U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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)
20410 Observation Drive
Germantown, Maryland 20876
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (301) 353-1550
(3 New England Executive Park
Burlington, Massachusetts 01803-5087)
(Previous address of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
At January 31, 2002 there were 192,247,507 shares of common stock of the
registrant outstanding.
PART I. Financial Information
Item 1. Financial Statements
ACTERNA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands except per share data)
Net sales $ 248,785 $ 369,982 $ 920,197 $ 972,955
Cost of sales 132,264 150,875 430,488 443,233
--------- --------- --------- ---------
Gross profit 116,521 219,107 489,709 529,722
Selling, general & administrative expense 105,184 138,838 352,280 351,936
Product development expense 38,146 44,713 124,417 118,814
Impairment of net assets held for sale -- -- 17,918 --
Goodwill impairment 3,947 -- 3,947 --
Recapitalization and other related costs -- -- -- 9,194
Restructuring 9,347 -- 17,244 --
Purchased incomplete technology -- -- -- 56,000
Amortization of intangibles 9,935 34,853 32,086 84,162
--------- --------- --------- ---------
Total operating expense 166,559 218,404 547,892 620,106
--------- --------- --------- ---------
Operating income (loss) (50,038) 703 (58,183) (90,384)
Interest expense (22,693) (27,941) (73,669) (73,803)
Interest income 140 808 1,520 2,604
Other income (expense) (990) 702 (6,269) (2,378)
--------- --------- --------- ---------
Loss from continuing operations before
income taxes and extraordinary item (73,581) (25,728) (136,601) (163,961)
Provision (benefit) for income taxes 425 (3,261) 81,037 (13,668)
--------- --------- --------- ---------
Net loss from continuing operations
before extraordinary item (74,006) (22,467) (217,638) (150,293)
Income (loss) from discontinued operations -- 4,161 (10,039) 9,863
--------- --------- --------- ---------
Net loss before extraordinary item (74,006) (18,306) (227,677) (140,430)
Extraordinary item -- -- -- (10,659)
--------- --------- --------- ---------
Net loss $ (74,006) $ (18,306) $(227,677) $(151,089)
========= ========= ========= =========
Income (loss) per common share -
Basic and diluted:
Continuing operations $ (0.39) $ (0.12) $ (1.14) $ (0.82)
Discontinued operations -- 0.02 (.05) .05
Extraordinary loss -- -- -- (0.06)
--------- --------- --------- ---------
Net loss per common share -
Basic and diluted $ (0.39) $ (0.10) $ (1.19) $ (0.83)
========= ========= ========= =========
Weighted average number of common shares:
Basic and diluted 192,183 190,300 191,739 181,634
========= ========= ========= =========
- ----------
See notes to consolidated financial statements.
2
ACTERNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2001 2001
------------ -----------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 50,978 $ 63,054
Accounts receivable, net 139,996 233,371
Inventories:
Raw materials 49,622 61,009
Work in process 37,198 48,266
Finished goods 44,837 48,206
----------- -----------
Total inventory 131,657 157,481
Deferred income taxes 12,493 37,961
Other current assets 38,879 39,610
----------- -----------
Total current assets 374,003 531,477
Property, plant and equipment, net 124,443 124,566
Other assets:
Net assets held for sale -- 37,908
Goodwill, net 432,330 435,478
Other intangible assets, net 162,765 195,093
Deferred debt issuance costs, net 25,621 25,908
Other assets, net 27,491 32,549
----------- -----------
$ 1,146,653 $ 1,382,979
=========== ===========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable $ 2,004 $ 10,919
Current portion of long-term debt 26,887 22,248
Accounts payable 67,239 112,155
Accrued expenses:
Compensation and benefits 41,339 71,836
Deferred revenue 39,048 47,743
Taxes other than income taxes 11,695 14,112
Other 65,262 60,191
Accrued income taxes 29,504 7,616
----------- -----------
Total current liabilities 282,978 346,820
Long-term debt 1,061,505 1,056,383
Deferred income taxes 26,630 2,915
Pensions and other long-term compensation 66,150 57,838
Stockholders' deficit:
Common stock 1,922 1,910
Additional paid-in capital 790,111 801,080
Accumulated deficit (1,023,423) (795,746)
Unearned compensation (60,110) (90,986)
Other comprehensive income 890 2,765
----------- -----------
Total stockholders' deficit (290,610) (80,977)
----------- -----------
$ 1,146,653 $ 1,382,979
=========== ===========
- ----------
See notes to consolidated financial statements.
3
ACTERNA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
2001 2000
--------- ---------
(In thousands)
Operating activities:
Net loss $(227,677) $(151,089)
Adjustments for non-cash items included in net loss:
Depreciation 26,255 14,700
Amortization of intangibles 32,086 76,086
Amortization of inventory step-up -- 35,750
Amortization of unearned compensation 16,964 15,195
Amortization of deferred debt issuance costs 4,293 2,943
Writeoff of deferred debt issuance costs -- 10,019
Purchased incomplete technology -- 56,000
Recapitalization and other related costs -- 9,194
Change in deferred income taxes 72,135 (4,538)
Loss from discontinued operations 10,039
Impairment of assets held for sale and goodwill
impairment 21,865
Other 2,777 125
Change in operating assets and liabilities 40,219 (91,782)
--------- ---------
Net cash flows used in operating activities, net
of assets acquired (1,044) (27,397)
Investing activities:
Purchases of property and equipment (28,658) (23,474)
Proceeds from sale of business 23,800 3,500
Businesses acquired in purchase transaction, net of
cash acquired (1,495) (407,034)
Other (4,266) (4,709)
--------- ---------
Net cash flows used in investing activities (10,619) (431,717)
Financing activities:
Net borrowings of debt 1,782 323,015
Repayment of capital lease obligations (68) (17)
Capitalized debt issuance costs (4,006) (18,519)
Proceeds from issuance of common stock, net of
expenses 2,082 199,609
--------- ---------
Net cash flows provided by (used in) financing
activities (210) 504,088
Effect of exchange rate change on cash (203) (7,023)
--------- ---------
Increase (decrease) in cash and cash equivalents (12,076) 37,951
Cash and cash equivalents at beginning of year 63,054 33,839
--------- ---------
Cash and cash equivalents at end of period $ 50,978 $ 71,790
========= =========
- ----------
See notes to consolidated financial statements.
4
ACTERNA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. FORMATION, BACKGROUND AND RECLASSIFICATION OF FINANCIAL STATEMENT
PRESENTATION
Acterna Corporation was formed in 1959 and is a global communications
equipment company focused on network technology solutions. The Company's
operations are conducted 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 two business segments: communications test and industrial
computing and communications. The Company also has other subsidiaries
that, in the aggregate, are not reportable as a segment.
The Company previously reported the industrial computing and
communications segment as discontinued operations. This segment is
comprised of two subsidiaries: ICS Advent and Itronix Corporation. In
October 2001, the Company divested its ICS Advent subsidiary (see Note M.
Sale of ICS Advent and Other Subsidiary), but decided to retain Itronix
based on current market conditions. The decision to retain Itronix
required the Company to make certain reclassifications to its Statements
of Operations and Balance Sheets for all periods presented. The Statements
of Operations were reclassified to include the results of operations of
ICS Advent and Itronix. The Balance Sheets as of December 31, 2001 and
March 31, 2001 include the assets and liabilities of Itronix. The Balance
Sheet at March 31, 2001 reflects the net assets of ICS Advent classified
as net assets held for sale. The Statement of Cash Flows was not
reclassified as these statements were not previously presented on a
discontinued basis.
The communications test business develops, manufactures and markets
instruments, systems, software and services used to test, deploy, manage
and optimize communications networks, equipment and services.
The industrial computing and communications segment provides computer
products to the ruggedized computer market. ICS Advent sold computer
products and systems designed to withstand excessive temperatures, dust,
moisture and vibration in harsh operating environments. Itronix sells
ruggedized portable communications and computing devices used by field
service workers.
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 2002 are references to the Company's
fiscal year which began April 1, 2001 and will end March 31, 2002). Unless
the context otherwise requires, the "Company" or "Acterna" refers to
Acterna Corporation and its subsidiaries.
B. RECENT DEVELOPMENTS AND LIQUIDITY
The current global economic downturn has further impacted a previously
existing downturn in the Company's communications test segment and in its
other
5
businesses. The Company continues to experience diminished product demand,
excess manufacturing capacity and erosion of average selling prices.
In response to the decline in product demand, the Company continues to
implement cost reduction programs aimed at aligning its ongoing operating
costs with its expected revenues. In the third quarter of fiscal 2002, the
Company's headcount was further reduced to 5,200 (down from 6,380 at the
beginning of fiscal 2002), and the corporate headquarters was relocated
from Burlington, Massachusetts to Germantown, Maryland. Given the severity
of current market conditions, however, the Company cannot make any
assurance that these cost reduction programs will actually align the
Company's operating expenses and revenues, be sufficient to avoid
operating losses, or that additional cost reduction programs will not be
necessary in the future.
On December 27, 2001 the Company amended its senior secured credit
facility. (See Note J. Senior Secured Credit Agreement Amendment.) The
continuing effectiveness of this amendment was conditioned upon the
Company raising new financing of $75 million within a specified time. This
was completed on January 15, 2002. (See Note Q. Subsequent Event -
Issuance and Sale of $75 Million 12% Senior Secured Convertible Notes.) As
of December 31, 2001, the Company was in compliance with the covenants
under its senior secured credit facility as amended.
The Company's cash requirements for debt service and ongoing operations
are substantial. While there can be no assurance that the Company will
have sufficient funds or available funds to meet its cash needs over the
next twelve months, as a result of the amendment of the senior secured
credit agreement and the issuance at par of $75 million of 12% Senior
Secured Convertible Notes in January 2002, the Company believes that funds
generated by ongoing operations and funds available under its senior
secured credit facility will be sufficient to meet its cash needs over the
next twelve-month period.
These and other risks associated with the Company's business are described
in the Company's Securities and Exchange Commission reports, including the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2001.
C. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated balance sheet at
December 31, 2001, and the unaudited consolidated statements of operations
and unaudited consolidated statements of cash flows for the interim
periods ended December 31, 2001 and 2000 include all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly these financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The year-end balance sheet data
was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the Company's most recent
Form 10-K as of March 31, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Significant estimates in these
financial statements include allowances for accounts receivable, net
realizable value of inventories, purchased
6
incomplete technology, warranty accruals and tax valuation reserves.
Actual results could differ from those estimates.
D. NEW PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS
141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS
No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a
business combination be recognized as assets apart from goodwill. FAS No.
142 requires that ratable amortization of goodwill be replaced with
periodic tests of the goodwill's impairment and that intangible assets
other than goodwill be amortized over their useful lives. FAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and
for all business combinations accounted for by the purchase method for
which the date of acquisition is before June 30, 2001. The provisions of
FAS No. 142 will be effective for fiscal years beginning after December
15, 2001; however, the Company elected to early adopt the provisions
effective April 1, 2001.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". FAS 144
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations- Reporting the Effects of Disposal of a Segment of a
Business". FAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001, and will thus be adopted by the
Company, as required, on April 1, 2002. Management is currently
determining what effect, if any, FAS 144 will have on its financial
position and results of operations.
E. INCOME TAXES
During the quarter ended September 30, 2001 the Company recorded a
valuation allowance of approximately $71 million against all of its U.S.
net deferred tax assets. Statement of Financial Accounting Standards No.
109 requires a valuation allowance to be recorded against deferred tax
assets when it is more likely than not that some or all of the deferred
tax assets will not be realized. As a result of the downturn in the
telecommunications test equipment sector, the Company has incurred
significant and previously unanticipated financial accounting and taxable
losses in the U.S. for the first half of the current fiscal year, and the
current outlook indicates that significant uncertainty will continue for
the remainder of this fiscal year and into the next fiscal year. These
cumulative losses, together with the Company's prior fiscal financial
accounting and taxable losses in the U.S., resulted in management's
decision that it is more likely than not that all of its U.S. deferred tax
assets will not be realized.
The Company will continue to provide a valuation allowance against
primarily all of its U.S. net deferred tax assets until it returns to an
appropriate level of financial accounting and taxable income in the U.S.
The ultimate realization of these deferred tax assets depends upon the
Company's ability to generate sufficient future taxable income in the U.S.
If the Company is successful in generating sufficient future taxable
income in the U.S., the Company will reduce the valuation allowance
through a reduction in income tax expense in the future.
7
F. ACQUIRED INTANGIBLE ASSETS
As of December 31, 2001
Gross Carrying Accumulated
Amount Amortization
-------------- -----------
(In thousands)
Amortized intangible assets:
Core technology $ 236,415 $ 74,526
Other intangible assets 17,969 17,093
---------- ---------
Total $ 254,384 $ 91,619
========== =========
Aggregate amortization expense:
For the nine months ended December 31, 2001 $ 32,086
Estimated amortization expense:
For the year ended March 31, 2002 42,004
For the year ended March 31, 2003 38,704
For the year ended March 31, 2004 36,137
For the year ended March 31, 2005 35,327
For the year ended March 31, 2006 35,327
Core technology is amortized over a weighted average of 6 years and all
other intangible assets are amortized on a weighted average of 2 years.
G. GOODWILL
The changes in the carrying amount of goodwill during the nine months
ended December 31, 2001 are as follows:
Reporting Units
------------------------------------------------------------------
Communications
Test Itronix Airshow da Vinci Total
-------------- -------- ------- -------- ---------
(In thousands)
Balance as of April 1, 2001 $377,187 $ 34,036 $19,039 $ 5,216 $ 435,478
Goodwill adjustments 3,099 (2,300) -- (3,947) (3,148)
-------- -------- ------- ------- ---------
Balance as of December 31, 2001 $380,286 $ 31,736 $19,039 $ 1,269 $ 432,330
======== ======== ======= ======= =========
The goodwill adjustments in the communications test reporting unit
resulted primarily from final adjustments to the purchase price allocation
for the Wavetek Wandel Goltermann merger (See Note L. Acquisitions) and to
the deferred tax adjustment in respect to reclassifying certain intangible
assets as goodwill on adoption of FAS 142. The goodwill adjustment for the
Itronix reporting unit is related to the disposition of a subsidiary of
Itronix during the second quarter of fiscal 2002. The goodwill adjustment
for da Vinci relates to the goodwill impairment as a result of the closure
of a subsidiary of da Vinci Systems, Inc. during the third quarter of
fiscal 2002.
8
H. GOODWILL AND OTHER INTANGIBLE ASSETS - Adoption of FAS 142
Three Months Ended Nine Months Ended
December 31, December 31,
2000 2000
----------- -----------
Net loss from continuing operations before
extraordinary item $ (22,467) $ (150,293)
Add back goodwill amortization 21,705 50,361
Add back other intangible amortization 1,848 7,426
----------- -----------
Adjusted net income (loss) from continuing
operations before extraordinary item $ 1,086 $ (92,506)
=========== ===========
Basic and diluted loss per share:
Reported net loss from continuing
operations before extraordinary item $ (0.12) $ (0.82)
Goodwill amortization 0.12 0.28
Other intangible amortization 0.01 0.04
----------- -----------
Adjusted basic and diluted loss per share
from continuing operations before
extraordinary item $ 0.01 $ (0.50)
=========== ===========
The Company completed its transitional impairment test of goodwill during
the quarter ended September 30, 2001 for all reporting units required
under FAS 142 as of March 31, 2001 and determined that goodwill was not
impaired. The impairment testing was based on discounted cash flow
analyses of expectations of future earnings for each of the reporting
units over the remaining estimated lives of the separately identifiable
intangible assets. The Company's annual impairment test will be performed
as of March 31, 2002. If the Company's expectations as to future results
are diminished significantly, goodwill may be impaired and any resulting
noncash impairment charge may have an adverse effect on results of
operations.
I. DISCONTINUED OPERATIONS
In May 2000, the Board of Directors approved a plan to divest the
industrial computing and communications segment, which consists of ICS
Advent and Itronix Corporation subsidiaries. In October 2001, the Company
divested its ICS Advent subsidiary (see Note M. Sale of ICS Advent and
Other Subsidiary), but decided to retain Itronix based on current market
conditions. The decision to retain Itronix required the Company to make
certain reclassifications to its Statements of Operations and Balance
Sheets for all periods presented. Management had previously expected that
proceeds on disposal of both businesses comprising the segment would
exceed net assets, including operating losses incurred subsequent to May
2000, and accordingly these operating losses were deferred.
The net operating losses for ICS Advent and Itronix included in continuing
operations for the three and nine months ended December 31, 2000 were
offset by an equal net income amount presented on the discontinued
operations line within the Statement of Operations. Therefore, the net
loss in total for the Company as previously reported for these periods did
not change. The charge reported as discontinued operations for the nine
months ended December 31, 2001 represents the cumulative net operating
losses previously deferred from April 1, 2000 to June 30, 2001 for ICS
Advent and Itronix.
The Balance Sheets as of December 31, 2001 and March 31, 2001 include the
assets and liabilities of Itronix. The Balance Sheet at March 31, 2001
reflects the net assets of ICS Advent classified as net assets held for
sale. The Statement of Cash Flows was not reclassified as these statements
were not previously presented on a discontinued basis.
9
J. SENIOR SECURED CREDIT AGREEMENT AMENDMENT
On December 27, 2001, the Company entered into an amendment to the credit
agreement governing its senior secured credit facility. Under the
amendment, the lenders under the credit agreement, among other things,
agreed to waive the minimum interest coverage and maximum leverage
covenants of the Company under the credit agreement through June 30, 2003
and consented to the issuance and sale of the 12% Senior Secured
Convertible Notes Due 2007 (See Note Q. Subsequent Event - Issuance and
Sale of $75 Million 12% Senior Secured Convertible Notes.). Under the
amendment, the Company also became subject to certain additional covenants
and restrictions, including, without limitation, new minimum liquidity and
EBITDA requirements and additional restrictions on the Company's ability
to make capital expenditures, incur and guarantee debt, make investments,
optionally prepay the 9.75% Senior Subordinated Notes Due 2008 and dispose
of assets. The amendment also, among other things, adds additional
prepayment requirements for certain transactions, establishes additional
guarantees and pledges of collateral and increases the interest rates on
loans under the senior secured credit facility by 0.75%. On June 30, 2003,
the Company will again become subject to its minimum interest coverage and
maximum leverage covenants under the credit agreement. The Company can
make no assurance that it will be in compliance with these covenants upon
such reversion.
The Company incurred a $2.9 million fee payable to the lenders under its
senior secured credit facility in connection with the consummation of the
amendment and has been capitalized as deferred debt issuance costs that
will be amortized over the remaining life of the senior secured credit
agreement.
K. RESTRUCTURING
Due to the downturn in the Company's communications test segment and its
other businesses, the Company announced on August 1, 2001 a comprehensive
cost reduction program that includes the reduction of (1) approximately
400 jobs worldwide; (2) outside contractors and consultants; (3) operating
expenses; and (4) manufacturing costs through procurement programs to
lower materials costs. As a result of these measures, the Company recorded
a charge of $8 million during the quarter ended September 30, 2001
relating primarily to severance and terminated 328 employees and paid
approximately $1.9 million in severance and other related costs.
In October 2001, the Company announced an expanded cost reduction plan
that included (1) a reduction of 500 additional positions excluding the
employees of the sold ICS Advent subsidiary; (2) consolidating certain of
its development and marketing offices; (3) instituting a reduced workweek
at selected manufacturing locations; and (4) reducing capital
expenditures. In addition, the Company announced the relocation of its
Burlington, Massachusetts corporate headquarters to Germantown, Maryland.
The Company incurred a restructuring charge of $9.3 million in connection
with this plan in the quarter ended December 31, 2001 and terminated 394
employees under this plan.
The following table summarizes the restructuring expenses and payments
incurred during the three and nine months ended December 31, 2001:
10
For The Three Months Ended December 31, 2001
Balance Balance
September 30, December 31,
2001 Expense Paid 2001
------------- -------- -------- ------------
Workforce-related $ 5,452 $ 8,935 $ (5,172) $ 9,215
Facilities 95 412 -- 507
Other 32 -- -- 32
------------ -------- -------- ------------
Total $ 5,579 $ 9,347 $ (5,172) $ 9,754
============ ======== ======== ============
For The Nine Months Ended December 31, 2001
Balance Balance
April 1, December 31,
2001 Expense Paid 2001
---------- --------- ------- ------------
Workforce-related $ -- $ 16,620 $ (7,405) $ 9,215
Facilities -- 592 (53) 539
Other -- 32 (32) --
----------- -------- --------- -------------
Total $ -- $ 17,244 $ (7,490) $ 9,754
=========== ======== ========= =============
L. ACQUISITIONS
Wavetek Wandel Goltermann, Inc.
On May 23, 2000, a subsidiary of the Company merged with Wavetek Wandel
Goltermann, Inc. ("WWG"), pursuant to which WWG became an indirect, wholly
owned subsidiary of the Company (the "WWG Merger") for a purchase price of
$402.0 million.
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.
Pro Forma Financial Information
The following unaudited pro forma information presents a summary of
consolidated results of operations, excluding the effects of adopting FAS
142, of the Company for the nine months ended December 31, 2000 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.
11
Nine Months Ended
December 31, 2000
------------------
(In thousands, except
per share data)
Revenue $ 1,071,541
Net loss from continuing operations before
extraordinary item (181,262)
Loss per share from continuing operations before
extraordinary item:
Basic and diluted $ (1.00)
Weighted average shares:
Basic and diluted 181,634
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.
M. SALE OF ICS ADVENT AND OTHER SUBSIDIARY
On October 31, 2001, the Company sold its ICS Advent subsidiary for $23
million in cash proceeds. The Company wrote down the net assets of ICS
Advent at September 30, 2001, to the cash to be received less expenses
related to the sale, which resulted in an impairment charge of $15 million
in the Statement of Operations in the quarter ended September 30, 2001.
In addition, the Company recorded a charge of $2.9 million relating to the
disposition of a subsidiary of Itronix Corporation during the second
quarter of fiscal 2002.
N. EXTRAORDINARY ITEM
In connection with the WWG Merger in May 2000, the Company recorded an
extraordinary charge of $10.7 million (net of an income tax benefit of
$6.6 million), of which $7.3 million (pretax) related to a premium paid by
the Company to WWG's former bondholders to repurchase WWG's senior
subordinated debt outstanding prior to the WWG Merger. In addition, the
Company booked a charge of $10.0 million (pretax) for the unamortized
deferred debt issuance costs which originated at the time of the
recapitalization of the Company in May of 1998.
O. LOSS PER SHARE
Loss per share is calculated as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands, except per share data)
Net income (loss):
Continuing operations $ (74,006) $ (22,467) $(217,638) $(150,293)
Discontinued operations -- 4,161 (10,039) 9,863
Extraordinary item -- -- -- (10,659)
--------- --------- --------- ---------
Net loss $ (74,006) $ (18,306) $(227,677) $(151,089)
========= ========= ========= =========
BASIC AND DILUTED:
Common stock outstanding, beginning of period 192,089 190,070 190,953 122,527
Weighted average common stock issued during
the period 94 230 786 53,578
Bonus element adjustment related to rights offering -- -- -- 5,529
--------- --------- --------- ---------
Weighted average common stock outstanding,
end of period 192,183 190,300 191,739 181,634
========= ========= ========= =========
Income (loss) per common share:
Continuing operations $ (0.39) $ (0.12) $ (1.14) $ (0.82)
Discontinued operations -- 0.02 (0.05) 0.05
Extraordinary item -- -- -- (0.06)
--------- --------- --------- ---------
Net loss per common share $ (0.39) $ (0.10) $ (1.19) $ (0.83)
========= ========= ========= =========
12
The Company did not have any common stock equivalents for the three and
nine month period ended December 31, 2001. For the three and nine months
ending December 31, 2000, the Company excluded from its diluted weighted
average shares outstanding the effect of the weighted average common stock
equivalents of 12.7 million and 14.5 million, respectively, as the Company
incurred a net loss. The inclusion of the common stock equivalents has
been excluded from the calculation of diluted weighted average shares
outstanding as inclusion would have an antidilutive effect on net loss per
common share.
P. SEGMENT INFORMATION
Net sales, earnings before interest, taxes and amortization ("EBITA") and
total assets for the three and nine months ended December 2001 and 2000
are shown below:
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Communications test segment:
Net sales $ 187,215 $ 296,244 $ 707,673 $ 754,100
EBITA (23,967) 41,139 25,263 100,429
Total assets 944,445 1,147,015 944,445 1,147,015
Industrial computing and communications segment:
Sales 41,139 45,878 143,285 135,470
EBITA 1,625 (853) (94) (4,471)
Total assets 91,300 136,918 91,300 136,918
Other subsidiaries:
Sales 20,431 27,860 69,239 83,385
EBITA 3,757 6,705 12,262 19,198
Total assets 49,152 57,381 49,152 57,381
Corporate:
Loss before interest and taxes (3,498) (1,504) (7,705) (4,563)
Total assets 61,756 87,519 61,756 87,519
Total company:
Sales 248,785 369,982 920,197 972,955
EBITA (22,083) 45,487 29,726 110,593
Total assets $ 1,146,653 1,428,833 $ 1,146,653 1,428,833
13
The following are excluded from the calculation of EBITA:
Amortization of inventory step up $ -- $ 562 $ -- $ 35,750
Purchased incomplete technology -- -- -- 56,000
Amortization of unearned
compensation 4,897 6,630 16,964 15,195
Restructuring and other charges 9,347 2,036 21,959 2,829
Recapitalization and other
related costs -- -- -- 9,194
Impairment of assets 3,947 -- 21,865 --
One-time and other special charges 820 -- 1,305 --
------- ------ ------- --------
Total excluded items $19,011 $9,228 $62,093 $118,968
======= ====== ======= ========
Q. SUBSEQUENT EVENT - ISSUANCE AND SALE OF $75 MILLION 12% SENIOR SECURED
CONVERTIBLE NOTES
On January 15, 2002, Acterna LLC, a wholly-owned subsidiary of the
Company, issued and sold at par $75 million aggregate principal amount of
12% Senior Secured Convertible Notes Due 2007 (the "Notes") to Clayton,
Dubilier & Rice Fund VI Limited Partnership. The Company used the proceeds
of the issuance and sale of the Notes (net of fees and expenses) to repay
a portion of its indebtedness under its revolving credit facility. The
amounts repaid remain available to be reborrowed by the Company.
Interest on the Notes is payable semi-annually in arrears on each March
31st and September 30th, with interest payments commencing on March 31,
2002. At the option of Acterna LLC, interest is payable in cash or in-kind
by the issuance of additional Notes. Due to limitations imposed by the
senior secured credit facility, Acterna LLC expects to pay interest on the
Notes in-kind by issuing additional Notes. The Notes are secured by a
second lien on all of the assets of the Company and its subsidiaries that
secure the senior secured credit facility, and are guaranteed by the
Company and its domestic subsidiaries.
Subject to prior approval of the Company's stockholders (as described
below), at the option of Clayton, Dubilier & Rice Fund VI Limited
Partnership (or any subsequent holder of Notes), at any time prior to
December 31, 2007, the maturity date of the Notes, the Notes may be
converted into newly-issued shares of common stock of the Company at a
conversion price of $3.00 per share, subject to customary antidilution
adjustments. On the date of issuance, the conversion price of the Notes
exceeded the public market price per share of common stock of the Company.
If in the future any Note is issued with a conversion price that is less
than the public market price on January 15, 2002 (the date of original
issuance) as a result of an anti-dilution adjustment of the conversion
price, then the Company would be required to take a charge to its results
of operations to reflect the discount of the adjusted conversion price to
the market price of the common stock on the date of original issuance.
Acterna LLC may redeem the Notes, in whole or in part, and without penalty
or premium, at any time prior to the maturity date. In addition, Acterna
LLC is required to offer to repurchase the Notes upon a change of control
and upon the disposition of certain assets. If any Note is redeemed,
repurchased or repaid for any reason prior to the maturity date, the
holder will be entitled to receive from the Company a warrant to purchase
a number of newly-issued shares of common stock of the Company equal to
the number of shares of common stock that such Note was convertible into
immediately prior to its redemption, repurchase or repayment. The exercise
price of such warrant will be the conversion price in effect immediately
prior to such warrant's issuance, subject to customary antidilution
adjustments. Subject to the approval of the Company's
14
stockholders (as described below), warrants will be exerciseable upon
issuance and will expire on the maturity date of the Notes. The Company is
required to classify the contingently issuable warrants as liabilities.
Because the warrants are only issuable upon redemption, repurchase or
repayment prior to maturity, which requires the consent of the lenders
under the Company's senior secured credit facility, the Company has valued
the warrants at zero as of the date of issuance. The fair value of the
warrants upon issuance will be recorded as a charge to operations.
In order to comply with the rules of the Nasdaq National Market, where the
common stock of the Company is listed, the terms of the Notes provide,
and, if issued, the terms of the warrants will provide, that no Note or
warrant may be converted or exercised, as the case may be, until the
stockholders of the Company have approved the issuance of the shares of
common stock upon such conversion or exercise. The Company expects to
obtain such approval by obtaining the written consent of its stockholders.
Without giving effect to the issuance and sale of the Notes, Clayton,
Dubilier & Rice Fund V Limited Partnership and Clayton, Dubilier & Rice
Fund VI Limited Partnership collectively own approximately 80% of the
outstanding common stock of the Company. Each intends to vote its shares
to approve the issuance of the shares of common stock upon conversion of
the Notes or exercise of the warrants, thereby assuring that the Company
will receive the stockholder approval necessary to comply with the Nasdaq
rules.
The Company incurred a $2.2 million fee payable to Clayton, Dubilier &
Rice, Inc. in connection with the issuance and sale of the Notes.
R. SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF ACTERNA CORPORATION AND
ACTERNA LLC
In connection with the Company's recapitalization and related
transactions, Acterna LLC became the primary obligor with respect to
substantially all of the 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.
15
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Nine Months Ended December 31, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Net sales $ -- $ 259,391 $ 660,806 $ -- $ 920,197
Cost of sales -- 118,882 311,606 -- 430,488
--------- --------- --------- -------- ---------
Gross profit -- 140,509 349,200 -- 489,709
Selling, general and administrative
expense -- 169,259 183,021 -- 352,280
Product development expense -- 43,972 80,445 -- 124,417
Impairment of assets held for sale -- -- 17,918 -- 17,918
Other asset impairment -- -- 3,947 -- 3,947
Restructuring -- 11,289 5,955 -- 17,244
Amortization of intangibles -- 2,607 29,479 -- 32,086
--------- --------- --------- -------- ---------
Totaling operating expense -- 227,127 320,765 -- 547,892
--------- --------- --------- -------- ---------
Operating income (loss) -- (86,618) 28,435 -- (58,183)
Interest (expense) -- (64,611) (9,058) -- (73,669)
Interest income -- 264 1,256 -- 1,520
Intercompany interest income (expense) -- 169 (169) -- --
Intercompany royalty income (expense) -- 2,569 (2,569) -- --
Other income (expense) -- 954 (7,223) -- (6,269)
--------- --------- --------- -------- ---------
Income (loss) from continuing
operations before income taxes -- (147,273) 10,672 -- (136,601)
Provision for income taxes -- 33,961 47,076 -- 81,037
--------- --------- --------- -------- ---------
Net income (loss) from continuing
operations -- (181,234) (36,404) -- (217,638)
Loss from discontinued operations -- -- (10,039) -- (10,039)
Equity income (loss) (227,677) (46,443) -- 274,120 --
--------- --------- --------- -------- ---------
Net income (loss) $(227,677) $(227,677) $ (46,443) $274,120 $(227,677)
========= ========= ========= ======== =========
16
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Nine Months Ended December 31, 2000
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ------------ ------------
(In thousands)
Net sales $ -- $ 318,162 $ 654,793 $ -- $ 972,955
Cost of sales -- 113,548 329,685 -- 443,233
--------- --------- --------- -------- ---------
Gross profit -- 204,614 325,108 -- 529,722
Selling, general and administrative expense -- 161,305 190,631 -- 351,936
Product development expense -- 38,719 80,095 -- 118,814
Recapitalization and other related costs -- 9,194 -- -- 9,194
Purchased incomplete technology -- -- 56,000 -- 56,000
Amortization of intangibles -- 229 83,933 -- 84,162
--------- --------- --------- -------- ---------
Total operating expense -- 209,447 410,659 -- 620,106
Operating loss -- (4,833) (85,551) -- (90,384)
Interest expense -- (65,777) (8,026) -- (73,803)
Interest income -- 1,149 1,455 -- 2,604
Other income (expense) -- 258 (2,636) -- (2,378)
--------- --------- --------- -------- ---------
Loss from continuing operations before
income taxes and extraordinary item -- (69,203) (94,758) -- (163,961)
Provision (benefit) for income taxes -- (3,915) (9,753) -- (13,668)
--------- --------- --------- -------- ---------
Net loss from continuing operations before
extraordinary item -- (65,288) (85,005) -- (150,293)
Income from discontinued operations -- -- 9,863 -- 9,863
Equity income (loss) (151,089) (75,142) -- 226,231 --
Extraordinary item -- (10,659) -- -- (10,659)
--------- --------- --------- -------- ---------
Net income (loss) $(151,089) $(151,089) $ (75,142) $226,231 $(151,089)
========= ========= ========= ======== =========
17
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
----------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ -- $ 19,801 $ 31,177 $ -- $ 50,978
Accounts receivable, net -- 49,891 90,105 139,996
Inventory -- 27,184 104,473 131,657
Other current assets -- 21,778 29,594 -- 51,372
----------- --------- --------- ----------- -----------
Total current assets -- 118,654 255,349 -- 374,003
Property and equipment, net -- 29,633 94,810 -- 124,443
Investments in and advances to
consolidated subsidiaries (225,380) 278,805 (602,614) 549,189 --
Goodwill -- -- 432,330 432,330
Intangible assets, net -- -- 162,765 -- 162,765
Other -- 33,077 20,035 53,112
----------- --------- --------- ----------- -----------
$ (225,380) $ 460,169 $ 362,675 $ 549,189 $ 1,146,653
=========== ========= ========= =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion
of long-term debt $ -- $ 21,250 $ 7,641 $ -- $ 28,891
Accounts payable -- 21,288 45,951 -- 67,239
Accrued expenses -- 68,643 118,205 -- 186,848
----------- --------- --------- ----------- -----------
Total current liabilities -- 111,181 171,797 282,978
Long-term debt -- 948,750 112,755 -- 1,061,505
Deferred income taxes -- 23,092 3,538 -- 26,630
Deferred compensation -- 11,338 54,812 -- 66,150
Stockholders' equity (deficit):
Common stock 1,922 1,221 16,935 (18,156) 1,922
Additional paid-in capital 790,111 418,845 171,408 (590,253) 790,111
Accumulated earnings (deficit) (1,017,413) (993,628) (169,980) 1,157,598 (1,023,423)
Unearned compensation -- (60,110) -- -- (60,110)
Other comprehensive income (loss) -- (520) 1,410 -- 890
----------- --------- --------- ----------- -----------
Total stockholders' equity
(deficit) (225,380) (634,192) 19,773 549,189 (290,610)
----------- --------- --------- ----------- -----------
$ (225,380) $ 460,169 $ 362,675 $ 549,189 $ 1,146,653
=========== ========= ========= =========== ===========
18
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ -- $ 22,179 $ 40,875 $ -- $ 63,054
Accounts receivable, net -- 67,637 165,734 -- 233,371
Inventory -- 28,053 129,428 -- 157,481
Other current assets -- 38,799 38,772 -- 77,571
--------- --------- --------- ----------- -----------
Total current assets -- 156,668 374,809 -- 531,477
Property and equipment, net -- 26,641 97,925 -- 124,566
Investments in and advances to
consolidated subsidiaries 13,255 259,637 (547,301) 274,409 --
Goodwill -- -- 435,478 -- 435,478
Intangible assets, net -- -- 195,093 -- 195,093
Net assets held for sale -- -- 37,908 -- 37,908
Other -- 28,166 30,291 -- 58,457
--------- --------- --------- ----------- -----------
$ 13,255 $ 471,112 $ 624,203 $ 274,409 $ 1,382,979
========= ========= ========= =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of debt $ -- $ 16,000 $ 17,167 $ -- $ 33,167
Accounts payable -- 31,623 80,532 -- 112,155
Accrued expenses -- 53,331 148,167 -- 201,498
--------- --------- --------- ----------- -----------
Total current liabilities -- 100,954 245,866 -- 346,820
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' equity (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 equity (deficit) (789,735) (765,953) (123,536) 883,478 (795,746)
Unearned compensation -- (90,986) -- -- (90,986)
Other comprehensive income (loss) -- (928) 3,693 -- 2,765
--------- --------- --------- ----------- -----------
Total stockholders' equity (deficit) 13,255 (437,801) 69,160 274,409 (80,977)
--------- --------- --------- ----------- -----------
$ 13,255 $ 471,112 $ 624,203 $ 274,409 $ 1,382,979
========= ========= ========= =========== ===========
19
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Nine Months Ended December 31, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- -------------
(In thousands)
Operating activities:
Net income (loss) from operations $(227,677) $(227,677) $(46,443) $ 274,120 $(227,677)
Adjustment for noncash items included
in net income (loss):
Depreciation -- 9,049 17,206 -- 26,255
Amortization of intangibles -- 2,608 29,478 -- 32,086
Amortization of unearned compensation -- 8,023 8,941 -- 16,964
Amortization of deferred debt
issuance costs -- 4,293 -- -- 4,293
Change in deferred income taxes -- 72,135 -- -- 72,135
Loss from discontinued operations -- -- 10,039 -- 10,039
Impairment of net assets held for sale -- -- 21,865 -- 21,865
Other -- 2,047 730 -- 2,777
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures -- 22,942 17,277 -- 40,219
Changes in intercompany 227,677 107,080 (60,637) (274,120) --
--------- --------- -------- --------- ---------
Net cash flows provided by (used in) operating
activities -- 500 (1,544) -- (1,044)
Investing activities:
Purchases of property and equipment -- (11,380) (17,278) -- (28,658)
Proceeds from sale of business -- -- 23,800 -- 23,800
Businesses acquired in purchase transaction,
net of cash acquired and non-cash issuance of
common stock -- -- (1,495) -- (1,495)
Other -- (2,574) (1,692) -- (4,266)
--------- --------- -------- --------- ---------
Net cash flows provided by investing
activities -- (13,954) 3,335 -- (10,619)
Financing activities:
Net borrowing (repayment) of debt -- 13,000 (11,218) -- 1,782
Repayment of capital lease obligations -- (68) -- (68)
Capitalized debt issuance costs -- (4,006) -- -- (4,006)
Proceeds from issuance of common stock, net of
expenses -- 2,082 -- -- 2,082
--------- --------- -------- --------- ---------
Net cash flows (used in) provided by
financing activities -- 11,076 (11,286) -- (210)
Effect of exchange rate on cash -- (203) -- (203)
--------- --------- -------- --------- ---------
Decrease in cash and cash equivalents -- (2,378) (9,698) -- (12,076)
Cash and cash equivalents at beginning of year -- 22,179 40,875 -- 63,054
--------- --------- -------- --------- ---------
Cash and cash equivalents at end of period $ -- $ 19,801 $ 31,177 $ -- $ 50,978
========= ========= ======== ========= =========
20
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Nine Months Ended December 31, 2000
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- -------------- ----------- -------------
(In thousands)
Operating activities:
Net income (loss) from operations $(151,089) $(151,089) $ (75,142) $ 226,231 $(151,089)
Adjustment for noncash items included
in net income (loss):
Depreciation -- 6,172 8,528 -- 14,700
Amortization of intangibles -- -- 76,086 -- 76,086
Amortization of inventory step-up -- 35,750 -- -- 35,750
Amortization of unearned compensation -- 7,500 7,695 -- 15,195
Amortization of deferred debt issuance
costs -- 2,943 -- -- 2,943
Write off of deferred debt issuance cost -- 10,019 -- -- 10,019
Purchased incomplete technology -- 56,000 -- -- 56,000
Recapitalization and other related costs -- 9,194 -- -- 9,194
Other -- -- 125 -- 125
Changes in deferred income taxes -- (4,538) -- -- (4,538)
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures -- (11,164) (80,618) -- (91,782)
Changes in intercompany 151,089 (43,016) 118,158 (226,231) --
--------- --------- --------- --------- ---------
Net cash flows provided by (used in)
operating activities -- (82,229) 54,832 -- (27,397)
Investing activities:
Purchases of property and equipment -- (9,946) (13,528) -- (23,474)
Proceeds from sale of business -- 3,500 -- -- 3,500
Businesses acquired in purchase transactions,
net of cash acquired and non-cash items -- (407,034) -- -- (407,034)
Other -- (2,920) (1,789) -- (4,709)
--------- --------- --------- --------- ---------
Net cash flows used in investing activities -- (416,400) (15,317) -- (431,717)
Financing activities:
Net borrowings of debt -- 323,015 -- -- 323,015
Repayment of capital lease obligations -- -- (17) -- (17)
Capitalized debt issuance costs -- (18,519) -- -- (18,519)
Proceeds from issuance of common stock, net
of expenses -- 199,609 -- -- 199,609
--------- --------- --------- --------- ---------
Net cash flows provided by (used in)
financing activities -- 504,105 (17) -- 504,088
Effect of exchange rate on cash -- (7,023) -- -- (7,023)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents -- (1,547) 39,498 -- 37,951
Cash and cash equivalents at beginning of year -- 19,359 14,480 -- 33,839
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ -- $ 17,812 $ 53,978 $ -- $ 71,790
========= ========= ========= ========= =========
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the effect of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 2001 and below.
OVERVIEW
The Company is managed in two business segments: communications test and
industrial computing and communications. The Company also has other subsidiaries
that, in the aggregate, are not reportable as a segment.
The current global economic downturn has further impacted a previously existing
downturn in the Company's communications test segment as well as its other
businesses. As in past downturns, the Company continues to experience diminished
product demand, excess manufacturing capacity and erosion of average selling
prices. In the third quarter of the current fiscal year, the Company's bookings
increased to approximately $223.8 million from approximately $201.7 million in
the second quarter but down significantly from approximately $369.6 million in
the third quarter of last year (excluding bookings related to ICS Advent). At
present, the Company cannot predict the duration or severity of this downturn,
but based on the historical correlation between the Company's bookings and its
revenue, the Company expects fourth quarter revenue in its communications test
segment to be down substantially as compared with the same period last year.
The Company continues to implement cost reduction programs aimed at aligning its
ongoing operating costs with its expected revenues. In the third quarter of
fiscal 2002, the Company's headcount was further reduced to 5,200 (down from
6,380 at the beginning of fiscal 2002), and the corporate headquarters was
relocated from Burlington, Massachusetts to Germantown, Maryland. Given the
severity of current market conditions, however, the Company cannot make any
assurance that these cost reduction programs will actually align the Company's
operating expenses and revenues, be sufficient to avoid operating losses, or
that additional cost reduction programs will not be necessary in the future.
On August 1, 2001 the Company announced a comprehensive cost reduction program
that includes a reduction of: (1) approximately 400 jobs worldwide; (2) outside
contractors and consultants; (3) operating expenses; and (4) manufacturing costs
through procurement programs to lower materials costs. The Company expects these
steps to result in annualized cost savings in excess of $50 million. As a result
of these measures, the Company terminated 328 employees and recorded a charge of
$8 million relating primarily to severance in the second quarter of fiscal 2002.
In October 2001, the Company announced an expanded cost reduction plan which
included (1) a reduction of 500 additional positions excluding the employees of
the sold ICS Advent subsidiary; (2) consolidating certain of its development and
22
marketing offices; (3) instituting a reduced workweek at selected manufacturing
locations; (4) reducing capital expenditures, and (5) the relocation of its
corporate headquarters. The Company incurred a restructuring charge of $9.3
million for this plan.
During the nine months ended December 31, 2001, the Company paid approximately
$7.5 million in severance and other related costs. At December 31, 2001
approximately $9.8 million was left to be paid for this restructuring; the
Company anticipates that this amount will be paid primarily during the fourth
quarter of fiscal 2002. (See Note K. Restructuring.)
The Company previously reported the industrial computing and communications
segment as discontinued operations. This segment is comprised of two
subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the Company
divested its ICS Advent subsidiary and decided to retain Itronix based on
current market conditions. The decision to retain Itronix required the Company
to make certain reclassifications to its Statements of Operations and Balance
Sheets for all periods presented. The Statements of Operations were reclassified
to include the results of operations of ICS Advent and Itronix. The balance
sheet reflects the assets and liabilities of Itronix, and the net assets of ICS
Advent are classified as net assets held for sale on the March 31, 2001 balance
sheet. On October 31, 2001, the Company sold its ICS Advent subsidiary for $23
million in cash. The Company recorded an impairment charge of $15 million in the
Statement of Operations for this transaction during the quarter ended September
30, 2001.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Number 141, ("FAS 141"), "Business Combinations"
and Number 142 ("FAS 142"), "Goodwill and Other Intangible Assets". FAS Number
141 requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS Number 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS Number 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS Number 142 will be effective for fiscal
years beginning after December 15, 2001; however, the Company elected to early
adopt the provisions effective April 1, 2001.
RESULTS OF OPERATIONS
For the Three Months Ended December 31, 2001 as Compared to Three Months Ended
December 31, 2000 on a Consolidated Basis
Net sales. For the three months ended December 31, 2001, consolidated net sales
decreased $121.2 million to $248.8 million as compared to $370 million for the
three months ended December 31, 2000. The decrease is primarily attributable to
reduced demand for the Company's communications tests products partially offset
by an increase in sales at Itronix.
Gross profit. Consolidated gross profit decreased $102.6 million to $116.5
million or 46.8% of consolidated net sales for the three months ended December
31, 2001 as compared to $219.1 million or 59.2% of consolidated net sales for
the three months ended December 31, 2000. The decrease in gross profit is in
part due to a charge of $15 million for inventory adjustments and other reserves
recorded during the third quarter of fiscal 2002 within the communications test
segment in response to the reduced forecasted demand due to the continuing
economic downturn. Excluding
23
the impact of the $15 million charge, gross profit was $131.5 million or 53% of
consolidated net sales. The reduction in gross profit is also a result of
shipping fewer optical transport products, which carry a higher gross profit
than other communications test products.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; goodwill impairment;
restructuring; and amortization of intangibles. Total operating expenses were
$166.6 million or 66.9% of consolidated net sales for the three months ended
December 31, 2001, as compared to $218.4 million or 59.0% of consolidated net
sales for the three months ended December 31, 2000. Excluding the impact of the
$3.9 million goodwill impairment charge and the $9.3 million restructuring
charge within the third quarter of fiscal 2002, total operating expenses were
$153.3 million or 61.6% of consolidated net sales for the three months ended
December 31, 2001. The decrease in operating expenses during the current quarter
is in part a result of restructuring and reduced employee expenses as described
above. The decrease is also attributable to the Company's early adoption of FAS
142 in the first quarter of fiscal 2002, which eliminated the amortization of
goodwill expense of approximately $27.3.
Included in both cost of sales ($0.3 million and $2.2 million) and operating
expenses ($4.6 million and $4.4 million) (for the three months ending December
31, 2001 and 2000, respectively,) is the amortization of unearned compensation
which relates to the issuance of non-qualified stock options to employees and
non-employee directors at a grant price lower than fair market value (defined as
the closing price on the open market at the date of issuance). The Company
discontinued the practice of issuing stock options at grant prices lower than
fair-market value during fiscal 2001. Therefore, the Company has not incurred
any additional charges for unearned compensation during fiscal 2002.
Selling, general and administrative expense was $105.2 million or 42.3% of
consolidated sales for the three months ended December 31, 2001, as compared to
$138.8 million or 37.5% of consolidated net sales for the three months ended
December 31, 2000. The decrease in these expenses is a result of the Company's
restructuring efforts to reduce operating costs of the business as well as a
result of the sale of ICS Advent. The Company has reduced its headcount by 710
employees since the end of the second quarter of fiscal 2002 of which 430 were
due to the restructuring and 280 were due to the sale of ICS Advent. The
increase as a percentage of sales is due to the reduction in sales caused by the
continuing economic downturn.
Product development expense was $38.1 million or 15.3% of consolidated net sales
for the three months ended December 31, 2001 as compared to $44.7 million or
12.1% of consolidated sales for the same period a year ago.
The Company recorded a charge of $3.9 million during the third quarter of fiscal
2002 related to goodwill impairment as a result of the closure of a subsidiary
of da Vinci Systems, Inc.
During the quarter, the Company incurred a charge of $9.3 million related
to the additional restructuring of the business. (See Note K. Restructuring).
This charge is primarily related to severance and other related costs.
Amortization of intangibles was $9.9 million for the three months ended December
31, 2001, as compared to $34.9 million for the amortization of intangibles and
goodwill in the same period a year ago. The decrease was primarily attributable
to the Company's early adoption of FAS 142 in the first quarter of fiscal 2002,
which eliminates the amortization of goodwill.
24
Interest. Interest expense, net of interest income, was $22.6 million for the
three months ended December 31, 2001 as compared to $27.1 million for the same
period a year ago. The decrease in interest expense was primarily attributable
to lower interest rates on borrowings during the third quarter of fiscal 2002 as
compared to the same period last year.
Taxes. During the third quarter of fiscal 2002 the Company recorded a tax
provision of $425 thousand. This represents a provision for taxes on earnings in
tax jurisdictions where the Company is profitable. The Company did not record a
tax benefit for losses incurred in the tax jurisdictions where the benefit of
the loss may not be realized. (See Note E. Income Taxes.)
Nine Months Ended December 31, 2001 as Compared to Nine Months Ended December
31, 2000 on a Consolidated Basis
Net sales. For the nine months ended December 31, 2001, consolidated net sales
decreased $52.8 million or 5.4% to $920.2 million as compared to $973.0 million
for the nine months ended December 31, 2000. The decrease in net sales is
primarily a result of a reduction in net sales of optical transport products
within the communications test segment. The Company also derived lower revenues
from Airshow and daVinci, but higher revenues at Itronix, as compared to the
same period last year.
Gross profit. Consolidated gross profit decreased $40.0 million to $489.7
million or 53.2% of consolidated net sales for the nine months ended December
31, 2001 as compared to $529.7 million or 54.4% of consolidated net sales for
the nine months ended December 31, 2000. Excluding the $35.8 million included in
cost of sales for the amortization of the inventory step-up from the
acquisitions of WWG and Cheetah during the same period last year, consolidated
gross profit was 58.1% of consolidated net sales. The decrease in gross profit
was primarily attributable to the erosion of gross margins as the Company
experienced pressure from its customers to reduce selling prices and a shift in
product mix toward the Company's lower-margin products.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; impairment of assets;
recapitalization and other related costs; restructuring; purchased incomplete
technology; and amortization of intangibles. Total operating expenses were
$547.9 million or 59.5% of consolidated net sales for the nine months ended
December 31, 2001, as compared to $620.1 million or 63.7% of consolidated net
sales for the nine months ended December 31, 2000. Excluding the impact of $21.9
million of asset impairment charges and $17.2 million of restructuring charges
in the first nine months of fiscal 2002, and a $56 million writeoff of purchased
incomplete technology and $9.2 million of recapitalization and other costs
(related to the departure of an executive of the Company during fiscal 2000)
during the first nine months of fiscal 2001, total operating expenses were
$508.8 million or 55.3% of consolidated net sales and $554.9 million or 57.0% of
consolidated net sales for the nine months ended December 31, 2001 and 2000,
respectively.
Included in both cost of sales ($1.1 million and $5.0 million) and operating
expenses ($15.9 million and $10.2 million) (for the nine months ending December
31, 2001 and 2000, respectively), is the amortization of unearned compensation
which relates to the issuance of non-qualified stock options to employees and
non-employee directors at a grant price lower than fair market value (defined as
the closing price on the open market at the date of issuance). The Company
discontinued the practice of issuing stock options at grant prices lower than
fair-market value during fiscal 2001.
25
Selling, general and administrative expense was $352.3 million or 38.3% of
consolidated net sales for the nine months ended December 31, 2001 as compared
to $351.9 million or 36.2% of consolidated net sales for the nine months ended
December 31, 2000.
Product development expense was $124.4 million or 13.5% of consolidated net
sales for the nine months ended December 31, 2001 as compared to $118.8 million
or 12.2% of consolidated sales for the same period a year ago.
The Company recorded a charge of $3.9 million during the third quarter of fiscal
2002 related to goodwill impairment as a result of the closure of a subsidiary
of da Vinci Systems, Inc.
During the nine months ended December 31, 2001, the Company incurred a charge of
$17.2 million related to the restructuring of the business. (See Note K.
Restructuring). This charge is primarily related to severance and other related
costs.
The Company wrote down the net assets of ICS Advent at September 30, 2001 to the
cash to be received upon the sale of ICS Advent less transaction-related
expenses, which resulted in an impairment charge of $15 million. ICS Advent was
sold on October 31, 2001. In addition, the Company recorded a charge of $2.9
million relating to the disposition of a subsidiary of Itronix Corporation.
Amortization of intangibles was $32.1 million for the nine months ended December
31, 2001, as compared to $84.2 million for the amortization of intangibles and
goodwill in the same period a year ago. The decrease was attributable to the
Company's early adoption of FAS 142 in the first quarter of fiscal 2002, which
eliminates the amortization of goodwill as well as only approximately one month
of goodwill amortization related to the WWG Merger during the first three months
of fiscal 2001.
Interest. Interest expense, net of interest income, was $72.1 million for the
nine months ended December 31, 2001 as compared to $71.2 million for the same
period a year ago.
Taxes. For the nine months ended December 31, 2001, the effective tax rate was
not meaningful due to the provision of a $71 million valuation allowance against
the Company's U.S. net deferred tax assets that was recorded in the second
quarter ended September 30, 2001. (See Note E. Income Taxes.)
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.
Segment Disclosure
The Company measures the performance of its subsidiaries by their respective new
orders received ("bookings"), net sales and earnings before interest, taxes and
amortization ("EBITA") which excludes non-recurring and one-time charges.
Included in each segment's EBITA is an allocation of corporate expenses. The
information below includes bookings, net sales and EBITA for the two segments
the Company operates as well as other subsidiaries that, in the aggregate, are
not reportable as a segment.
26
Three Months Ended Nine Months Ended
December 31, December 31,
SEGMENT 2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands)
Communications test segment:
Bookings $ 169,122 $ 309,154 $ 535,579 $ 781,766
Net sales 187,215 296,244 707,673 754,100
EBITA (23,967) 41,139 25,263 100,429
Industrial computing and
communications segment:
Bookings 39,788 53,384 107,940 161,550
Net sales 41,139 45,878 143,285 135,470
EBITA 1,625 (853) (94) (4,471)
Other subsidiaries:
Bookings 14,896 29,382 61,189 83,846
Net sales 20,431 27,860 69,239 83,385
EBITA 3,757 6,705 12,262 19,198
Three and Nine Months Ended December 31, 2001 Compared to Three and Nine Months
Ended December 31, 2000 - Communications Test Products
Bookings for communications test products decreased to $169.1 million for the
three months ended December 31, 2001 as compared to $309.2 million for the same
period a year ago. For the nine months ended December 31, 2001, bookings for
communications test products decreased to $535.6 million as compared to $781.8
million for the same period a year ago. The decrease is a result of the current
global economic slowdown and capital spending cutbacks in the communications
industry.
Net sales of communications test products were $187.2 million for the three
months ended December 31, 2001 as compared to $296.2 million for the same period
a year ago. For the nine months ended December 31, 2001, net sales of
communications test products were $707.7 million as compared to $754.1 million
for the nine months ended December 31, 2000. The decrease for the third quarter
of fiscal 2002 is within all five areas of the communications test businesses,
with the most significant decline for optical transport products. The decrease
for the nine months ended December 31, 2001 is a result of the reduced bookings
as well as the continued pressure on the Company from its customers to reduce
selling prices.
EBITA for the communications test products decreased to a loss of $24.0 million
for the three months ended December 31, 2001 as compared to income of $41.1
million for the same period a year ago. For the nine months ended December 31,
2001, EBITA decreased to $25.3 million as compared to $100.4 million for the
same period a year ago. The decrease is primarily a result of the factors
described above. In addition, the Company recorded a charge of $15 million for
inventory adjustments and other reserves during the third quarter of fiscal 2002
further reducing EBITA for the periods.
Three and Nine Months Ended December 31, 2001 Compared to Three and Nine Months
Ended December 31, 2000 - Industrial Computing and Communications Products
27
Bookings for industrial computing and communications products decreased $13.6
million to $39.8 million for the three months ended December 31, 2001 as
compared to $53.4 million for the same period a year ago. For the nine months
ended December 31, 2001 bookings for this segment decreased $53.7 million to
$107.9 million from $161.6 million for the same period a year ago. The decrease
is in part a result of the sale of ICS Advent during the quarter as well as a
slight decrease in orders at Itronix, as compared to the same period last year.
Net sales of industrial computing and communications products decreased $4.8
million to $41.1 million for the three months ended December 31, 2001 as
compared to $45.9 million for the same period a year ago. For the nine months
ended December 31, 2001 sales within this segment increased $7.8 million to
$143.3 million as compared to $135.5 million for the same period a year ago. The
increase for the nine months ended December 31, 2001 was primarily due to
increased shipments of Itronix's new rugged laptop PC which was introduced to
the market in December 2000.
EBITA for the industrial computing and communications segment was $1.6 million
for the three months ended December 31, 2001 as compared to a loss of $0.9
million for the same period a year ago. For the nine months ended December 31,
2001 EBITA was a loss of $0.1 million as compared to a loss of $4.5 million for
the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the WWG Merger and from the
funding of working capital and capital expenditures. As of December 31, 2001,
the Company had $1,088.4 million of indebtedness, primarily consisting of $275.0
million principal amount of senior subordinated notes, $787.4 million in
borrowings under the Company's senior secured credit facility and $26.0 million
under other debt obligations.
In addition, on January 15, 2002, Acterna LLC, a wholly-owned subsidiary of the
Company, issued and sold at par $75 million aggregate principal amount of 12%
Senior Secured Convertible Notes Due 2007 (the "Notes") to Clayton, Dubilier &
Rice Fund VI Limited Partnership. The Company used the proceeds of the issuance
and sale of the Notes (net of fees and expenses) to repay a portion of its
indebtedness under its revolving credit facility. The amounts repaid remain
available to be reborrowed by the Company. As a result of the repayment, the
Company currently has $96 million of availability under its revolving credit
facility.
On December 27, 2001, the Company entered into an amendment to the credit
agreement (the "Amendment") governing its senior secured credit facility. Under
the Amendment, the lenders under the credit agreement, among other things,
agreed to waive the minimum interest coverage and maximum leverage covenants of
the Company under the credit agreement through June 30, 2003 and consented to
the issuance and sale of the Notes. Under the Amendment, the Company also became
subject to certain additional covenants and restrictions, including, without
limitation, new minimum liquidity and EBITDA requirements and additional
restrictions on the Company's ability to make capital expenditures, incur and
guarantee debt, make investments, optionally prepay the 9.75% Senior
Subordinated Notes Due 2008 and dispose of assets. The Amendment also, among
other things, adds additional prepayment requirements for certain transactions,
establishes additional guarantees and pledges of collateral and increases the
interest rates on loans under the senior secured credit facility by 0.75%. On
June 30, 2003, the Company will again become subject to its minimum interest
coverage and maximum leverage covenants under the
28
senior secured credit agreement. The Company can make no assurance that it will
be in compliance with these covenants upon such reversion.
The Company's $40 million short-term credit facility expired on December 31,
2001.
Cash Flows. The Company's cash and cash equivalents decreased $12.1 million
during the nine months ended December 31, 2001.
Working Capital. For the nine months ended December 31, 2001, the Company's
working capital decreased as its operating assets and liabilities provided $40.2
million of cash. Accounts receivable decreased, creating a source of cash of
$92.8 million primarily due to the decrease in sales as well as enhanced efforts
to reduce the number of days sales outstanding. Inventory levels decreased,
creating a source of cash of net $15.5 million primarily due to increased focus
on reducing overall inventory levels. Accounts payable decreased, creating a use
of cash of $50.4 million primarily as a result of the Company paying accounts
payable outstanding at March 31, 2001. Other current liabilities decreased,
creating a use of cash of $28.0 million due in part to management incentive
payments made during the first quarter of fiscal year 2002 relating to bonuses
earned during fiscal 2001 as well as the payment of the semi-annual interest
payment on the senior subordinated notes.
Investing activities. The Company's net investing activities totaled $10.6
million for the nine months ended December 31, 2001 due primarily to capital
expenditures of $28.7 million as a result of the WWG Merger. This was offset by
the sale of ICS Advent and another smaller subsidiary for gross cash proceeds of
$23.8 million.
Financing Activities. The Company's financing activities provided $0.2 million
in net cash during the first nine months of fiscal 2002, primarily due to
additional borrowings of cash under the Company's revolving credit facility and
the proceeds from the sale of common stock offset by $4.0 million in debt
financing fees incurred for the Company's credit agreement amendment and the
short-term credit facility.
Future Financing Sources and Cash Flows. As of December 31, 2001, the Company
had $133.0 million of borrowings and $17.0 million of letters of credit
outstanding under its revolving credit facility and $25 million of additional
availability under the facility.
The Company's cash requirements for debt service and ongoing operations are
substantial. While there can be no assurance that the Company will have
sufficient funds or available funds to meet its cash needs over the next twelve
months, as a result of the amendment of the senior secured credit agreement and
the issuance at par of $75 million of 12% Senior Secured Convertible Notes in
January 2002, the Company believes that funds generated by ongoing operations
and funds available under its senior secured credit facility will be sufficient
to meet its cash needs over the next twelve-month period.
In addition, the Company's future operating performance and ability to
repay, extend or refinance the senior secured credit facility (including the
revolving credit facility) or any new borrowings, and to service and repay or
refinance the 12% Senior Secured Convertible Notes due 2007 and the 9.75% Senior
Subordinated Notes due 2008, will be subject to future economic, financial and
business conditions and other factors, including demand for communications test
equipment, many of which are beyond the Company's control. These and other risks
associated with the Company's business are described in the Company's Securities
and Exchange Commission reports, including the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 2001. From time to time, the Company or
its affiliates may purchase debt of the Company on the open market or otherwise,
subject to the
29
terms of the Company's senior and subordinated debt agreements and depending
upon market conditions.
New Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("FAS 141"), "Business Combinations" and
No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years
beginning after December 15, 2001; however, the Company has elected to early
adopt the provisions effective April 1, 2001.
In October 2001, the Financial Accounting Standards Board Statement of Financial
Accounting Board issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144").
FAS 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". FAS 144 applies
to all long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business". FAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and will thus be adopted by the Company, as required,
on April 1, 2002. Management is currently determining what effect, if any, FAS
144 will have on its financial position and results of operations.
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.
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 December 31, 2001, the Company had $787.4 million of variable rate debt
outstanding, which represents approximately 72% of the Company's total
outstanding debt. The Company currently has one interest rate swap contract with
notional amounts totaling $130 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
30
rate on a portion of its outstanding debt and receives interest at the
three-month LIBOR rate.
At December 31, 2001, the swap contract currently outstanding and the swap
contract that expired had fixed interest rates higher than the three-month LIBOR
quoted by its financial institutions. The Company therefore recognized an
increase in interest expense (calculated as the difference between the interest
rate in the swap contracts and the three-month LIBOR rate) for the first nine
months of fiscal 2002 of $1.0 million. 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
December 31, 2001, the analysis demonstrated that such movement would cause the
Company to recognize additional interest expense of approximately $0.2 million,
and accordingly, would cause a hypothetical loss in cash flows of approximately
$0.2 million on an annual basis.
The Company has significant debt and resulting debt service obligations. A
substantial portion of the debt is subject to variable rate interest expense.
The weighted average interest rate for the nine months ended December 31, 2001
was 8.1%. Interest rates are at historically low rates and an increase in
interest rates in the future could have a material impact on the results of
operations and financial position of the Company. An increase of 100 basis
points in interest rates would increase interest expense by approximately $8.0
million on an annual basis.
31
PART II. Other Information
Item 1. 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 believes 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, and on December 17, 2001, the
United States Court of Appeals for the Federal Circuit affirmed the ruling in
favor of the Company by the Federal District Court.
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(1) The Company filed a Current Report on Form 8-K dated
December 27, 2001 relating to the Company's issuance and
sale of $75 million aggregate principal amount of 12% Senior
Secured Convertible Notes Due 2007.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTERNA CORPORATION
Date February 13, 2002 /s/ JOHN D. RATLIFF
-----------------------------------
John D. Ratliff
Senior Vice President and Chief
Financial Officer
Date February 13, 2002 /s/ ROBERT W. WOODBURY, JR.
-----------------------------------
Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
33