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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
ITEM 4.
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.
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.
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.
ITEM 6. SELECTED FINANCIAL DATA.
The information requested by this Item is attached as Appendix A.
ITEM 7.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information requested by this Item is included in Appendix B.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information requested by this Item is attached as Appendix C.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 10.
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.
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.
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.
ITEM 13.
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.
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.
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.
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.
* 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
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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
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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
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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
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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
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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
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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.)
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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:
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
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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.
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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
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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
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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.
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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.
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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
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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;
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. 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.
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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.
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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.
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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.
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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;
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. 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.
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APPENDIX C
ACTERNA CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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
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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.
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Acterna Corporation Consolidated Statements of Income
The accompanying notes are an integral part of the consolidated financial statements.
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Acterna Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
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Acterna Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
The accompanying notes are an integral part of the consolidated financial statements.
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Acterna Corporation Consolidated Statements of Cash Flows
The accompanying notes are an integral part of the consolidated financial statements.
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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
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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
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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
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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.
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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
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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:
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.
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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:
---- (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:
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.
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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:
The components of the benefit for income taxes from continuing operations are as follows:
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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)% ====== ====== =====
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The principal components of the deferred tax assets and liabilities follow:
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 ======== ======== ========= =========
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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:
------------ (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 ==========
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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:
---- (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:
---- (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:
---- (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:
---- (In thousands) Service cost $ 4,374 Interest cost 2,939 Expected return of plan assets (822) ---------- Net periodic pension cost $ 6,491 ==========
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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:
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.
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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.
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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
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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.
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The following are excluded from the calculation of EBITA:
Geographic Information. Information by geographic areas for the years ended March 31, 2001, 2000, and 1999 is summarized below:
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(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.
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS March 31, 2001
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2001
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (a) For The Twelve Months Ended March 31, 2001
(a) Has not been restated for discontinued operations.
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Twelve Months Ended March 31, 2000
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2000
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For The Twelve Months Ended March 31, 2000 (a)
(a) Has not been restated for discontinued operations.
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Twelve Months Ended March 31, 1999
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ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (a) For The Twelve Months Ended March 31, 1999
(a) Has not been restated for discontinued operations.
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SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
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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)
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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)
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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.
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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 ========