acquisition, options to purchase shares of
Cheetah were converted into options to purchase shares of Acterna common
stock. The fair value as of the announcement date of the acquisition of all
options converted was $5.8 million using an option-pricing model. An
additional charge 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 three years).
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The purchase accounting is summarized as follows:
Aggregate purchase price:
Cash paid $164,723
Add fair value of Cheetah stock options converted to Acterna
stock options 5,754
Acquisition costs 997
--------
Total purchase price 171,474
Less net assets acquired (15,073)
--------
Total purchase price in excess of net assets acquired $156,401
========
Allocations of purchase price:
Inventory step-up to fair value $ 750
In-process research and development acquired 5,000
Deferred compensation related to unvested stock options
assumed by the Company 6,720
Core technology 48,300
Workforce 3,900
Backlog 3,300
Other intangibles 700
Goodwill 87,731
--------
$156,401
========
The final allocation of the purchase price of Cheetah is dependent upon the
Company's decision to consolidate certain manufacturing operations.
ACQUISITIONS DURING FISCAL 2000
-------------------------------
WPI Husky Technology, Inc., WPI Oyster Termiflex Limited, WPI Husky
Technology Limited and WPI Husky Technology GmbH
On February 24, 2000 the Company, through one of its wholly owned
subsidiaries, purchased certain assets and liabilities of WPI Husky
Technology, Inc., and WPI Oyster Termiflex Limited, and the stock of WPI
Husky Technology Limited and WPI Husky Technology GmbH (collectively
"Itronix UK"), all of which were subsidiaries of WPI, Inc. The total
purchase price for Itronix UK totaled approximately $34.8 million in cash
(of which approximately $30 million was borrowed to finance the
acquisition). The acquisition was accounted for using the purchase method
of accounting and resulted in approximately $30 million of goodwill that is
being amortized on a straight-line basis over 5 years. The operating
results of Itronix UK have been included in the Company's consolidated
financial statements presented within discontinued operations since
February 23, 2000. The Company intends to sell this acquired company in
connection with the sale of the other business units within discontinued
operations within the first half of fiscal 2002. Itronix UK distributes
rugged field computer systems including the provision of related services
for incorporation into customers' specific applications.
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ICS Advent (Europe) Ltd.
On January 4, 2000, the Company purchased the remaining outstanding stock of
ICS Advent (Europe) Ltd. ("ICS UK") for (Pounds)3.0 million (approximately
$4.9 million) in cash. The Company previously owned approximately 25% of ICS
UK. The acquisition was accounted for using the purchase method of accounting
and generated approximately $4.0 million of goodwill that is being amortized
on a straight-line basis over 5 years. The operating results of ICS UK have
been included in the Company's financial statements presented within
discontinued operations, since January 1, 2000. The Company intends to sell
this acquired company in connection with the sale of the other business units
within discontinued operations within the first half of fiscal 2002. ICS UK
is primarily a distributor of mission-critical computer systems to the
defense, factory-automation, data and telecommunications markets within Europe
as well as a distributor of rack-mounted computers supplied by the Company's
ICS Advent subsidiary.
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 $46.3 million of excess of purchase price over
cost that 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.
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 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.
Flight TECH
In February 1999, the Company, through one of its wholly owned subsidiaries,
acquired Flight TECH of Hillsboro, Oregon for $2 million in cash. The
acquisition was accounted for using the purchase method of accounting and
resulted in approximately $1.9 million of goodwill that is being amortized on
a straight-line basis over 30 years. The operating results of Flight TECH
have been included in the Company's financial statements since February 1999
within Other Subsidiaries. Flight TECH is an inflight entertainment
manufacturer specializing in equipment for small and medium jets, and
turboprop aircraft.
C-17
ACQUISITION DURING FISCAL 1999
------------------------------
Pacific Systems Corporation
On June 19, 1998, the Company, through one of its indirectly wholly owned
subsidiaries, acquired all of the outstanding stock of Pacific Systems
Corporation of Kirkland, Washington ("Pacific") for a total purchase price of
approximately $20 million in cash, which includes an incentive earnout. The
acquisition was accounted for using the purchase method of accounting and
resulted in $18.0 million of goodwill that is being amortized on a straight-
line basis over 30 years. The operating results of Pacific have been included
in Acterna's consolidated financial statements within Other Subsidiaries since
June 19, 1998. Pacific designs and manufactures customer-specified avionics
and integrated cabin management.
The goodwill generated from these acquisitions during fiscal 2000 was
calculated based on the purchase price less the net assets acquired, as
follows:
2000
----
(Amounts in
thousands)
Total purchase price $ 126,891
---------
Less net assets acquired:
Cash 13,664
Accounts receivable 12,638
Inventories 19,684
Deferred tax asset 20,099
Other assets 11,949
Notes payable (124)
Accounts payable (11,686)
Accrued liabilities (14,431)
Long-term debt (139)
---------
51,654
---------
Goodwill $ 75,237
=========
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the acquisitions had
occurred at the beginning of the fiscal year presented, with pro forma
adjustments to give effect to amortization of goodwill and intangibles,
interest expense on acquisition debt, and certain other adjustments, together
with related income tax effect. These pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisitions had occurred as of the beginning of the periods presented, or
that may be obtained in the future.
2001 2000
---- ----
(Amounts in thousands except
per share data)
(unaudited)
Revenue $1,266,401 $ 995,789
Net loss from continuing operations $ (191,518) $(111,108)
Loss per share from continuing operations:
Basic and diluted $ (1.01) $ (0.75)
Weighted average shares:
Basic and diluted 189,223 147,998
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DIVESTITURES
ComCoTec, Inc.
On June 30, 1998, the Company sold the assets of ComCoTec, Inc.
("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc. for
$21 million. Acterna recorded a pre-tax gain on $15.9 million on the sale
of the assets, which was included in other income. Sales and operating
results were insignificant for the periods ended March 31, 1999 and 1998.
Data Views Corporation
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".
OTHER ACQUISITIONS AND DIVESTITURES
-----------------------------------
In the normal course of business, the Company has acquired and sold small
companies that, in the aggregate, do not have a material impact on the
financial results of the Company for the periods presented.
G. INTANGIBLE ASSETS
Intangible assets, acquired primarily from business acquisitions, are
summarized as follows (See Note F. Acquisitions and Divestitures):
2001 2000
------- -------
(Amounts in thousands)
Goodwill $426,612 $67,328
Core technology 228,042 9,236
Other intangible assets 70,709 4,177
-------- -------
725,363 80,741
Less accumulated amortization 131,700 22,233
-------- -------
Total $593,663 $58,508
======== =======
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H. NET INCOME (LOSS) PER SHARE
The computation for net income (loss) per share is as follows:
2001 2000 1999
------- ------- -------
(Amounts in thousands except per share data)
Net income (loss):
Continuing operations $(161,158) $ (6,714) $ (5,534)
Discontinued operations --- 12,726 11,979
Extraordinary loss (10,659) --- ---
--------- -------- --------
Net income (loss) $(171,817) $ 6,012 $ 6,445
========= ======== ========
BASIC AND DILUTED:
Common stock outstanding, net of treasury stock,
beginning of period 122,527 120,665 16,864
Weighted average common stock and treasury stock
issued during the period 57,188 886 104,331
Weighted average common stock and treasury stock
repurchased --- --- (14,983)
--------- -------- --------
179,715 121,551 106,212
Bonus element adjustment related to rights offering 4,166 26,761 23,384
-------- -------- --------
Weighted average common stock outstanding, net of
treasury stock, end of period 183,881 148,312 129,596
======== ======== ========
Net income per common share basic and diluted:
Continuing operations $ (0.87) $ (0.05) $ (0.04)
Discontinued operations --- 0.09 0.09
Extraordinary loss (0.06) --- ---
--------- -------- --------
Net income per common share $ (0.93) $ 0.04 $ 0.05
========= ======== ========
On May 23, 2000 in connection with the WWG Merger, the Company issued
43,125,000 shares of common stock to CDR Fund V and CDR Fund VI at a price
of $4.00 per share. In order to reverse the diminution 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) of record on April 20, 2000 (the "Offering").
CDR Fund V elected to waive its right to participate in this Rights
Offering. Thus, 4,983,000 shares of common stock were covered under the
Offering to stockholders other than
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CDR Fund V. As a result of these transactions, the Company granted a right
to all stockholders other than CDR Fund V to purchase 4,983,000 shares of
common stock at a price of $4.00 per share. The closing trading price of
the common stock on May 22, 2000, immediately prior to the sale of the
common stock to CDR Fund V, was $11.25.
For purposes of calculating weighted average shares and earnings per share,
the Company has treated the sale of common stock to the CDR Funds and the
sale of common stock to all other stockholders as a rights offer. Since the
common stock was offered to all stockholders at a price that was less than
that of the market trading price (the "bonus element"), a retroactive
adjustment of 1.22 per share was made to weighted average shares to reflect
this bonus element.
In fiscal 2001 and 2000 the Company excluded from its diluted weighted
average shares outstanding the effect of the weighted average common stock
equivalents (13.5 million in fiscal 2001 and 11.4 million in fiscal 2000)
as the Company incurred a net loss from continuing operations. The
inclusion of the common stock equivalents has been excluded from the
calculation of diluted weighted average shares outstanding because
inclusion would result in an antidilutive effect on net loss per common
share from continuing operations.
I. NOTES PAYABLE AND DEBT
Notes Payable
Certain of the Company's foreign subsidiaries have agreements with banks
that provide for short-term revolving advances and overdraft facilities
(the "Overdraft Facilities") in an aggregate total amount of approximately
$30.7 million. At March 31, 2001, aggregate amounts of $8.5 million had
been borrowed under these facilities. Certain of these bank agreements also
provide for long-term borrowings and are generally secured by the assets of
the local subsidiary and guaranteed by the Company. Most of these
agreements do not have stated maturity dates, but are cancelable by the
banks at any time and, accordingly, are classified as short-term
liabilities.
Revolving borrowings under these Overdraft Facilities vary significantly by
country. The average interest rate on the Overdraft Facilities, which
ranges from approximately 15% to 20%, is primarily due to the high cost of
borrowing in Brazil. Approximately 83% of the outstanding balance on the
Overdraft Facilities is with banking institutions in Brazil.
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Long-Term Debt
Long-term debt is summarized below:
2001 2000
-------- ---------
(Amounts in thousands)
Senior secured credit facilities $ 776,354 $304,861
Senior subordinated notes 275,000 275,000
Capitalized leases and other debt 27,277 73
---------- --------
Total debt 1,078,631 579,934
---------- --------
Less current portion 22,248 7,646
---------- --------
Long-term debt $1,056,383 $572,288
========== ========
The book value of the debt under the Senior Secured Credit Facilities
represents fair market value at March 31, 2001 and 2000. The fair market
value of the Senior Subordinated Notes was $226.9 million and $250.3
million at March 31, 2001 and 2000, respectively.
Senior Secured Credit Facilities
In connection with the WWG Merger, the Company refinanced certain of its
debt and entered into a new senior secured credit facility (the "Senior
Secured Credit Facility") which provided for up to $175.0 million in
revolving credit borrowings (the "Revolving Credit Facility") and $685.0
million of term loan borrowings. As of March 31, 2001, the Company had
$776.4 million of indebtedness outstanding under the Senior Secured Credit
Facility consisting of $668.4 million in term loans and $108.0 million in
revolving credit borrowings. In addition, the Company had outstanding
$275.0 million principal amount of 9 3/4% senior subordinated notes (the
"Senior Subordinated Notes") and $27.2 million in other debt obligations.
As of March 31, 2000, the Company had $579.9 million of debt. The amount
under the Revolving Credit Facility that remained undrawn at March 31, 2001
was approximately $43.7 million, including outstanding letters of credit
which reduces the borrowing capacity of the Company under the terms of the
Revolving Credit Facility.
At the time of the WWG Merger, the Company acquired and subsequently repaid
approximately $118.6 million of WWG revolving credit debt and $94.1 million
of outstanding WWG bonds.
The loans under the Senior Secured Credit Facility bear interest at
floating rates based upon the interest rate option elected by the Company.
These rates are based on LIBOR plus an applicable margin ranging from 2.75%
to 3.25% per annum. To fix interest charged on a portion of its debt, the
Company entered into interest rate hedge agreements. After giving effect to
these agreements, $195 million of the Company's debt is currently subject
to an effective average annual fixed rate of 5.718% per annum until
September 2002.
The annual weighted-average interest rate on the loans under the Company's
senior secured credit facilities was 9.8% and 7.85% for the fiscal years
ended March 31, 2001 and 2000, respectively. Due to the recent reduction in
the prime interest rate, the Company's 90-day LIBOR borrowing rate plus
margin at March 31, 2001 was 7.65%. 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 through 2008.
The Company is also required, under the terms of the Senior Secured Credit
Facility, to pay a commitment fee based on the unused amount of the
revolving
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credit facility. The rate is an annual rate, paid quarterly, and ranges
from 0.30% to 0.50%, and is based on the Company's leverage ratio in effect
at the beginning of the quarter. The Company paid $0.3 million and $0.3
million in fiscal 2001 and 2000, respectively, in commitment fees.
The mandatory repayment schedule of the Senior Secured Credit Facilities
over the next five years and thereafter is as follows: $18.8 million in
fiscal 2002, $25.8 million in fiscal 2003, $40.8 million in fiscal 2004,
$44.8 million in fiscal 2005, $75.2 million in fiscal 2006, and $462.0
million in fiscal years subsequent to fiscal 2006.
In connection with the Recapitalization in fiscal 1999, the Company entered
into a secured credit agreement, which consisted of a $260 million term
loan facility and a $110 million revolving credit facility. In addition,
the Company incurred $275 million of debt through the sale of the Senior
Subordinated Notes. As a result of the refinancing of WWG's and the
Company's senior bank debt during fiscal 2001, the Company recorded an
extraordinary charge of approximately $10.7 million (net of taxes). (See
Note P. Extraordinary Charge)
Covenant Restrictions. The Senior Secured Credit Agreement imposes
restrictions on the ability of the Company to make capital expenditures,
and both the Senior Secured Credit Facility and the indenture governing
the Senior Subordinated Notes limit the Company's ability to incur
additional indebtedness. The covenants contained in the Senior Secured
Credit Agreement also, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur guarantee
obligations, prepay other indebtedness, make restricted payments, create
liens, make equity or debt investments, make acquisitions, modify terms of
the indenture governing the Senior Subordinated Notes, engage in mergers or
consolidations, change the business conducted by the Company and its
subsidiaries taken as a whole or engage in certain transactions with
affiliates. These restrictions, among other things, preclude Acterna LLC
from distributing assets to Acterna Corporation (which has no independent
operations and no significant assets other than its membership interest in
Acterna LLC), except in limited circumstances. In addition, under the
Senior Secured Credit Agreement, the Company is required to comply with a
minimum interest expense coverage ratio and a maximum leverage ratio. These
financial tests become more restrictive in future years. The term loans
under the Senior Secured Credit Facilities are governed by negative
covenants that are substantially similar to the negative covenants
contained in the indenture governing the Senior Subordinated Notes, which
also impose restrictions on the operation of the Company's business.
The Senior Secured Credit Facilities are subject to mandatory prepayments
and reductions in an amount equal to, subject to certain exceptions, (a)
100% of the net proceeds of (1) certain debt offerings by the Company and
any of its subsidiaries, (2) certain asset sales or other dispositions by
the Company or any of its subsidiaries, and (3) property insurance or
condemnation awards received by the Company or any of its subsidiaries, and
(b) 50% of the Company's excess cash flow (the "Recapture") (as defined in
the Senior Secured Credit Agreement) for each fiscal year in which the
Company exceeds a certain leverage ratio. The Senior Subordinated Notes are
subject to certain mandatory prepayments under certain circumstances.
During fiscal 2000 the Company was required, under the terms of the
Recapture, to repay $15 million in Term Loan borrowings on June 30, 1999.
The Company elected
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to use the $15 million in part to prepay the mandatory $8 million
amortization due in fiscal 2000. Based on the Recapture calculations at
March 31, 2001 and March 31, 2000, the Company was not required to make an
additional mandatory principal reduction during fiscal 2001.
Senior Subordinated Notes
The Senior Subordinated Notes due 2008 will not be redeemable at the option
of the Company prior to May 15, 2003 unless a change of control occurs.
Should that happen, the Company may redeem the Notes in whole, but not in
part, at a price equal to 100% of the principal amount plus the greater of
(1) 1.0% of the principal amount of such Note and (2) the excess of (a) the
present value of (i) redemption price of such Note plus (ii) all required
remaining scheduled interest payments due on such Note through May 15,
2003, over (b) principal amount of such Note on the redemption date.
Except as noted above, the Notes are redeemable at the Company's option, in
whole or in part, anytime on and after May 15, 2003, and prior to maturity
at the following redemption prices:
Redemption
Period Price
------ ----------
2003 104.875%
2004 103.250%
2005 101.625%
2006 and thereafter 100.000%
Principal and interest payments under the 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.
On June 29, 2001, the Company entered into an unsecured, short-term
revolving credit facility (the "Short-Term Credit Facility") with Credit
Suisse First Boston and The Chase Manhattan Bank, which provides for
revolving credit loans in an aggregate principal amount not to exceed $40
million. The Company arranged the facility to provide additional funds for
general corporate purposes including short-term working capital needs,
which have increased, in part, as a result of the growth of the Company's
business. Loans under the facility bear interest at floating rates based
upon the interest rate option elected by the Company. The Short-Term Credit
Facility matures on December 31, 2001. Interest and any loans outstanding
from time to time under the Short-Term Credit Facility are expected to be
repaid from cash generated by the Company's operations.
J. INTEREST RATE SWAP CONTRACTS
The Company uses interest rate swap contracts to effectively fix a portion
of its variable rate term loans under the Senior Secured Credit Facility to
a fixed rate in order to reduce the impact of interest rate changes on
future income. The differential to be paid or received under these
agreements is recognized as an adjustment to interest expense related to
the debt. At March 31, 2001 the Company had two interest rate swap
contracts in which the Company pays a fixed interest rate and the Company
receives a three-month LIBOR interest rate.
Notional Fixed Interest Market Valuation
Swap No. Amount Term Rate at March 31, 2001
------- ------- ---------- ----------- -----------------
(Amounts in thousands)
1 $ 65,000 September 30, 1998 - 5.845% $ (389)
September 30, 2001
2 $130,000 September 30, 1998 - 5.655% $(1,890)
September 28, 2002
C-24
During fiscal 2001, the Company recognized a reduction in interest expense
from the swap contracts of $1.8 million and an increase in interest expense in
fiscal 2001 of $0.4 million.
The valuations of derivatives transactions are indicative values based on mid-
market levels as of the close of business of the date they are provided.
These valuations are provided for information purposes only and do not
represent (1) the actual terms at which new transactions could be entered
into, (2) the actual terms at which existing transactions could be liquidated
or unwound, or (3) the calculation or estimate of an amount that would be
payable following the early termination of any master trading agreement to
which the Company is a party to.
The provided valuations of derivatives transactions are derived from
proprietary models based upon well-recognized financial principles and
reasonable estimates about relevant future market conditions. The valuations
set forth above indicate a net payment from the Company to the financial
institution since the fixed interest rates in the contracts was higher than
the three-month LIBOR interest rate at March 31, 2001.
K. INCOME TAXES
The components of income (loss) from continuing operations before taxes are as
follows:
2001 2000 1999
--------- -------- --------
(Amounts in thousands)
Domestic $(190,362) $ (8,645) $ (5,398)
Foreign 20,822 762 (205)
--------- -------- --------
Total $(169,540) $ (7,883) $ (5,603)
========= ======== ========
The components of the benefit for income taxes from continuing operations are
as follows:
2001 2000 1999
-------- -------- --------
(Amounts in thousands)
Provision for income taxes:
United States $ (22,374) $ (1,334) $ (469)
Foreign 15,858 213 (125)
State (1,866) (48) 525
--------- -------- ---------
Total $ (8,382) $ (1,169) $ (69)
========= ======== =========
C-25
The components of the income tax benefit are as follows:
2001 2000 1999
--------- -------- ---------
(Amounts in thousands)
Current:
Federal $ (7,416) $ 346 $ 5,435
Foreign 24,892 213 (125)
State 79 84 142
--------- -------- ---------
Total Current 17,555 643 5,452
--------- -------- ---------
Deferred:
Federal (14,958) (1,680) ( 5,904)
Foreign (9,034) --- ---
State (1,945) (132) 383
--------- -------- ---------
Total deferred (25,937) (1,812) ( 5,521)
--------- -------- ---------
Total $ (8,382) $(1,169) $ (69)
========= ======== =========
Reconciliations between U.S. federal statutory rate and the effective tax rate
of continuing operations before extraordinary items follow:
2001 2000 1999
---- ---- ----
Tax at U.S. federal statutory rate (35.0)% (35.0)% (35.0)%
Increases (reductions) to statutory tax rate
resulting from:
Foreign income subject to tax at a rate
different than U.S. rate 7.3 (2.9) 8.3
State income taxes, net of federal income
tax benefit (0.7) (0.4) 6.1
Nondeductible purchased incomplete technology 10.5 --- ---
Nondeductible amortization 10.0 31.7 7.6
Adjustment to foreign deferred tax assets
and liabilities for enacted changes in tax
rates (6.0) --- ---
Unremitted earnings of foreign subsidiaries 6.0 --- ---
Nondeductible compensation 0.7 1.4 13.9
Foreign sales corporation tax benefit --- (12.1) (14.2)
Non-deductible meals and entertainment
expenses 0.3 4.0 4.1
Other, net 2.0 (1.6) 8.0
------ ----- -----
Effective tax rate before extraordinary
items (4.9)% (14.9)% (1.2)%
====== ====== =====
C-26
The principal components of the deferred tax assets and liabilities follow:
2001 2000
------- -------
(Amounts in thousands)
Deferred tax assets:
Net operating loss and credit carryforwards $ 53,444 $ 15,931
Depreciation and amortization 26,739 23,979
Other accruals 12,867 4,328
Deferred revenue 8,908 9,797
Deferred compensation 4,705 2,795
Compensation related to stock options 16,255 9,708
Other deferred assets 15,756 4,652
-------- --------
138,674 71,190
Valuation allowance (16,189) (5,681)
-------- --------
122,485 65,509
Deferred tax liabilities:
Depreciation and amortization 76,241 256
Unremitted earnings of foreign subsidiaries 10,356
Other deferred liabilities 842 1,016
-------- --------
87,439 1,272
-------- --------
Net deferred tax assets $ 35,046 $ 64,237
======== ========
The valuation allowance applies to state and foreign net operating loss
carryforwards that may not be fully utilized by the Company. The increase in
the valuation reserve relates to the net increase in these loss carryforwards.
Realization of the net deferred tax asset is dependent upon generating
sufficient taxable income in the appropriate taxable jurisdictions prior to
the expiration of the net operating losses. Although realization is not
assured, management believes it is more likely than not that the recorded
deferred tax assets, net of valuation allowance provided, will be realized.
At March 31, 2001 the Company has tax net operating losses (NOL) and credit
carryforwards expiring as follows:
Federal &
U.S. Federal Foreign State
NOLs State NOLs NOLs Credits
---------- ---------- ------ ---------
(Amounts in thousands)
Year of
expiration:
2002 - 2007 $ --- $ --- $ 100 $ 1,400
2008 - 2013 1,200 --- 18,600 1,100
2014 - 2019 9,000 11,100 --- 1,200
2020 - 2025 63,400 107,000 --- 600
Thereafter --- --- 43,800 1,300
-------- -------- --------- ---------
Totals $ 73,600 $118,100 $ 62,500 $ 5,600
======== ======== ========= =========
C-27
The federal and state loss carryforwards relate primarily to tax deductions
generated in the current year from the exercise of nonqualified stock options
by the Company's employees. Tax credits and foreign loss carryforwards are
available primarily as a result of certain acquisitions.
U.S. income taxes have not been provided for unremitted foreign earnings of
approximately $13.8 million. These earnings are considered to be permanently
invested in non-U.S. operations. The residual U.S. tax liability, if such
amounts were remitted, would be approximately $2.4 million.
L. EMPLOYEE RETIREMENT PLANS
The Company has a trusteed employee 401(k) savings plan for eligible U.S.
employees. The Plan does not provide for stated benefits upon retirement.
The Company has a nonqualified deferred compensation plan that permits certain
key employees to annually elect to defer a portion of their compensation for
their retirement. The amount of compensation deferred and related investment
earnings have been placed in an irrevocable rabbi trust and recorded within
other assets in the Company's balance sheet, as this trust will be available
to the general creditors of the Company in the event of the Company's
insolvency. An offsetting deferred compensation liability, which equals the
total value of the trust at March 31, 2001 and 2000 of $10.6 million and $11.3
million, respectively, reflect amounts due the key employees who contribute to
the plan. The change in the valuation is due to employee contributions, the
Company match on the contributions, and the change in the market valuation of
the fund.
Corporate contributions to employee retirement plans were $8.8 million in
fiscal 2001, $6.2 million in fiscal 2000, and $4.9 million in fiscal 1999.
WWG sponsors several qualified and non-qualified pension plans for its
employees. For those employees participating in defined benefit plans,
benefits are generally based upon years of service and compensation or stated
amounts for each year of service. Assets of the various pension plans consist
primarily of managed funds that have underlying investments in stocks and
bonds. WWG's policy for funded plans is to make contributions equal to or
greater than the requirements prescribed by law in each country.
The following table provides a reconciliation of the changes in the plans'
benefits obligations for the year ended March 31, 2001:
2001
------------
(In thousands)
Purchased obligation $ 50,712
Service cost 4,373
Interest cost 2,939
Actuarial gain/loss 4,254
Foreign currency exchange rate changes (1,116)
Benefits paid (1,864)
----------
Obligation at March 31 $ 59,298
==========
C-28
The following table provides a reconciliation of the changes in the fair value
of assets under the benefits plans for the year ended March 31, 2001:
2001
----
(In thousands)
Fair value of plan assets acquired $ 14,084
Actual return on plan assets 139
Foreign currency exchange rate changes (786)
Employer contributions 816
Benefits paid (292)
----------
Fair value of plan assets at March 31 $ 13,961
==========
The following table represents a statement of the funded status for the year
ended March 31, 2001:
2001
----
(In thousands)
Net amount recognized $ 42,637
Unrecognized net gain/loss 2,700
----------
Funded status $ 45,337
==========
The following table provides the amounts recognized in the consolidated balance
sheets as of March 31, 2001:
2001
----
(In thousands)
Prepaid benefit cost $ (370)
Accrued benefit liability 43,007
---------
Net amount recognized $ 42,637
=========
The following table provides the components of the net periodic benefit cost for
the plans for the years ended March 31, 2001:
2001
----
(In thousands)
Service cost $ 4,374
Interest cost 2,939
Expected return of plan assets (822)
----------
Net periodic pension cost $ 6,491
==========
C-29
M. STOCK COMPENSATION PLANS
The Company maintains two Stock Option plans in which common stock is
available for grant to key employees at prices not less than fair market
value (110% of fair market value for employees holding more than 10% of the
outstanding common stock) at the date of grant determined by the Board of
Directors. Incentive or nonqualified options may be issued under the plans
and are exercisable from one to ten years after grant.
The Company maintains a third Stock Option plan in which common stock is
available for grant to non-employee directors. Each eligible director is
automatically granted a stock option to purchase 25,000 shares of stock
when he or she is first elected to the Board of Directors.
Stock options for all three plans vest primarily between three and five
years.
At the time of the Recapitalization, primarily all Company stock options
became fully vested and exercisable. Any Company stock option that was
outstanding immediately prior to the effective time of the Recapitalization
was cancelled and each holder received an option cancellation payment.
Stock options held by certain key executives were converted into equivalent
options to purchase shares of Common Stock and were not cancelled.
A summary of activity in the Company's option plans is as follows:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
2001 Exercise 2000 Exercise 1999 Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Shares under option, beginning of year 33,384,111 $2.40 33,903,244 $1.85 2,135,719 $26.33
Impact of converting shares on date of
of Recapitalization --- --- 18,479,093
Options granted (at an exercise price
of $3.25 to $27.94 in 2001, $3.25 to
$4.00 in 2000, $2.50 to $3.187 in 1999) 12,675,790 7.62 9,537,781 3.29 16,439,511 2.54
Options exercised (5,223,498) 1.84 (1,194,318) 1.24 (860,120) 15.15
Options canceled (3,282,905) 4.94 (8,862,596) 1.36 (2,290,959) 9.68
---------- ---------- ----------
Shares under option, end of year 37,553,498 $4.02 33,384,111 $2.40 33,903,244 $ 1.85
========== ========== ==========
Shares exercisable 12,402,897 $2.00 13,178,441 $1.66 18,420,794 $ 1.30
As of March 31, 2001 and 2000, the Company issued approximately 10.3
million and 4.3 million stock options, respectively, at a weighted-average
exercise price of $5.28 and $3.33, respectively, which were below the
quoted market price on the day of grant. Options available for future
grants under the plans were 13.4 million, 3.9 million and 4.2 million at
March 31, 2001, 2000, and 1999, respectively.
C-30
The following table summarizes information about currently outstanding and
exercisable stock options at March 31, 2001:
Weighted
Number of Average Weighted
Options Remaining Average
Outstanding Contractual Exercise
Range of Exercise Price At March 31,2001 Life Price
$ 0.00 - $ 4.00 33,073,265 7.485 $ 2.786
$ 4.01 - $ 8.00 2,063,550 9.420 8.000
$ 8.01 - $ 15.00 612,000 9.702 12.193
$ 15.01 - $ 28.00 1,804,683 8.064 19.353
----------
Total 37,553,498 7.655 $4.0220
==========
The fair market value of each option granted during 2001, 2000, and 1999 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
2001 2000 1999
--------- --------- ---------
Expected volatility 100.00% 70.00% 45.00%
Risk-free rate of return 6.30% 6.13% 5.38%
Expected life (in years) 5 yrs. 5 yrs. 5 yrs.
Weighted average fair value $ 14.007 $ 3.274 $ 1.673
Dividend yield 0.00% 0.00% 0.00%
Had compensation cost for the Company's stock-based compensation plans been
recorded based on the fair value of awards or grant date consistent with the
method prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and earnings
per share would approximate the pro forma amounts indicated below:
2001 2000 1999
------------------ ------------------ ------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
(Amounts in thousands except per share)
Net income $(171,817) $(185,166) $6,012 $2,579 $6,445 $(7,510)
Net income
per share:
Basic $ (0.93) $ (1.01) $ 0.04 $ 0.02 $ 0.05 $ (0.06)
Diluted $ (0.93) $ (1.01) $ 0.04 $ 0.02 $ 0.05 $ (0.06)
The effect of applying FAS123 in this pro forma disclosure is not indicative
of future amounts. Additional awards in future years are anticipated.
C-31
N. COMMITMENTS AND CONTINGENCIES
The Company has operating leases from continuing operations covering plant,
office facilities, and equipment that expire at various dates through 2006.
Future minimum annual fixed rentals required during the years ending in
fiscal 2002 through 2006 under noncancelable operating leases having an
original term of more than one year are $16.6 million, $13.1 million, $10.8
million, $7.3 million, and $4.5 million, respectively. The aggregate
obligation subsequent to fiscal 2006 is $11.3 million. Rent expense was
approximately $16.2 million, $7.3 million and $7.1 million in fiscal 2001,
2000 and 1999, respectively.
The Company is a party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined
with certainty, the Company's counsel and management are of the opinion
that the final outcome should not have a material adverse effect on the
Company's operations or financial position.
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 appeal has been fully
briefed and the Company is awaiting a hearing date.
O. INCREASE IN AUTHORIZED SHARES OF COMMON STOCK
On April 28, 2000 the Board of Directors amended the Certificate of
Incorporation of the Company by increasing the number of shares of the
Company's common stock to be issued from 200,000,000 to 350,000,000.
P. EXTRAORDINARY CHARGE
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.
Q. SEGMENT INFORMATION AND GEOGRAPHIC AREAS
Segment Information.
The Company is currently managed in one business segment: communications
test. This segment tests, develops, manufactures and markets instruments,
systems, software and services to test, deploy, manage and optimize
communications networks and equipment. The Company offers products that test
and manage the performance of equipment found in modern, converged networks,
including optical transmission systems for data communications, voice
services, wireless voice and
C-32
data services, cable services, and video delivery. The Company also has other
subsidiaries ("Other Subsidiaries") that, in the aggregate, are not reportable
as a segment for financial reporting purposes. These Other Subsidiaries include
AIRSHOW, Inc., which is a provider of systems that deliver real-time news,
information and flight data to aircraft passengers. AIRSHOW's systems are
marketed to commercial airlines and private aircraft owners. Other Subsidiaries
also includes da Vinci Systems, Inc. ("da Vinci") and DataViews, Inc.
("DataViews"). da Vinci provides digital color enhancement systems used in the
production of television commercials and programming. da Vinci's products are
sold to post-production and video production professionals and producers of
content for standard- and high-definition television market. DataViews, Inc.,
was sold in June 2000. In years prior to fiscal 2000, the Company's consolidated
statements of income and the Other Subsidiaries section of this Note included
the results of operations of two subsidiaries which have since been divested:
ComCoTec, Inc. was sold in June 1998, and Parallax Graphics, which was
liquidated during fiscal 1999.
The Company measures the performance of its subsidiaries by its respective
earnings before interest, taxes and amortization of intangibles and amortization
of unearned compensation ("EBITA"), which excludes non-recurring and one-time
charges. Included in the segment's EBITA is an allocation of corporate expenses.
The information below includes sales and EBITA for the Company's communications
test segment and its Other Subsidiaries.
Corporate EBITA is comprised of a portion of the total corporate general and
administrative expense that has not been allocated to the subsidiaries.
Corporate assets are comprised primarily of cash, deferred financing fees, and
deferred taxes.
The Company is a multi-national corporation with continuing operations both in
the United States and Europe as well as distribution and sales offices in the
Far East and Latin America.
The accounting policies for the segment are the same as those described in the
summary of significant accounting policies. (See Note E. Summary of Significant
Accounting Policies.) In order to conform to the requirements of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the operating segment information for the
fiscal years 2000 and 1999 has been restated.
No single customer accounted for more than 10% of sales from continuing
operations during fiscal 2001, 2000, and 1999.
C-33
2001 2000 1999
------- ------- -------
(Amounts in thousands)
Communications test segment:
Net sales $1,052,747 $349,886 $238,942
Depreciation and amortization $ 129,272 $ 15,441 $ 8,845
EBITA $ 139,498 $ 62,447 $ 42,800
Total assets $1,109,270 $179,338 $ 71,453
Capital expenditures $ 35,339 $ 13,629 $ 5,147
Other subsidiaries:
Net sales 115,068 103,353 90,590
Depreciation and amortization 4,277 3,320 2,591
EBITA 26,499 27,718 29,841
Total assets 58,130 52,789 41,748
Capital expenditures 3,455 2,504 3,029
Discontinued operations:
Net assets held for sale $ 99,244 $ 72,601 N/A
Total assets N/A N/A $ 93,753
Capital expenditures N/A N/A 2,967
Corporate:
Depreciation and amortization $ 91 $ 95 $ 93
Loss before interest, taxes and
amortization (5,255) (4,941) (6,638)
Total assets 76,496 110,110 141,150
Capital expenditures 222 31 180
Total Company:
Net sales $1,167,815 $453,239 $329,532
Depreciation and amortization $ 133,640 $ 18,856 $ 11,529
EBITA $ 160,742 $ 85,224 $ 66,003
Total assets $1,343,140 $414,838 $348,104
Capital expenditures $ 39,016 $ 16,164 $ 11,323
The following are excluded from the calculation of EBITA:
Amortization of inventory step up $ 35,750 $ 4,299 $ ---
Purchased incomplete technology 56,000 --- ---
Amortization of unearned compensation 18,266 1,937 1,228
Recapitalization and other
related costs 9,194 27,942 40,767
Gain on sale of subsidiary --- --- (15,900)
Other 2,380 1,000 ---
---------- --------- ---------
Total excluded items $121,590 $35,178 $ 26,095
========== ========= =========
Geographic Information. Information by geographic areas for the years ended
March 31, 2001, 2000, and 1999 is summarized below:
United States Outside U.S.
(a) (b) Combined
----------- ---------- -----------
(Amounts in thousands)
Sales to unaffiliated customers...............
2001....................................... $ 762,433 $405,382 $1,167,815
2000....................................... 432,216 21,023 453,239
1999....................................... 310,724 18,808 329,532
C-34
Income (loss) before taxes from continuing
operations
2001....................................... $(219,466) $ 49,926 $ (169,540)
2000....................................... (7,957) 74 (7,883)
1999....................................... (5,398) (205) (5,603)
Long-lived assets at
March 31, 2001............................. $ 664,693 $ 45,857 $ 710,550
March 31, 2000............................. 85,122 702 85,824
March 31, 1999............................. 81,662 725 82,387
(a) Sales within the United States include export sales of $67,819, $44,798,
and $44,567 in 2001, 2000, and 1999, respectively.
(b) Sales outside the United States includes sales from foreign subsidiaries
to the United States of $28,817 in fiscal 2001.
Currency gains (losses). Net income in fiscal 2001, 2000, and 1999 included
currency gains (losses) of approximately ($5.5) million, $54,500, and
$9,800, respectively.
R. SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF ACTERNA CORPORATION AND
ACTERNA LLC
In connection with the Recapitalization and related transactions, Acterna
LLC (formerly known as Telecommunications Techniques Co., LLC), Acterna
Corporation's wholly owned subsidiary ("Acterna LLC"), became the primary
obligor (and Acterna Corporation, a guarantor) with respect to indebtedness
of Acterna Corporation, including the 9 3/4% Senior Subordinated Notes due
2008 (the "Senior Subordinated Notes").
Acterna Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Acterna Corporation, however, is a holding company with
no independent operations and no significant assets other than its
membership interest in Acterna LLC. Certain other subsidiaries of the
Company are not guarantors of the Senior Subordinated Notes. The condensed
consolidating financial statements presented herein include the statement
of operations, balance sheets, and statements of cash flows without
additional disclosure as the Company has determined that the additional
disclosure is not material to investors.
C-35
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
March 31, 2001
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ----------- -------- ------------
(In thousands)
Net sales $ --- $ 418,232 $ 749,583 $1,167,815
Cost of sales --- 138,675 329,867 --- 468,542
--------- ---------- ---------- --------- ----------
Gross profit --- 279,557 419,716 --- 699,273
Selling, general and administrative expense --- 221,812 217,592 --- 439,404
Product development expense --- 51,838 98,223 --- 150,061
Recapitalization and other related costs --- 9,194 --- --- 9,194
Purchase incomplete technology --- --- 56,000 --- 56,000
Amortization of intangibles --- 109,788 --- 109,788
--------- ---------- ---------- --------- ----------
Operating income --- (3,287) (61,887) --- (65,174)
Interest expense --- (90,003) (12,063) --- (102,066)
Interest income --- 1,742 1,413 --- 3,155
Intercompany income (expense) --- 19,481 (19,481) --- ---
Other income (expense), net --- 284 (5,739) --- (5,455)
--------- ---------- ---------- --------- ----------
Income (loss) from continuing operations
before income taxes --- (71,783) (97,757) --- (169,540)
Provision (benefit) for income taxes --- (21,293) 12,911 --- (8,382)
--------- ---------- ---------- --------- ----------
Income (loss) from continuing operations --- (50,490) (110,668) --- (161,158)
Equity income (loss) (171,817) (110,668) --- 282,485 ---
Extraordinary item --- (10,659) --- --- (10,659)
--------- ---------- ---------- --------- ----------
Net income $(171,817) $(171,817) $(110,668) $282,485 $ (171,817)
========= ========== ========== ========= ==========
C-36
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2001
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ --- $ 22,179 $ 39,707 $ --- $ 61,886
Accounts receivable, net --- 67,637 147,430 --- 215,067
Inventory --- 28,053 105,334 --- 133,387
Other current assets --- 38,799 35,789 --- 74,588
--------- -------- ---------- --------- ----------
Total current assets --- 156,668 328,260 --- 484,928
--------- -------- ---------- --------- ----------
Property and equipment, net --- 26,641 90,246 --- 116,887
Investments in and advances to
consolidated subsidiaries 13,255 259,637 (547,301) 274,409 ---
Intangible assets, net --- --- 593,663 --- 593,663
Net assets of discontinued operations --- --- 99,244 --- 99,244
Other --- 28,166 20,252 --- 48,418
--------- -------- ---------- --------- ----------
$ 13,255 $ 471,112 $ 584,364 $ 274,409 $1,343,140
========= ========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable and current portion of debt $ --- $ 16,000 $ 17,167 $ --- $ 33,167
Accounts payable --- 31,623 65,401 --- 97,024
Accrued expenses --- 53,331 123,459 --- 176,790
--------- -------- ---------- --------- ----------
Total current liabilities --- 100,954 206,027 --- 306,981
Long-term debt --- 875,100 181,283 --- 1,056,383
Deferred income taxes --- (77,765) 80,680 --- 2,915
Deferred compensation --- 10,624 47,214 --- 57,838
Stockholders' deficit:
Common stock 1,910 1,221 17,595 (18,816) 1,910
Additional paid-in capital 801,080 418,845 171,408 (590,253) 801,080
Accumulated deficit (789,735) (765,953) (123,536) 883,478 (795,746)
Unearned compensation --- (90,986) --- --- (90,986)
Other comprehensive loss --- (928) 3,693 2,765
--------- -------- ---------- --------- ----------
Total stockholders' deficit 13,255 (437,801) 69,160 274,409 (80,977)
--------- -------- ---------- --------- ----------
$ 13,255 $ 471,112 $ 584,364 $ 274,409 $1,343,140
========= ========= ========== ========= ==========
C-37
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (a)
For The Twelve Months Ended March 31, 2001
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
------- ------- ------------- -------- ------------
(In thousands)
Operating activities:
Net income (loss) from operations $(171,817) $(171,817) $(132,846) $ 304,663 $(171,817)
Adjustment for noncash items included
in net income:
Depreciation --- 21,421 2,431 --- 23,852
Amortization of intangibles --- 107,942 1,846 --- 109,788
Amortization of inventory step-up --- 35,750 --- --- 35,750
Amortization of unearned compensation --- 17,012 1,254 --- 18,266
Amortization of deferred debt
issuance costs --- 3,974 --- --- 3,974
Writeoff of deferred debt issuance costs --- 10,019 --- --- 10,019
Purchased incomplete technology --- 56,000 --- --- 56,000
Recapitalization and other related costs --- 9,194 --- --- 9,194
Tax benefit from stock option exercise --- 21,319 --- --- 21,319
Other --- 45 2,002 --- 2,047
Change in deferred income taxes --- (40,452) 9,143 --- (31,309)
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures --- (19,672) (48,041) --- (67,713)
Changes in intercompany 171,817 (61,592) 194,438 (304,663) ---
--------- --------- --------- --------- ---------
Net cash flows provided by operating activities --- (10,857) 30,227 --- 19,370
Investing activities:
Purchases of property and equipment --- (35,560) (10,345) --- (45,905)
Proceeds from sale of property and equipment --- 2,433 --- 2,433
Proceeds from sales of businesses --- 6,381 --- --- 6,381
Businesses acquired in purchase transactions,
net of cash and noncash items --- (422,137) --- --- (422,137)
Other --- (389) (4,474) --- (4,863)
--------- --------- --------- --------- ---------
Net cash flows provided by (used in)
investing activities --- (451,705) (12,386) --- (464,091)
Financing activities:
Borrowings under revolving credit
facility, net --- 108,000 --- --- 108,000
Borrowings of term loan debt, net --- 670,622 --- --- 670,622
Borrowings of notes payable and other debt --- 31,858 (123) --- 31,735
Repayment of debt under old Senior Secured
Credit Facility --- (304,861) --- --- (304,861)
Repayment of WWG term debt --- (118,594) --- --- (118,594)
Redemption of WWG bonds --- (94,148) --- --- (94,148)
Financing fees --- (18,519) --- --- (18,519)
Proceeds from issuance of common stock, net of
expenses --- 200,404 1 --- 200,405
-------- -------- ---------- --------- ----------
Net cash flows used in financing --- 474,762 (122) --- 474,640
activities
Effect of exchange rate on cash --- (9,380) 6,745 --- (2,635)
--------- -------- ---------- --------- ----------
Increase (decrease) in cash and cash equivalents --- 2,820 24,464 --- 27,284
Cash and cash equivalents at beginning of year --- 19,359 16,410 --- 35,769
--------- -------- ---------- --------- ----------
Cash and cash equivalents at end of year $ --- $ 22,179 $ 40,874 --- $ 63,053
========= ======== ========== ========= ==========
(a) Has not been restated for discontinued operations.
C-38
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Twelve Months Ended March 31, 2000
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Net sales $ --- $ 306,504 $ 146,735 $ --- $ 453,239
Cost of sales --- 104,805 52,285 --- 157,090
--------- --------- --------- --------- ---------
Gross profit --- 201,699 94,450 --- 296,149
Selling, general and administrative
expense --- 106,982 49,517 --- 156,499
Product development expense --- 43,497 17,675 --- 61,172
Recapitalization and other related
costs --- 27,543 399 --- 27,942
Amortization of intangibles --- 1,847 6,942 --- 8,789
--------- --------- --------- --------- ---------
Operating income --- 21,830 19,917 --- 41,747
Interest expense --- (51,899) (17) --- (51,916)
Interest income --- 1,537 817 --- 2,354
Intercompany interest income (expense) --- 477 (477) --- ---
Other income (expense), net --- (972) 904 --- (68)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes --- (29,027) 21,144 --- (7,883)
Provision (benefit) for income taxes --- (10,329) 9,160 --- (1,169)
--------- --------- --------- --------- ---------
Income (loss) from continuing --- (18,698) 11,984 --- (6,714)
operations
Equity income (loss) 6,012 24,710 --- (30,722) ---
Discontinued operations --- --- 12,726 --- 12,726
--------- --------- --------- --------- ---------
Net income (loss) $ 6,012 $ 6,012 $ 24,710 $ (30,722) $ 6,012
========= ========= ========= ========= =========
C-39
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2000
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
-------- --------- ------------- ----------- ------------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ --- $ 18,645 $ 15,194 $ --- $ 33,839
Accounts receivable, net --- 49,840 28,396 --- 78,236
Inventory --- 16,919 13,333 --- 30,252
Other current assets --- 33,072 4,808 --- 37,880
--------- --------- --------- --------- ---------
Total current assets --- 118,476 61,731 --- 180,207
Property and equipment, net --- 18,151 9,165 --- 27,316
Investments in and advances to
consolidated subsidiaries (271,820) 294,569 7,992 (30,741) ---
Intangible assets, net --- --- 58,508 --- 58,508
Net assets of discontinued
operations --- --- 72,601 --- 72,601
Other --- 55,696 20,510 --- 76,206
--------- --------- --------- --------- ---------
$(271,820) $ 486,892 $ 230,507 $ (30,741) $ 414,838
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Notes payable and current
portion of long-term debt $ --- $ 7,625 $ 21 $ --- $ 7,646
Accounts payable --- 26,990 11,384 --- 38,374
Accrued expenses --- 59,017 22,908 --- 81,925
--------- --------- --------- -------- ---------
Total current liabilities --- 93,632 34,313 --- 127,945
Long-term debt --- 572,236 52 --- 572,288
Deferred compensation --- 11,280 --- --- 11,280
Stockholders' deficit:
Common stock 1,225 1,221 17,595 (18,816) 1,225
Additional paid-in capital 344,873 418,845 171,408 (590,253) 344,873
Accumulated deficit (617,918) (594,136) 9,797 578,328 (623,929)
Unearned compensation --- (16,965) --- --- (16,965)
Dividends --- 108 (108) --- ---
Other comprehensive loss --- 671 (2,550) --- (1,879)
--------- --------- --------- --------- ---------
Total stockholders' deficit (271,820) (190,256) 196,142 (30,741) (296,675)
--------- --------- --------- --------- ---------
$(271,820) $ 486,892 $ 230,507 $ (30,741) $ 414,838
========= ========= ========= ========= =========
C-40
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Twelve Months Ended March 31, 2000 (a)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
-------- --------- ------------- ----------- ------------
(In thousands)
Operating activities:
Net income from operations $ 6,012 $ 6,012 $ 24,710 $ (30,722) $ 6,012
Adjustment for noncash items included
in net income:
Depreciation --- 6,543 6,539 --- 13,082
Amortization of intangibles --- 7,645 4,682 --- 12,327
Recapitalization and other related costs --- 12,327 --- --- 12,327
Amortization of unearned compensation --- 2,419 --- --- 2,419
Amortization of deferred debt issuance costs --- 3,232 --- --- 3,232
Change in net deferred income tax asset --- (2,840) --- --- (2,840)
Other --- 1,461 56 --- 1,517
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures --- (9,474) 18,808 --- 9,334
Changes in intercompany (6,012) 19,676 (44,386) 30,722 ---
-------- --------- ---------- ---------- -----------
Net cash flows provided by operating activities --- 47,001 10,409 --- 57,410
Investing activities:
Purchases of property and equipment --- (11,962) (9,897) --- (21,859)
Businesses acquired in purchase transactions,
net of cash acquired --- (113,227) --- --- (113,227)
Other --- (5,643) (1,522) --- (7,165)
-------- --------- ---------- ---------- -----------
Net cash flows provided by (used in) investing
activities --- (130,832) (11,419) --- (142,251)
Financing activities:
Borrowings (repayments) under revolving
credit facility, net --- 70,000 --- --- 70,000
Repayment of term loan debt --- (17,139) --- --- (17,139)
Repayment of capital lease obligations --- --- (212) --- (212)
Proceeds from issuance of common stock and
stock options --- 4,736 --- --- 4,736
Redemption of stock options --- (6,980) --- --- (6,980)
-------- --------- ---------- ---------- -----------
Net cash flows used in financing activities --- 50,617 (212) --- 50,405
Effect of exchange rate on cash --- 92 (249) --- (157)
-------- --------- ---------- ---------- -----------
Increase (decrease) in cash and cash equivalents --- (33,122) (1,471) --- (34,593)
Cash and cash equivalents at beginning of year --- 52,481 17,881 --- 70,362
-------- --------- ---------- ---------- -----------
Cash and cash equivalents at end of year $ --- $ 19,359 $ 16,410 $ --- $ 35,769
======== ========= ========== ========== ===========
(a) Has not been restated for discontinued operations.
C-41
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Twelve Months Ended March 31, 1999
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
------- -------- ------------- ----------- ------------
(In thousands)
Net sales $ --- $221,172 $108,360 $ --- $329,532
Cost of sales --- 73,284 35,334 108,618
-------- -------- --------- --------- --------
Gross profit --- 147,888 73,026 --- 220,914
Selling, general and administrative expense --- 79,927 33,542 --- 113,469
Product development expense --- 32,613 9,859 --- 42,472
Recapitalization and other related costs --- 38,656 2,111 --- 40,767
Amortization of intangibles --- 2,117 609 --- 2,726
-------- -------- --------- --------- --------
Operating income --- (5,425) 26,905 --- 21,480
Interest expense --- (46,152) (26) --- (46,178)
Interest income --- 1,649 1,743 --- 3,392
Other income (expense), net --- 1,962 13,741 --- 15,703
-------- -------- --------- --------- --------
Income (loss) from continuing operations
before income taxes --- (47,966) 42,363 --- (5,603)
Provision (benefit) for income taxes --- (12,533) 12,464 --- (69)
-------- -------- --------- --------- --------
Income (loss) from continuing operations --- (35,433) 29,899 --- (5,534)
Equity income 6,445 41,878 --- (48,323) ---
Discontinued operations --- --- 11,979 --- 11,979
-------- -------- --------- --------- --------
Net income (loss) $ 6,445 $ 6,445 $ 41,878 $ (48,323) $ 6,445
======== ======== ========= ========= ========
C-42
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (a)
For The Twelve Months Ended March 31, 1999
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
-------- --------- ------------- ----------- ------------
(In thousands)
Operating activities:
Net income from operations $ 6,445 $ 6,445 $ 41,878 $ (48,323) $ 6,445
Adjustment for noncash items included
in net income:
Depreciation --- 6,532 5,209 --- 11,741
Amortization of intangibles --- 2,144 4,084 --- 6,228
Gain on sale of subsidiary --- --- (15,900) --- (15,900)
Recapitalization and other related costs --- 14,640 --- --- 14,640
Amortization of unearned compensation --- 1,519 --- --- 1,519
Amortization of deferred debt
issuance costs --- 2,693 --- --- 2,693
Change in net deferred income tax asset --- (12,289) --- --- (12,289)
Other --- 620 (8) --- 612
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures --- 19,055 32,926 --- 51,981
Changes in intercompany (6,445) 24,591 (66,469) 48,323 ---
-------- --------- ---------- --------- ---------
Net cash flows provided by
operating activities --- 65,950 1,720 --- 67,670
-------- --------- ---------- --------- ---------
Investing activities:
Purchases of property and equipment --- (5,192) (6,131) --- (11,323)
Proceeds from sales of businesses --- 21,000 --- --- 21,000
Businesses acquired in purchase
transactions, net of cash acquired --- (21,365) --- --- (21,365)
Incentive earnout related to the
purchase of Advent --- --- (3,845) --- (3,845)
Other --- (4,513) (33) --- (4,546)
-------- --------- ---------- --------- ---------
Net cash flows provided by (used in)
investing activities --- (10,070) (10,009) --- (20,079)
-------- --------- ---------- --------- ---------
Financing activities:
Borrowings of term loan debt,
net of repayments --- 527,000 --- --- 527,000
Repayment of notes payable --- --- (2,192) --- (2,192)
Repayment of capital lease obligations --- --- (159) --- (159)
Financing fees --- (38,631) --- --- (38,631)
Proceeds from issuance of common stock and
stock options --- 278,835 --- --- 278,835
Purchases of treasury stock, common stock and
stock options --- (806,508) --- --- (806,508)
-------- --------- ---------- --------- ---------
Net cash flows used in financing activities --- (39,304) (2,351) --- (41,655)
Effect of exchange rate on cash --- 717 (1,195) --- (478)
-------- --------- ---------- --------- ---------
Increase (decrease) in cash and cash equivalents --- 17,293 (11,835) --- 5,458
Cash and cash equivalents at beginning of year --- 35,186 29,718 --- 64,904
-------- --------- ---------- --------- ---------
Cash and cash equivalents at end of year $ $ 52,479 $ 17,883 $ --- $ 70,362
======== ========= ========== ========= =========
(a) Has not been restated for discontinued operations.
C-43
SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
FY 2001
-------
(Amounts in thousands except per share data)
First Second Third Fourth Year
----- ------- ----- ------ ----
Net sales $208,171 $305,210 $324,104 $330,330 $1,167,815
Gross profit 118,563 164,160 205,179 211,371 699,273
Net income (loss) from
continuing operations $(71,735) $(50,389) $(18,306) $(20,728) $ (161,158)
Net income (loss) (82,394) (50,389) (18,306) (20,728) (171,817)
Income (loss) per common
share - basic and
diluted:
Continuing operations $ (0.43) $ (0.27) $ (0.10) $ (0.11) $ (0.87)
Extraordinary (loss) (0.07) --- --- --- (0.06)
FY 2000
-------
First Second Third Fourth Year
----- ------ ----- ------ ----
Net sales $ 90,794 $103,789 $122,225 $136,431 $ 453,239
Gross profit 60,080 69,730 81,409 84,930 296,149
Net income (loss) from
continuing operations $ (6,066) $ 5,642 $ 3,934 $(10,224) $ (6,714)
Net income (loss) 2,551 9,566 4,754 (10,859) 6,012
Income (loss) per common
share - basic:
Continuing operations $ (0.04) $ 0.04 $ 0.03 $ (0.07) $ (0.05)
Net income (loss) 0.02 0.06 0.03 (0.07) 0.04
Income (loss) per common
share - diluted:
Continuing operations $ (0.04) $ 0.04 $ 0.03 $ (0.07) $ (0.05)
Net income (loss) 0.02 0.06 0.03 (0.07) 0.04
C-44
Appendix D
EXHIBIT INDEX
Exhibit
No.
2.1 Agreement and Plan of Merger, dated as of December 20, 1997, by and
between Acterna Corporation and CDRD Merger Corporation. (1)
2.2 Agreement and Plan of Merger, dated as of September 7, 1999, by and
among Acterna Corporation, Acterna Acquisition Corporation and Applied
Digital Access, Inc. (2)
2.3 Agreement and Plan of Merger, dated as of February 14, 2000, by and
among Acterna Corporation, DWW Acquisition Corporation and Wavetek
Wandel Goltermann, Inc. (3)
2.4 Agreement for the Sale and Purchase of Shares in WPI Husky Technology
Ltd., dated February 23, 2000, by and among Acterna Nominees Limited,
WPI Group (UK), and WPI Group, Inc.(5)
3.1 Amended and Restated Certificate of Incorporation of Acterna
Corporation.(5)
3.2 Amended and Restated By-Laws of Acterna Corporation. (4)
4.1 Indenture, dated as of May 21, 1998, among Acterna Corporation, TTC
Merger Co. LLC (now known as Acterna LLC) and State Street Bank and
Trust Company, as trustee. (6)
4.2 Form of 9 3/4% Senior Subordinated Note due 2008 (6).
4.3 First Supplemental Indenture, dated as of May 21, 1998, among Acterna
Corporation, Telecommunications Techniques Co., LLC (now known as
Acterna LLC) and State Street Bank and Trust Company, as trustee. (6)
4.4 Registration Rights Agreement, dated May 21, 1998, by and among Acterna
Corporation, Telecommunications Techniques Co., LLC (now known as
Acterna LLC), Credit Suisse First Boston Corporation and J.P. Morgan
Securities Inc. (6)
4.5 Registration Rights Agreement, dated as of May 21, 1998, among Acterna
Corporation, Clayton, Dubilier & Rice Fund V Limited Partnership, Mr.
John F. Reno, The John F. Reno 1997 Qualified Annuity Trust, under Trust
Agreement, dated as of the 28th day of November, 1997, between John F.
Reno as Grantor and John F. Reno and John D. Hamilton, Jr. as Trustees,
and The Suzanne D. Reno 1997 Qualified Annuity Trust, under Trust
Agreement, dated as of the 28th day of November, 1997, between Suzanne
D. Reno as Grantor and John F. Reno and John D. Hamilton, Jr. as
Trustees. (6)
4.6 Amendment No. 1, dated as of May 23, 2000, among Acterna Corporation
("Acterna"), Clayton, Dubilier & Rice Fund V Limited Partnership ("Fund
V") and Clayton, Dubilier & Rice Fund VI Limited Partnership, to the
Registration Rights Agreement, dated as of May 21, 1998, among Acterna,
Fund V and the other parties thereto.(5)
D-1
4.7 Form of Piggyback Registration Rights Agreement, dated as of February
29, 2000, by and among Wavetek Wandel Goltermann, Inc. ("WWG"),
Acterna Corporation and each stockholder of WWG party thereto.(5)
4.8 Form of Subscription Warrant to Subscribe for Shares of Acterna
Corporation Common Stock. (7)
10.1 Credit Agreement, dated May 23, 2000, among Acterna LLC, Wavetek
Wandel Goltermann GmbH and Acterna Subworld Holdings GmbH, the lenders
named therein, Morgan Guaranty and Trust Company of New York ("Morgan
Guaranty") as administrative agent, Morgan Guaranty as German Term
Loan Servicing Bank, Credit Suisse First Boston as syndication agent
and The Chase Manhattan Bank and Bankers Trust Company as co-
documentation agents.(5)
10.2 Guarantee and Collateral Agreement, dated as of May 23, 2000, among
Acterna LLC, certain of its subsidiaries and Morgan Guaranty and Trust
Company of New York as administrative agent.(5)
10.3 Indemnification Agreement, dated as of May 21, 1998, by and among
Acterna Corporation, Telecommunications Techniques Co., LLC (now known
as Acterna LLC), Clayton, Dubilier & Rice, Inc. and Clayton, Dubilier
& Rice Fund V Limited Partnership. (6)
10.4 Indemnification Agreement, dated as of May 23, 2000, by and among
Acterna Corporation, Clayton, Dubilier & Rice Fund VI Limited
Partnership and Clayton, Dubilier & Rice, Inc.(5)
10.5 Amended and Restated Consulting Agreement, dated as of January 1,
2001, by and among Acterna Corporation, Acterna LLC and Clayton,
Dubilier & Rice, Inc.
10.6 Agreement, dated as of May 23, 2000, by and between Clayton, Dubilier
& Rice, Inc. and Acterna Corporation.(5)
10.7 Tax Sharing Agreement, dated as of May 21, 1998, by and between
Acterna Corporation and Telecommunications Techniques Co., LLC (now
known as Acterna LLC). (6)
10.8 Form of Letter Agreement by and between Acterna Corporation
("Acterna") and certain officers of Acterna. (8)
10.9 Form of Management Equity Agreement among Acterna Corporation,
Clayton, Dubilier & Rice Fund V Limited Partnership and Messrs. Kline
and Peeler. (8)
10.10 Form of Management Equity Agreement among Acterna Corporation
("Acterna"), Clayton, Dubilier & Rice Fund V Limited Partnership and
certain officers of Acterna. (8)
10.11 Amended and Restated Employment Agreement, entered into on November 1,
1998, by and between Acterna Corporation and Allan M. Kline. (9)
10.12 Amended and Restated Employment Agreement, entered into on November 1,
1998, by and between Acterna Corporation and John R. Peeler. (9)
10.13 Form of Nondisclosure, Noncompetition and Nonsolicitation Agreement by
and between Acterna Corporation ("Acterna") and certain executives of
Acterna. (8)
D-2
10.14 Acterna Corporation 1992 Stock Option Plan. (6)
10.15 Acterna Corporation Amended and Restated 1994 Stock Option and Incentive
Plan.(10)
10.16 Acterna Corporation Non-Employee Directors Stock Incentive Plan. (10)
10.17 Acterna Corporation Directors Stock Purchase Plan. (4)
10.18 Form of Non-Employee Director Stock Subscription Agreement between
Acterna Corporation and non-employee directors of Acterna. (11)
10.19 Loanout Agreement, dated as of May 19, 1999, by and among Acterna
Corporation, Acterna LLC and Clayton, Dubilier & Rice, Inc. (12)
21 Subsidiaries of Acterna Corporation.
23 Consent of Independent Accountants.
(1) Incorporated by reference to Acterna Corporation's Report on Form 8-K
(File No. 0-7438).
(2) Incorporated by reference to Acterna Corporation's Schedule 14D-1 (File
No. 5-44783).
(3) Incorporated by reference to Acterna Corporation's Report on Form 8-K
(File No. 1-12657), filed May 31, 2000.
(4) Incorporated by reference to Acterna Corporation's Form 10-Q for the
quarter ended September 30, 1999.
(5) Incorporated by reference to Acterna Corporation's Report on Form 10-K for
the year ended March 31, 2000 (File No. 0-7438).
(6) Incorporated by reference to Acterna Corporation's Registration Statement
on Form S-4 (Registration No. 333-60893).
(7) Incorporated by reference to Acterna Corporation's Registration Statement
on Form S-3 (Registration No. 333-35476).
(8) Incorporated by reference to Acterna Corporation's Registration Statement
on Form S-4 (File No. 333-44933).
(9) Incorporated by reference to Acterna Corporation's Form 10-Q for the
quarter ended December 31, 1998.
(10) Incorporated by reference to Acterna Corporation's Registration Statement
on Form S-8 (File No. 333-75797).
(11) Incorporated by reference to Acterna Corporation's Form 10-Q for the
quarter ended December 31, 1999.
(12) Incorporated by reference to Acterna Corporation's Form 10-Q for the
quarter ended June 30, 1999.
D-3
Item 14(a) (2)
SCHEDULE II
ACTERNA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2001, 2000, 1999 and 1998
Reserve for Doubtful Accounts
(In thousands)
Balance, March 31, 1998 $ 1,764
Additions charged to income 483
Writeoff of uncollectible accounts, net (613)
--------
Balance, March 31, 1999 1,634
Additions charged to income 620
Writeoff of uncollectible accounts, net (22)
Balance acquired by acquisition 247
Adjustment for discontinued operations (527)
--------
Balance, March 31, 2000 1,952
Additions charged to income 5,284
Writeoff of uncollectible accounts, net (2,172)
Balance acquired by acquisition 3,933
--------
Balance, March 31, 2001 $ 8,997
========