U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission file number 000-07438
ACTERNA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2258582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (781) 272-6100
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
At October 15, 2001 there were 192,106,169 shares of common stock of the
registrant outstanding.
PART I. Financial Information
Item 1. Financial Statements
ACTERNA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands except per share data)
Net sales $ 314,812 $ 348,287 $ 671,412 $ 602,973
Cost of sales 143,013 170,520 298,224 292,358
--------- --------- --------- ---------
Gross profit 171,799 177,767 373,188 310,615
Selling, general & administrative expense 117,816 127,539 247,096 213,098
Product development expense 42,574 42,564 86,271 74,101
Impairment of net assets held for sale 17,918 -- 17,918 --
Recapitalization and other related costs -- -- -- 9,194
Restructuring 7,897 -- 7,897 --
Purchased incomplete technology -- 6,000 -- 56,000
Amortization of intangibles 10,367 33,290 22,151 49,309
--------- --------- --------- ---------
Total operating expense 196,572 209,393 381,333 401,702
--------- --------- --------- ---------
Operating loss (24,773) (31,626) (8,145) (91,087)
Interest expense (24,698) (27,150) (50,976) (45,862)
Interest income 893 1,172 1,380 1,796
Other expense (3,447) (1,267) (5,279) (3,080)
--------- --------- --------- ---------
Loss from continuing operations before
income taxes and extraordinary item (52,025) (58,871) (63,020) (138,233)
Provision (benefit) for income taxes 84,406 (6,623) 80,612 (10,407)
--------- --------- --------- ---------
Net loss from continuing operations
before extraordinary item (136,431) (52,248) (143,632) (127,826)
Income (loss) from discontinued operations (11,090) 1,859 (10,039) 5,702
--------- --------- --------- ---------
Net loss before extraordinary item (147,521) (50,389) (153,671) (122,124)
Extraordinary item -- -- -- (10,659)
--------- --------- --------- ---------
Net loss $(147,521) (50,389) $(153,671) (132,783)
========= ========= ========= =========
Loss per common share -
basic and diluted:
Continuing operations $ (0.71) $ (0.28) $ (0.75) $ (0.72)
Discontinued operations (0.06) 0.01 (0.05) 0.03
Extraordinary loss -- -- -- (0.06)
--------- --------- --------- ---------
Net loss per common share -
basic and diluted $ (0.77) $ (0.27) $ (0.80) $ (0.75)
========= ========= ========= =========
Weighted average number of common shares:
Basic and diluted 191,889 189,003 191,538 177,279
========= ========= ========= =========
- ---------------------
See notes to consolidated financial statements.
2
ACTERNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
2001 2001
------------- ----------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 51,448 $ 63,054
Accounts receivable, net 190,064 233,371
Inventories:
Raw materials 58,343 61,009
Work in process 45,997 48,266
Finished goods 60,049 48,206
---------- ----------
Total inventory 164,389 157,481
Net assets held for sale 19,052 --
Deferred income taxes 16,916 37,961
Other current assets 38,383 39,610
---------- ----------
Total current assets 480,252 531,477
Property, plant and equipment, net 128,310 124,566
Other assets:
Net assets held for sale -- 37,908
Goodwill, net 435,853 435,478
Other intangible assets, net 172,901 195,093
Deferred debt issuance costs, net 24,446 25,908
Other assets, net 25,355 32,549
---------- ----------
$1,267,117 $1,382,979
========== ==========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable $ 2,520 $ 10,919
Current portion of long-term debt 25,175 22,248
Accounts payable 93,437 112,155
Accrued expenses:
Compensation and benefits 44,058 71,836
Deferred revenue 41,669 47,743
Taxes other than income taxes 13,267 14,112
Other 68,720 60,191
Accrued income taxes 36,695 7,616
---------- ----------
Total current liabilities 325,541 346,820
Long-term debt 1,071,339 1,056,383
Deferred income taxes 31,804 2,915
Deferred compensation 61,648 57,838
Stockholders' deficit:
Common stock 1,921 1,910
Additional paid-in capital 796,411 801,080
Accumulated deficit (949,417) (795,746)
Unearned compensation (71,630) (90,986)
Other comprehensive income (loss) (500) 2,765
---------- ----------
Total Stockholders' deficit (223,215) (80,977)
---------- ----------
$1,267,117 $1,382,979
========== ==========
- ---------------------
See notes to consolidated financial statements.
3
ACTERNA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
2001 2000
---------- ----------
(In thousands)
Operating activities:
Net loss $ (153,671) $ (132,783)
Adjustments for non-cash items included in net loss:
Depreciation 17,758 11,964
Amortization of intangibles 22,151 49,309
Amortization of inventory step-up -- 35,188
Amortization of unearned compensation 12,067 8,564
Amortization of deferred debt issuance costs 2,662 2,048
Writeoff of deferred debt issuance costs -- 10,019
Purchased incomplete technology -- 56,000
Recapitalization and other related costs -- 9,194
Deferred tax provision 71,141
Tax benefit from stock option exercises 994
Loss from discontinued operations 10,039 --
Impairment of net assets held for sale 17,918
Other 2,899 14,579
Change in operating assets and liabilities 3,204 (114,389)
---------- ----------
Net cash flows provided by (used in) operating
activities 7,162 (50,307)
Investing activities:
Purchases of property and equipment (24,749) (13,320)
Proceeds from sale of business 800 3,500
Businesses acquired in purchase transaction, net of
cash acquired and non-cash issuance of common stock (1,495) (402,149)
Other (2,201) (642)
---------- ----------
Net cash flows used in investing activities (27,645) (412,611)
Financing activities:
Net borrowings of debt 7,140 308,921
Repayment of capital lease obligations (64) (11)
Capitalized debt issuance costs -- (18,519)
Proceeds from issuance of common stock, net of
expenses 1,759 198,241
---------- ----------
Net cash flows provided by financing activities 8,835 488,632
Effect of exchange rate change on cash 42 (10,718)
---------- ----------
Increase (decrease) in cash and cash equivalents (11,606) 14,996
Cash and cash equivalents at beginning of year 63,054 33,839
---------- ----------
Cash and cash equivalents at end of period $ 51,448 $ 48,835
========== ==========
- ---------------------
See notes to consolidated financial statements.
4
ACTERNA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. FORMATION, BACKGROUND AND RECLASSIFICATION OF FINANCIAL STATEMENT
PRESENTATION
Acterna Corporation was formed in 1959 and is a global communications
equipment company focused on network technology solutions. The Company's
operations are conducted by wholly owned subsidiaries located principally
in the United States of America and Europe with other operations,
primarily sales offices, located in Asia and Latin America. The Company is
managed in two business segments: communications test and industrial
computing and communications. The Company also has other subsidiaries
that, in the aggregate, are not reportable as a segment.
The Company previously reported the industrial computing and
communications segment as discontinued operations. This segment is
comprised of two subsidiaries: ICS Advent and Itronix Corporation. In
October 2001, the Company divested its ICS Advent subsidiary (see Note O.
Subsequent Event - Sale of ICS Advent), but decided to retain Itronix
based on current market conditions. The decision to retain Itronix
required the Company to make certain reclassifications to its Statements
of Operations and Balance Sheets for all periods presented. The Statements
of Operations were reclassified to include the results of operations of
ICS Advent and Itronix. The Balance Sheets reflect the assets and
liabilities of Itronix; the net assets of ICS Advent are classified as net
assets held for sale for all periods presented. The Statement of Cash
Flows was not reclassified as these statements were not previously
presented on a discontinued basis.
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.
The industrial computing and communications segment provides computer
products to the ruggedized computer market. ICS Advent sells computer
products and systems designed to withstand excessive temperatures, dust,
moisture and vibration in harsh operating environments. Itronix sells
ruggedized portable communications and computing devices used by field
service workers.
In addition the Company also operates two subsidiaries, AIRSHOW, Inc., and
da Vinci Systems. AIRSHOW is the leading provider of systems that deliver
real-time news, information and flight data to aircraft passengers. da
Vinci manufactures systems that correct or enhance the accuracy of color
during the process of transferring film-based images to videotape.
The Company operates on a fiscal year ended March 31 in the calendar year
indicated (e.g., references to fiscal 2002 are references to the Company's
fiscal year which began April 1, 2001 and will end March 31, 2002). Unless
the context otherwise requires, the "Company" or "Acterna" refers to
Acterna Corporation and its subsidiaries.
5
B. RECENT DEVELOPMENTS AND LIQUIDITY
The current global economic downturn has further impacted a previously
existing downturn in the Company's communications test segment and in its
other businesses. The Company is experiencing diminished product demand,
excess manufacturing capacity and erosion of average selling prices.
In response to this decline in product demand, the Company has begun to
implement cost reduction programs aimed at aligning the Company's ongoing
operating costs with its expected revenues. Given the severity of current
market conditions, however, the Company cannot make any assurance that
these cost reduction programs will actually align the Company's operating
expenses and revenues, be sufficient to avoid operating losses, or that
additional cost reduction programs will not be necessary in the future.
As of September 30, 2001, the Company was in compliance with the covenants
under its senior secured credit facility. The Company plans to work with
the lenders under the senior secured credit facility to modify the
covenants in order to maintain compliance with the senior secured credit
agreement. However, unless the Company obtains modifications to the
credit agreement, the Company likely will violate certain financial
covenants as of the end of its third fiscal quarter.
The Company's cash requirements for debt service and ongoing operations
are substantial. Unless market conditions improve or the Company obtains
additional debt or equity financing, the Company cannot make any assurance
that its cash on hand, funds generated by ongoing operations and funds
available under its senior secured credit facility will be sufficient to
meet its cash needs over the next twelve-month period.
The Company plans to work with its senior lenders to modify its credit
agreement and with potential financing sources to obtain additional debt
or equity financing. The Company cannot provide any assurance that it will
be able to reach agreement with its lenders to modify its financial
covenants or with any financing source to obtain additional debt or equity
financing on terms acceptable to the Company. Even if the Company obtains
additional financing, the Company's future operating performance and
ability to repay, extend or refinance the senior secured credit facility
(including the revolving credit facility) or any new borrowings and to
service or refinance the senior subordinated notes will be subject to
future economic, financial and business conditions and other factors,
including demand for communications test equipment, many of which are
beyond the Company's control. These and other risks associated with the
Company's business are described in the Company's Securities and Exchange
Commission reports, including the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2001.
Our consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets and
the amount and classification of liabilities or any adjustments that might
be necessary as a result of the uncertainties noted above.
C. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated balance sheet at
September 30, 2001, and the unaudited consolidated statements of
operations and unaudited consolidated statements of cash flows for the
interim periods ended September 30, 2001 and 2000 include all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly these financial statements.
6
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The year-end balance sheet data
was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the Company's most recent
Form 10-K as of March 31, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Significant estimates in these
financial statements include allowances for accounts receivable, net
realizable value of inventories, purchased incomplete technology, warranty
accruals and tax valuation reserves. Actual results could differ from
those estimates.
D. NEW PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS
141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS
No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a
business combination be recognized as assets apart from goodwill. FAS No.
142 requires that ratable amortization of goodwill be replaced with
periodic tests of the goodwill's impairment and that intangible assets
other than goodwill be amortized over their useful lives. FAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and
for all business combinations accounted for by the purchase method for
which the date of acquisition is before June 30, 2001. The provisions of
FAS No. 142 will be effective for fiscal years beginning after December
15, 2001; however, the Company elected to early adopt the provisions
effective April 1, 2001.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". FAS 144
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations- Reporting the Effects of Disposal of a Segment of a
Business". FAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001, and will thus be adopted by the
Company, as required, on April 1, 2002. Management is currently
determining what effect, if any, FAS 144 will have on its financial
position and results of operations.
E. INCOME TAXES
During the quarter ended September 30, 2001 the Company recorded a
valuation allowance of approximately $71 million against all of its U.S.
net deferred tax assets. Statement of Financial Accounting Standards No.
109 requires a valuation allowance to be recorded against deferred tax
assets when it is more likely than not that some or all of the deferred
tax assets will not be realized. As a result of the downturn in the
telecommunications test equipment sector, the Company has incurred
significant and previously unanticipated financial accounting and taxable
losses in the U.S. for the first half of the current fiscal year, and the
current outlook indicates that significant
7
uncertainty will continue for the remainder of this fiscal year and into
the next fiscal year. These cumulative losses, together with the Company's
prior fiscal financial accounting and taxable losses in the U.S., resulted
in management's decision in the current period that it is more likely than
not that all of its U.S. deferred tax assets will not be realized.
The Company will continue to provide a valuation allowance against all of
its U.S. net deferred tax assets until it returns to an appropriate level
of financial accounting and taxable income in the U.S. The ultimate
realization of these deferred tax assets depends upon the Company's
ability to generate sufficient future taxable income in the U.S. If the
Company is successful in generating sufficient future taxable income in
the U.S., the Company will reduce the valuation allowance through a
reduction in income tax expense in the future.
F. ACQUIRED INTANGIBLE ASSETS
As of September 30, 2001
Gross Carrying Accumulated
Amount Amortization
--------------- ------------
(In thousands)
Amortized intangible assets:
Core technology $ 236,415 $ 65,213
Other intangible assets 17,733 16,034
--------- ---------
Total $ 254,148 $ 81,247
========= =========
Aggregate amortization expense:
For the six months ended September 30, 2001 $ 22,151
Estimated amortization expense:
For the year ended March 31, 2002 42,004
For the year ended March 31, 2003 38,704
For the year ended March 31, 2004 36,137
For the year ended March 31, 2005 35,327
For the year ended March 31, 2006 35,327
All intangible assets are amortized on a straight line basis over a
weighted average of 5 years. Core technology is amortized over a weighted
average of 6 years and all other intangible assets are amortized on a
weighted average of 2 years.
G. GOODWILL
The changes in the carrying amount of goodwill during the six months ended
September 30, 2001 are as follows:
Reporting Units
---------------------------------------------------------------------
Communications
Test Itronix Airshow da Vinci Total
-------------- -------- ------- -------- --------
(in thousands)
Balance as of April 1, 2001 $377,187 $ 34,036 $19,039 $5,216 $435,478
Goodwill adjustments 2,616 (2,241) -- -- 375
-------- -------- ------- ------ --------
Balance as of September 30, 2001 $379,803 $ 31,795 $19,039 $5,216 $435,853
======== ======== ======= ====== ========
8
The goodwill adjustments in the communications test reporting unit
resulted primarily from final adjustments to the purchase price allocation
for the Wavetek Wandel Goltermann merger (See Note K. Acquisitions) and to
the deferred tax adjustment in respect to reclassifying certain intangible
assets as goodwill on adoption of FAS 142. The goodwill adjustment for the
Itronix reporting unit is related to the disposition of a small subsidiary
of Itronix during the second quarter of fiscal 2002.
H. GOODWILL AND OTHER INTANGIBLE ASSETS - Adoption of FAS 142
Three Months Ended Six Months Ended
September 30, September 30,
2000 2000
---- ----
Net loss from continuing operations before
extraordinary item $(52,248) $(127,826)
Add back goodwill amortization 14,333 28,656
Add back other intangible amortization 875 1,816
-------- ---------
Adjusted net loss from continuing operations
operations before extraordinary item (37,040) (97,354)
======== =========
Basic and diluted loss per share:
Reported net loss from continuing before operations
extraordinary item $ (.28) $ (.72)
Goodwill amortization .08 .16
Other intangible amortization -- .01
-------- ---------
Adjusted basic and diluted loss per share
from continuing operations before
extraordinary item $ (.20) $ (.55)
======== =========
The Company completed its transitional impairment test of goodwill for all
reporting units required under FAS 142 and determined that goodwill is not
currently impaired.
I. DISCONTINUED OPERATIONS
In May 2000, the Board of Directors approved a plan to divest the
industrial computing and communications segment, which consists of ICS
Advent and Itronix Corporation subsidiaries. In October 2001, the Company
divested its ICS Advent subsidiary (see Note O. Subsequent Event - Sale of
ICS Advent), but decided to retain Itronix based on current market
conditions. The decision to retain Itronix required the Company to make
certain reclassifications to its Statements of Operations and Balance
Sheets for all periods presented. Management had previously expected that
proceeds on disposal of both businesses comprising the segment would
exceed net assets, including operating losses incurred subsequent to
May 2000, and accordingly these operating losses were deferred.
The net operating losses for ICS Advent and Itronix included in continuing
operations for the three and six months ended September 30, 2000 have been
offset by an equal net income amount presented on the discontinued
operations line within the Statement of Operations. Therefore, the net
loss in total for the Company as previously reported for these periods did
not change. The charge reported as discontinued operations for the three
months ended September 30, 2001 represents the cumulative net operating
losses previously deferred from April 1, 2000 to June 30, 2001 for ICS
Advent and Itronix.
9
The balance sheets at September 30, 2001 and March 31, 2001 reflect the
assets and liabilities of Itronix and the net assets of ICS Advent are
classified as net assets held for sale.
The Statements of Cash Flows were not reclassified as these statements
were not previously presented on a discontinued basis.
J. RESTRUCTURING
Due to the downturn in the Company's communications test segment and its
other businesses, the Company announced on August 1, 2001 a comprehensive
cost reduction program that includes the reduction of (1) approximately 8%
of the Company-wide workforce, impacting approximately 400 jobs worldwide;
(2) outside contractors and consultants; (3) operating expenses; and (4)
manufacturing costs through procurement programs to lower materials costs.
As a result of these measures, the Company recorded a charge of $8 million
relating primarily to severance during the three months ended September
30, 2001. During the second quarter of fiscal 2002, the Company terminated
328 employees and paid approximately $1.9 million in severance and other
related costs. At September 30, 2001, approximately $6.0 million is left
to be paid for this restructuring during the third quarter of fiscal 2002.
K. ACQUISITIONS
Wavetek Wandel Goltermann, Inc.
On May 23, 2000, a subsidiary of the Company merged with Wavetek Wandel
Goltermann, Inc. ("WWG"), pursuant to which WWG became an indirect, wholly
owned subsidiary of the Company (the "WWG Merger") for a purchase price of
$402.0 million.
Superior Electronics Group, Inc., doing business as Cheetah Technologies
On August 23, 2000 the Company acquired Superior Electronics Group, Inc.,
a Florida corporation doing business as Cheetah Technologies ("Cheetah")
for a purchase price of $171.5 million.
Pro Forma Financial Information
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company for the six months ended
September 30, 2000 as if the acquisitions had occurred at the beginning of
the fiscal year presented, with pro forma adjustments to give effect to
amortization of goodwill and intangibles, interest expense on acquisition
debt, and certain other adjustments, together with related income tax
effect. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisitions had
occurred as of the beginning of the periods presented, or that may be
obtained in the future.
10
Six Months Ended
September 30, 2000
------------------
(In thousands, except
per share data)
Revenue $ 701,556
Net loss from continuing operations before
extraordinary item (159,243)
Loss per share from continuing operations before
extraordinary item:
Basic and diluted $ (0.84)
Weighted average shares:
Basic and diluted 189,003
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.
L. EXTRAORDINARY ITEM
In connection with the WWG Merger in May 2000, the Company recorded an
extraordinary charge of $10.7 million (net of an income tax benefit of
$6.6 million), of which $7.3 million (pretax) related to a premium paid by
the Company to WWG's former bondholders to repurchase WWG's senior
subordinated debt outstanding prior to the WWG Merger. In addition the
Company booked a charge of $10.0 million (pretax) for the unamortized
deferred debt issuance costs which originated at the time of the
recapitalization of the Company in May of 1998.
M. LOSS PER SHARE
Loss per share is calculated as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands, except per share data)
Net loss:
Continuing operations $(136,431) $ (52,248) $(143,632) $(127,826)
Discontinued operations (11,090) 1,859 (10,039) 5,702
Extraordinary item -- -- -- (10,659)
--------- --------- --------- ---------
Net loss $(147,521) $ (50,389) $(153,671) $(132,783)
========= ========= ========= =========
BASIC AND DILUTED:
Common stock outstanding, beginning of period 191,450 187,304 190,953 122,527
Weighted average common stock issued during
the period 439 1,699 585 46,441
Bonus element adjustment related to rights offering -- -- -- 8,311
--------- --------- --------- ---------
Weighted average common stock outstanding,
end of period 191,889 189,003 191,538 177,279
========= ========= ========= =========
Loss per common share:
Continuing operations $ (0.71) $ (0.28) $ (0.75) $ (0.72)
Discontinued operations (0.06) 0.01 (0.05) 0.03
Extraordinary item -- -- -- (0.06)
--------- --------- --------- ---------
Net loss per common share $ (0.77) $ (0.27) $ (0.80) $ (0.75)
========= ========= ========= =========
During the first six months of fiscal 2002 and 2001, the Company excluded
from its diluted weighted average shares outstanding the effect of the
weighted average common stock equivalents of 1.5 million and 15.4 million,
respectively,
11
as the Company incurred a net loss. The inclusion of the common stock
equivalents has been excluded from the calculation of diluted weighted
average shares outstanding as inclusion would have an antidilutive effect
on net loss per common share.
N. SEGMENT INFORMATION
Sales, earnings before interest, taxes and amortization ("EBITA") and
total assets for the six months ended September 2001 and 2000 are shown
below:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Communications test segment:
Sales $ 243,875 $ 276,787 $ 520,458 $ 457,856
EBITA $ 14,306 $ 35,456 $ 49,230 $ 59,290
Total assets $1,045,484 $1,132,008 $1,045,484 $1,132,008
Industrial computing and communications segment:
Sales 47,796 43,077 102,146 89,592
EBITA (1,167) (1,630) (1,719) (3,618)
Total assets 102,572 118,991 102,572 118,991
Other subsidiaries:
Sales 23,141 28,423 48,808 55,525
EBITA 3,468 6,966 8,505 12,494
Total assets 55,544 54,644 55,544 54,644
Corporate:
Loss before interest and taxes (2,758) (1,495) (4,207) (3,060)
Total assets 84,343 76,003 84,343 76,003
Total company:
Sales $ 314,812 $ 348,287 $ 671,412 $ 602,973
EBITA $ 13,849 $ 39,297 $ 51,809 $ 65,106
Total assets $1,287,943 $1,381,646 $1,287,943 $1,381,646
The following are excluded from the calculation of EBITA:
Amortization of inventory step up $ -- $ 26,438 $ -- $ 35,188
Purchased incomplete technology -- 6,000 -- 56,000
Amortization of unearned
compensation 5,402 6,296 12,067 8,564
Restructuring 7,897 -- 12,612 --
Recapitalization and other
related costs -- -- -- 9,194
Impairment of assets held for sale 17,918 -- 17,918 --
One-time and other special charges 485 165 485 1,018
---------- ---------- ---------- ----------
Total excluded items $ 31,702 $ 38,899 $ 43,082 $ 109,964
========== ========== ========== ==========
12
O. SUBSEQUENT EVENT - SALE OF ICS ADVENT
On October 31, 2001, the Company sold its ICS Advent subsidiary for $23
million in cash proceeds. The Company wrote down the net assets of ICS
Advent at September 30, 2001 to the cash to be received less expenses
related to the sale, which resulted in an impairment charge of $15 million
in the Statement of Operations. The net assets held for sale on the
balance sheet at September 30, 2001 reflects the cash to be received less
expenses relating to the sale.
P. SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF ACTERNA CORPORATION AND
ACTERNA LLC
In connection with the Company's recapitalization and related
transactions, Acterna LLC became the primary obligor with respect to
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.
13
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Six Months Ended September 30, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Net sales $ -- $ 164,823 $ 506,589 $ -- $ 671,412
Cost of sales -- 69,089 229,135 -- 298,224
--------- --------- --------- --------- ---------
Gross margin -- 95,734 277,454 -- 373,188
Selling, general and administrative
expense -- 114,277 132,819 -- 247,096
Product development expense -- 24,990 61,281 -- 86,271
Impairment of assets held for sale -- -- 17,918 -- 17,918
Restructuring -- 5,928 1,969 -- 7,897
Amortization of intangibles -- 253 21,898 -- 22,151
--------- --------- --------- --------- ---------
Totaling operating expense -- 145,448 235,885 -- 381,333
--------- --------- --------- --------- ---------
Operating income (loss) -- (49,714) 41,569 -- (8,145)
Interest expense -- (44,634) (6,342) -- (50,976)
Interest income -- 249 1,131 -- 1,380
Other expense -- (213) (5,066) -- (5,279)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes -- (94,312) 31,292 -- (63,020)
Provision for income taxes -- 53,431 27,181 -- 80,612
--------- --------- --------- --------- ---------
Net income (loss) from continuing
operations -- (147,743) 4,111 -- (143,632)
Loss from discontinued operations -- -- (10,039) -- (10,039)
Equity income (loss) (153,671) (5,928) -- 159,599 --
--------- --------- --------- --------- ---------
Net income (loss) $(153,671) $(153,671) $ (5,928) $ 159,599 $(153,671)
========= ========= ========= ========= =========
14
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Six Months Ended September 30, 2000
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Net sales $ -- $ 205,443 $ 397,530 $ -- $ 602,973
Cost of sales -- 70,435 221,923 -- 292,358
--------- --------- --------- -------- ---------
Gross profit -- 135,008 175,607 -- 310,615
Selling, general and administrative expense -- 99,791 113,307 -- 213,098
Product development expense -- 25,335 48,766 -- 74,101
Recapitalization and other related costs -- 9,194 -- -- 9,194
Purchased incomplete technology -- 56,000 -- -- 56,000
Amortization of intangibles -- 824 48,485 -- 49,309
--------- --------- --------- -------- ---------
Total operating expense -- 191,144 210,558 -- 401,702
--------- --------- --------- -------- ---------
Operating loss -- (56,136) (34,951) -- (91,087)
Interest expense -- (41,007) (4,855) -- (45,862)
Interest income -- 927 869 -- 1,796
Other income (expense) -- 180 (3,260) -- (3,080)
--------- --------- --------- -------- ---------
Loss from continuing operations before
income taxes and extraordinary item -- (96,036) (42,197) -- (138,233)
Provision (benefit) for income taxes -- (19,795) 9,388 -- (10,407)
--------- --------- --------- -------- ---------
Net loss from continuing operations before
extraordinary item -- (76,241) (51,585) -- (127,826)
Income from discontinued operations -- -- 5,702 -- 5,702
Equity income (loss) (132,783) (45,883) -- 178,666 --
Extraordinary item -- (10,659) -- -- (10,659)
--------- --------- --------- -------- ---------
Net income (loss) $(132,783) $(132,783) $ (45,883) $178,666 $(132,783)
========= ========= ========= ======== =========
15
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ -- $ 19,309 $ 32,139 $ -- $ 51,448
Accounts receivable, net -- 73,129 116,935 -- 190,064
Inventory -- 38,123 126,266 -- 164,389
Net assets held for sale -- -- 19,052 -- 19,052
Other current assets -- 29,161 26,138 -- 55,299
--------- --------- --------- ----------- -----------
Total current assets -- 159,722 320,530 -- 480,252
Property and equipment, net -- 29,625 98,685 -- 128,310
Investments in and advances to
consolidated subsidiaries (145,074) 293,291 (582,225) 434,008 --
Goodwill -- 612 435,241 -- 435,853
Intangible assets, net -- 701 172,200 -- 172,901
Other -- 24,446 25,355 -- 49,801
--------- --------- --------- ----------- -----------
$(145,074) $ 508,397 $ 469,786 $ 434,008 $ 1,267,117
========= ========= ========= =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion
of long-term debt -- $ 19,500 $ 8,195 -- $ 27,695
Accounts payable -- 25,851 67,586 -- 93,437
Accrued expenses -- 69,533 134,876 -- 204,409
--------- --------- --------- ----------- -----------
Total current liabilities -- 114,884 210,657 -- 325,541
Long-term debt -- 954,500 116,839 -- 1,071,339
Deferred income taxes -- -- 31,804 -- 31,804
Deferred compensation -- 11,131 50,517 -- 61,648
Stockholders' equity (deficit):
Common stock 1,921 1,221 17,595 (18,816) 1,921
Additional paid-in capital 796,411 418,845 171,408 (590,253) 796,411
Accumulated earnings (deficit) (943,406) (919,624) (129,464) 1,043,077 (949,417)
Unearned compensation -- (71,630) -- -- (71,630)
Other comprehensive income (loss) -- (930) 430 -- (500)
--------- --------- --------- ----------- -----------
Total stockholders' equity
(deficit) (145,074) (572,118) 59,969 434,008 (223,215)
--------- --------- --------- ----------- -----------
$(145,074) $ 508,397 $ 469,786 $ 434,008 $ 1,267,117
========= ========= ========= =========== ===========
16
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2001
(Unadudited)
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ -- $ 22,179 $ 40,875 $ -- $ 63,054
Accounts receivable, net -- 67,637 165,734 -- 233,371
Inventory -- 28,053 129,428 -- 157,481
Other current assets -- 38,799 38,772 -- 77,571
--------- --------- --------- --------- -----------
Total current assets -- 156,668 374,809 -- 531,477
Property and equipment, net -- 26,641 97,925 -- 124,566
Investments in and advances to
consolidated subsidiaries 13,255 259,637 (547,301) 274,409 --
Goodwill -- -- 435,478 -- 435,478
Intangible assets, net -- -- 195,093 -- 195,093
Net assets held for sale -- -- 37,908 -- 37,908
Other -- 28,166 30,291 -- 58,457
--------- --------- --------- --------- -----------
$ 13,255 $ 471,112 $ 624,203 $ 274,409 $ 1,382,979
========= ========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of debt $ -- $ 16,000 $ 17,167 $ -- $ 33,167
Accounts payable -- 31,623 80,532 -- 112,155
Accrued expenses -- 53,331 148,167 -- 201,498
--------- --------- --------- --------- -----------
Total current liabilities -- 100,954 245,866 -- 346,820
Long-term debt -- 875,100 181,283 -- 1,056,383
Deferred income taxes -- (77,765) 80,680 -- 2,915
Deferred compensation -- 10,624 47,214 -- 57,838
Stockholders' equity (deficit):
Common stock 1,910 1,221 17,595 (18,816) 1,910
Additional paid-in capital 801,080 418,845 171,408 (590,253) 801,080
Accumulated equity (deficit) (789,735) (765,953) (123,536) 883,478 (795,746)
Unearned compensation -- (90,986) -- -- (90,986)
Other comprehensive income (loss) -- (928) 3,693 -- 2,765
--------- --------- --------- --------- -----------
Total stockholders' equity (deficit) 13,255 (437,801) 69,160 274,409 (80,977)
--------- --------- --------- --------- -----------
$ 13,255 $ 471,112 $ 624,203 $ 274,409 $ 1,382,979
========= ========= ========= ========= ===========
17
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Six Months Ended September 30, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Operating activities:
Net income (loss) from operations $(153,671) $(153,671) $ (5,928) $ 159,599 $(153,671)
Adjustment for noncash items included
in net income (loss):
Depreciation -- 13,418 4,340 -- 17,758
Amortization of intangibles -- 252 21,899 -- 22,151
Amortization of unearned compensation -- 6,159 5,908 -- 12,067
Amortization of deferred debt
issuance costs -- 2,662 -- -- 2,662
Deferred tax provision -- 71,141 -- -- 71,141
Tax benefit from stock option exercise -- 994 -- -- 994
Loss from discontinued operations -- -- 10,039 -- 10,039
Impairment of net assets held for sale -- -- 17,918 -- 17,918
Other -- 2,047 852 -- 2,899
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures -- (17,099) 20,303 -- 3,204
Changes in intercompany 153,671 108,536 (102,608) (159,599) --
--------- --------- --------- --------- ---------
Net cash flows provided by (used in) operating
activities -- 34,439 (27,277) -- 7,162
Investing activities:
Purchases of property and equipment -- (21,502) (3,247) -- (24,749)
Proceeds from sale of businesses -- -- 800 -- 800
Businesses acquired in purchase transaction,
net of cash acquired and non-cash issuance of
common stock -- -- (1,495) -- (1,495)
Other -- -- (2,201) -- (2,201)
--------- --------- --------- --------- ---------
Net cash flows provided by investing
activities -- (21,502) (6,143) -- (27,645)
Financing activities:
Net borrowing (repayment) of debt -- (18,000) 25,140 -- 7,140
Repayment of capital lease obligations -- -- (64) -- (64)
Proceeds from issuance of common stock, net of
expenses -- 1,759 -- -- 1,759
--------- --------- --------- --------- ---------
Net cash flows (used in) provided by
financing activities -- (16,241) 25,076 -- 8,835
Effect of exchange rate on cash -- 434 (392) -- 42
--------- --------- --------- --------- ---------
Decrease in cash and cash equivalents -- (2,870) (8,736) -- (11,606)
Cash and cash equivalents at beginning of year -- 22,179 40,875 -- 63,054
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ -- $ 19,309 $ 32,139 $ -- $ 51,448
========= ========= ========= ========= =========
18
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Six Months Ended September 30, 2000
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Operating activities:
Net income (loss) from operations $(132,783) $(132,783) $(45,883) $ 178,666 $(132,783)
Adjustment for noncash items included
in net income (loss):
Depreciation -- 3,650 8,314 -- 11,964
Amortization of intangibles -- 824 48,485 -- 49,309
Amortization of inventory step-up -- -- 35,188 -- 35,188
Amortization of unearned compensation -- 7,409 1,155 -- 8,564
Amortization of deferred debt issuance costs -- 2,048 -- -- 2,048
Write off of deferred debt issuance cost -- 10,019 -- -- 10,019
Purchased incomplete technology -- -- 56,000 -- 56,000
Recapitalization and other related costs -- 9,194 -- -- 9,194
Other -- 14,579 -- -- 14,579
Changes in operating assets and liabilities,
net of effects of purchase acquisitions
and divestitures -- (46,418) (67,971) -- (114,389)
Changes in intercompany 132,783 48,792 (2,909) (178,666) --
--------- --------- -------- --------- ---------
Net cash flows provided by (used in) operating
activities -- (82,686) 32,379 -- (50,307)
Investing activities:
Purchases of property and equipment -- (5,514) (7,806) -- (13,320)
Proceeds from sale of business -- 3,500 -- -- 3,500
Businesses acquired in purchase transactions,
net of cash acquired and non-cash items -- (402,149) -- -- (402,149)
Other -- (1,843) 1,201 -- (642)
--------- --------- -------- --------- ---------
Net cash flows used in investing activities -- (406,006) (6,605) -- (412,611)
Financing activities:
Net borrowings of debt -- 308,921 -- -- 308,921
Repayment of capital lease obligations -- -- (11) -- (11)
Capitalized debt issuance costs -- (18,519) -- -- (18,519)
Proceeds from issuance of common stock, net of
expenses -- 198,241 -- -- 198,241
--------- --------- -------- --------- ---------
Net cash flows provided by (used in)
financing activities -- 488,643 (11) -- 488,632
Effect of exchange rate on cash -- (10,718) -- -- (10,718)
--------- --------- -------- --------- ---------
Increase (decrease) in cash and cash equivalents -- (10,767) 25,763 -- 14,996
Cash and cash equivalents at beginning of year -- 19,360 14,479 -- 33,839
--------- --------- -------- --------- ---------
Cash and cash equivalents at end of period $ -- $ 8,593 $ 40,242 $ -- $ 48,835
========= ========= ======== ========= =========
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the effect of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 2001 and below.
OVERVIEW
The Company is managed in two business segments: communications test and
industrial computing and communications. The Company also has other subsidiaries
that, in the aggregate, are not reportable as a segment.
The Company previously reported the industrial computing and communications
segment as discontinued operations. This segment is comprised of two
subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the Company
divested its ICS Advent subsidiary and decided to retain Itronix based on
current market conditions. This decision to retain Itronix required the Company
to make certain reclassifications to its Statements of Operations and Balance
Sheets for all periods presented. The Statements of Operations were reclassified
to include the results of operations of ICS Advent and Itronix. The balance
sheet reflects the assets and liabilities of Itronix, and the net assets of ICS
Advent are classified as net assets held for sale.
On October 31, 2001, the Company sold its ICS Advent subsidiary for $23 million
in proceeds. The Company wrote down the net assets of ICS Advent at September
30, 2001 to the cash to be received less expenses relating to the sale, which
resulted in an impairment charge of $15 million in the Statement of Operations.
The net assets held for sale on the balance sheet at September 30, 2001 reflects
the cash to be received less expenses relating to the sale.
The current global economic downturn has further impacted a previously existing
downturn in the Company's communications test segment as well as its other
businesses. As in past downturns, the Company is experiencing diminished product
demand, excess manufacturing capacity and erosion of average selling prices. In
the second quarter of the current fiscal year, the Company's bookings dropped to
approximately $201.7 million from approximately $279.2 million in the first
quarter and from approximately $384.5 million in the second quarter of last
year. At present, the Company cannot predict the duration or severity of this
downturn, but based on the historical correlation between the Company's bookings
and its revenue, the Company expects third quarter revenue in its communications
test segment to be down substantially as compared with the same period last
year.
In response to the decline in the Company's bookings the Company has begun to
implement cost reduction programs aimed at aligning the Company's ongoing
operating costs with its expected revenues. Given the severity of current market
conditions, however, the Company cannot make any assurance that these cost
20
reduction programs will actually align the Company's operating expenses and
revenues, be sufficient to avoid operating losses, or that additional cost
reduction programs will not be necessary in the future.
On August 1, 2001 the Company announced a comprehensive cost reduction program
that includes a reduction of: (1) approximately 8% of the Company-wide work
force, impacting approximately 400 jobs worldwide; (2) outside contractors and
consultants; (3) operating expenses; and (4) manufacturing costs through
procurement programs to lower materials costs. The Company expects these steps
to result in annualized cost savings in excess of $50 million, which will be
substantially realized beginning in the third quarter of fiscal 2002 and fully
realized by the fourth quarter. As a result of these measures, the Company
recorded a charge of $8 million in the second quarter of fiscal 2002. During the
second quarter of fiscal 2002, the Company terminated 328 employees and paid
approximately $1.9 million in severance and other related costs.
On October 30, 2001 the Company announced an expanded cost reduction plan, which
includes a reduction of 500 positions or 9% of its total workforce, excluding
ICS Advent. The Company will also consolidate some of its development and
marketing offices, institute a reduced workweek at selected manufacturing
locations and reduce capital expenditures. These measures, which are in addition
to the cost reductions announced in August 2001, are expected to yield
annualized savings of $115 to $125 million, and to reduce the quarterly
operating expense runrate to approximately $130 million as the company ends its
fiscal year. This cost reduction program is expected to result in a
restructuring charge of $15 to $17 million in the third quarter of fiscal 2002.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Number 141, ("FAS 141") "Business Combinations"
and Number 142 ("FAS 142"), "Goodwill and Other Intangible Assets". FAS Number
141 requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS Number 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS Number 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS Number 142 will be effective for fiscal
years beginning after December 15, 2001; however, the Company elected to early
adopt the provisions effective April 1, 2001.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2001 as Compared to Three Months Ended
September 30, 2000 on a Consolidated Basis
Net sales. For the three months ended September 30, 2001, consolidated net sales
decreased $33.5 million to $314.8 million as compared to $348.3 million for the
three months ended September 30, 2000. The decrease is primarily attributable to
reduced demand for the Company's communications tests products partially offset
by an increase in sales at Itronix.
Gross profit. Consolidated gross profit decreased $6.0 million to $171.8 million
or 54.6% of consolidated net sales for the three months ended September 30, 2001
as compared to $177.8 million or 51.0% of consolidated net sales for the three
months ended September 30, 2000. Excluding the $26.4 million included in cost of
sales for the amortization of the inventory step-up from the acquisitions of WWG
and Cheetah
21
during the second quarter of the previous year, consolidated gross profit was
58.6% of consolidated net sales. The decrease in gross margin as a percent of
sales was related to the sale of products with lower gross margins as well as
lower prices as the Company experienced pressure from its customers to reduce
selling prices.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; impairment of net assets
held for sale; restructuring; purchased incomplete technology; and amortization
of intangibles. Total operating expenses were $196.6 million or 62.4% of
consolidated net sales for the three months ended September 30, 2001, as
compared to $209.4 million or 60.1% of consolidated net sales for the three
months ended September 30, 2000. Excluding the impact of the $17.9 million
impairment charge and the $7.9 million restructuring charge within the second
quarter of fiscal 2002, and the $6.0 million writeoff of the purchased
incomplete technology during the same period last year, total operating expenses
were $170.8 million or 54.2% of consolidated net sales for the three months
ended September 30, 2001 as compared to $203.4 million or 58.4% of consolidated
sales for the same period last year. The decrease during the current quarter is
in part a result of decreased selling expenses due to the decline in revenues
and bookings in the communications test segment. The decrease is also
attributable to the Company's early adoption of FAS 142 in the first quarter of
fiscal 2002, which eliminates the amortization of goodwill.
Included in both cost of sales ($0.4 million and $1.9 million) and operating
expenses ($5.1 million and $3.9 million) (for the three months ending September
30, 2001 and 2000, respectively,) is the amortization of unearned compensation
which relates to the issuance of non-qualified stock options to employees and
non-employee directors at a grant price lower than fair market value (defined as
the closing price on the open market at the date of issuance). The Company
discontinued the practice of issuing stock options at grant prices lower than
fair-market value during fiscal 2001. Therefore, the Company has not incurred
any additional charges for unearned compensation during fiscal 2002.
Selling, general and administrative expense was $117.8 million or 37.4% of
consolidated sales for the three months ended September 30, 2001, as compared to
$127.5 million or 36.6% of consolidated net sales for the three months ended
September 30, 2000. The dollar decrease is primarily attributable to decreased
selling expenses as a result of decline in revenue and bookings in the
communications test segment.
Product development expense was $42.6 million or 13.5% of consolidated net sales
for the three months ended September 30, 2001 as compared to $42.6 million or
12.2% of consolidated sales for the same period a year ago.
The Company wrote down the net assets of ICS Advent at September 30, 2001 to the
cash to be received upon the sale of ICS Advent less transaction-related
expenses, which resulted in an impairment charge of $15 million. ICS Advent was
sold on October 31, 2001. In addition, the Company recorded a charge of $2.9
million relating to the disposition of a small subsidiary of Itronix.
Amortization of intangibles was $10.4 million for the three months ended
September 30, 2001, as compared to $33.3 million for the same period a year ago.
The decrease was primarily attributable to the Company's early adoption of FAS
142 in the first quarter of fiscal 2002, which eliminates the amortization of
goodwill.
Interest. Interest expense, net of interest income, was $23.8 million for the
three months ended September 30, 2001 as compared to $26.0 million for the same
period a year ago. The decrease in interest expense was primarily attributable
to lower interest rates on borrowings during the second quarter of fiscal 2002
as compared to the same period last year. The Company's weighted average
interest
22
rate was approximately 8.0% for the second quarter of fiscal 2002 as compared to
approximately 9.64% for the same period last year.
Taxes. The effective tax rate for the three months ended September 30, 2001 is
not meaningful due to the provision of a $71 million valuation allowance against
the Company's U.S. net deferred tax assets that was recorded in this period.
(See Note E. Income Taxes of the Consolidated Financial Statements for more
information.)
Six Months Ended September 30, 2001 as Compared to Six Months Ended September
30, 2000 on a Consolidated Basis
Net sales. For the six months ended September 30, 2001, consolidated net sales
increased $68.4 million or 11.4% to $671.4 million as compared to $603.0 million
for the six months ended September 30, 2000. The increase in net sales is
primarily attributable to a complete six months of revenue of WWG and Cheetah
during fiscal 2002 as compared to only four months of WWG and slightly more than
one month of revenues for Cheetah for the same period last year. In addition,
Itronix's net sales for the six months ended September 30, 2001 increased $23
million from the same period last year primarily as a result of the large
backlog at March 31, 2001 for Itronix's new rugged laptop PC which was
introduced to the market in December 2000.
Gross profit. Consolidated gross profit increased $62.6 million to $373.2
million or 55.6% of consolidated net sales for the six months ended September
30, 2001 as compared to $310.6 million or 51.5% of consolidated net sales for
the six months ended September 30, 2000. Excluding the $35.2 million included in
cost of sales for the amortization of the inventory step-up from the
acquisitions of WWG and Cheetah during the same period last year, consolidated
gross profit was 57.3% of consolidated net sales. The decrease in gross margin
as a percent of sales was related to the sale of products with lower gross
margins as well as lower prices as the Company experienced pressure from its
customers to reduce selling prices.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; impairment of assets held
for sale; recapitalization and other related costs; restructuring; purchased
incomplete technology; and amortization of intangibles. Total operating expenses
were $381.3 million or 56.8% of consolidated net sales for the six months ended
September 30, 2001, as compared to $401.7 million or 66.6% of consolidated net
sales for the six months ended September 30, 2000. Excluding the impairment of
assets held for sale of $17.9 million and the restructuring charge of $7.9
million during the first six months of fiscal 2002 and the writeoff of the
purchased incomplete technology of $56.0 million as well as the recapitalization
and other related costs of $9.2 million during the same period last year, total
operating expenses were $355.5 million or 53.0% of consolidated net sales and
$336.5 million or 55.8% of consolidated net sales for the six months ended
September 30, 2001 and 2000, respectively. The dollar increase is in part a
result of the fact that the expenses of WWG and Cheetah have been incurred by
the Company for the full six months of the current fiscal year, whereas in the
same period last year the Company's results reflected only four months of
WWG-related expenses and slightly more than one month of Cheetah-related
expenses. This increase is partially offset by the Company's early adoption of
FAS 142 in the first quarter of fiscal 2002, which eliminates the amortization
of goodwill.
Included in both cost of sales ($0.8 million and $2.6 million) and operating
expenses ($11.3 million and $6.0 million) (for the six months ending September
30, 2001 and 2000, respectively), is the amortization of unearned compensation
which relates to the issuance of non-qualified stock options to employees and
non-
23
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).
Selling, general and administrative expense was $247.1 million or 36.8% of
consolidated net sales for the six months ended September 30, 2001 as compared
to $213.1 million or 35.3% of consolidated net sales for the six months ended
September 30, 2000. The percentage increase is in part a result of the fact that
the expenses of WWG and Cheetah have been incurred by the Company for the full
six months of the current fiscal year, whereas in the same period last year the
Company's results reflected only four months of WWG-related expenses and
slightly more than one month of Cheetah-related expenses.
Product development expense was $86.3 million or 12.8% of consolidated net sales
for the six months ended September 30, 2001 as compared to $74.1 million or
12.3% of consolidated sales for the same period a year ago. The percentage
increase is in part a results of the fact that the expenses of WWG and Cheetah
have been incurred by the Company for the full six months of the current fiscal
year, whereas in the same period last year the Company's results reflected only
four months of WWG-related expenses and slightly more than one month of
Cheetah-related expenses.
Recapitalization and other related costs were $9.2 million during the six months
ending September 30, 2000. The expense incurred during the first three months of
fiscal 2001 of $9.2 million related to an executive who left the Company during
fiscal 2000.
Amortization of intangibles was $22.2 million for the six months ended September
30, 2001, as compared to $49.3 million for the same period a year ago. The
decrease was attributable to the Company's early adoption of FAS 142 in the
first quarter of fiscal 2002, which eliminates the amortization of goodwill as
well as only approximately one month of goodwill amortization related to the WWG
Merger during the first three months of fiscal 2001.
Interest. Interest expense, net of interest income, was $49.6 million for the
six months ended September 30, 2001 as compared to $44.1 million for the same
period a year ago. The increase in interest expense during the current fiscal
year was attributable to increased borrowings during the current fiscal year
slightly offset by lower borrowing costs as compared to the same period last
year.
Taxes. For the six months ended September 30, 2001, the effective tax rate if
not meaningful due to the provision of a $71 million valuation allowance against
the Company's U.S. net deferred tax assets that was recorded in this period.
(See Note E. Income Taxes of the Consolidated Financial Statements for more
information.)
Extraordinary item. In connection with the WWG Merger, the Company recorded an
extraordinary charge of approximately $10.7 million (net of an income tax
benefit of $6.6 million), of which $7.3 million (pretax) related to a premium
paid by the Company to WWG's former bondholders for the repurchase of WWG's
senior subordinated debt outstanding prior to the WWG Merger. In addition, the
Company booked a charge of $10.0 million (pretax) for the unamortized deferred
debt issuance costs that originated at the time of the May 1998
Recapitalization.
Segment Disclosure
The Company measures the performance of its subsidiaries by their respective new
orders received ("bookings"), net sales and earnings before interest, taxes and
amortization ("EBITA") which excludes non-recurring and one-time charges.
Included in each segment's EBITA is an allocation of corporate expenses. The
information below includes bookings, net sales and EBITA for the two segments
the Company
24
operates as well as other subsidiaries which, in the aggregate, are not
reportable as a segment.
Three Months Ended Six Months Ended
September 30, September 30,
SEGMENT 2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands)
Communications test segment:
Bookings $ 153,730 $ 289,634 $ 366,457 $ 472,612
Net sales 243,875 276,787 520,458 457,856
EBITA 14,306 35,456 49,230 59,290
Industrial computing and communications segment:
Bookings 28,194 66,125 68,152 108,166
Net sales 47,796 43,077 102,146 89,592
EBITA (1,167) (1,630) (1,719) (3,618)
Other subsidiaries:
Bookings 19,783 28,741 46,293 54,464
Net sales 23,141 28,423 48,808 55,525
EBITA 3,468 6,966 8,505 12,494
Three and Six Months Ended September 30, 2001 Compared to Three and Six Months
Ended September 30, 2000 - Communications Test Products
Bookings for communications test products decreased to $153.7 million for the
three months ended September 30, 2001 as compared to $289.6 million for the same
period a year ago. For the six months ended September 30, 2001, bookings for
communications test products decreased to $366.5 million as compared to $472.6
million for the same period a year ago. The decrease is a result of the current
global economic slowdown and capital spending cutbacks in the communications
industry.
Net sales of communications test products were $243.9 million for the three
months ended September 30, 2001 as compared to $276.8 million for the same
period a year ago. For the six months ended September 30, 2001, net sales of
communications test products were $520.5 million as compared to $457.9 million
for the six months ended September 30, 2000. The decrease for the current
quarter is a result of the reduced bookings level as described above. The
increase for the six months of fiscal 2002 as compared to the same period last
year is a result of the full six months of operations of WWG and Cheetah in the
current fiscal year as compared to only partial results for the same period last
year.
EBITA for the communications test products decreased to $14.3 million for the
three months ended September 30, 2001 as compared to $35.5 million for the same
period a year ago. For the six months ended September 30, 2001, EBITA decreased
to $49.2 million as compared to $59.3 million for the same period a year ago.
The decrease is primarily a result of the factors described above.
Three and Six Months Ended September 30, 2001 Compared to Three and Six Months
Ended September 30, 2000 - Industrial Computing and Communications Products
Bookings for industrial computing and communications products decreased $37.9 to
$28.2 million for the three months ended September 30, 2001 as compared to $66.1
25
million for the same period a year ago. For the six months ended September 30,
2001 bookings for this segment decreased $40.1 million to $68.1 million from
$108.2 million for the same period a year ago. The decrease is primarily
attributable to customers placing orders in anticipation of a new rugged laptop
PC introduced during the first six months ending September 2000. Orders for
Itronix's products vary widely because of the relatively small number of
potential customers with large field-dash service workforces and the
irregularity of timing and size of such customers' orders.
Sales of industrial computing and communications products increased $4.7 to
$47.8 million for the three months ended September 30, 2001 as compared to $43.1
million for the same period a year ago. For the six months ended September 30,
2001 sales within this segment increased $12.5 million to $102.1 million as
compared to $89.6 million for the same period a year ago. The increase was
primarily due to increased shipments of Itronix's new rugged laptop PC which was
introduced to the market in December 2000.
EBITA for the industrial computing and communications segment was a loss of $1.2
million for the three months ended September 30, 2001 as compared to a loss of
$1.6 million for the same period a year ago. For the six months ended September
30, 2001 EBITA was a loss of $1.7 million as compared to a loss of $3.6 million
for the same period a year ago. The increase in sales contributed to a smaller
loss before interest, taxes and amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the WWG Merger and from the
funding of working capital and capital expenditures. As of September 30, 2001,
the Company had $1,099.0 million of indebtedness, primarily consisting of $275.0
million principal amount of senior subordinated notes, $794.5 million in
borrowings under the Company's senior secured credit facility and $29.5 million
under other debt obligations.
Cash Flows. The Company's cash and cash equivalents decreased $11.6 million
during the six months ended September 30, 2001.
Working Capital. For the six months ended September 30, 2001, the Company's
working capital increased as its operating assets and liabilities provided $3.2
million of cash. Accounts receivable decreased, creating a source of cash of
$42.6 million primarily due the decrease in sales. Inventory levels increased,
creating a use of cash of $7.2 million primarily due to increased components for
optical transport products. Other current assets decreased, creating a source of
cash of $1.2 million. Accounts payable decreased, creating a use of cash of
$19.1 million primarily as a result of the Company paying accounts payable
outstanding at March 31, 2001. Other current liabilities decreased, creating a
use of cash of $14.3 million due in part to management incentive payments made
during the first quarter of fiscal year 2002 relating to bonuses earned during
fiscal 2001.
Investing activities. The Company's investing activities totaled $27.6 million
for the six months ended September 30, 2001 due primarily to capital
expenditures as a result of the WWG Merger as well as the continuing
implementation of a new ERP system.
Financing Activities. The Company's financing activities provided $8.8 million
in net cash during the first six months of fiscal 2002, primarily due to
additional borrowings of cash under the Company's revolving credit facility.
26
Short-Term Revolving Credit Facility. On June 29, 2001, the Company entered into
an unsecured, short-term revolving credit facility that 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. To date, the Company has
not drawn on this facility. Because the facility matures on December 31, 2001,
the Company does not expect to borrow under the facility.
Future Financing Sources and Cash Flows. As of September 30, 2001, the Company
had $133 million of borrowings and $16.5 million of letters of credit
outstanding under its revolving credit facility and $25.5 million of additional
availability under the facility. In addition, the Company had $40 million
available to it under the short-term credit facility, which expires on December
31, 2001. As of November 6, 2001, the Company had approximately $56 million in
cash (including the proceeds from the sale of ICS Advent), $25 million available
under its revolving credit facility and $40 million available under the
short-term credit facility. The Company cannot make any assurance that in the
future it will be able to satisfy the conditions precedent to borrow additional
funds under its revolving credit facility. In addition, because the short-term
credit facility matures on December 31, 2001, the Company does not expect to
borrow any funds under the facility.
As of September 30, 2001, the Company was in compliance with the covenants under
its senior secured credit facility. The Company plans to work with the lenders
under the senior secured credit facility to modify the covenants in order to
maintain compliance with the senior secured credit agreement. However, unless
the Company obtains modifications to the credit agreement, the Company likely
will violate its financial covenants based on the ratio of the Company's EBITDA
(earnings before interest, taxes, depreciation and amortization) to interest
expense and its total debt to EBITDA as of December 31, 2001, the end of the
Company's third fiscal quarter.
The Company's cash requirements for debt service and ongoing operations are
substantial. Unless market conditions improve or the Company obtains additional
debt or equity financing, the Company cannot make any assurance that its cash on
hand, funds generated by ongoing operations and funds available under its senior
secured credit facility will be sufficient to meet its cash needs over the next
twelve-month period.
The Company plans to work with its senior lenders to modify its credit agreement
and with potential financing sources to obtain additional debt or equity
financing. The Company cannot provide any assurance that it will be able to
reach agreement with its lenders to modify its financial covenants or with any
financing source to obtain additional debt or equity financing on terms
acceptable to the Company. Even if the Company obtains additional financing, the
Company's future operating performance and ability to repay, extend or refinance
the senior secured credit facility (including the revolving credit facility) or
any new borrowings and to service or refinance the senior subordinated notes
will be subject to future economic, financial and business conditions and other
factors, including demand for communications test equipment, many of which are
beyond the Company's control. These and other risks associated with the
Company's business are described in the Company's Securities and Exchange
Commission reports, including the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2001. From time to time, the Company or its
affiliates may purchase debt of the Company on the open market or otherwise,
subject to the terms of the Company's senior and subordinated debt agreements
and depending upon market conditions.
27
New Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("FAS 141") "Business Combinations" and
No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years
beginning after December 15, 2001; however, the Company has elected to early
adopt the provisions effective April 1, 2001.
In October 2001, the Financial Accounting Standards Board Statement of Financial
Accounting Board issued Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144").
FAS 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". FAS 144 applies
to all long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business". FAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and will thus be adopted by the Company, as required,
on April 1, 2002. Management is currently determining what effect, if any, FAS
144 will have on its financial position and results of operations.
Quantitative and Qualitative Disclosures about Market Risk
The Company operates manufacturing facilities and sales offices in over 80
countries. The Company is subject to business risks inherent in non-U.S.
activities, including political and economic uncertainty, import and export
limitations, and market risk related to changes in interest rates and foreign
currency exchange rates. The Company believes the political and economic risks
related to its foreign operations are mitigated due to the stability of the
countries in which its facilities are located. The Company's principal currency
exposures against the U.S. dollar are in the Euro and in Canadian currency. The
Company does use foreign currency forward exchange contracts to mitigate
fluctuations in currency. The Company's market risk exposure to currency rate
fluctuations is not material. The Company does not hold derivatives for trading
purposes.
The Company uses derivative financial instruments consisting primarily of
interest rate hedge agreements to manage exposures to interest rate changes. The
Company's objective in managing its exposure to changes in interest rates (on
its variable rate debt) is to limit the impact of such changes on earnings and
cash flow and to lower its overall borrowing costs.
At September 30, 2001, the Company had $794.4 million of variable rate debt
outstanding, which represents approximately 72% of the Company's total
outstanding debt. The Company currently has one interest rate swap contract with
notional amounts totaling $130 million which fixed its variable rate debt to a
fixed interest rate for periods of two years in which the Company pays a fixed
interest rate on a portion of its outstanding debt and receives interest at the
three-month LIBOR rate. The Company had another swap contract with a notional
amount of $65 million, which expired on September 30, 2001.
28
At September 30, 2001, the swap contract currently outstanding and the swap
contract which expired had fixed interest rates higher than the three-month
LIBOR quoted by its financial institutions. The Company therefore recognized an
increase in interest expense (calculated as the difference between the interest
rate in the swap contracts and the three-month LIBOR rate) for the first six
months of fiscal 2002 of $1.4 million. The Company performed a sensitivity
analysis assuming a hypothetical 10% adverse movement in the floating interest
rate on the interest rate sensitive instruments described above. The Company
believes that such a movement is reasonably possible in the near term. As of
September 30, 2001, the analysis demonstrated that such movement would cause the
Company to recognize additional interest expense of approximately $0.5 million,
and accordingly, would cause a hypothetical loss in cash flows of approximately
$0.5 million on an annual basis.
29
PART II. Other Information
Item 1. Legal Proceedings
The Company is a party to several pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company believes that the final outcome should not have a material adverse
effect on the Company's operations or financial position.
In 1994, the Company sold its radar detector business to Whistler Communications
of Massachusetts. On June 27, 1996, Cincinnati Microwave, Inc. ("CMI"), filed an
action in the United States District Court for the Southern District of Ohio
against the Company and Whistler Corporation, alleging willful infringement of
CMI's patent for a mute function in radar detectors. On September 26, 2000, the
Federal District Court Judge granted the Company's motion for partial summary
judgment on the affirmative defense of laches, and the case was administratively
terminated. The decision was appealed by CMI on October 24, 2000. The appeal has
been fully briefed and the Company is awaiting a hearing date.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 4. Submission of Matters to a Vote
The Annual Meeting of Stockholders was held on September 12, 2001 in New York,
New York. At such meeting, 192,203,334 shares were entitled to vote. The table
below discloses the vote with respect to each proposal:
PROPOSAL I
To elect four directors to serve for a term ending upon the 2004 Annual Meeting
of Stockholders and one director to serve for a term ending upon the 2003 Annual
Meeting of Stockholders:
Nominees: Allan M. Kline, Victor A. Pelson, Brian H. Rowe, Richard J. Schnall
and Peter M. Wagner.
Number of Shares/Votes
Nominee Term Expiring For Withheld
- ------- ------------- --- --------
Allan M. Kline 2003 183,912,364 141,239
Victor A. Pelson 2004 183,915,910 137,693
Brian H. Rowe 2004 183,915,699 137,904
Richard J. Schnall 2004 182,220,744 1,832,859
Peter M. Wagner 2004 183,889,674 163,929
Proposal II
To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the current fiscal year.
30
For: 183,874,130 99.90%
Against: 166,617 .09%
Abstain: 12,856 .01%
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTERNA CORPORATION
-----------------------------------
Date November 14, 2001 /s/ ALLAN M. KLINE
- --------------------------- -----------------------------------
Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
Date November 14, 2001 /s/ ROBERT W. WOODBURY, JR.
- --------------------------- -----------------------------------
Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
32