As filed with the Securities and Exchange Commission on July 18, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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DYNATECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 3825 04-02258582
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(781) 272-6100 www.dynatech.com
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Mark V.B. Tremallo, Esq.
Corporate Vice President, General Counsel
Dynatech Corporation
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(781) 272-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Franci J. Blassberg, Esq. Vincent Pagano, Jr., Esq.
Debevoise & Plimpton Simpson Thacher & Bartlett
875 Third Avenue 425 Lexington Avenue
New York, New York 10022 New York, New York 10017
(212) 909-6000 (212) 455-2000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Title of Each Class of Maximum Aggregate Amount of
Securities to be Registered Offering Price(1)(2) Registration Fee
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Common Stock, par value $0.01 per
share............................. $115,000,000.00 $30,360.00
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes shares that the underwriters may purchase to cover over-
allotments, if any.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 18, 2000
Shares
[LOGO OF DYNATECH]
Common Stock
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We are selling shares of our common stock.
Prior to this offering, our common stock was traded over-the-counter under
the symbol "DYNA." On July 17, 2000, the last sale price of our common stock as
reported on the over-the-counter market was $24.1875 per share. We have applied
to list our common stock on The Nasdaq Stock Market's National Market under the
symbol " ."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
Underwriting Proceeds to
Price Discounts and Dynatech
to Public Commissions Corporation
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Per Share.................................. $ $ $
Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Joint Book-Running Managers
Credit Suisse First Boston Merrill Lynch & Co.
The date of this prospectus is , 2000.
[PHOTOS]
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TABLE OF CONTENTS
Prospectus Summary.................. 1
Summary Consolidated and Pro Forma
Financial Data of Dynatech
Corporation........................ 4
Risk Factors........................ 6
Forward-Looking Statements.......... 13
Use of Proceeds..................... 14
Dividend Policy..................... 15
Price Range of Common Stock......... 15
Capitalization...................... 16
Unaudited Pro Forma Condensed
Consolidated Financial Statements
of Dynatech........................ 17
Selected Historical Consolidated
Financial Data of Dynatech......... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Dynatech.......... 31
Business............................ 46
Management.......................... 58
Principal Shareholders.............. 65
Certain Transactions................ 67
Description of Capital Stock........ 69
Description of Indebtedness......... 72
Shares Eligible for Future Sale..... 74
Underwriting........................ 76
Notice to Canadian Residents........ 79
Legal Matters....................... 80
Experts............................. 80
Where You Can Find Additional
Information........................ 81
Index to the Consolidated Financial
Statements......................... F-1
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
i
PROSPECTUS SUMMARY
Unless otherwise noted, the information presented in this prospectus
reflects the combined businesses of Dynatech and Wavetek Wandel Goltermann,
Inc., or WWG, which merged with one of our subsidiaries on May 23, 2000, and
gives effect to our decision to discontinue our industrial computing and
communications business segment. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those discussed in the forward-looking statements as a
result of factors described under "Risk Factors" and elsewhere in this
prospectus.
Our Business
We are the world's second largest developer, manufacturer and marketer of
instruments, systems, software and services to test, deploy, manage and
optimize communications networks, equipment and services. We are the largest
company that focuses primarily on the communications test and management
business. With over 750 sales personnel and a local presence in over 80
countries, we offer a broad range of products that test and manage the
operational performance of converged networks, including optical transmission
systems, data services, voice services, wireless services, cable services, and
video delivery. For the year ended March 31, 2000, on a pro forma basis giving
effect to our merger with WWG and our other acquisitions and divestitures, we
generated over $1.0 billion in net sales.
Our products address all phases of the network lifecycle, from initial
development of underlying technologies to deployment, maintenance and
optimization of networks. Our products also operate across networks containing
a variety of elements and address a wide array of technologies, 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 services.
Over the past decade, communications networks have undergone dramatic growth
and change. Contributing factors to this evolution include the proliferation of
the Internet, growing demand for converged voice, data and video
communications, the increasing use of wireless communications, global
deregulation of telecommunications services and the availability of advanced
technologies such as digital wireless telephones and fiber optics. To support
this growth and to enhance their competitive position, communications service
providers globally are making significant investments to upgrade their
infrastructure and to offer new services to customers. Dataquest Inc., a market
research firm, estimates that the overall communications equipment market in
1999 was approximately $275 billion and is expected to grow to $352 billion in
2003. To facilitate the deployment and management of this infrastructure,
communications service providers are expected to continue to invest
substantially in instruments, software and systems to test and manage their
networks.
Prime Data, a market research firm, estimates that the market for
communications test equipment was approximately $3.2 billion in 1999 and will
grow to approximately $5.2 billion in 2001. Similarly, Dataquest projects that
the market for software-based telecom operations support systems will reach
approximately $10.6 billion in 2003, up from approximately $5.6 billion in
1999, a compound annual growth rate of approximately 14%. Within these markets,
test and management systems that address high-growth markets, such as fiber
optics, are expected to experience faster rates of growth to keep pace with
communications equipment deployments in those markets. For example, RHK, Inc.,
a market research firm, estimates that the global optical networking equipment
market will grow from $14.6 billion in 2000 to $41 billion in 2003, a 41%
compound annual growth rate.
As networks become more complex and the market for telecommunications and
data communications services becomes more competitive, communications service
providers and equipment manufacturers
1
increasingly seek test and management systems that facilitate the rapid
deployment and support of new communications services. As a result,
communications service providers and equipment manufacturers require highly
integrated test and management systems capable of supporting the diverse
protocols, technologies and standards deployed across their networks and able
to perform tasks remotely and with less manual operation.
Using our instruments, systems, software and services, our customers are
able to:
. reduce the time required to deploy network equipment and provision
services to customers;
. improve network performance and reliability;
. lower costs associated with deploying and maintaining equipment and
services;
. improve their management of increasingly complex services;
. automate or perform network management functions remotely; and
. enhance customer satisfaction by improving network dependability and
customer service.
Capitalizing on our large and geographically broad direct sales
organization, we market our products to 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. We also market our products to communications
equipment manufacturers who both build network equipment and deploy it on
behalf of service providers, and to service users, including large corporate
customers, governments operators and educational institutions. We augment our
direct efforts with an extensive network of dealers and a highly trained
technical support organization that assists customers in implementing our
systems and in managing their networks more efficiently.
Our goal is to be the global leader in helping companies test, deploy,
manage and optimize communications networks, equipment and services. To achieve
this goal, we intend to:
. continue to invest in research and development to address high growth
markets such as optical networking, broadband access, data over cable and
wireless technologies;
. develop customer-focused solutions that address all phases of the network
lifecycle;
. extend our global presence; and
. pursue strategic acquisitions.
In addition to our communications test and management business, we operate
two subsidiaries, AIRSHOW and da Vinci. 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. For
the year ended March 31, 2000, our AIRSHOW and da Vinci subsidiaries generated
$97.5 million in net sales, or approximately 9.6% of our total net sales on a
pro forma basis giving effect to our merger with WWG and our other acquisitions
and divestitures.
We were incorporated in Massachusetts in 1959. In 1999, we reincorporated in
Delaware. Our principal offices are located at 3 New England Executive Park,
Burlington, Massachusetts 01803-5087. Our telephone number is (781) 272-6100,
and our website is http://www.dynatech.com. No portion of our website or other
websites linked to it should be considered a part of this prospectus.
2
Recent Developments
Merger with WWG and Related Financing
On May 23, 2000, we completed our merger with WWG, a leading developer,
manufacturer and marketer of communications test instruments, systems, software
and services in Europe. To finance the WWG merger, we sold 12.5 million and
30.625 million newly-issued but unregistered shares of our common stock to
Clayton, Dubilier & Rice Fund V Limited Partnership and Clayton, Dubilier &
Rice Fund VI Limited Partnership, respectively, for an aggregate purchase price
of $172.5 million. We also entered into a new credit facility with a syndicate
of lenders that allows us to borrow up to $860 million. On June 30, 2000, we
sold 4.983 million newly-issued, registered shares of our common stock at the
same price per share that was paid by the Clayton, Dubilier & Rice funds in a
rights offering to our shareholders of record on April 20, 2000 (other than
Clayton, Dubilier & Rice Fund V Limited Partnership). The rights offering
provided these shareholders with the opportunity to reverse the diminution of
their percentage equity ownership interest in Dynatech that resulted from our
sale of our common stock to the Clayton, Dubilier & Rice funds.
Planned Divestitures
In May 2000, our board of directors approved a plan to divest our industrial
computing and communications business segment, which consists of our ICS Advent
and Itronix Corporation subsidiaries. We expect to divest these two
subsidiaries, either separately or together, no later than the end of the first
quarter of our 2002 fiscal year. The businesses to be divested will be treated
as discontinued operations for accounting purposes.
Acquisition
On June 27, 2000, we entered into an agreement to acquire substantially all
of the assets and specified liabilities of Superior Electronics Group, Inc., a
Florida corporation doing business as Cheetah Technologies, for a purchase
price of approximately $164 million. Cheetah Technologies is a leading global
supplier of automated test, monitoring and management systems for cable
television and telecommunications networks. We expect that, subject to
regulatory approval, the transaction will be completed by the end of August
2000.
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The Offering
Common stock offered by us ........................ shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... Repayment of a portion of
our existing debt and
general corporate
purposes. See "Use of
Proceeds".
Proposed Nasdaq National Market symbol.............
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of , 2000 and excludes:
. shares of common stock issuable upon exercise of options outstanding
as of , 2000 at a weighted average exercise price of $ per share;
and
. additional shares of common stock at , 2000 that may be granted
in the future under our stock option plans.
3
Summary Consolidated and Pro Forma Financial Data of Dynatech Corporation
The following table presents summary consolidated and pro forma financial
data of Dynatech Corporation. The summary historical consolidated financial
data do not include WWG or Cheetah Technologies and are derived from the
historical consolidated financial statements and related notes that are
included elsewhere in this prospectus. The pro forma financial data includes
WWG and Cheetah Technologies and is derived from the "Unaudited Pro Forma
Condensed Consolidated Financial Statements of Dynatech" that are also included
elsewhere in this prospectus. You should read those sections for a further
explanation of the financial data summarized here.
The column captioned "Pro Forma" set forth in this summary gives effect to
the following:
. our merger with WWG (giving effect to the divestitures of WWG's
Precision Measurement and Test Tools divisions, which occurred in
January 2000);
. our sale, in connection with the WWG merger, of 43,125,000 newly-issued
but unregistered shares of our common stock to Clayton, Dubilier & Rice
Fund V Limited Partnership and Clayton, Dubilier & Rice Fund VI Limited
Partnership and the concurrent establishment of our new Senior Secured
Credit Facility;
. our sale of 4,983,048 newly-issued registered shares of our common stock
to shareholders of record on April 20, 2000 (other than CD&R Fund V) in
the rights offering completed on June 30, 2000;
. our probable acquisition of substantially all of the assets and
specified liabilities of Superior Electronics Group, Inc., a Florida
corporation doing business as Cheetah Technologies (after giving effect
to the sale of a building and the exclusion of specified assets and
liabilities that will not be acquired);
. the inclusion of the results of operations for the full period presented
relating to our acquisitions of Sierra Design Labs and Applied Digital
Access, Inc.; and
. the exclusion of the results of operations for the full period presented
relating to our divestiture of DataViews Corporation.
The column captioned "Pro Forma As Adjusted" set forth in this summary gives
effect to the following:
. the events described above; and
. the receipt and application of the estimated net proceeds from the sale
of shares of common stock in this offering as described under "Use of
Proceeds."
4
Summary Consolidated and Pro Forma Financial Data of Dynatech Corporation
Year Ended March 31,
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Pro Forma
Pro Forma As Adjusted
1996 1997 1998 1999 2000 2000 2000
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(In thousands, except per share data)
Statement of Operations
Data:
Net sales............. $235,123 $284,070 $317,955 $329,532 $453,239 $1,017,602
Gross profit.......... 157,447 193,669 214,032 220,914 296,149 634,762
Operating income
(loss)............... 19,484 50,484 62,428 21,480 41,747 (13,835)
Interest expense...... (1,723) (679) (1,184) (46,178) (51,916) (102,548)
Income (loss) from
continuing operations
before income taxes.. 20,844 53,020 64,808 (5,603) (7,883) (111,342)
Net income (loss) from
continuing
operations........... $ 12,398 $ 28,928 $ 38,287 $ (5,534) $ (6,714) $ (94,513)
Income (loss) per
share--basic:
Continuing
operations......... $ 0.57 $ 1.38 $ 1.87 $ (0.04) $ (0.05) $ (0.51)
Discontinued
operations......... 0.08 0.04 0.17 0.09 0.09
Income (loss) per
share--diluted:
Continuing
operations......... $ 0.55 $ 1.32 $ 1.80 $ (0.04) $ (0.05) $ (0.51)
Discontinued
operations......... 0.08 0.04 0.16 0.09 0.09
Weighted average
number of shares:
Basic............... 21,925 20,987 20,493 129,596 148,312 184,646
Diluted............. 22,347 21,997 21,272 129,596 148,312 184,646
As of March 31,
----------------------------------
Pro Forma
Pro Forma As Adjusted
2000 2000 2000
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(In thousands)
Balance Sheet Data:
Cash and cash equivalents.................. $ 33,839 $ 69,110
Total assets............................... 414,838 1,341,241
Total debt, including current portion...... 579,934 1,090,631
Total shareholders' equity (deficit)....... (296,675) (85,841)
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Unless otherwise stated, in this prospectus, "Dynatech," "we," "us," and
"our" refer to Dynatech Corporation and its subsidiaries. Unless otherwise
stated, the information in this prospectus assumes that the underwriters do not
exercise their option to purchase additional shares in the offering. The market
share and competitive position data contained in this prospectus are
approximations derived from our estimates, which we believe to be reasonable,
but which have not been independently verified and, to a lesser extent, from
industry sources, which we have not independently verified. We believe that
such data are inherently imprecise, but are generally indicative of our
relative market share and competitive position.
5
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before deciding to purchase shares in this
offering. Our shares are subject to significant investment risks. Many factors,
including the risks described below and other risks we have not recognized,
could cause our business and results of operations to be negatively affected,
which could cause the price of our shares to decline.
Risks Related to Our Business
Because our quarterly operating results have fluctuated in the past and are
likely to fluctuate in the future, our stock price may be volatile and may
decline.
In the past, we have experienced fluctuations in our quarterly results due
to a number of factors beyond our control. In the future, we expect that our
quarterly operating results may fluctuate and will be difficult to predict
given the nature of our business. Many factors could cause our operating
results to fluctuate from quarter to quarter in the future, including the
following:
. the size and timing of orders from our customers, in each case
exacerbated by the lengthy and unpredictable buying patterns of our
customers, and our ability to ship these orders on a timely basis;
. the degree to which our customers have allocated and spent their yearly
budgets, which has, in some cases, resulted in higher net sales in our
third quarter;
. the uneven pace of technology innovation, the development of products and
services responding to these technology innovations by us and our
competitors and customers' acceptance of these products and innovations;
. the varied degree of price, product and technology competition, which has
been affected by the rapid changes in the telecommunications industry and
our customers' and competitors' responses to these changes;
. economic downturns may cause our customers to reduce their spending on
testing products and services;
. the relative percentages of our products and services sold domestically
and internationally; and
. the mix of the products and services we sell and the varied margins
associated with these products.
A significant portion of our operating expenses is fixed and if our net
sales are below our expectations in any quarter, we may not be able to reduce
our spending in a timely manner. If our results of operations are below the
expectations of investors or market analysts, our stock price is likely to
decline.
The length and unpredictability of the order process for our products make it
difficult to forecast quarterly revenues.
Sales of our products, particularly our systems, often entail an extended
decision-making process on the part of prospective customers. We may experience
delays in obtaining orders following initial contact with a prospective
customer and expend substantial funds and management effort pursuing these
sales. Our ability to forecast the timing and amount of specific sales is
therefore limited. As a result, the uneven buying patterns of our customers may
cause fluctuations in our quarterly operating results, which could cause our
stock price to decline.
There are other sources of delays that contribute to a long order process,
or even the loss of a potential order. These include potential customers'
internal approval and contracting procedures, procurement practices, and
testing and acceptance processes. As a result, the order process for larger
deployment of selected products typically ranges from six to 24 months for new
deployment of selected product sales, and up to six months for occasional large
selected product sales. The deferral or loss of one or more significant orders
could significantly affect operating results in a particular quarter,
especially if there are significant sales and marketing expenses associated
with the deferred or lost order.
6
We only recently began the process of integrating the operations of WWG with
ours and may encounter unanticipated difficulties or costs during the
integration process.
The merger with WWG presents us with significant challenges. Among other
things, it reflects a major commitment to diversifying our geographic presence.
It may be difficult for us to integrate the operations of WWG, and the
strategic and commercial benefits we expect from the merger may not be
realized. It may also be difficult for us to expand our financial and
management controls and reporting systems and procedures to integrate WWG. The
successful integration of WWG and implementation of our operating strategy
could divert substantial resources and attention from our management team. If
currently unanticipated costs or difficulties arise, the merger could have a
material adverse effect on our results of operations or competitive position.
The markets in which we operate are highly competitive. We may not adapt as
quickly as our competitors to changes in these markets.
The markets for our products are highly competitive. We compete directly or
indirectly with Agilent Technologies, Inc., Tektronix, Inc. and Anritsu
Corporation. We also compete with a number of other vendors who offer products
that address discrete portions of our market, including Hekimian Laboratories,
Inc., Digital Lightwave, Inc., Exfo Electro-Optical Engineering, Inc. and
Sunrise Telecom Incorporated. Due to the rapid evolution of the markets in
which we compete, additional competitors with significant market presence and
financial resources, including large telecommunications equipment
manufacturers, may enter our markets and further intensify competition.
Increased competition could cause us to reduce the price of our products or
lose market share.
In addition, some of our current and potential competitors have greater name
recognition and greater financial, selling and marketing, technical,
manufacturing and other resources than we do. To continue to compete
effectively, we will be required to make significant investments in research
and product development, marketing and customer service and support. Our
indebtedness could limit our ability to continue to make such investments or
other necessary or desirable capital expenditures, to compete effectively and
to respond to market conditions. We may not be able to compete effectively with
our existing competitors or with new competitors, and our 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 we serve are characterized by rapid change and innovation. We may
not be able to develop and successfully market products that account for such
changes and innovations.
The market for our 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 our existing
offerings obsolete or unmarketable. A shift in customer emphasis from employee-
operated communications test to automated test and monitoring systems could
likewise render our existing product offerings obsolete or unmarketable, or
reduce the size of one or more of our addressed markets. In particular,
incorporation of self-testing functions in the equipment currently addressed by
our communications test instruments could render our offerings redundant and
unmarketable. Failure to anticipate or to respond rapidly to advances in
technology and to adapt our products appropriately could have a material
adverse effect on our 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.
We may not have sufficient free cash flow to continue to incur such costs.
Our manufacturing efforts could be interrupted due to component shortages,
which could reduce our ability to build and sell our products.
We use a number of components to build our products and systems that are
only available from a limited number of, or single-source, vendors. Examples of
these types of components include semiconductors that we purchase exclusively
from large manufacturers and custom application-specific integrated circuits
that are made for us by a single foundry. In addition, to obtain the components
we require to build our products and systems,
7
we may be required to obtain alternate sources of supply, which can be time
consuming and result in higher procurement costs. We are currently receiving
limited allocations of key components for several of our products. To address
this issue, we are attempting to increase inventory levels of key components
and seeking additional sources of supply. We cannot assure you, however, that
these measures will be adequate to fulfill our manufacturing requirements. We
also cannot assure you that we will be able to obtain suitable substitutes for
components that become unavailable, which could potentially require us to
perform costly and time consuming redesigns of our products. If we are unable
to obtain sufficient quantities of these required components, or if suppliers
choose to reduce the amount of parts they make available to us, we may be
unable to meet customer demand for our products, which would negatively affect
our business and results of operations.
Acquisitions by us of additional businesses, products or technologies could
negatively affect our business.
We have acquired businesses and technologies in the past and expect to
pursue acquisitions of other companies, technologies and new and complementary
product lines in the future. Any acquisition would involve risks to our
business, including:
. an inability to integrate the acquired business' operations, products and
personnel;
. an inability to retain key personnel of, or add key personnel to, the
acquired businesses;
. an inability to manufacture and sell the products of the acquired
businesses;
. a decline in demand by our customers for the acquired business' products;
. an inability to expand our financial and management controls and
reporting systems and procedures to incorporate the acquired businesses;
. diversion of management's time and attention;
. customer dissatisfaction or performance problems with the products or
services of an acquired firm;
. assumption of unknown liabilities, or other unanticipated events or
circumstances; and
. the need to record significant one-time charges or amortize intangible
assets, which could lower our reported earnings.
We cannot assure you that any business that we may acquire will achieve
anticipated net sales and operating results, which could decrease the value of
the acquisition to us. Any of these risks could materially harm our business,
financial condition and results of operations.
Economic, political and other risks associated with international sales and
operations could adversely affect our net sales.
Because we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We expect our net sales
originating outside the United States to be approximately half of our total net
sales for our 2001 fiscal year. In addition, many of our manufacturing
facilities and suppliers are located outside the United States. Accordingly,
our future results could be harmed by a variety of factors, including:
. changes in foreign currency exchange rates;
. changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
. trade protection measures and import or export licensing requirements;
. potentially negative consequences from changes in tax laws;
. challenges in staffing and managing international operations;
. differing protection of intellectual property in disparate jurisdictions;
and
. unexpected changes in regulatory requirements.
8
Several of our products must comply with significant governmental and industry-
based regulations, certifications, standards and protocols. Such compliance is
costly and time consuming, and we cannot assure you that our products will
continue to meet these standards in the future.
Several of our products must comply with significant governmental and
industry-based regulations, certifications, standards and protocols, some of
which evolve as new technologies are deployed. These regulations,
certifications, standards and protocols include those promulgated by the U.S.
Federal Communications Commission, the Underwriters Laboratories and various
foreign jurisdictions. Compliance with such regulations, certifications,
standards and protocols may prove costly and time-consuming for us. In
addition, regulatory compliance may present barriers to entry in particular
markets or reduce the profitability of our product offerings. Such regulations,
certifications, standards and protocols may also adversely affect the
communications industry, limit the number of potential customers for our
products and services or otherwise have a material adverse effect on our
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 our existing products to become obsolete.
Our debt agreements impose significant operating and financial restrictions,
which may prevent us from capitalizing on business opportunities.
Our debt agreements impose significant restrictions on our operations,
thereby limiting the discretion of management with respect to certain business
matters. These agreements restrict, among other things, our ability to:
. incur additional indebtedness, guarantee obligations and create liens;
. pay dividends and make other distributions;
. prepay or modify the terms of other indebtedness;
. make certain capital expenditures, investments or acquisitions, or enter
into mergers or consolidations or sales of assets; and
.engage in certain transactions with affiliates.
Our ability to comply with the restrictions contained in our debt agreements
may be affected by events beyond our control, including prevailing economic,
financial and industry conditions, and we may not be able to comply with such
restrictions in the future.
We may incur expenses to comply with environmental regulations.
There are aspects of our business that involve substances that could pose a
threat of contamination to the environment. We may in the future incur expenses
resulting from environmental remediation activities, or in connection with
complying with current or future environmental regulations. Environmental
remediation is costly, time consuming and could result in lengthy proceedings
that could distract our management. If we are required to remediate any
environmental hazard, our business, results of operations and financial
condition could be harmed.
Risks Related to Our Industry
Industry consolidation or changes in regulation could adversely affect our
business.
A substantial portion of our 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 our customers, increase their buying
power and create pressure on us to lower our prices. In addition, governmental
regulation of the communications industry could materially adversely affect our
customers and, as a result, materially limit or restrict our business. The
current trend toward deregulation of the telecommunications
9
market, which has resulted in increased competition among our customers as well
as escalating demand on the part of such customers for our 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 our products could
decrease.
To ensure quality service, our major service provider customers typically
send a technician who uses our product into the field 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 our
products could decrease, which would negatively affect our business and results
of operations.
Our success depends upon the quality of our key personnel. If we are unable to
retain some of our personnel, or if we are unable to continue to hire highly-
skilled personnel, our business may suffer.
Our success depends in large part upon our senior management, as well as our
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 we may not be
successful in retaining our existing key personnel or attracting additional
employees. Any failure to retain our personnel, including our senior
management, could have a material adverse effect on our 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 our results of operations.
Third parties may claim we are infringing their intellectual property and, as a
result of such claims, we may face significant litigation or incur licensing
expenses or be prevented from selling our products.
Third parties may claim that we are infringing their intellectual property
rights, and we may be found to infringe those intellectual property rights.
Although we do not believe that any of our products infringe the valid
intellectual property rights of third parties, we may be unaware of the
intellectual property rights of others that may cover some of our technology,
products and services.
Any litigation regarding patents or other intellectual property rights could
be costly and time consuming, and divert the attentions of our management and
key personnel from our business operations. The complexity of the technology
involved and the uncertainty of intellectual property litigation increase these
risks. Claims of intellectual property infringement might also require us to
enter into costly royalty or license agreements. However, we may not be able to
obtain royalty or license agreements on terms acceptable to us, or at all. We
also may be subject to significant damages or injunctions against development
and sale of certain of our products.
Third parties may infringe on our intellectual property and, as a result, we
may expend significant resources enforcing our rights or suffer competitively.
Our success depends in large part on our intellectual property. We rely on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary intellectual property. If we fail to enforce successfully our
intellectual property rights, our competitive position could suffer, which
could have a material adverse effect on our business, financial condition and
results of operations.
Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these patent
applications or trademarks registrations. In addition, competitors may design
alternatives to our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for our competitors to capture market share.
10
Our products are complex, and our failure to detect errors and defects may
subject us to costly repairs, product returns under warranty and product
liability litigation.
Our products are complex and may contain undetected defects or errors when
first introduced or as enhancements are released. These errors may occur
despite our testing and may not be discovered until after a product has been
shipped and used by our customers. This risk is compounded by the fact that we
offer many products, with multiple hardware and software configurations, which
makes it more difficult to ensure high standards of quality control in our
manufacturing process. The existence of these errors or defects could result in
costly repairs and/or returns of products under warranty, diversion of
development resources and, more generally, in delayed market acceptance of the
product or damage to our reputation and business, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
Risks Related to this Offering
Our current principal shareholders will continue to have significant influence
over our business after this offering, and could delay, deter or prevent a
change of control or other business combination.
Upon completion of this offering, the Clayton, Dubilier & Rice funds, our
current controlling shareholders, will together hold approximately %, of the
outstanding shares of our common stock. In addition, four of the eleven
directors who will serve on our board following this offering will be
affiliated with the Clayton, Dubilier & Rice funds. By virtue of such stock
ownership and board representation, these entities will continue to have
significant influence over all matters submitted to our shareholders, including
the election of our directors, and to exercise significant control over our
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 our shareholders. Clayton,
Dubilier & Rice Fund V Limited Partnership has agreed, pursuant to certain
employment agreements with Messrs. Allan M. Kline, our Corporate Vice
President, Chief Financial Officer and Treasurer, and John R. Peeler, our
Corporate Vice President and President and Chief Executive Officer of our
Communications Test Business, to vote its shares to elect both men as directors
so long as they are employed by us.
Our common stock has a limited trading history and may be extremely volatile.
Since May 21, 1998, our common stock has been trading on the over-the-
counter market, and the public market for our common stock has been limited. An
active public market for our common stock may not develop and continue after
this offering. The trading price of our common stock is likely to be volatile.
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. Investors
may not be able to sell their common stock at or above our public offering
price or at all. The market price of our common stock could fluctuate
significantly after this offering in response to any of the following:
. changes in financial estimates or investment recommendations relating to
us by securities analysts;
. our quarterly operating results falling below analysts' or investors'
expectations in any given period;
. changes in economic conditions for companies serving our markets;
. changes in market valuations of, or earnings and other announcements by,
companies serving our markets;
. declines in the market prices of stocks generally, particularly those of
technology companies;
. announcements by us or our competitors of new products, acquisitions or
strategic relationships;
. changes in business or regulatory conditions; and
. trading volume of our common stock.
11
In the past, following periods of market volatility, stockholders have
instituted securities class action litigation. If we were involved in
securities litigation, it could have a substantial cost and divert resources
and the attention of executive management from our business.
The market price for our common stock could be adversely affected by the large
number of additional shares eligible for sale in the future.
Our officers and directors and some other shareholders who own in the
aggregate approximately million shares, representing approximately
% of our total outstanding common stock after this offering have agreed not
to sell shares of our common stock until 135 days following the date of this
prospectus without the consent of Credit Suisse First Boston Corporation. In
addition, we and the Clayton, Dubilier & Rice funds, which own in the aggregate
153,915,770 shares, representing % of our total outstanding common stock
after this offering, have agreed not to sell shares of our common stock until
180 days following the date of this prospectus without the prior written
consent of Credit Suisse First Boston Corporation. Upon expiration of these
135-day lock-up agreements, or 180-day in the case of the Clayton, Dubilier &
Rice funds, and subject to the volume limitations imposed by Rule 144 of the
U.S. Securities Act of 1933, as amended, or the U.S. Securities Act,
shares will be available for resale in the public market. In addition, some of
our current shareholders including the Clayton, Dubilier & Rice funds have
"demand" and/or "piggyback" registration rights in connection with future
offerings of our common stock. "Demand" rights enable the holders to demand
that their shares be registered and may require us to file a registration
statement under the U.S. Securities Act at our expense. "Piggyback" rights
provide for notice to the relevant holders of our stock if we propose to
register any of our securities under the U.S. Securities Act, and grant such
holders the right to include their shares in the registration statement. Our
directors and officers and some of our other shareholders with registration
rights have agreed not to exercise their registration rights until 135 days in
the case of our directors and officers, or 180 days in the case of the Clayton,
Dubilier & Rice Funds, following the date of this prospectus without the
consent of Credit Suisse First Boston Corporation.
The sale of a substantial number of shares or the perception that such sales
could occur could adversely affect the market price for our common stock
because these sales could cause the amount of our stock available for sale in
the market to exceed the amount of demand for our stock and could also make it
more difficult for us to sell equity securities in the future at a time and
price that we deem appropriate. This could adversely affect our ability to fund
our current and future obligations.
Provisions in our charter documents and state law may make it harder for others
to obtain control of us even though some shareholders might consider such a
change of control to be favorable.
Provisions in our charter and bylaws, including our staggered board of
directors, may have the effect of delaying or preventing a change of control or
change in our management that you, as a stockholder, might consider favorable
or beneficial. If a change in control or change in management is delayed or
prevented, the market price of our common stock could suffer.
12
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical facts included in this prospectus may constitute
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events. Although we
believe that our assumptions made in connection with the forward-looking
statements are reasonable, we cannot assure you that our assumptions and
expectations will prove to have been correct. Important factors that could
cause our actual results to differ materially from our expectations are
disclosed in this prospectus, including factors disclosed under "Risk Factors"
beginning on page 6. These forward-looking statements are subject to various
risks, uncertainties and assumptions including, among other things:
. our outstanding debt and the restrictions imposed by our debt;
. the cyclical nature of certain of our businesses, and domestic and
international economic conditions;
. the high degree of competition in certain of our businesses, and the
potential for new competitors to enter into those businesses;
. the integration of recent and future acquired businesses with our
existing operations in a timely and efficient manner;
. our ability to divest our ICS Advent and Itronix Corporation
subsidiaries, which together comprise our industrial and communications
business segment;
. the extent to which we undertake new acquisitions or enter into strategic
joint ventures or partnerships;
. future modifications to existing laws and regulations affecting the
environment, health and safety;
. discovery of unknown contingent liabilities, including environmental
contamination at our facilities;
. fluctuations in interest rates and in foreign currency exchange rates;
and
. increases in the cost of raw materials and other inputs used to make our
products.
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by those cautionary
statements. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur and you
should not place undue reliance upon them.
13
USE OF PROCEEDS
We expect to receive net proceeds from the sale of shares of common
stock offered by us in this offering at a price of , after deducting
estimated underwriting discounts and commission and estimated expenses, of
approximately $ , if the underwriters' over-allotment is exercised.
We intend to use the net proceeds to reduce the indebtedness of our
subsidiary, Dynatech LLC, under its new Senior Secured Credit Facility. Our
Dynatech LLC new Senior Secured Credit Facility provides for borrowings of up
to an aggregate principal amount of $860 million and consists of multi-tranche
term loans and a revolving credit facility with a final maturity date of March
31, 2006 for the revolving loans, the tranche A term loans and the German term
loans, and September 30, 2007 for the tranche B term loans. The loans under
this facility bear interest at floating rates based upon the interest rate
option we elect from time to time. The overall effective interest rate for the
term loans at June 30, 2000 was %. See "Description of Indebtedness--Senior
Secured Credit Facility." The new Senior Secured Credit Facility was used to
refinance certain existing debt of Dynatech LLC and to finance a portion of the
WWG merger.
14
DIVIDEND POLICY
Since April 1, 1995, we have not declared or paid cash dividends to the
holders of our common stock. We intend to retain earnings for use in the
operation and expansion of our business. In addition, certain restrictions in
our credit agreement and debt securities limit our ability to pay cash
dividends.
PRICE RANGE OF COMMON STOCK
Prior to this offering, our common stock was traded in the over-the-counter
market under the symbol "DYNA." We have applied to have our common stock traded
on The Nasdaq National Market. The following table sets forth the high and low
sales prices of our common stock on the over-the-counter market for each
quarterly period within our two most recent fiscal years.
High Low
------- ------
Fiscal Year Ended March 31, 1999
First Quarter(1)........................................... $ 4.312 $3.125
Second Quarter............................................. 3.438 2.687
Third Quarter.............................................. 3.000 2.375
Fourth Quarter............................................. 3.500 2.718
High Low
------- ------
Fiscal Year Ended March 31, 2000
First Quarter.............................................. $ 4.062 $3.125
Second Quarter............................................. 5.031 3.437
Third Quarter.............................................. 8.000 4.875
Fourth Quarter............................................. 15.937 6.875
High Low
------- ------
Quarter Ended June 30, 2000................................ $20.250 $8.000
Quarter Ended September 30, 2000 (through July 17, 2000)... 24.625 22.375
- -----------------------
(1) From January 28, 1997 to May 21, 1998, our common stock was traded on the
New York Stock Exchange, or the NYSE. After our merger on May 21, 1998 with
an entity formed by Clayton, Dubilier & Rice Fund V Limited Partnership,
however, our common stock ceased to be listed on the NYSE and became
available only in the over-the-counter market. The high and low sales
prices of our common stock set forth above are for the periods following
May 21, 1998.
On June 30, 2000, there were 935 registered holders of the common stock and
the price of our common stock on the over-the-counter market was $20.250.
15
CAPITALIZATION
The following table shows our cash and cash equivalents and actual
capitalization at March 31, 2000. The columns captioned "Pro Forma" and "Pro
Forma As Adjusted" are defined terms described in the "Unaudited Pro Forma
Condensed Consolidated Financial Statements of Dynatech" contained elsewhere in
this prospectus. You should read the information set forth below together with
the Summary Consolidated and Pro Forma Financial Data of Dynatech and Unaudited
Pro Forma Condensed Consolidated Financial Statements herein, as well as our
historical consolidated financial statements and the notes thereto.
As of March 31, 2000
----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- ---------- -----------
(in thousands)
Cash and cash equivalents... $ 33,839 $ 69,110 $
========= ========== =======
Long-term debt, including
current portion:
Senior Credit Facility:
Revolving credit
facility............... $ 70,000 $ 100,000 $
Term loans.............. 234,861 685,000
9 3/4% Senior Subordinated
Notes Due 2008........... 275,000 275,000
Other debt................ 73 30,631
--------- ---------- -------
Total debt.............. 579,934 1,090,631
Shareholders' equity
(deficit):
Common stock.............. 1,225 1,856
Additional paid-in-
capital.................. 344,873 666,674
Accumulated deficit....... (623,929) (735,527)
Unearned compensation..... (16,965) (16,965)
Other comprehensive loss.. (1,879) (1,879)
--------- ---------- -------
Total shareholders'
equity (deficit)....... (296,675) (85,841)
--------- ---------- -------
Total capitalization.... $ 283,259 $1,004,790 $
========= ========== =======
16
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DYNATECH
The column captioned "Pro Forma" set forth in these Unaudited Pro Forma
Condensed Consolidated Financial Statements gives effect to the following:
. our merger with WWG (after giving effect to the divestitures of WWG's
Precision Measurement and Test Tools divisions, which occurred in January
2000);
. our sale, in connection with the WWG merger, of 43,125,000 newly-issued
but unregistered shares of our common stock to Clayton, Dubilier & Rice
Fund V Limited Partnership and Clayton, Dubilier & Rice Fund VI Limited
Partnership, and the concurrent establishment of our new Senior Secured
Credit Facility;
. our sale of 4,983,048 newly-issued registered shares of our common stock
to shareholders of record on April 20, 2000 (other than CD&R Fund V) in
the rights offering completed on June 30, 2000;
. our probable acquisition of substantially all of the assets and specified
liabilities of Superior Electronics Group, Inc., a Florida corporation
doing business as Cheetah Technologies (after giving effect to the sale
of a building and the exclusion of specified assets and liabilities that
will not be acquired);
. the inclusion of the results of operations for the full period presented
relating to our acquisitions of Sierra Design Labs and Applied Digital
Access, Inc.; and
. the exclusion of the results of operations for the full period presented
relating to our divestiture of DataViews Corporation.
The column captioned "Pro Forma As Adjusted" set forth in these Unaudited
Pro Forma Condensed Consolidated Financial Statements gives effect to the
following:
. the events described above; and
. the receipt and application of the estimated net proceeds from the sale
of shares of common stock in this offering as described under "Use of
Proceeds."
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31,
2000 set forth herein was prepared assuming that the above-listed transactions
took place on that date. The Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the twelve months ended March 31, 2000 set forth
herein was prepared assuming that the above-listed transactions occurred as of
the first day of that period.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with the Dynatech, WWG and Applied Digital Access, Inc.
historical Consolidated Financial Statements, which are included elsewhere in
this prospectus, as well as Dynatech's "Management Discussion and Analysis of
Financial Condition and Results of Operations", also included elsewhere in this
prospectus.
The pro forma adjustments, as described in the Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements herein, are based on currently
available information and certain adjustments that management believes are
reasonable. This pro forma financial information is presented for informational
purposes only and does not necessarily represent what our financial position or
results of operations would have been if these transactions had in fact
occurred on the dates indicated and is not necessarily indicative of our
financial position or results of operations for any future period.
17
Dynatech Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2000
(In thousands)
Other Cheetah
Acquisitions WWG Purchase Purchase Debt Related
Dynatech and Pro Forma Accounting Pro Forma Accounting Pro Forma
Corporation Divestitures (a) WWG (b) Adjustments (c) Cheetah (d) Adjustments (d) Adjustments (f)
----------- ---------------- --------- --------------- ----------- --------------- ---------------
ASSETS
Current assets:
Cash and cash
equivalents....... $ 33,839 $ 700 $ 17,974 $(258,000) $ 6,565 $(166,000) $ 287,000
Accounts
receivable, net... 78,236 (911) 92,113 -- 7,408 -- --
Inventories....... 30,252 -- 71,506 45,000 7,550 -- --
Other current
assets............ 37,880 (69) 20,464 -- 484 -- --
--------- ----- -------- --------- ------- --------- ---------
Total current
assets.......... 180,207 (280) 202,057 (213,000) 22,007 (166,000) 287,000
Property and
equipment, net..... 27,316 (355) 53,066 10,000 1,450 -- --
Net assets from
discontinued
operations......... 72,601 -- -- -- -- -- --
Intangible assets,
net................ 58,508 -- 136,903 282,175 92 143,345 --
Other assets....... 76,206 (19) 5,457 -- 5,803 -- 9,670
--------- ----- -------- --------- ------- --------- ---------
Total assets.... $ 414,838 $(654) $397,483 $ 79,175 $29,352 $ (22,655) $ 296,670
========= ===== ======== ========= ======= ========= =========
LIABILITIES &
SHAREHOLDERS'
EQUITY (DEFICIT)
Current
liabilities:
Notes payable and
current portion
of long-term
debt.............. $ 7,646 $ -- $ 23,755 $ -- $ -- $ -- $ (18,000)
Other current
liabilities....... 120,299 (654) 103,506 20,000 6,697 -- 15,868
--------- ----- -------- --------- ------- --------- ---------
Total current
liabilities..... 127,945 (654) 127,261 20,000 6,697 -- (2,132)
Long-term debt..... 572,288 -- 199,942 -- -- -- 305,000
Pension
liabilities........ -- -- 33,455 -- -- -- --
Deferred
compensation....... 11,280 -- -- -- -- -- --
Other long-term
liabilities........ -- -- 12,000 54,000 -- -- --
Common stock and
additional paid-in
capital............ 346,098 -- -- 130,000 -- -- --
Other shareholders'
equity (deficit)... (642,773) -- 24,825 (124,825) 22,655 (22,655) (6,198)
--------- ----- -------- --------- ------- --------- ---------
Total
liabilities and
shareholders'
equity
(deficit)....... $ 414,838 $(654) $397,483 $ 79,175 $29,352 $ (22,655) $ 296,670
========= ===== ======== ========= ======= ========= =========
Equity Related
Pro Forma Pro Forma
Adjustments (h) Pro Forma Offering As Adjusted
--------------- ----------- -------- -----------
ASSETS
Current assets:
Cash and cash
equivalents....... $147,032 $ 69,110 $ $
Accounts
receivable, net... -- 176,846
Inventories....... -- 154,308
Other current
assets............ -- 58,759
--------------- ----------- -------- -----------
Total current
assets.......... 147,032 459,023
Property and
equipment, net..... -- 91,477
Net assets from
discontinued
operations......... -- 72,601
Intangible assets,
net................ -- 621,023
Other assets....... -- 97,117
--------------- ----------- -------- -----------
Total assets.... $147,032 $1,341,241 $ $
=============== =========== ======== ===========
LIABILITIES &
SHAREHOLDERS'
EQUITY (DEFICIT)
Current
liabilities:
Notes payable and
current portion
of long-term
debt.............. $ -- $ 13,401 $ $
Other current
liabilities....... (40,000) 225,716
--------------- ----------- -------- -----------
Total current
liabilities..... (40,000) 239,117
Long-term debt..... -- 1,077,230
Pension
liabilities........ -- 33,455
Deferred
compensation....... -- 11,280
Other long-term
liabilities........ -- 66,000
Common stock and
additional paid-in
capital............ 192,432 668,530
Other shareholders'
equity (deficit)... (5,400) (754,371)
--------------- ----------- -------- -----------
Total
liabilities and
shareholders'
equity
(deficit)....... $147,032 $1,341,241 $ $
=============== =========== ======== ===========
See accompanying notes to the unaudited pro forma statements.
18
Dynatech Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Twelve Months Ended March 31, 2000
(In thousands, except per share data)
Other Other
Acquisitions/ Pro Forma Pro Forma Amortization Pro Forma
Dynatech Divestitures (a) WWG (b) Cheetah (d) of Intangibles (e) Adjustments Pro Forma Offering
-------- ---------------- --------- ----------- ------------------ ----------- ---------- --------
Net sales........ $453,239 $20,474 $497,351 $46,538 $ -- $ -- $1,017,602 $
Cost of sales.... 157,090 9,598 193,828 22,324 -- -- 382,840
-------- ------- -------- ------- -------- -------- ---------- ----
Gross profit..... 296,149 10,876 303,523 24,214 -- -- 634,762
-------- ------- -------- ------- -------- -------- ---------- ----
Selling, general
and
administrative
expense.......... 156,499 8,317 180,727 17,644 1,667 -- 364,854
Product
development
expense.......... 61,172 5,285 69,740 5,085 -- -- 141,282
Recapitalization-
related costs.... 27,942 -- -- -- -- -- 27,942
Restructuring and
other non-
recurring
charges.......... -- -- 4,400 -- -- -- 4,400
Amortization of
intangibles...... 8,789 389 18,765 -- 82,176 -- 110,119
-------- ------- -------- ------- -------- -------- ---------- ----
Total operating
expenses......... 254,402 13,991 273,632 22,729 83,843 -- 648,597
-------- ------- -------- ------- -------- -------- ---------- ----
Operating income
(loss).......... 41,747 (3,115) 29,891 1,485 (83,843) -- (13,835)
Interest
expense.......... (51,916) (4) (20,497) -- -- (30,131)(f) (102,548)
Interest income.. 2,354 346 769 -- -- -- 3,469
Other income
(loss), net...... (68) 56 1,584 -- -- -- 1,572
-------- ------- -------- ------- -------- -------- ---------- ----
Income (loss)
from continuing
operations before
income taxes..... (7,883) (2,717) 11,747 1,485 (83,843) (30,131) (111,342)
Provision
(benefit) for
income taxes..... (1,169) 171 9,517 594 (13,890) (12,052)(g) (16,829)
-------- ------- -------- ------- -------- -------- ---------- ----
Income (loss)
from continuing
operations....... $ (6,714) $(2,888) $ 2,230 $ 891 $(69,953) $(18,079) $ (94,513) $
======== ======= ======== ======= ======== ======== ========== ====
Pro Forma
As Adjusted
-----------
Net sales........ $
Cost of sales....
-----------
Gross profit.....
-----------
Selling, general
and
administrative
expense..........
Product
development
expense..........
Recapitalization-
related costs....
Restructuring and
other non-
recurring
charges..........
Amortization of
intangibles......
-----------
Total operating
expenses.........
-----------
Operating income
(loss)..........
Interest
expense..........
Interest income..
Other income
(loss), net......
-----------
Income (loss)
from continuing
operations before
income taxes.....
Provision
(benefit) for
income taxes.....
-----------
Income (loss)
from continuing
operations....... $
===========
Income (loss) per
share from
continuing
operations (i):
Basic........... $ (0.05) $ (0.51)
======== ==========
Diluted......... $ (0.05) $ (0.51)
======== ==========
Income (loss) per
share from
continuing
operations (i):
Basic........... $
===========
Diluted......... $
===========
Weighted average
number of shares
(i):
Basic........... 148,312 184,646
Diluted......... 148,312 184,646
Weighted average
number of shares
(i):
Basic...........
Diluted.........
See accompanying notes to the unaudited pro forma statements.
19
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(In thousands)
a. Dynatech Acquisitions and Divestitures
Acquisitions related to Continuing Operations
Sierra Design Labs
On September 10, 1999, we, through one of our wholly-owned subsidiaries,
purchased the outstanding stock of Sierra Design Labs ("Sierra") for a total
purchase price of $6,300 in cash. The acquisition was accounted for using the
purchase method of accounting and resulted in $4,900 of goodwill, which is
being amortized over ten years. The operating results of Sierra have been
included in our consolidated financial statements since September 10, 1999.
Applied Digital Access, Inc.
On November 1, 1999, we, through one of our wholly-owned subsidiaries,
acquired all the outstanding stock of Applied Digital Access, Inc. ("ADA") for
a total purchase price of approximately $81,000 in cash. The acquisition was
accounted for using the purchase method of accounting and resulted in $36,000
of goodwill which is being amortized over three years. The operating results of
ADA have been included in our consolidated financial statements since November
1, 1999.
Divestitures related to Continuing Operations
DataViews Corporation
During June 2000, we sold the stock of DataViews Corporation ("DataViews"),
located in Northampton, Massachusetts, for a sale price of approximately $3,500
(before costs related to the divestiture including legal and employee related
costs of approximately $2,800). The gain on sale of the business was not
material.
20
Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements--(Continued)
(In thousands)
b. Pro Forma WWG
On May 23, 2000, we consummated the merger of one of our subsidiaries with
Wavetek Wandel Goltermann, Inc., or WWG, pursuant to which WWG became one of
our subsidiaries.
Set forth below is the unaudited balance sheet of WWG as of March 31, 2000,
which includes the effect of the divestitures of WWG's Precision Measurement
and Test Tools divisions, which occurred in January 2000.
WWG Balance
Sheet as of
March 31, 2000
--------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 17,974
Accounts receivable, net....................................... 92,113
Inventories.................................................... 71,506
Other current assets........................................... 20,464
--------
Total current assets......................................... 202,057
Property and equipment, net...................................... 53,066
Intangible assets, net........................................... 136,903
Other assets..................................................... 5,457
--------
Total assets................................................. $397,483
========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt............ $ 23,755
Other current liabilities...................................... 103,506
--------
Total current liabilities.................................... 127,261
Long-term debt................................................... 199,942
Pension liabilities.............................................. 33,455
Deferred compensation............................................ --
Other long-term liabilities...................................... 12,000
Common stock and additional paid-in capital...................... --
Other shareholders' equity ...................................... 24,825
--------
Total liabilities and shareholders' equity .................. $397,483
========
21
Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements--(Continued)
(In thousands)
b. Pro Forma WWG--(continued)
Set forth below are the unaudited pro forma results of operations for WWG
for the twelve months ended March 31, 2000. The WWG results have been adjusted
to exclude the results of operations for the divestitures of the Precision
Measurement and Test Tools divisions, which occurred during January 2000.
WWG's fiscal year ends on September 30. The WWG historical information for
the twelve months ended March 31, 2000 has been derived from the Statement of
Operations for the year ended September 30, 1999 included in WWG's Form 10-K
for the year ended September 30, 1999, then adding the Statement of Operations
for the six months ended March 31, 2000, included in WWG's Form 10-Q for the
period ended March 31, 2000, and then subtracting the Statement of Operations
for the six months ended March 31, 1999, included in WWG's Form 10-Q for the
period ended March 31, 1999.
Twelve Months Ended
March 31, 2000
---------------------------------
WWG WWG Pro Forma
Historical Divestitures WWG
---------- ------------ ---------
Net sales................................... $519,059 $(21,708) $497,351
Cost of sales............................... 205,598 (11,770) 193,828
-------- -------- --------
Gross profit................................ 313,461 (9,938) 303,523
-------- -------- --------
Selling, general and administrative
expense.................................... 188,711 (7,984) 180,727
Product development expense................. 71,055 (1,315) 69,740
Restructuring and other non-recurring
charges.................................... 4,400 -- 4,400
Amortization of intangibles................. 18,765 -- 18,765
-------- -------- --------
Total operating expenses.................... 282,931 (9,299) 273,632
-------- -------- --------
Operating income.......................... 30,530 (639) 29,891
Interest expense............................ (20,497) -- (20,497)
Interest income............................. 769 -- 769
Other income, net........................... 1,584 -- 1,584
-------- -------- --------
Income from continuing operations before
income taxes............................... 12,386 (639) 11,747
Provision (benefit) for income taxes........ 9,773 (256) 9,517
-------- -------- --------
Income from continuing operations........... $ 2,613 $ (383) $ 2,230
======== ======== ========
22
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
c. Purchase Accounting Related to WWG Acquisition
Aggregate purchase price:
Cash in exchange for WWG stock..................................... $ 250,000
Cash in exchange for WWG options................................... 8,000
Dynatech Common Stock (approximately 14,987 shares)................ 130,000
---------
388,000
Add: Estimated acquisition costs................................... 20,000
---------
Total purchase price............................................. 408,000
Less: Pro Forma WWG net assets acquired (see Note (b))............... (24,825)
---------
Total purchase price in excess of net assets acquired............ 383,175
Estimated purchase accounting allocations:
Less: Inventory step-up to fair value.............................. (45,000)
Less: Fixed assets step-up to fair value........................... (10,000)
Less: Incremental completed technology acquired.................... (22,000)
Less: Incremental assembled workforce acquired..................... (33,000)
Less: In-process research and development acquired................. (100,000)
Add: Deferred tax liabilities...................................... 54,000
Add: WWG historical debt issuance costs not acquired............... 5,162
---------
Estimated incremental goodwill from acquisition.................. $ 232,337
=========
The final allocation of the purchase price depends upon certain valuations
and other studies that are still in progress. The estimated purchase price
allocations are therefore preliminary, and have been presented solely for the
purpose of developing these pro forma statements. The final allocation of the
purchase price to be ultimately recorded in our historical financial statements
may or may not be materially different than what has been presented in these
pro forma statements.
The estimated in-process research and development charge of $100,000 has
been included as an adjustment within the Unaudited Pro Forma Condensed
Consolidated Balance Sheet, but has not been included as an adjustment within
the Unaudited Pro Forma Condensed Consolidated Statement of Operations, as this
charge is non-recurring in nature.
For purposes of these pro forma statements, the estimated life of the WWG
related pro forma intangible assets is a blended life of six years. WWG
historical and pro forma intangible assets (adjusted as a result of the
acquisition) at March 31, 2000 are as follows:
Pro Forma
WWG
Purchase Adjusted for
WWG Accounting Purchase
Historical Adjustments Accounting
---------- ----------- ------------
Goodwill................................. $ 50,423 $232,337 $282,760
Completed technology..................... 69,766 22,000 91,766
Assembled work force..................... 6,250 33,000 39,250
Deferred issuance costs.................. 5,162 (5,162) --
Other.................................... 5,302 -- 5,302
-------- -------- --------
$136,903 $282,175 $419,078
======== ======== ========
Pro forma amortization expense......... $ 69,846
========
23
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
c. Purchase Accounting Related to WWG Acquisition--(continued)
To the extent that the blended life of the intangibles changed from six
years to five years, total pro forma annual amortization expense would be
$83,816.
The estimated incremental increase related to the amortization of intangible
assets is as follows:
Twelve Months
Ended
March 31,
2000
-------------
Pro forma amortization expense................................. $ 69,846
Less: WWG historical amortization of intangible assets......... (18,765)
--------
Incremental pro forma amortization of intangible assets...... $ 51,081
========
d. Pro Forma Cheetah
On June 27, 2000, we entered an agreement to acquire substantially all of
the assets and assume specified liabilities of Superior Electronics Group,
Inc., a Florida corporation doing business as Cheetah Technologies. Set forth
below is the unaudited summary of assets and liabilities of Cheetah, which
assumes the sale of a building and the exclusion of specified assets and
liabilities that will not be acquired.
As of March 31, 2000
-----------------------------------
Cheetah Cheetah
Historical Adjustments Pro Forma
---------- ----------- ---------
Cash........................................ $ 1,249 $ 5,316 (1) $ 6,565
Accounts receivable, net.................... 7,408 7,408
Inventories................................. 7,550 7,550
Other current assets........................ 702 (218)(2) 484
Property and equipment, net................. 12,181 (10,731)(1) 1,450
Intangible assets, net...................... 92 92
Other assets................................ 6,150 (347)(2) 5,803
------- -------- -------
Total assets.............................. $35,332 $ (5,980) $29,352
======= ======== =======
Current liabilities......................... $ 6,817 $ (120)(2) $ 6,697
Long-term debt.............................. 17,369 (5,415)(1) --
(11,954)(2)
------- -------- -------
Total liabilities......................... $24,186 $(17,489) $6,697
======= ======== =======
- -----------------------
(1) Reflects the sale of a building with a net book value of $10,731 for cash
proceeds of $5,316 and the assumption by the purchaser of the building of
$5,415 of long-term debt. The sale of the building will be completed prior
to the consummation of the Cheetah acquisition.
(2) Reflects assets that are not being acquired and liabilities that are not
being assumed in the Cheetah acquisition.
24
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
d. Pro Forma Cheetah--(continued)
Set forth below are the unaudited pro forma results of operations for
Cheetah for the twelve months ended March 31, 2000. The Cheetah results have
been adjusted to reflect the elimination of interest expense on the debt that
is not being assumed in the Cheetah acquisition and the recording of an income
tax provision at Dynatech's effective statutory rate of 40% as Cheetah was not
a tax paying entity prior to the acquisition.
Twelve Months Ended
March 31, 2000
----------------------------------
Cheetah Cheetah
Historical Adjustments Pro Forma
---------- ----------- ---------
Net sales.................................. $46,538 $ -- $46,538
Cost of sales.............................. 22,324 -- 22,324
------- ------ -------
Gross profit............................... 24,214 -- 24,214
Selling, general and administrative ex-
penses.................................... 16,733 (279)(3) 17,644
1,190 (4)
Product development expense................ 5,085 -- 5,085
------- ------ -------
Total operating expenses................... 21,818 911 22,729
------- ------ -------
Operating income......................... 2,396 (911) 1,485
Interest expense........................... (1,825) 1,825 (5) --
------- ------ -------
Income from continuing operations before
income taxes.............................. 571 914 1,485
Provision for income taxes................. -- 594 (6) 594
------- ------ -------
Income from continuing operations.......... $ 571 $ 320 $ 891
======= ====== =======
- -----------------------
(3) Reflects the reduction in annual depreciation expense associated with the
building that will be sold prior to the Cheetah acquisition.
(4) Reflects the anticipated annual rental expense associated with the building
that will be sold prior to the Cheetah acquisition and then leased back to
Dynatech under an operating lease arrangement upon the consummation of the
Cheetah acquisition.
(5) Reflects the elimination of interest expense on the debt that is not being
assumed in the Cheetah acquisition.
(6) Reflects the application of Dynatech's effective statutory income tax rate
of 40% to Cheetah's historical income from continuing operations before
income taxes of $571, the net increase in facilities cost of $911 and the
elimination in interest expense of $1,825.
25
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
d. Pro Forma Cheetah--(continued)
We intend to account for this acquisition using the purchase method of
accounting. Under the purchase method of accounting, the total purchase price
will be allocated to the acquired assets and liabilities of Cheetah based on
their relative fair values as of the closing date of the Cheetah acquisition.
Upon consummation of the Cheetah acquisition, we intend to undertake a study to
determine the allocation of the total purchase price to the various assets
acquired and the liabilities assumed including the potential allocation of a
portion of the purchase price to in-process research and development.
Accordingly, the final allocations could be different from the amounts
reflected herein and such differences may be significant. The amount and
components of the estimated purchase price along with the allocation of the
estimated purchase price to the assets purchased and liabilities assumed as
though the Cheetah acquisition had occurred on March 31, 2000 are as follows:
Estimated aggregate purchase price:
Cash paid..................................................... $164,000
Estimated acquisition costs................................... 2,000
--------
Purchase price to be allocated.................................. $166,000
========
Net assets acquired............................................. $ 22,655
--------
Purchase price in excess of net assets acquired................. $143,345
========
We intend to fund the purchase price with borrowings of $100,000 on
Dynatech's $860,000 Senior Credit Facility (see Note (f)) and approximately
$66,000 from our existing cash balance.
For purposes of these pro forma statements, the purchase price in excess of
the net assets acquired has been allocated to intangible assets and assigned a
blended life of six years. Therefore, amortization expense related to the
purchase price in excess of net assets acquired is estimated to be $23,891 for
the year ended March 31, 2000. Because the transaction is an asset purchase, we
are able to deduct the resulting goodwill amortization in computing its taxable
income resulting in an estimated annual income tax benefit of $9,556.
To the extent that the blended life of the intangibles changed from six
years to five years, total pro forma annual amortization expense associated
with the Cheetah acquisition would be $28,669.
e. Amortization of Intangibles and Depreciation
Twelve Months
Ended
March 31, 2000
--------------
Incremental pro forma amortization of intangible assets from WWG
acquisition.................................................... $ 51,081
Incremental pro forma amortization of intangible assets from
Cheetah acquisition............................................ 23,891
Adjustments to reflect full year amortization of goodwill to
acquisitions consummated during the period, as discussed in
Note (a) (excludes amortization related to Husky acquisition,
which is reflected in discontinued operations segment) ........ 7,204
--------
82,176
Tax benefit related to incremental amortization of intangible
assets and deductible goodwill................................. (13,223)
--------
Net impact to continuing operations......................... $ 68,953
========
Incremental depreciation for fixed assets step-up............... $ 1,667
Tax benefit related to incremental depreciation................. (667)
--------
Net impact to continuing operations......................... $ 1,000
========
26
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
f. Restructuring of Debt
Upon consummation of the WWG merger, we refinanced the existing debt of both
Dynatech and WWG, as follows:
Deferred Debt
Issuance
Debt Costs Interest Expense
--------- ------------- ----------------
As of As of Twelve Months
March 31, March 31, Ended March 31,
2000 2000 2000
--------- ------------- ----------------
Existing debt to be repaid:
Dynatech bank debt................. $(305,000) $ -- $ 21,454
Dynatech debt issuance costs for
bank debt......................... -- (10,330) 3,446
WWG senior subordinated debt, bank
debt
and other debt, current and long-
term ............................. (193,000) -- 20,497
WWG debt issuance costs for bank
and other debt.................... -- 902
--------- -------- --------
(498,000) (10,330) 46,299
--------- -------- --------
New debt:
$860,000 Senior Credit Facility:
6 year revolving credit facility at
an assumed interest rate of 2.75%
plus LIBOR (9.05%)................ 100,000 -- (9,050)
6 year amortizing term loan at an
assumed interest rate of 2.75%
plus LIBOR (9.05%)................ 175,000 -- (15,838)
Debt issuance costs (6 year
amortization)..................... -- 5,109 (852)
7.5 year term loan at an assumed
interest rate of 3.25% plus LIBOR
(9.55%)........................... 510,000 -- (48,705)
Debt issuance costs (7.5 year
amortization)..................... -- 14,891 (1,985)
--------- -------- --------
785,000 20,000 (76,430)
--------- -------- --------
Net addition to debt................. $ 287,000
=========
Net addition to debt issuance costs.. $ 9,670
========
Net addition to interest expense..... $(30,131)
========
Upon the consummation of the merger with WWG and subsequently the probable
acquisition of Cheetah, we will have borrowed approximately $785,000 of the
facility, leaving $75,000 available to be drawn under a six year revolving
credit facility, with an assumed interest rate of LIBOR plus 2.75% (9.05%). A
one percentage point change in LIBOR would result in an annual change in
interest expense of $7,850, excluding any effects under our swap contracts.
In accordance with the terms of the WWG subordinated debt agreement, the
Company paid a penalty of approximately $9,000 due to the early termination of
the WWG debt. Such amount has been excluded from the Unaudited Pro Forma
Condensed Consolidated Statement of Operations as it is non-recurring in
nature. For historical financial statement purposes, this $9,000 ($5,400 on an
after tax basis) penalty will be presented as an extraordinary item on our
statement of operations (see Note (h) for impact to cash).
27
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
f. Restructuring of Debt--(continued)
For historical financial statement purposes, the $10,330 ($6,198, net of a
$4,132 tax benefit) of debt issuance costs of Dynatech at March 31, 2000 will
be written off and presented as an extraordinary item on our statement of
operations. For pro forma purposes, this charge has been excluded from the
Unaudited Pro Forma Condensed Consolidated Statement of Operations, as it is
non-recurring in nature.
The impact upon other current liabilities is summarized as follows:
Increase in other current liabilities resulting from debt
issuance costs on new debt................................ $ 20,000
Reduction in other current liabilities from the income tax
benefit associated with the write-off of debt issuance
costs on debt to be repaid................................ $ (4,132)
---------
Net increase in other current liabilities resulting from
the restructuring of debt................................. $ 15,868
=========
g. Tax Benefit on Interest Expense
Twelve Months Ended
March 31, 2000
-------------------
Tax benefit related to incremental interest expense at
effective statutory rate of 40% (see Note (f))............ $ (12,052)
=========
h. Proceeds from Sale of Stock
Sale of 12,500 shares of Dynatech common stock
to CD&R Fund V at $4.00 per share...................... $ 50,000
Sale of 30,625 shares of Dynatech common stock
to CD&R Fund VI at $4.00 per share..................... 122,500
Sale of 4,983 shares of Dynatech common stock
in Rights Offering to stockholders of record on April
20, 2000 (other than CD&R Fund V) at $4.00 per share... 19,932
---------
Gross cash proceeds..................................... 192,432
Transaction fees and expenses(1)........................ 40,000
Payment, net of tax, for early retirement of WWG senior
subordinated debt (see Note (f))....................... 5,400
---------
Net cash proceeds....................................... $147,032
=========
- -----------------------
(1) In connection with the WWG merger and the concurrent establishment of our
new Senior Secured Credit Facility, we incurred approximately $40,000 of
transaction related fees and expenses (as discussed in Notes (c) and (f)),
including $6,000 payable to Clayton, Dubilier & Rice, Inc., an investment
firm that manages Clayton, Dubilier & Rice Fund V Limited Partnership and
Clayton, Dubilier & Rice Fund VI Limited Partnership, our controlling
shareholders, for services provided in connection with the WWG merger and
the related financing.
28
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements--
(Continued)
(In thousands)
i. Weighted Average Number of Common Shares
The unaudited "Pro Forma" and "Pro Forma As Adjusted" per share amounts are
based on the weighted average number of common shares as set forth below:
Our historical weighted average number of common shares for the
twelve months ended March 31, 2000 (see Note J to our
consolidated financial statements)............................ 148,312
Issuance of our common shares in the WWG acquisition (see Note
(c)).......................................................... 14,987
Sale of our common shares to Clayton, Dubilier & Rice Fund V
Limited Partnership and Clayton, Dubilier & Rice Fund VI
Limited Partnership in connection with the WWG acquisition
(see Note (h))................................................ 43,125
Sale of our common shares in the rights offering (see Note
(h)).......................................................... 4,983
Elimination of bonus element of rights offering included in the
historical weighted average number of common shares for the
twelve months ended March 31, 2000 (see Note J to our
consolidated financial statements)............................ (26,761)
-------
"Pro Forma" weighted average number of shares.................. 184,646
=======
Sale of our common shares in the offering......................
-------
"Pro Forma as Adjusted" weighted average number of shares......
=======
All shares issuable upon the exercise of options have been excluded from the
calculation of "Pro Forma" and "Pro Forma As Adjusted" income (loss) from
continuing operations per common share as their inclusion would be
antidilutive.
29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF DYNATECH
The following tables set forth selected consolidated historical, financial
and other data of Dynatech as of and for each of the five fiscal years ended
March 31, 2000, which have been derived from, and should be read in conjunction
with, the audited historical Consolidated Financial Statements, and related
notes thereto, of Dynatech contained elsewhere in this prospectus. The
information provided below only reflects the results of operations and
financial condition of Dynatech and its subsidiaries as of and for each of the
five fiscal years ended March 31, 2000 and does not include the business or
results of WWG or Cheetah as the WWG merger occurred after March 31, 2000 and
the Cheetah acquisition has not been completed.
As of and for the Year Ended March 31,
--------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- --------- ---------
(In thousands, except per share data)
Statement of Operations
Data:
Net sales................. $235,123 $284,070 $317,955 $ 329,532 $ 453,239
Cost of sales............. 77,676 90,401 103,923 108,618 157,090
-------- -------- -------- --------- ---------
Gross profit.............. 157,447 193,669 214,032 220,914 296,149
Selling, general &
administrative expense... 82,865 95,203 106,328 113,469 156,499
Product development
expense.................. 35,461 39,037 42,919 42,472 61,172
Recapitalization and other
related costs............ -- -- -- 40,767 27,942
Nonrecurring charges...... 16,852 5,063 -- -- --
Amortization of
intangibles.............. 2,785 3,882 2,357 2,726 8,789
-------- -------- -------- --------- ---------
Operating income.......... 19,484 50,484 62,428 21,480 41,747
Interest expense.......... (1,723) (679) (1,184) (46,178) (51,916)
Interest income........... 2,181 2,675 3,013 3,392 2,354
Other income (expense),
net...................... 902 540 551 15,703 (68)
-------- -------- -------- --------- ---------
Income (loss) from
operations before income
taxes.................... 20,844 53,020 64,808 (5,603) (7,883)
Provision (benefit) for
income taxes............. 8,446 24,092 26,521 (69) (1,169)
-------- -------- -------- --------- ---------
Income (loss) from
continuing operations.... 12,398 28,928 38,287 (5,534) (6,714)
Discontinued operations,
net of income taxes...... 1,845 921 3,489 11,979 12,726
-------- -------- -------- --------- ---------
Net income................ $ 14,243 $ 29,849 $ 41,776 $ 6,445 $ 6,012
======== ======== ======== ========= =========
Income (loss) per common
share--basic:
Continuing operations... $ 0.57 $ 1.38 $ 1.87 $ (0.04) $ (0.05)
Discontinued
operations............. .08 0.04 0.17 0.09 0.09
-------- -------- -------- --------- ---------
$ 0.65 $ 1.42 $ 2.04 $ 0.05 $ 0.04
======== ======== ======== ========= =========
Income (loss) per common
share--diluted:
Continuing operations... $ 0.55 $ 1.32 $ 1.80 $ (0.04) $ (0.05)
Discontinued
operations............. 0.08 0.04 0.16 0.09 0.09
-------- -------- -------- --------- ---------
$ 0.63 $ 1.36 $ 1.96 $ 0.05 $ 0.04
======== ======== ======== ========= =========
Weighted average number of
shares:
Basic................... 21,925 20,987 20,493 129,596 148,312
Diluted................. 22,347 21,997 21,272 129,596 148,312
Balance Sheet Data:
Cash and cash
equivalents.............. $ 46,094 $ 39,782 $ 64,904 $ 70,362 $ 33,839
Total assets.............. $205,189 $249,010 $288,130 $ 348,104 $ 414,838
Long-term debt, including
current portion.......... $ 2,455 $ 5,427 $ 233 $ 527,342 $ 579,934
Shareholders' equity
(deficit)................ $160,719 $160,686 $202,119 $(316,440) $(296,675)
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF DYNATECH
The following discussion of our results of operations, financial condition
and liquidity should be read in conjunction with the information contained in
the consolidated financial statements and notes thereto included elsewhere in
this prospectus. 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 below only reflects the
business of Dynatech and its subsidiaries and does not include the business or
results of WWG because the WWG merger was consummated after the end of
Dynatech's fiscal year.
Overview
General
We have reported our results of operations in two business segments:
communications test and inflight information systems. Our communications test
business develops, manufactures and markets instruments, systems, software and
services to test, deploy, manage and optimize communications networks,
equipment and services. Our inflight information systems segment, through our
AIRSHOW, Inc. subsidiary, is the leading provider of systems that deliver real-
time news, information and flight data to aircraft passengers. We also have
other subsidiaries that, in the aggregate, are not reportable as a segment
("Other Subsidiaries"). These Other Subsidiaries include da Vinci Systems,
Inc., which manufactures systems that correct or enhance the accuracy of color
during the process of transferring film-based images to videotape; and
Dataviews, Inc., which was sold in June 2000. In years prior to fiscal 2000,
our consolidated statements of income and the Other Subsidiaries section of
Note S. Segment Information and Geographic Areas of our consolidated financial
statements included the results of operations of two subsidiaries that have
since been divested: ComCoTec, Inc., which was sold in June 1998, and Parallax
Graphics, which was liquidated during fiscal 1999.
In May 2000, the Board of Directors approved a plan to divest the industrial
computing and communications segment, which consists of our ICS Advent and
Itronix Corporation subsidiaries. That segment's results of operations
including net sales, operating costs and expenses, other income and expense and
income taxes for fiscal 1998, 1999 and 2000, have been reclassified in the
accompanying statements of operations as discontinued operations. Our balance
sheet for fiscal 2000 reflects the net assets of the industrial computing and
communications segment as net assets held for sale within non-current assets.
Our balance sheet for fiscal 1999 and the Statements of Cash Flows for fiscal
years 1998, 1999 and 2000 have not been reclassified for the discontinued
businesses. Management believes that the net proceeds from the disposition of
these companies will exceed the carrying amount of the net assets. In addition,
management does not anticipate net operating losses from the discontinued
segment through the first quarter of fiscal 2002, at which time we anticipate
having sold these businesses. Accordingly, the anticipated gains from the
disposal of the segment and the operating results will not be reflected in the
statements of operations until they are realized.
On May 21, 1998, we merged with an entity formed by Clayton, Dubilier & Rice
Fund V Limited Partnership in a recapitalization transaction. As a result of
the recapitalization, CD&R Fund V became our controlling shareholder.
On May 23, 2000, we completed the merger of one of our subsidiaries with
WWG, a leading developer, manufacturer and marketer of communications test
instruments, systems, software and services in Europe. To finance the WWG
merger, we sold 12.5 million and 30.625 million newly-issued but unregistered
shares of common stock to CD&R Fund V and CD&R Fund VI, respectively, for an
aggregate purchase price of $172.5 million. In addition, on June 30, 2000, we
sold in a rights offering, 4.983 million newly-issued, registered shares of
common stock to shareholders of record on April 20, 2000 (other than CD&R Fund
V) at the same
31
price per share that was paid by CD&R Fund V and CD&R Fund VI. The rights
offering provided such shareholders 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 CD&R Fund V and CD&R Fund VI. CD&R
Fund V and CD&R Fund VI, our controlling shareholders, hold, approximately 66%
and 16% respectively, of the outstanding shares of our common stock.
In connection with the WWG merger, we also entered into a new credit
agreement for $860 million with a bank syndicate led by J.P. Morgan Securities
Inc. The proceeds were used to finance the merger with WWG, refinance WWG and
Dynatech debt and provide for additional working capital and borrowing
capacity.
On May 19, 1999, our then-Chairman, President and Chief Executive Officer,
John F. Reno, announced his retirement. Ned C. Lautenbach, a principal of
Clayton, Dubilier & Rice, Inc. , was named to replace Mr. Reno as Chairman,
President and Chief Executive Officer.
Current and Historical Trends
During fiscal 2000, the communications test business, our largest segment,
experienced a significant increase in new orders received, or bookings, of 65%
over fiscal 1999's level. This represents a compound annual growth rate in
bookings of 35% since fiscal 1998. This recent trend of bookings was due to
increased demand primarily for our high-speed transmission products, which
include optical transmission test instruments.
The bookings for our continuing operations have increased approximately 69%
since fiscal 1998, which was primarily due to the communications test segment,
but also we experienced an increase in bookings for our inflight information
systems segment.
Our operating income, excluding recapitalization and other related costs,
increased 12% from fiscal 1998 to 2000 as sales growth was 43% for the same
period. During this period, we increased our spending in product development
expense by 43% primarily for the next generation of communications test
products. We also amended our compensation plans for our commissioned-based
sales personnel during this period. In addition, our gross margin decreased
from 67% in fiscal 1998 to 65% in fiscal 2000 primarily as a result of the
acquisition of companies that operate at a lower gross margin than the
consolidated group in fiscal 1998.
Seasonality
As a result of purchasing patterns of our telecommunications customers which
tend to place large orders periodically typically at the end of our second and
fourth fiscal quarters, we expect that our results of operations may vary on a
quarterly basis, as they have in the past.
Product Development
For the year ended March 31, 2000, on a pro forma basis to give effect to
the WWG merger and our other acquisitions and divestitures, we invested
approximately $141.3 million in research and development activities of which
approximately $122.0 million was applied to the communications test segment.
32
Recent Acquisitions and Dispositions and Discontinued Operations
Acquisitions
Pacific Systems Corporation
On June 19, 1998, through one of our indirectly wholly owned subsidiaries,
we acquired all of the outstanding stock of Pacific Systems Corporation of
Kirkland, Washington 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 million of goodwill
that is being amortized on a straight-line basis over 30 years. The operating
results of Pacific have been included in our consolidated financial statements
within the inflight information systems segment since June 19, 1998. Pacific
designs and manufactures customer-specified avionics and integrated cabin
management.
Flight TECH
In February 1999, through one of our wholly owned subsidiaries, we 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 our financial statements since February 1999 within the inflight
information systems segment. Flight TECH is an inflight entertainment
manufacturer specializing in equipment for small and medium jets, and turboprop
aircraft.
Sierra Design Labs
On September 10, 1999, through one of our wholly owned subsidiaries, we
purchased the outstanding stock of Sierra Design Labs 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 that is
being amortized on a straight-line basis over ten years. The operating results
of Sierra have been included in our consolidated financial statements within
Other Subsidiaries as presented in Note S. Segment Information and Geographic
Areas of our consolidated financial statements since September 10, 1999. Sierra
designs, manufactures, and markets uncompressed, real-time videodisk recorders.
Applied Digital Access, Inc.
On November 1, 1999, through one of our wholly owned subsidiaries, we
acquired all of the outstanding stock of Applied Digital Access, Inc. for a
total purchase price of approximately $81 million in cash, (of which $60
million was borrowed to finance this acquisition). The acquisition was
accounted for using the purchase method of accounting and resulted in $36
million of goodwill that is being amortized on a straight-line basis over three
years. The purchase price allocation for this acquisition is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies and our analysis of our business plan of integration. The
operating results of ADA have been included in our consolidated financial
statements within the communications test segment since November 1, 1999. ADA
is a provider of network performance management products that include systems,
software and services used to manage the quality, performance, availability and
reliability of telecommunications service providers' networks.
ICS Advent (Europe) Ltd.
On January 4, 2000, we purchased the remaining outstanding stock of ICS
Advent (Europe) Ltd. for (Pounds)3.0 million (approximately $4.9 million) in
cash. We 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 five years. The operating results of ICS UK have been included
in our consolidated financial statements within discontinued operations, since
January 1, 2000. We intend to sell this acquired company in connection with the
sale of the other business units
33
within discontinued operations within the next year. 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 our ICS Advent subsidiary.
WPI Husky Technology, Inc., WPI Oyster Termiflex Limited, WPI Husky Technology
Limited and WPI Husky Technology GmbH
On February 24, 2000, through one of our wholly owned subsidiaries, we
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, or collectively Itronix UK, all which were subsidiaries
of WPI, Inc. The total purchase price for Itronix UK totaled approximately
$34.8 million in cash (of which approximately $15 million was borrowed to
finance this 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 five years. The purchase price
allocation for this acquisition is preliminary and further refinements are
likely to be made based on the completion of final valuation studies and our
analysis of our business plan of integration. The operating results of Itronix
UK have been included in our consolidated financial statements within
discontinued operations since February 23, 2000. We intend to sell this
acquired company in connection with the sale of the other business units within
discontinued operations within the next year. Itronix UK distributes rugged
field computer systems and provides related services for incorporation into
customers' specific applications.
Divestitures
ComCoTec, Inc.
On June 30, 1998, we sold the assets of ComCoTec, Inc. located in Lombard,
Illinois to The Potomac Group, Inc. for $21 million. We 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.
Parallax Graphics
During fiscal year 1999, we liquidated the assets and liabilities of
Parallax Graphics. The loss from the liquidation activities was immaterial.
Sales and operating results were insignificant for the periods ended March 31,
1999 and 1998.
Results of Operations
Period-to-Period Increase
Percent of Net Sales (Decrease)
------------------------ ---------------------------
1998 1999 2000 1999 vs. 1998 2000 vs. 1999
------ ------ ------ ------------- -------------
Net sales............... 100% 100% 100% 4% 38%
Cost of sales........... 33 33 35 5 45
Gross profit............ 67 67 65 3 34
Selling, general and
administrative
expense................ 33 34 35 7 38
Product development
expense................ 13 13 13 (1) 44
Recapitalization and
other related costs.... 0 12 6 N/A (31)
Operating income........ 20 7 9 (66) 94
Interest expense........ 0 (14) (11) NM (12)
Income (loss) from
continuing operations.. 12 (2) (1) (114) (21)
34
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 our communications test products
as this business segment experienced a recovery from fiscal 1999's reduced
order volume. In addition, we also recognized additional revenue due to the
acquisitions of ADA within the communications test segment and Sierra within
Other Subsidiaries. These acquisitions contributed 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% of consolidated sales 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 we invested
in the next generation of communications test equipment. We also incurred
additional expenses relating to improvements in our subsidiaries' customer
service departments, enterprise resource planning (ERP) 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 34.5% 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, we invested in the next generation of high-speed
test equipment as well as data services all within the communications test
segment.
35
Recapitalization and other related costs from continuing operations during
fiscal 2000 was $27.9 million, most of which related to the retirement of John
F. Reno, our former Chairman, President and Chief Executive Officer, 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 for 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.
Operating Income
Operating income from continuing operations increased to $41.7 million or
9.2% of consolidated sales for the fiscal year ended March 31, 2000 as compared
to $21.5 million or 6.5% of consolidated sales for the same period a year ago.
The increase was primarily a result of the recapitalization and other related
costs in connection with the recapitalization completed in fiscal 1999.
Excluding these expenses, we generated operating income of $69.7 million or
15.3% of consolidated sales in fiscal 2000 as compared to $62.2 million or
18.9% of consolidated sales during fiscal 1999. The percentage decrease was
primarily the result of the increase in sales offset by the increase in
operating expenses as discussed above.
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 "Debt and equity--Debt."
Other Income
During fiscal 1999, we 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
(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 state taxes incurred
in fiscal 2000.
Net Loss
Net loss from continuing operations was $7.9 million for the fiscal year
ended March 31, 2000 as compared to a net loss of $5.6 million for the same
period a year ago. The increase was primarily attributable to the
recapitalization and other related expenses and the higher operating expenses
described above.
Backlog
Backlog from continuing operations at March 31, 2000 was $180.4 million, an
increase of 98.6% from $90.8 million at March 31, 1999. The increase is a
result of additional bookings within the communications test and inflight
information systems segments.
36
Fiscal 1999 Compared to Fiscal 1998 on a Consolidated Basis
Sales
For the fiscal year ended March 31, 1999 consolidated sales from continuing
operations increased $11.6 million or 3.6% to $329.5 million as compared to
$318.0 million for the fiscal year ended March 31, 1998. The increase was
primarily attributable to increased demand for our aircraft cabin video
information services within the inflight information systems segment offset by
slightly lower sales of our communications test products.
International sales from continuing operations (defined as sales outside of
North America) were $63.4 million or 19.2% of consolidated sales for the fiscal
year ended March 31, 1999, as compared to $62.9 million or 19.8% of
consolidated sales for the fiscal year ended March 31, 1998. The slight
decrease in international sales is primarily a result of decreased demand for
our communications test products due in part to the economic slowdown in Asia.
Gross Profit
Consolidated gross profit from continuing operations increased $6.9 million
to $220.9 million or 67.0% of consolidated sales for the fiscal year ended
March 31, 1999 as compared to $214.0 million or 67.3% of consolidated sales for
the fiscal year ended March 31, 1998. The slight percentage decrease was
attributable to a change in the sales mix within the consolidated group.
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 $199.4 million or 60.5% for the fiscal year ended March 31, 1999 as
compared to $151.6 million or 47.8% of consolidated sales for the fiscal year
ended March 31, 1998. Excluding the impact of the recapitalization and other
related costs, total operating expenses were $158.7 million or 48.1% of
consolidated sales in fiscal 1999.
Included in both cost of sales and operating expenses 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 as defined as the closing price on the open market at the date of
issuance. The amortization of unearned compensation in fiscal 1999 was $1.2
million 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
$113.5 million or 34.4% of consolidated sales for the fiscal year ended March
31, 1999, as compared to $106.3 million or 33.4% of consolidated sales for the
fiscal year ended March 31, 1998. The percentage increase is a result of
increased selling and marketing expense due to an increase in compensation
expense.
Product development expense from continuing operations was $42.5 million or
12.9% of consolidated sales for the fiscal year ended March 31, 1999 as
compared to $42.9 million or 13.5% of consolidated sales for the same period a
year prior. The decrease is primarily due to the timing of expenses related to
ongoing research and development programs.
Recapitalization and other related costs from continuing operations totaling
$40.8 million were incurred in connection with the recapitalization, consisting
of cancellation payments of employee stock options, compensation expense due to
the acceleration of unvested stock options, and other expenses resulting from
the recapitalization.
Amortization of intangibles from continuing operations was $2.7 million for
the fiscal year ended March 31, 1999 as compared to $2.4 million for the same
period a year prior. The increase was primarily attributable to increased
goodwill amortization related to the acquisition of Pacific in June 1998.
37
Operating Income
Operating income from continuing operations decreased to $21.5 million or
6.5% of consolidated sales for the fiscal year ended March 31, 1999 as compared
to $62.4 million or 19.6% of consolidated sales for the same period a year
prior. The decrease was primarily a result of the costs in connection with the
recapitalization. Excluding these expenses, we generated operating income of
$62.2 million or 18.9% of consolidated sales. The percentage decrease was
primarily the result of higher operating expenses described above.
Interest
Interest expense, net of interest income from continuing operations, was
$42.8 million for the fiscal year ended March 31, 1999 as compared to interest
income, net of interest expense of $1.8 million for the fiscal year ended March
31, 1998. The increase in net interest expense was attributable to the debt
incurred in connection with the merger on May 21, 1998. Also included in
interest expense is $2.7 million of amortization expense related to deferred
debt issuance costs.
Other Income
Other income from continuing operations was $15.7 million for the fiscal
year ended March 31, 1999 as compared to $0.6 million for the same period in
the previous year. The increase is a result of the sale of assets of ComCoTec
for $21 million in gross proceeds that resulted in a gain of $15.9 million.
Taxes
The effective tax rate from continuing operations changed to (1.2)% for the
fiscal year ended March 31, 1999 as compared to 40.9% for the fiscal year ended
March 31, 1998 due to permanent differences arising in connection with the
accounting for the recapitalization, and a smaller amount of income before
income taxes, which magnified the effect of such permanent differences.
Net Income (Loss)
Net loss from continuing operations was $5.5 million or ($0.04) per share on
a diluted basis for the fiscal year ended March 31, 1999 as compared to net
income of $38.3 million or $1.80 per share on a diluted basis for the same
period a year prior. The decrease was primarily attributable to the
recapitalization and other related expenses, higher interest expense, and an
increase in the weighted average number of shares outstanding in connection
with the recapitalization, which collectively resulted in a lower earnings per
share.
Backlog
Backlog from continuing operations at March 31, 1999 was $90.8 million, an
increase of 50.5% from $60.3 million at March 31, 1998. The increase is a
result of additional bookings within the communications test and inflight
information systems segments.
38
Business Segments
We measure the performance of our subsidiaries by their respective earnings
before interest, taxes, amortization of intangibles, non-recurring items, one-
time charges and gain on sale of subsidiary, or EBITA. See Note S. Segment
Information and Geographic Areas to our consolidated financial statements. The
discussion below includes bookings (defined as new orders received) sales and
EBITA for the two segments in which we participate in: communications test and
inflight information systems as well as Other Subsidiaries.
Year Ended March 31,
--------------------------
Segment 1998 1999 2000
- ------- -------- -------- --------
(In thousands)
Communications test segment:
Bookings.......................................... $233,934 $260,722 $430,254
Sales............................................. 240,432 238,942 349,886
EBITA............................................. 50,614 42,800 62,447
Inflight information systems segment:
Bookings.......................................... $ 38,758 $ 62,882 $ 71,411
Sales............................................. 34,797 58,794 70,960
EBITA............................................. 15,519 22,373 19,314
Other subsidiaries:
Bookings.......................................... $ 43,627 $ 32,903 $ 32,391
Sales............................................. 42,726 31,796 32,394
EBITA............................................. 4,790 7,468 8,404
Fiscal 2000 Compared to Fiscal 1999--Communications Test
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. We received an increase in orders for our
transmission test equipment (transport and loop) as well as an increase in
bookings due to the acquisition of ADA. We experienced a decrease in bookings
during fiscal 1999 for our core instruments in part due to the Regional Bell
Operating Companies, or 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. We shipped an increased amount of orders for our
transmission test equipment (transport and loop) as well as orders for our
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 direct result of the increase in sales.
Fiscal 2000 Compared to Fiscal 1999--Inflight Information Systems
Bookings for the inflight information systems increased 13.6% to $71.4
million for the fiscal year ended March 31, 2000 as compared to $62.9 million
for the same period a year ago. The increase is due to the increase in our
real-time flight information passenger video displays both in the general and
commercial aviation markets. In addition, we purchased Pacific in June 1998
that provided a full year of operations during fiscal 2000 as compared to nine
months during fiscal 1999.
Sales of the inflight information systems increased 20.7% to $71.0 million
for the fiscal year ended March 31, 2000 as compared to $58.8 million for the
same period a year ago. The increase is a direct result of the increase in
bookings. The Pacific acquisition contributed approximately 12% to the total
sales growth.
39
EBITA for inflight information systems decreased 13.7% to $19.3 million for
the fiscal year ended March 31, 2000 as compared to $22.4 million for the same
period a year ago. The decrease was due primarily to costs associated with
potential acquisitions that did not materialize, consulting expenses and
expenses relating to the hiring of additional field service technicians.
Fiscal 2000 Compared to Fiscal 1999--Other Subsidiaries
Bookings for the Other Subsidiaries remained at essentially the same level
during fiscal 2000 of $32.4 million as compared to $32.9 million for the same
period a year ago. The bookings and the operating results during fiscal 2000
remained essentially the same although the mix differed. During June 1998 we
sold ComCoTec, and in September 1999 we purchased Sierra.
Sales of the Other Subsidiaries increased slightly to $32.4 million for the
fiscal year ended March 31, 2000 as compared to $31.8 million for the same
period a year ago.
EBITA for the Other Subsidiaries increased 12.5% to $8.4 million for fiscal
2000 as compared to $7.5 million for the same period a year ago. The increase
is due in part to better operating performance by our da Vinci subsidiary.
Fiscal 1999 Compared to Fiscal 1998--Communications Test
Bookings for communications test products increased 11.5% to $260.7 million
for the fiscal year ended March 31, 1999 as compared to $233.9 million for the
same period in the previous year.
Sales of communications test products decreased $1.5 million or 0.6% to
$238.9 million for the fiscal year ended March 31, 1999 as compared to $240.4
million for the fiscal year ended March 31, 1998. We had been experiencing a
decrease in demand for our core instruments in part due to the RBOC's
consolidating their purchasing practices as well as the economic slowdown in
Asia. This decrease was partially offset by an increase in demand for our
systems and services.
EBITA for the communications test products decreased $7.8 million to $42.8
million for the fiscal year ended March 31, 1999 as compared to $50.6 million
for the same period a year prior. The reduction in EBITA is in part due to the
sales volume decrease as well as reorganizing and investing in the our sales
force.
Fiscal 1999 Compared to Fiscal 1998--Inflight Information Systems
Bookings for the inflight information systems increased $24.1 million or
62.2% to $62.9 million for the fiscal year ended March 31, 1999 as compared to
$38.8 million for the same period in the previous year. The increase was
primarily a result of a continued increased demand for the our real-time flight
information passenger video displays, as well as an increase in sales from the
acquisition of Pacific.
Sales for our inflight information systems increased $24.0 million or 69.0%
to $58.8 million for the year ended March 31, 1999 as compared to $34.8 million
for the same period a year prior. The increase in shipments is a result of the
increased order volume as described above. The Pacific Acquisition accounted
for approximately 32% of total growth.
EBITA for the inflight information systems increased $6.9 million or 44.2%
to $22.4 million for the fiscal year ended March 31, 1999 as compared to $15.5
million for the fiscal year ended March 31, 1998. The increase in EBITA is a
result of the increased shipments as well as reducing redundant functions at
Pacific.
40
Fiscal 1999 Compared to Fiscal 1998--Other Subsidiaries
Bookings for the Other Subsidiaries decreased $10.7 million to $32.9 million
for the fiscal year ended March 31, 1999 as compared to $43.6 million for the
same period in the previous year. The decrease was primarily a result of the
sale of ComCoTec in June 1998 as well as the shutdown of Parallax.
Sales for our Other Subsidiaries decreased $10.9 million to $31.8 million
for the year ended March 31, 1999 as compared to $42.7 million for the same
period a year prior. The decrease in shipments was a result of the decreased
order volume as described above.
EBITA for the Other Subsidiaries increased $2.7 million to $7.5 million for
the fiscal year ended March 31, 1999 as compared to $4.8 million for the period
ended March 31, 1998. The increase was a result of the shutdown reserve and
operating loss at Parallax that was incurred during fiscal 1998 as well as
better operating performance by our da Vinci subsidiary.
Liquidity and Capital Resources
Our liquidity needs arise primarily from debt service on the substantial
indebtedness incurred in connection with the recapitalization and the WWG
merger and from the funding of working capital and capital expenditures. As of
March 31, 2000, we had $579.9 million of indebtedness, primarily consisting of
$275.0 million principal amount of our 9 3/4% Senior Subordinated Notes due
2008, or the Senior Subordinated Notes, $234.9 million in borrowings under the
term loan facility and $70.0 million borrowings under the revolving credit
facility. As of June 30, 2000, we had $ million of indebtedness, primarily
consisting of $275.0 million principal amount of the Senior Subordinated Notes
and $ in borrowings under the New Term Loans and $ million borrowings
under the New Revolving Credit Facility.
Our Statement of Cash Flows for fiscal years 1998 through 2000 includes the
cash flows from the industrial computing and communications segment on a fully-
consolidated basis and has not been restated to reflect discontinued
operations.
Cash Flows
Our cash and cash equivalents decreased $34.6 million during the fiscal year
ended March 31, 2000.
Working Capital
For the fiscal year ended March 31, 2000, our net working capital decreased
as our operating assets and liabilities provided a $9.3 million source of cash,
excluding acquisitions. Accounts receivable increased, creating a use of cash
of $18.2 million, primarily due to the increase in shipments during the last
month of the fiscal year. Inventory levels decreased, creating a source of cash
of $7.2 million, due primarily to better inventory management throughout the
organization. Other current assets increased, creating a use of cash of $7.3
million, primarily due to the prepayment of expenses relating to the merger of
TTC and WWG. Accounts payable increased, creating a source of cash of $12.4
million as we continue to manage our working capital. Other current liabilities
increased, creating a source of cash of $15.3 million, in part related to an
increase in commission and compensation expense as a result of the increase in
sales during the last quarter of fiscal 2000.
Investing Activities
Our investing activities totaled $142.3 million for the fiscal year ended
March 31, 2000 in part for the purchase and replacement of property and
equipment. The primary use of cash was for the acquisition of four companies
during fiscal 2000 for a total purchase price of approximately $113.2 million
(approximately $126.9 million in gross purchase price less $13.7 million of
cash acquired); Sierra for net $6.2 million; ADA for net $67.2 million; ICS
Advent (Europe) Ltd. for net $4.2 million; and Itronix UK for net $35.6
million.
41
Our capital expenditures in fiscal 2000 were $21.9 million as compared to
$11.3 in fiscal 1999. The increase during fiscal 2000 was primarily due to
replacing certain of our ERP systems at the communications test and industrial
computing and communications businesses. We are, according to the terms of the
Senior Secured Credit Agreement, subject to annual maximum capital
expenditures.
Debt and equity
Our financing activities generated $50.4 million in cash during fiscal 2000,
due primarily to revolving credit borrowings for the acquisition of the four
companies described above. In addition, we repaid $17.1 million in term loan
borrowings.
Debt
In connection with the recapitalization, we entered into a senior secured
credit facility which consisted of a $260 million term loan facility and a $110
million revolving credit facility. In addition, we incurred $275 million of
debt through the sale of our 9 3/4% Senior Subordinated Notes. Our weighted-
average interest rate on the loans under the senior secured credit facility was
7.85% per annum for fiscal 2000.
Principal and interest payments under the senior secured credit agreement
and interest payments on the senior subordinated notes represented significant
liquidity requirements for us. Total interest expense including the
amortization of deferred debt issuance costs was $51.9 million in fiscal 2000.
In addition, during fiscal 2000 and 1999, we repaid approximately $17.1 million
and $8 million, respectively, of term debt and incurred net borrowings under
the Revolving Credit Facility of $70 million in fiscal 2000. At March 31, 2000,
we had $40 million undrawn under the Revolving Credit Facility.
To finance the acquisition of WWG, we needed to restructure our current debt
and equity. As a result, on May 23, 2000 we entered into a new credit facility
with a syndicate of lenders (the "Senior Secured Credit Facility"). Our new
senior credit agreement (the "Senior Secured Credit Agreement"), which
established the Senior Secured Credit Facility, provides for senior secured
credit facilities in an aggregate principal amount of up to $860 million,
consisting of:
. a revolving credit facility available to Dynatech LLC in U.S. dollars or
euros, in an aggregate principal amount of up to $175 million, which can
also be used to issue letters of credit (the "New Revolving Credit
Facility");
. a Tranche A term loan of $75 million to Dynatech LLC with a six year
amortization (the "Tranche A Term Loan");
. a Tranche B term loan of $510 million to Dynatech LLC with a seven and
one-half year amortization (the "Tranche B Term Loan"); and
. German term loans from certain German banks in an aggregate amount equal
to (Euro)108.375 million to our German subsidiaries with six year
amortization periods (the "German Term Loans") (all term loans
collectively, the "New Term Loans").
The Senior Secured Credit Facility also provides for the issuance of a
letter of credit that the German banks may draw upon in the event of the
failure of our German subsidiaries to make payments on the (Euro)108.375
million loans, and our German subsidiaries are required to reimburse the letter
of credit issuer for any such issuances. The amount of the letter of credit
also may be fully drawn under certain circumstances, and in such event the
amount of the draw shall convert into term loans to our German subsidiaries
with similar amortization to the German term loans.
We used the New Term Loans to refinance certain of our existing indebtedness
and as part of the financing for the WWG merger. The New Revolving Credit
Facility is available to us from time to time for potential acquisitions and
other general corporate purposes.
42
Principal and interest payments under the Senior Secured Credit Facility and
interest payments on the Senior Subordinated Notes represent significant
liquidity requirements for us. The Tranche A Term Loan will be amortized in:
. four quarterly installments of $750,000 commencing on June 30, 2000;
. four quarterly installments of $2.0 million commencing on June 30, 2001;
. four quarterly installments of $3.75 million commencing on June 30,
2002;
. four quarterly installments of $7.5 million commencing on June 30, 2003;
. four quarterly installments of $2.5 million commencing on June 30, 2004;
and
. four quarterly installments of $2.25 million commencing on June 30,
2005.
The Tranche B Term Loan will be amortized in:
. 24 quarterly installments of $2.0 million, commencing on June 30, 2000;
. four quarterly installments of $77.5 million commencing on June 30,
2006, and
. two quarterly installments of $76.0 million commencing on June 30, 2007.
The German Term Loans will be amortized in:
. four quarterly installments of (Euro)530,000 commencing on June 30,
2000;
. twelve quarterly installments of (Euro)790,000 commencing on June 30,
2001;
. four quarterly installments of (Euro)7.625 million commencing on June
30, 2004;
. three quarterly installments of (Euro)15.780 million commencing on June
30, 2005; and
. one quarterly installment of (Euro)18.935 million on March 31, 2006.
The $275 million of Senior Subordinated Notes will mature in 2008, and bear
interest at 9 3/4% per annum.
The loans under the Senior Secured Credit Facility bear interest at floating
rates based upon the interest rate option elected by us. To fix the interest
charged on a portion of the total debt outstanding under the Term Loan Facility
and the New Term Loan Facility, we entered into interest rate swaps which are
effective for periods ranging from two to three years which began in
September 30, 1998. After giving effects to these arrangements, $220 million of
the debt outstanding is subject to an effective average annual fixed rate of
5.66% (plus an applicable margin). The terms of one interest rate swap contract
provide upon termination for a one-year option to renew 50% of the notional
amount at the discretion of the lender. See Note L. Interest Rate Swap
Contracts to our consolidated financial statements.
The obligations of Dynatech LLC under the New Revolving Credit Facility, the
Tranche A Term Loan, the Tranche B Term Loan and the reimbursement obligations
of the German subsidiaries under the letter of credit relating to the German
Term Loan is guaranteed by each active direct or indirect U.S. subsidiary of
Dynatech LLC and by Dynatech Corporation. The obligations under the Senior
Secured Credit Facility are secured by a pledge of Dynatech Corporation's
equity interest in Dynatech LLC, by substantially all of the assets of Dynatech
LLC and each active direct or indirect U.S. subsidiary of Dynatech LLC, and by
a pledge of the capital stock of each such direct or indirect U.S. subsidiary,
and 65% of the capital stock of each subsidiary of Dynatech LLC that acts as a
holding company of Dynatech LLC's foreign subsidiaries.
The Company's Senior Secured Credit Facility generally permits voluntary
prepayment of loans thereunder without premium or penalty, subject to specified
limitations. Mandatory prepayments are required to be made from (a) 100% of net
proceeds from specified asset sales, casualty insurance and condemnation awards
or other similar recoveries; (b) 100% of the net proceeds from the issuance of
indebtedness by us, other than as
43
permitted by the Senior Secured Credit Facility; and (c) 50% of annual excess
cash flow for each fiscal year in which the ratio of our debt on the last day
of such fiscal year to our EBITDA (defined as earnings before interest, taxes,
depreciation and amortization) for such fiscal year is greater than or equal to
4.0 to 1.0.
Future Financing Sources and Cash Flows
The amount under the New Revolving Credit Facility that remained undrawn at
June 1, 2000 was $175 million. The undrawn portion of this facility will be
available to meet our future working capital and other business needs. We
believe that cash generated from operations, together with amounts available
under the New Revolving Credit Facility and any other available sources of
liquidity, will be adequate to permit us to meet our debt service obligations,
capital expenditure program requirements, ongoing operating costs and working
capital needs, although we cannot assure that this will be the case. Our future
operating performance and ability to service or refinance the Senior
Subordinated Notes and to repay, extend or refinance the Senior Secured Credit
Facilities (including the New Revolving Credit Facility) will be, among other
things, subject to future economic conditions and to financial, business and
other factors, many of which are beyond our control.
Covenant Restrictions
Our new Senior Secured Credit Facility contains covenants that, among other
things, restrict our ability to dispose of assets, incur additional debt,
guarantee obligations or incur contingent liabilities, repay our Senior
Subordinated Notes, pay dividends, create liens on assets, make investments,
loans or advances, engage in mergers or consolidations, make capital
expenditures or engage in certain transactions with affiliates. Our Senior
Secured Credit Facility contains customary events of default. The indenture
governing the Senior Subordinated Notes limits our ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature of
the Company, could limit our 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. These restrictions, among other
things, preclude Dynatech LLC from distributing assets to Dynatech Corporation
(which has no independent operations and no significant assets other than its
membership interest in Dynatech LLC), except in limited circumstances. In
addition, under the Senior Secured Credit Facility, we are 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 New Term
Loans under the Senior Secured Credit Facility 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 our business.
New Pronouncements
In December 1999 the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summaries the staff's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application
of the guidance in SAB 101 will be required in our fourth quarter ended March
31, 2001. We evaluated the application of SAB 101 based on the current guidance
and interpretations and have determined that it will not have a significant
impact.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and
among other issues clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. We do not expect the application of FIN 44 to have a material
impact on our results of operations or financial position.
44
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 was amended by
Statement of Financial Accounting Standards No. 137 which modified the
effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS 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. We
are assessing the impact of the adoption of SFAS 133 on our results of
operations and its financial position.
Quantitative and Qualitative Disclosures about Market Risk
We operate both manufacturing facilities and sales offices in over 80
countries. We are 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. We believe the political and economic risks related to our
foreign operations are mitigated due to the stability of the countries in which
our facilities are located. Our principal currency exposures against the U.S.
dollar are in the major European currencies and in Canadian currency. We do not
use foreign currency forward exchange contracts to mitigate fluctuations in
currency. Our market risk exposure to currency rate fluctuations is not
material. We do not hold derivatives for trading purposes.
We use derivative financial instruments consisting solely of interest rate
swap contracts. Our objective in managing our exposure to changes in interest
rates (on our variable rate debt) is to limit the impact of such changes on
earnings and cash flow and to lower our overall borrowing costs.
At March 31, 2000, we had $234.9 million of variable rate debt outstanding.
We currently have three interest rate swap contracts with notional amounts
totaling $220 million which fixed our variable rate debt to a fixed interest
rate for periods of two to three years in which we pay a fixed interest rate on
a portion of our outstanding debt and receive three-month LIBOR.
At March 31, 2000, all of our swap contracts had a fixed interest rate lower
than the three-month LIBOR quoted by our financial institutions. However, the
3-month LIBOR rate was lower than the fixed interest rate during fiscal 1999
and the first part of fiscal 2000 creating a net additional interest expense
(calculated as the difference between the interest rate in the swap contracts
and the three-month LIBOR rate) recognized by us during fiscal 2000 and fiscal
1999 which was $0.4 million and $0.5 million, respectively. We performed a
sensitivity analysis assuming a hypothetical 10% adverse movement in the
floating interest rate on the interest rate sensitive instruments described
above. We believe that such a movement is reasonably possible in the near term.
As of March 31, 2000, the analysis demonstrated that such movement would cause
us to recognize additional interest expense of approximately $1.4 million, and
accordingly, would cause a hypothetical loss in cash flows of approximately
$1.4 million.
45
BUSINESS
Overview
We are the world's second largest developer, manufacturer and marketer of
instruments, systems, software and services used to test, deploy, manage and
optimize communications networks, equipment and services. In addition to our
communications test and management business, we also operate two subsidiaries,
AIRSHOW and da Vinci. 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.
Our Communications Test Business
Industry Background
Growth of Communications
Over the past decade, telecommunications and data communications networks
have undergone dramatic growth and have become a critical part of the global
business and economic infrastructure. Numerous forces have contributed to this
growth, including:
. the proliferation of the Internet and corporate intranets;
. growing demand for converged voice, data, video communications, and other
services;
. increasing use of wireless communications; and
. worldwide deregulation of the communications industry, enabling a large
number of new communications service providers to enter the market.
To support growth in the number of subscribers and services and the
resulting increase in traffic, communications service providers are making
substantial investments to expand network capacity and capabilities. A
significant portion of this spending is devoted to the purchase and deployment
of equipment to increase network bandwidth and efficiency, such as optical
networking technology and a variety of broadband access technologies, including
digital subscriber line technology, or DSL, expanded cable infrastructure and
broadband wireless access.
Need for Reliable Networks
In today's environment of converging communication technologies, service
providers are increasingly supplementing their basic voice transmission
offerings, such as local and long distance calling, with high speed data
transmission, broadband access, wireless telephony and the delivery of
television programming. Responding to the growing demand for communications
services and increased competitive pressures, service providers are devoting
significant resources to testing and managing their networks to provide the
highest levels of reliability in both new and existing service offerings as
well as to expedite service deployment.
Growth and Importance of Communications Test and Management Products and
Services
To help ensure that communications infrastructure equipment is deployed
properly and functions reliably, communications service providers, equipment
manufacturers and service users employ a number of instruments, systems,
software and services to test, deploy, manage and optimize their communications
networks, equipment and services. Communications test and management products
and services consist of a broad range of instruments, systems, software and
services designed to address the development, manufacture, installation,
deployment, maintenance, monitoring and servicing of converged communications
networks. These products and services are growing in their strategic importance
to service providers, equipment manufacturers and service users due to market
pressures to:
46
Reduce time to revenue. Effective communications test and management
products and services decrease the time required for service providers to
turn-up new revenue-generating services and for equipment manufacturers to
launch new products;
Improve operational productivity. Test and management products and
services can lower operational costs by reducing the need for mobile field
service calls and lower training requirements for field technicians; and
Enhance network reliability. Test and management products and services
enable service providers and service users to deliver and maintain more
reliable and cost effective communications services.
Challenges of Testing and Managing Modern Networks
Communications networks were historically based on a limited number of
technologies, many of which were designed by a single vendor. Consequently,
service providers did not require a wide array of instruments or systems to
test and manage their performance.
With the deployment of new types of communications equipment, such as
optical infrastructure, broadband, cable and wireless technologies and the
emergence of multi-vendor environments, the process of deploying, testing and
managing communications networks has become increasingly complex. In addition
to multi-vendor environments and a broad array of technologies, other factors
have made provisioning and managing network services more difficult, including:
Managing all Stages of the Network Lifecycle. All providers must migrate
through each phase of the network lifecycle, including network planning
and design, equipment installation and commissioning, and service
provisioning. Customers need consistency of results and performance
through each phase.
Emergence of Converged Networks. Voice, data and video services delivered
on a single network infrastructure are beginning to emerge and require
advanced test and management technologies. Communications test and
management products and services must be capable of simultaneously
evaluating a variety of network elements that use a wide range of physical
media and protocols.
Emphasis on Quality of Service. As customers require communications
service providers to guarantee specific levels of bandwidth and network
availability, test and management products must enable service providers
and their customers to track network and service performance against
contractual benchmarks. Increasingly reliant on mission critical
applications, service users increasingly depend on the continuous
availability of services and the network.
Need for Automation. Competitive pressures to deploy new equipment and
turn-up new services rapidly are creating an increasing demand for
simplified, automated test and management products that require less
manual labor to operate. In addition, the ease with which customers can
switch providers and the proliferation of new equipment and services
intensifies the need of service providers to identify and resolve problems
rapidly.
Changing Competitive Environment. Rapid deployment of new technologies
and services, as well as the changes brought about by deregulation,
dictate that test and management products be capable of administering
highly dynamic networks and work across networks of multiple service
providers.
Globalization. As a result of the interconnection of international
communications systems and continued worldwide expansion and consolidation
of communications service providers, customers increasingly require test
and management products that support a variety of standards and protocols.
To support the rapidly changing needs of service providers, equipment
manufacturers and service users, test and management systems must offer high
levels of functional integration, automation and flexibility to operate across
a variety of network protocols, technologies and architectures. Moreover,
integrated test and management systems increasingly must enhance network
performance, preemptively identify network faults and offer communications
service providers valuable information for business analysis purposes.
47
Our Solution
We develop, manufacture and market 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. Our extensive
knowledge of communications technologies, combined with the broad capabilities
of our test and management products and services enable us to provide
integrated test and management systems to our customers. Integrated test and
management systems enable our 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. Our
products, systems and services help to shorten our customers' time to revenue,
enable proactive management of customer service levels, reduce costs, and
support evolving network architectures and technologies.
We believe that our primary focus on communications test and management
systems enables us to offer the most comprehensive family of products and
services available. Our 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.
Our Strategy
Our goal is to be the global leader in helping companies test, deploy,
manage, and optimize communications networks, equipment and services. To
achieve this goal, we intend to:
Continue to invest in research and development to address high growth
market opportunities. We plan to continue investing in markets and
technologies that offer substantial growth prospects. For example, we
intend to continue designing and building products for the optical
networking market as well as to expand our line of integrated test and
management systems and software that enable customers to perform multiple
functions on a single platform. In addition, we intend to continue to
invest in professional services that enable our products to provide
integrated solutions.
Develop customer-focused solutions that address all phases of the network
lifecycle. We design, develop, and manufacture products and provide
services that are tailored to the specific needs of our customers with an
emphasis on ease of use. We intend to continue to adapt our core
technologies to deliver focused products that improve our customers'
ability to test and manage increasingly large and complex networks and
that are easily used by field technicians.
Extend our global presence. Our customers' needs evolve through industry
consolidation as well as with the deployment of new technologies and
services. To support our customers more effectively, we intend to augment
our sales, marketing and customer support organizations. In particular, we
plan to extend the capabilities of our professional services and customer
support operations to provide higher levels of consultative services,
enhanced application engineering services and access to a wider array of
instrument, systems, software and services.
Pursue strategic acquisitions. The communications test and management
systems market is large and highly fragmented. We plan to extend our
market position by acquiring or investing in complementary businesses or
technologies. In particular, we will continue to pursue companies or
technologies that strengthen our competitive position in high growth areas
of our market, such as fiber optics, wireless networks and integrated
systems. For example, we recently acquired Applied Digital
48
Access, Inc., a leading provider of network management products used to
manage the quality, performance, availability and reliability of
communications service providers' networks. In addition, we recently
entered into an agreement to acquire substantially all of the assets and
specified liabilities of Cheetah Technologies, a leading global supplier
of automated test, monitoring and management systems for cable television
and telecommunications networks.
Products and Markets
We sell a wide range of communications test and management products. Our
products are designed to help communications service providers, equipment
manufacturers and service users test, deploy, manage and optimize the
performance of their networks and equipment. Our products are based on our
extensive technology base, developed during our decades of operating history.
All of our products are designed to address our customers' desire to deploy new
technologies and provision new services rapidly, decrease operating and
maintenance costs and improve service reliability. Our products address the
challenges of deploying and managing a variety of technologies and segments of
the network including optical transmission systems, data services, voice
services, wireless services, cable services, and video delivery.
We market our products to three primary groups of customers: communications
service providers, communications equipment manufacturers and service users.
Communications service providers rely on our products and services to
configure, test and manage network elements and the traffic that runs across
them. Equipment manufacturers rely on our 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 our products to ensure the proper functioning of their
communications networks. The instruments, systems, software 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. Our instruments incorporate high levels of intelligence and have user
interfaces that are designed to simplify the operation of our products and
decrease the training required to use them. We currently market 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. Our instruments can be generally
grouped into five categories and, in general, are used by service providers,
equipment manufacturers and service users.
49
Target Markets Instrument Function Representative Products
- ------------------------------------------------------------------------------------------
Optical Transport Installation, commissioning and . T-BERD 310
Networks maintenance of Optical Networks, Communications Analyzer
currently addressing SONET/SDH (up to . WWG OSA-155
OC-192/STM 64), DWDM and optical . WWG ANT-20
spectrum analysis. . T-BERD 2310
Communications Analyzer
- ------------------------------------------------------------------------------------------
Data Networks Installation, commissioning, and . CycloneFrame IP Optimizer
maintenance of wide area (WAN) and local . FIREBERD DNA-323 H.323
area (LAN) data networks, currently Analyzer
addressing IP, Frame Relay, ATM, ISDN . FIREBERD 6000
and Ethernet (Fast and Gigabit) Communications Analyzer
technologies and protocols. . WWG Domino WAN
. WWG Domino LAN
- ------------------------------------------------------------------------------------------
Wireless Networks Testing of mobile phones, base stations . Wavetek 4400
and wireless networks. Support for . Wavetek 4100 Series
analog and digital wireless technologies . Wavetek 4200 Series
including GSM, TDMA, CDMA and GPRS. . Wavetek 4300 Series
- ------------------------------------------------------------------------------------------
Telecom Access Installation, commissioning and . TTC 2000 Series
Networks maintaining access networks, currently . TPI 350
addressing a wide array of technologies . WWG Commander
including xDSL, El and T1. . T-BERD 950
- ------------------------------------------------------------------------------------------
Cable Networks Installation, commissioning and . Micro Stealth (MS1000,
maintenance of advanced cable networks. MS 1200, MS 1300)
Functions include signal level, leakage, . CLI 1450, CLI 1750
spectrum analysis, and a complete set of
solutions for DTV and cable modem
signals.
- --------------------------------------------------------------------------------
Systems
Our systems are test and management devices that reside in the network. They
can be accessed remotely using an intelligent terminal and allow multiple users
to simultaneously perform specific communications test and management
functions. Typically, our systems consist of hardware and software components
that are derived from our core instrument products. Using an integrated test
and management system, our 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. Our
customers typically begin using our instruments for initial deployments and
start using systems within a year of the completion of deployment. By reusing
the technology from our instrument products, we are able to enter new markets
rapidly with new test and monitoring functionality that is very similar, in
scope, to the existing instrument functions. We expect that a growing
proportion of our sales will be derived from our systems products.
50
The following table summarizes information about a number of our systems.
Representative
Systems Function Target Markets
CENTEST The CENTEST BTS is a next-generation Optical Transport Networks,
Broadband Test multi-user remote optical test platform Data Networks
System (BTS) installed in carrier central offices.
The BTS is operated remotely to test
optical transmission and data services
in both backbone and metro networks. The
BTS interfaces with optical switches and
cross-connects from multiple vendors to
gain access to the network for testing.
- ---------------------------------------------------------------------------------------
CENTEST 650 The CENTEST 650 is a multi-user remote Optical Transport Networks,
test platform installed in carrier Data Networks, Wireless
central offices or points of presence. Networks
The CENTEST 650 performs voice and data
service testing from DS0 subrates up to
STS-1.
Like the BTS, the CENTEST 650 interfaces
with digital cross-connect systems and
switches from multiple vendors. These
include systems from Cisco Systems,
Lucent Technologies, Alcatel, Nortel
Networks, Tellabs and Tadiran.
- ---------------------------------------------------------------------------------------
Frame Sentry Frame Sentry is a frame relay monitoring Data Networks
and test system consisting of remote
test unit hardware and server software.
Frame Sentry enables a service provider
to view the performance of its frame
relay network from the network
operations center in real-time.
- ---------------------------------------------------------------------------------------
T3AS The T3AS is a test and monitoring system Optical Networks, Data
which provides testing of DS0 and DS1 Networks, Wireless Networks
services from a DS3 access point,
without network or service interruption.
The T3AS is used by carriers for remote
network troubleshooting in central
offices, points of presence or CELEC co-
location sites.
- ---------------------------------------------------------------------------------------
WWG 8620 A Quality of Service (QoS) and network Switched Voice Networks,
performance test system for assessing Data Networks, Wireless
end-to-end network performance, billing Networks
integrity, and surveillance. This can be
performed on PSTN, ISDN, SS#7, and GSM
networks.
- ---------------------------------------------------------------------------------------
WWG PathTrak A return path performance monitoring Cable Networks
system that enables users to more
efficiently maintain advanced cable
networks with high quality of service.
- ---------------------------------------------------------------------------------------
ATLAS Distributed remote fiber optic test Optical Transport Networks
system monitors availability and
performance of fiber optic networks.
- --------------------------------------------------------------------------------
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Software
After our customers have deployed new networks or network technologies,
their focus often shifts to the rapid provisioning, monitoring and management
of services carried over those networks. We develop software applications that
enable customers to automate their service fulfillment and service assurance
processes. Our products assist customers in provisioning network services,
monitoring the performance of networks and services, and assessing 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. Our software applications allow service providers and
users to track SLAs more readily and are capable of integrating with diverse
network and transmission technologies, database management systems, order
management and customer care applications, and other network management and
assessment technologies. Our principal software applications are described
below.
. NetOptimize Service Activator. This product enables automated, or flow
through, provisioning by activating new services for specific customers
in real-time. Service Activator provides a graphical environment that
enables the user to configure the service. Service Activator then
automatically selects the most efficient routing for the service and
performs the end-to-end activation by interfacing to all of the network
elements that are required to provide that service. Service Activator can
activate services for multi-vendor transmission networks (TDM and
optical), access networks (DSL) and Data/IP networks. Service Activator
interfaces with elements from Lucent, Nortel, Fujitsu, Alcatel, Tellabs
and Newbridge.
. NetOptimize Alarm Manager. This fault management product performs real
time monitoring and surveillance of transmission on networks. Alarm
Manager filters, collects, and categorizes faults/alarms and enables
users to manage the resolution of the alarms. Alarm Manager interfaces
with over 150 network elements.
. NetOptimize Capacity Manager. This product enables users to manage the
capacity of voice networks. It collects performance data from network
switches and identifies current or future capacity problems. Capacity
management enables customers to proactively anticipate network
bottlenecks and reconfigure the network to avoid capacity problems. With
the advent of Voice over IP networks, this product is being used to
address capacity management problems for data networks. Capacity Manager
interfaces with network elements from Lucent, Nortel, Siemens and
Ericsson.
. NetOptimize Service Monitor. This product enables our customers to
monitor, manage and report on the QoS and SLAs for specific customers.
This product can monitor end-to-end services for transmission networks
(TDM and optical), access networks and Data/IP networks. Service Monitor
interfaces with network elements from Lucent, Cisco, Newbridge, Alcatel
and Tellabs.
. NetAnalyst. This is a software system that manages telecommunications
testing services throughout a service provider's network. NetAnalyst
allows a network control center to perform centralized testing by
accessing remote test units, such as the CENTEST BTS. NetAnalyst reduces
site visits, accelerates service activation and improves overall network
and service quality.
Services
We offer a range of product support and professional services geared to
address comprehensively our customers' requirements. We provide repair,
calibration and software support services for our products. We also provide
technical assistance on a global basis for a wide array of test equipment. In
addition, we provide a complete set of educational services that are aimed at
both product and technology areas. These training services are offered through
open enrollment or public course offerings. In addition, we consult with
customers on their training needs and develop custom curricula for company
personnel. Custom on-site and alternative training options are also available
to our customers. Project management services are an integral part of our
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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 a key offering that
builds upon our process consulting and software development expertise. We
provide both product and process consulting to our customers. This consulting
is tailored to our product offerings and systems.
Customers
We market our 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 our products
and services to configure, test and manage network elements and the traffic
that runs across them. Also, our products help to ensure smooth operation of
the network and increase the reliability of services to customers.
We sell our products and services 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 our 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 our instruments, systems and
software to assess the performance of their products during installation and
maintenance of a customer's network.
Service Users
We also sell our test and management instruments, systems, software, and
services to large corporate customers, government operators and educational
institutions.
None of our customers represented more than 10 percent of our sales during
fiscal 2000.
Sales, Marketing and Customer Support
Our products and services are primarily sold through our direct sales force.
As of May 31, 2000, on a pro forma basis giving effect to our merger with WWG
and our other acquisitions and divestitures, we employed approximately 750
communications test sales personnel throughout North America, Europe, the
Middle East, Africa, Latin America and Asia. In addition, we market and sell
our products and services through third party distributors and sales
representatives in areas where our direct sales efforts are less developed.
Through our distributors, sales representatives and direct sales force, we have
a presence in over 80 countries. In addition, we use the Internet,
advertisements in the trade press, direct mail, seminars, trade shows and
quarterly newsletters to raise awareness of our products.
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Our sales and marketing staff consists primarily of engineers and technical
professionals. They undergo extensive training and ongoing professional
development and education. We believe that the skill level of our sales and
marketing staff has been instrumental in building longstanding customer
relationships. In addition, our frequent dialogue with our customers provides
us with valuable input on systems and features they desire in future products.
We believe that our consultative sales approach and our product and market
knowledge differentiate our sales force from those of our competitors.
Our local sales forces are highly knowledgeable of their respective markets,
customer operations and strategies, and regulatory environments. In addition,
our representatives' familiarity with local languages and customs enables them
to build close relationships with our customers.
We provide installation, repair and training services to enable our
customers to improve performance of their networks. We operate service centers
that are located near many of our major customers. We also offer on-line
support services to supplement our on-site application engineering support.
Customers can also access our products remotely through our technical
assistance center.
Competition
The markets for communications test products and services are rapidly
evolving and highly competitive. We believe that the principal competitive
factors affecting our 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.
We believe we compete favorably with respect to the above factors. Our
principal competitors in the communications test and management markets include
Agilent Technologies, Tektronix and Anritsu. We also compete with a number of
other companies who offer products that address discrete portions of our
markets, including Hekimian Laboratories, Digital Lightwave, Exfo Electro-
Optical Engineering and Sunrise Telecom. Some of our competitors may have
greater sales, marketing, research and financial resources than we do. In
addition, new competitors with significant market presence and financial
resources may enter our markets and reduce our market share.
Research and Development
We believe that our significant commitment to research and development
activities has enabled us to offer customers an extensive range of products and
services, and we plan to continue investing in research and development
activities. For the year ended March 31, 2000, on a pro forma basis to give
effect to the WWG merger and our other acquisitions and divestitures, we
invested approximately $141.3 million in research and development activities of
which approximately $122.0 million was applied to our communications test
business.
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Other Businesses
We operate two subsidiaries, AIRSHOW and da Vinci. For the year ended March
31, 2000, AIRSHOW and da Vinci generated $97.5 million in net sales; or
approximately 9.6% of our total sales on a pro forma basis giving effect to our
merger with WWG and our other acquisitions and divestitures.
AIRSHOW
Our AIRSHOW subsidiary is the leading supplier of inflight video information
systems and services for passengers of private and commercial aircraft. We
market AIRSHOW products to airlines, aircraft manufacturers, avionics
installation centers and owners and operators of corporate aircraft. AIRSHOW
products are installed on over 4,500 general aviation aircraft and on
approximately 3,800 aircraft owned by 120 commercial airlines. 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
Our da Vinci subsidiary manufactures and sells digital color correction
systems. da Vinci systems are 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 our direct sales force, as well as in
conjunction with manufacturers of related products.
da Vinci has benefited from the transition from analog to 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.
Patents and Proprietary Rights
We rely primarily on trade secrets, trademark laws, confidentiality
procedures and contractual restrictions to establish and protect our
proprietary rights. We own a number of U.S. and foreign patents and patent
applications that are collectively important to our business. We do not
believe, however, that the expiration of any patent or group of patents would
materially affect our business.
Manufacturing
We manufacture a portion of our products and outsource to third parties a
portion of our manufacturing activities, such as the assembly of printed
circuit boards and the fabrication of some mechanical parts. We generally
perform our own final assembly and testing of our products. We operate 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, we received ISO 14001 certification, which relates to
environmental compliance in Germany.
The components we use to build our products are generally available from a
number of suppliers. We rely on a number of limited-source suppliers for
specific components and parts. Although we have entered into long-term
purchasing contracts with some of these suppliers, we cannot assure you that
these suppliers will be
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able to meet our needs or that we will not experience component shortages. If
we were required to locate new suppliers or additional sources of supply, we
could experience a disruption in our operations or incur additional costs in
procuring required materials.
Backlog
On a pro forma basis giving effect to our merger with WWG and our other
acquisitions and divestitures, our backlog at March 31, 2000 was approximately
$269 million.
Legal Proceedings
We are a party to various legal actions that arose in the ordinary course of
our business. We do not expect that resolution of these legal actions will
have, individually or in the aggregate, a material adverse effect on our
financial condition or results of operations.
Whistler Litigation
In 1994, we sold our radar detector business to Whistler Communications of
Massachusetts. On June 27, 1996, Cincinnati Microwave, Inc., or CMI, filed an
action in the United States District Court for the Southern District of Ohio
against us and Whistler Corporation, alleging willful infringement of CMI's
patent for a mute function in radar detectors. We, along with Whistler, have
asserted in response that we have not infringed CMI's patent, and that, in any
event, the patent is invalid and unenforceable. We obtained an opinion from
outside counsel that CMI's patent is invalid. We intend to offer that opinion
(and other evidence) to demonstrate that any alleged infringement of CMI's
patent due to our prior manufacture and sale of the Whistler series radar
detectors was not valid.
On February 14, 1997, CMI filed for bankruptcy in the United States
Bankruptcy Court for the Southern District of Ohio. Pursuant to that filing,
CMI sold its mute feature patent (and other assets) to Escort Acquisition Corp.
CMI, however, retained the right to seek past damages from us.
On March 24, 1998, CMI and its co-plaintiff Escort filed a motion for
summary judgment. We opposed that motion and went on to complete discovery,
which closed on June 20, 1998. We then filed our own series of summary judgment
motions.
A hearing on the parties' dispositive motions was held in May 1999. On May
27, 1999, Whistler filed a Chapter 11 bankruptcy petition in the United States
District Court for the District of Massachusetts. As a result of that filing,
CMI's patent infringement litigation is stayed as to Whistler.
On February 18, 2000, the United States Magistrate issued a Report and
Recommendation on some of the pending motions, recommending that judgment be
entered in our favor on half of the claims asserted by CMI. Then, on June 9,
2000, the Magistrate issued a second Report and Recommendation, recommending
that the plaintiffs be precluded from recovering any damages for any alleged
infringement that occurred prior to June 1996. Because we could not have
infringed on CMI's patent after it sold its radar detector business to Whistler
in 1994, if this Recommendation is adopted by the District Court Judge, we
would have no liability to CMI. The parties have filed (and will file) various
objections to the two Report and Recommendations. If necessary, trial in this
matter is scheduled for November 2000. We intend to continue to defend this
lawsuit vigorously and do not believe that the outcome of this litigation will
have a material adverse effect on our financial condition, results of
operation, or liquidity.
Employees
As of March 31, 2000, on a pro forma basis giving effect to our merger with
WWG and our other acquisitions and divestitures, we employed approximately
4,600 persons. Of these, approximately 1,200 were employed in engineering,
approximately 1,200 in sales and marketing and approximately 1,200 in general
and
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administrative functions. Some of our European employees are members of a
workers' council, principally due to applicable legal requirements in the
jurisdictions in which they work. However, none of our other employees are
represented by labor unions and we believe our employee relations are good.
Properties
The following table describes our design and manufacturing facilities:
Location Square Feet Title
- -------- ----------- ------
Eningen, Germany 779,000 Owned
Germantown, Maryland 277,000 Leased
Indianapolis, Indiana 206,000 Leased
Research Triangle Park, North Carolina 93,100 Leased
Plymouth, United Kingdom 86,400 Owned
San Diego, California 62,368 Leased
Tustin, California (AIRSHOW) 52,000 Leased
Munich, Germany 51,000 Leased
Research Triangle Park, North Carolina 50,800 Leased
Kirkland, Washington (AIRSHOW) 50,500 Leased
Salem, Virginia 35,900 Leased
Sao Paulo, Brazil 32,400 Owned
Burnaby, British Columbia 25,604 Leased
St. Etienne, France 23,400 Leased
Ft. Lauderdale, Florida (da Vinci) 16,300 Leased
Rennes, France 16,200 Owned
Zurich, Switzerland 15,700 Leased
Carson City, Nevada (da Vinci) 15,000 Leased
Burlington, Massachusetts 14,600 Leased
Terre Haute, Indiana 12,600 Leased
Milan, Italy 11,200 Owned
Baden, Austria 10,800 Owned
Bern, Switzerland 9,800 Owned
Scarborough, Ontario, Canada 8,200 Owned
Buenos Aires, Argentina 3,400 Owned
We believe our facilities are in good operating condition.
Government Regulation and Industry Standards and Protocols
We design our 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, our 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, our 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 our products to comply, or delays in compliance, with the various
existing and evolving standards could negatively impact our ability to sell our
products.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth our directors and executive officers, their
ages as of June 30, 2000, and the position currently held by each person:
Name Age Title
---- --- -----
Ned C. Lautenbach........ 56 Chairman, President and Chief Executive Officer
Allan M. Kline........... 55 Corporate Vice President, Chief Financial
Officer and Treasurer
John R. Peeler........... 45 Corporate Vice President and President and Chief
Executive Officer of our Communications Test
Business
Dennis E. Ferguson....... 55 Corporate Vice President and President of
Airshow, Inc.
Samuel W. Tishler........ 62 Corporate Vice President--Corporate Development
Mark V.B. Tremallo....... 43 Corporate Vice President--General Counsel
Robert W. Woodbury, Jr... 43 Corporate Vice President and Corporate
Controller
Brian D. Finn............ 39 Director (2)
Marvin L. Mann........... 67 Director (1)
William O. McCoy......... 66 Director (1)(2)
Victor A. Pelson......... 63 Director (1)
Joseph L. Rice, III...... 68 Director
Brian H. Rowe............ 69 Director (2)
Richard J. Schnall....... 30 Director
Peter M. Wagner.......... 47 Director
- -----------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Ned C. Lautenbach presently serves as our Chairman, President and Chief
Executive Officer and as a Director. He has served as Chairman, President and
Chief Executive Officer since May 20, 1999, and as a Director since November
30, 1998. Mr. Lautenbach joined Clayton, Dubilier & Rice, Inc. in 1998 from IBM
Corporation where he served as Senior Vice President and Group Executive of
Worldwide Sales and Services. During his career at IBM, he held a variety of
other senior executive positions in several divisions, including President of
the National Distribution Division of the United States, President, Asia
Pacific, and Chairman, IBM World Trade Corporation. Mr. Lautenbach received his
M.B.A. from Harvard University and his B.A. in economics at the University of
Cincinnati. He is a director of Eaton Corporation and Axcelis Technologies,
Inc. and a member of the Board of Trustees of Fidelity Investments and the
Council on Foreign Relations. He is a limited partner of CD&R Associates V
Limited Partnership ("Associates V"), the general partner of Clayton, Dubilier
& Rice Fund V Limited Partnership, a Director of CD&R Investment Associates II,
Inc. ("Associates II Inc."), the managing general partner of Associates V.
Mr. Lautenbach is also a limited partner of CD&R Associates VI Limited
Partnership ("Associates VI"), the general partner of Clayton, Dubilier & Rice
Fund VI Limited Partnership, and is a Director of CD&R Investment Associates
VI, Inc. ("Associates VI Inc."), the managing general partner of Associates VI.
Allan M. Kline presently serves as our Corporate Vice President, Chief
Financial Officer and Treasurer and, since May 21, 1998, as a Director. Mr.
Kline joined us in June 1996. From 1995 to 1996, he served as Senior Vice
President, Chief Financial Officer of CrossComm Corporation, a manufacturer of
networking products. From 1994 to 1995, he was President of TAR Acquisition
Corp., a private investment company. From 1989 to 1994, Mr. Kline was also a
Director of CrossComm Corporation. From 1990 to 1994, Mr. Kline was Senior Vice
President, Chief Financial Officer of Cabot Safety Corporation, a subsidiary of
Cabot Corporation. Prior to that, he served at Leggett & Platt, Incorporated
and was a partner with Arthur Young & Company.
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John R. Peeler presently serves as Corporate Vice President and President
and Chief Executive Officer of our Communications Test Business and, since May
21, 1998, as a Director. Mr. Peeler has been employed by us since 1980 and has
held positions of increasing responsibility including Vice President of
Engineering, Vice President of Product Development, Division President, and
Executive Vice President and Chief Operating Officer. Prior to joining us he
was a communications systems design engineer with Hughes Network Systems
(formerly M/A Com DCC). Mr. Peeler received a Bachelor of Science degree and a
Master of Science degree, both in electrical engineering, from the University
of Virginia.
Dennis E. Ferguson serves as our Corporate Vice President, a position to
which he was elected on November 30, 1998, and President of our AIRSHOW, Inc.
subsidiary. Mr. Ferguson joined us in 1994. Mr. Ferguson previously served from
1990 to 1994 as General Manager of Intercon Security, Inc., a manufacturer and
provider of security systems and services. Prior to 1990 he was employed by
Sundstrand Turbomach and served as Vice President and General Manager of
Transcom, an in-flight entertainment division of Sundstrand.
Samuel W. Tishler presently serves as our Corporate Vice President--
Corporate Development. Mr. Tishler joined us in September 1994. From 1988 to
1994, he was Vice President of Raytheon Ventures, the venture capital portfolio
of Raytheon Co. From 1986 to 1988, he was Chief Executive Officer of Kloss
Video Corporation, a manufacturer of video projectors. From 1977 to 1986, he
served as Vice President of ADL Enterprises, a wholly owned subsidiary of
Arthur D. Little, Inc. From 1970 to 1977, Mr. Tishler was President of
Harnessed Energies, Inc., a manufacturer of scientific instrumentation.
Mark V.B. Tremallo presently serves as our Corporate Vice President--General
Counsel. Mr. Tremallo joined us in May 1997. From 1995 to 1997 he served as
Vice President, General Counsel and Secretary of Aearo Corporation (formerly
Cabot Safety Corporation), a manufacturer of industrial safety products. From
1990 to 1995 he was General Counsel of Cabot Safety Corporation, a subsidiary
of Cabot Corporation.
Robert W. Woodbury, Jr. presently serves as our Corporate Vice President and
Corporate Controller. Mr. Woodbury joined us in January 1996. From 1992 to
January 1996, he served as Vice President and Controller for Kollmorgen
Corporation, a manufacturer of motion control devices. From 1990 to 1992, he
was Chief Financial Officer of Kidde Fenwal, Inc., a manufacturer of fire
suppression equipment.
Brian D. Finn is a principal and Director of Clayton, Dubilier & Rice, Inc.
and, since May 21, 1998, one of our Directors. Mr. Finn is also a Director of
U.S. Office Products Company, a corporation in which Clayton, Dubilier & Rice
Fund V Limited Partnership has an investment and of Baxter International and
Telemundo Holdings, Inc. Mr. Finn joined Clayton, Dubilier & Rice, Inc. in 1997
from Credit Suisse First Boston where he was Managing Director and Co-Head of
Mergers & Acquisitions. Mr. Finn received his B.S. in Economics from The
Wharton School of the University of Pennsylvania. He is a limited partner of
Associates V and a Director of Associates II Inc. Mr. Finn is also a limited
partner of Associates VI and a Director of Associates VI Inc.
Marvin L. Mann has served as a Director since February 4, 1999. He also has
served since April 1999 as Chairman Emeritus of the Board of Directors of
Lexmark International Group, Inc., a corporation in which an affiliate of
Clayton, Dubilier & Rice, Inc. had an investment from 1991 through 1998. He
served as Chairman of the Board of Lexmark International Group, Inc. from March
1991 through April 1999, as Chief Executive Officer from March 1991 through May
1998, and as President from March 1991 through February 1997. Prior to such
time, Mr. Mann held numerous positions with IBM. During his IBM career, Mr.
Mann held a number of executive positions including President of the
Information Products Division, President of the Service Sector Division and
President and Chief Executive Officer of the Satellite Business Systems. He was
elected an IBM Vice President in 1985. Mr. Mann also serves as a director of
the M.A. Hanna Company and Imation Corporation and is a member of the board of
trustees of Fidelity Investments.
William O. McCoy has served as a Director since July 20, 1999. He is
currently the Acting Chancellor of The University of North Carolina at Chapel
Hill. He retired in January 1999 as Vice President for Finance of
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the sixteen-campus University of North Carolina. He joined UNC General
Administration in 1995 after a 35-year career with the BellSouth Corporation,
where he served as Vice Chairman of the Board of Directors from 1984 through
1994. Mr. McCoy also serves as a director of Kenan Transport Company, Carolina
Power and Light Company, Liberty Corporation of Greenville, S.C. and the Weeks
Corporation in Atlanta and is a member of the board of trustees of Fidelity
Investments and a partner of Franklin Street Partners.
Victor A. Pelson has served as a Director since September 28, 1999. He
presently serves as a Senior Advisor of Warburg Dillon Read. Prior to his
affiliation with Warburg Dillon Read, Mr. Pelson held numerous positions at
AT&T Corporation. During his AT&T career, Mr. Pelson held a number of executive
positions including Chairman of AT&T Global Operations, Group Executive and CEO
of AT&T's Communications Services Group. He was also the Chairman of the New
Jersey State Chamber of Commerce from 1989 to 1991. Mr. Pelson is also a member
of the Board of Directors of United Parcel Services, Eaton Corporation, Dun and
Bradstreet and Carrier One International LLC.
Joseph L. Rice III is a principal and Chairman of Clayton, Dubilier & Rice,
Inc. and, since May 21, 1998, one of our Directors. In addition, Mr. Rice is a
Director of Uniroyal Holding, Inc., Remington Arms Company, Inc., RACI Holding,
Inc. and Thyssen Schulte Bautechnik, corporations in which an investment
partnership managed by Clayton, Dubilier & Rice, Inc. has an investment, and
serves as a trustee of Williams College and The Manhattan Institute. He is a
graduate of Williams College and Harvard Law School. Mr. Rice is a limited
partner of Associates V, and is a Director, Chairman and President of
Associates II Inc. Mr. Rice is also a limited partner of Associates VI, and is
a Director, Chairman and President of Associates VI Inc.
Brian H. Rowe has served as a Director since November 30, 1998. He is
currently Chairman Emeritus of GE Aircraft Engines in Cincinnati, Ohio, where
he also served as Chairman from September 1993 through January 1995, and as
President and Chief Executive Officer from 1979 through 1993. Mr. Rowe also
serves as a director of Atlas Air, Inc., B/E Aerospace, Inc., Fifth Third Bank,
Stewart & Stevenson Services, Inc., Convergys Corporation and Textron Inc.
Richard J. Schnall is a principal of Clayton, Dubilier & Rice, Inc. and
since September 28, 1999, a Director. In addition, Mr. Schnall is also a
Director of Schulte GmBH & Co. KG. Prior to joining Clayton, Dubilier and Rice,
Inc. in 1996, Mr. Schnall worked in the investment banking divisions of Smith
Barney & Co. and Donaldson, Lufkin & Jenrette, Inc. He also worked for McKinsey
and Company, Inc. Mr. Schnall is a graduate of the Wharton School at the
University of Pennsylvania and Harvard Business School. He is a limited partner
of Associates V, a Director of Associates II Inc., a limited partner of
Associates VI and a Director of Associates VI Inc.
Peter M. Wagner joined Debitel AG, Stuttgart, Germany, as its President and
Chief Executive Officer on May 22, 2000. From September 30, 1998 until May 19,
2000 he served as President, Chief Executive Officer and Director of WWG, and
was elected to our Board on March 23, 2000. Mr. Wagner served as President,
Chief Executive Officer and Managing Director of Wandel & Goltermann, Inc. from
February 1998 to September 1998, as Executive Vice President, Chief Operating
Officer and Managing Director of Wandel & Goltermann, Inc. from October 1995 to
February 1998 and as Vice President, Sales and Marketing from March 1995 to
October 1995. From January 1990 to February 1995, Mr. Wagner was General
Manager of the Line Transmission Systems Division of Alcatel SEL AG in
Stuttgart, Germany.
Compensation of Directors
Directors who are not also officers or employees of Dynatech or any
subsidiary or a representative of Clayton, Dubilier & Rice Fund V Limited
Partnership, Clayton, Dubilier & Rice Fund VI Limited Partnership or any
successor investment vehicle managed by Clayton, Dubilier & Rice, Inc.
("Eligible Directors") receive quarterly awards of our common stock in lieu of
annual retainer, meeting fees, chairman's fees and any other fees for services
as a director under the terms of the Non-Employee Directors Stock Incentive
Plan. Our Board of Directors determines the number of shares to be awarded each
year based on the recommendation of the
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Compensation Committee. The intent is that the number of such shares will have
a value (at the time the number of shares subject to quarterly share awards for
such year are established) approximately equal to the amount of cash fees that
would be payable to each Eligible Director for his or her services based on
appropriate competitive practices. For 2000, the quarterly share award has been
established at 4,000 shares of our common stock.
Each Eligible Director also receives a one-time stock option grant for
25,000 shares of common stock upon his or her initial election to the Board of
Directors. Each option has a ten year term and an exercise price equal to the
grant date fair market value of the common stock, as defined in the Non-
Employee Directors Stock Incentive Plan, based on an independent financial
appraisal of the common stock's value. Each such option will generally become
exercisable in five equal installments over the first five anniversaries of the
date of grant, assuming that the person is still a Director on each such date.
Each Eligible Director also may purchase up to $250,000 of our common stock
pursuant to the Directors Stock Purchase Plan at the fair market value on the
date of purchase, as defined in such plan, based on an independent financial
appraisal of the common stock's value. Our Board of Directors may permit an
Eligible Director to purchase a greater amount of our common stock taking into
account the scope of the Eligible Director's duties and commitment of time to
us, and the extent to which such Eligible Director's actions are expected to
affect our performance. In 1999, our Board of Directors permitted Mr.
Lautenbach to purchase $1 million of our common stock in the aggregate based on
his expected contributions to the Company.
Composition of Board and Committees
Our Board of Directors is classified in three classes, with members of each
class serving for staggered terms. The terms of office of each class expire at
different times in annual succession, with one class being elected at each
year's annual meeting of shareholders. Messrs. Kline, Schnall, Rowe, Pelson and
Wagner are members of Class I and will serve until the 2001 Annual Meeting.
Messrs. Peeler, Lautenbach and Mann are members of Class II and will serve
until the 2002 Annual Meeting. Messrs. Rice, Finn and McCoy are members of
Class III and will serve until the 2000 Annual Meeting.
Our Board of Directors has three committees, the executive committee, the
audit committee and the compensation committee. The Board may also establish
other committees to assist in the discharge of its responsibilities.
The executive committee is vested with the authority of the Board of
Directors between meetings of the Board of Directors in most matters (other
than with respect to certain fundamental issues). The executive committee is
comprised of Messrs. Lautenbach and Finn.
The audit committee makes recommendations to the Board of Directors
regarding the independent auditors to be approved by the shareholders, reviews
the independence of the independent auditors, approves the scope of the annual
audit activities of the independent auditors, approves the audit fee payable to
the independent auditors and reviews audit results with the independent
auditors. The audit committee is comprised of Messrs. Mann, Pelson and McCoy.
The compensation committee provides a general review of our compensation and
benefit plans to ensure that they meet corporate objectives. In addition, the
compensation committee reviews the chief executive officer's recommendations on
the compensation of our officers and the adoption and modification of major
compensation policies and practices, and reports its recommendations to the
whole Board of Directors for approval and authorization. The compensation
committee administers our stock plans and is comprised of Messrs. Finn, Rowe
and McCoy.
61
Executive Compensation
The following summary compensation table sets forth information concerning
compensation awarded to, earned by, or paid to our current and former Chief
Executive Officers and the four highest compensated executive officers who were
serving as executive officers at the end of fiscal 2000, who are collectively
referred to as the Named Executive Officers, for services rendered in all
capacities with respect to the fiscal years ended March 31, 1998, 1999 and
2000:
Summary Compensation Table
Long-Term
Compensation Awards
Annual Compensation (1) (2)
-------------------------- ---------------------
Name and Principal Fiscal Securities Underlying All Other
Position Year Salary($) Bonus($) Options(#) Compensation ($)(3)
------------------ ------ --------- --------- --------------------- -------------------
Ned C. Lautenbach (4)... 2000 0 0 0 0
Chairman, President and
Chief Executive Officer
John F. Reno (5)........ 2000 86,182 152,000 0 0
Chairman, President and 1999 507,500 1,130,203 0 61,492
Chief Executive Officer 1998 481,250 604,053 1,111,320 11,857
John R. Peeler.......... 2000 322,500 628,875 150,000 19,269
Corporate Vice
President, President
and Chief Executive
Officer of 1999 295,000 50,936 0 90,917
Communications Test
Business 1998 270,000 383,513 486,080 47,870
Allan M. Kline.......... 2000 271,250 365,735 75,000 35,442
Corporate Vice
President, 1999 251,250 422,613 0 24,067
Chief Financial Officer
and Treasurer 1998 218,750 198,108 313,600 23,060
Samuel W. Tishler....... 2000 207,500 291,530 50,000 25,646
Corporate Vice
President- 1999 188,333 255,105 98,000 24,834
Corporate Development 1998 176,667 145,338 623,280 15,834
Robert W. Woodbury,
Jr..................... 2000 195,406 277,453 50,000 25,050
Corporate Vice
President- 1999 181,481 260,325 196,000 19,385
Corporate Controller 1998 168,375 121,989 241,080 16,184
- -----------------------
(1) Perquisites and other personal benefits paid to each Named Executive
Officer in each instance aggregated less than the lesser of $50,000 or 10%
of the total annual salary and bonus set forth in the columns entitled
"Salary" and "Bonus" for each Named Executive Officer, and accordingly,
have been omitted from the table as permitted by the rules of the SEC.
(2) Figures in this column show the number of options for the common stock
granted. We did not grant any restricted stock awards or stock appreciation
rights to any of the Named Executive Officers during the years shown.
Options for the year 1998 have been converted to reflect the May 1998
recapitalization.
(3) Figures in this column represent our contributions on behalf of each of the
Named Executive Officers under the 401(k) plan. These figures also include
our contributions under a nonqualified deferred compensation plan.
(4) Effective May 20, 1999, Mr. Lautenbach became Chairman, President and Chief
Executive Officer of Dynatech. Mr. Lautenbach who is a principal of
Clayton, Dubilier & Rice, Inc., or CD&R, has entered into a Loanout
Agreement, dated as of May 19, 1999, with us, Dynatech LLC and CD&R
pursuant to which he does not receive compensation for his services
rendered to us. See "Certain Transactions."
(5) Mr. Reno retired as Chairman, President and Chief Executive Officer of the
Company effective May 19, 1999 and remained an employee to assist in the
transition of his duties until July 30, 1999.
62
2000 Option Grants
The following table sets forth information concerning individual grants of
stock options to the Named Executive Officers during the fiscal year ended
March 31, 2000:
Option Grants in Fiscal 2000
Individual Grants (1)
----------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Exercise Price Appreciation for
Underlying Employees in or Base Option Term (2)
Options Fiscal Price Expiration -----------------------
Name Granted (#) Year(%) ($/Sh) (1) Date 5% ($) 10% ($)
- ---- ----------- ------------ ---------- ---------- ----------- -----------
Ned C. Lautenbach....... -- -- -- -- -- --
John F. Reno............ -- -- -- -- -- --
John R. Peeler.......... 150,000 1.6% 3.25 6/15/2009 306,586 776,949
Allan M. Kline.......... 75,000 0.8% 3.25 6/15/2009 153,293 388,475
Samuel W. Tishler....... 50,000 0.5% 3.25 6/15/2009 102,195 258,983
Robert W. Woodbury,
Jr..................... 50,000 0.5% 3.25 6/15/2009 102,195 258,983
- -----------------------
(1) Options vest annually in five equal installments beginning on the first
anniversary date of grant. The options in this table expire ten years after
grant.
(2) These columns show the hypothetical value of the options granted at the end
of the option terms if the price of the Dynatech common stock were to
appreciate annually by 5% and 10%, respectively, based on the grant date
value of Dynatech's stock.
2000 Aggregate Option Exercises and Option Values
The following table sets forth certain information regarding stock option
exercises by the Named Executive Officers during the fiscal year ended March
31, 2000, and stock options held by the Named Executive Officers at March 31,
2000:
Aggregated Options Exercises in Fiscal Year 2000 and FY-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at FY-End (#)(1) Options at FY-End ($)(2)
------------------------- -------------------------
Shares
Acquired on Value
Name Exercise(#) Realized ($)(3) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- --------------- ----------- ------------- ----------- -------------
Ned C. Lautenbach....... -- -- -- -- -- --
John R. Reno............ 723,945 2,450,200 -- -- -- --
John R. Peeler.......... -- -- 2,696,960 150,000 7,826,548 112,500
Allan M. Kline.......... 15,000 106,760 1,278,600 75,000 2,693,859 56,250
Samuel W. Tishler....... 21,000 210,867 621,879 128,400 1,275,477 155,100
Robert W. Woodbury,
Jr..................... -- -- 811,439 206,800 2,051,530 272,700
- -----------------------
(1) Based on the number of shares subject to these options at fiscal year end
March 31, 2000.
(2) Calculated on the basis of the fair market value of our common stock as
determined by the Board of Directors in accordance with the Amended and
Restated 1994 Stock Option Plan on March 31, 2000, $4.00, less the
applicable option exercise price.
(3) Calculated on the basis of the fair market value of our common stock on the
date of exercise, less the option exercise price.
63
Employment and Other Agreements
In May 1998, we entered into employment agreements with Messrs. Kline and
Peeler. The employment agreements generally provide for an initial term of five
years. Pursuant to their employment agreements, Messrs. Kline and Peeler
currently receive an annual base salary of $275,000 and $335,000, respectively,
and are entitled to participate in the Company's annual incentive compensation
program which provides an annual bonus based on the satisfaction of certain
performance targets as determined by our board of directors. In addition,
Messrs. Kline and Peeler may participate in all of our pension, deferred
compensation and supplemental savings programs, insurance programs, including
life, medical, dental and disability, and other special benefit or perquisite
programs generally available to our senior executives. The employment
agreements further provide for the election of such officers to serve as
directors during their employment with us.
Pursuant to their respective employment agreements, all options to purchase
our common stock held by Mr. Kline prior to the May 1998 recapitalization, and
a substantial majority of the options held by Mr. Peeler prior to the May 1998
recapitalization, became fully vested and exercisable. In addition, the
employment agreements restrict the ability of the executive to transfer shares
of common stock beneficially owned by him (other than certain permitted
transfers for estate planning purposes and transfers not exceeding in the
aggregate 25% of the common stock owned, or subject to options held by the
executive at the effective time of the May 1998 recapitalization) during his
tenure.
The employment agreements also provide that, in the event of our termination
of the executive's employment during the term of the agreement other than for
"Cause" (as defined in the employment agreements) or by the executive for "Good
Reason" (as defined in the employment agreements), the executive will be
entitled to special termination benefits consisting of (a) continued payments
of his average annual base salary and average annual bonus until the second
anniversary of the date of termination, (b) continued coverage under our
medical insurance plan until his 65th birthday and (c) a pro rata incentive
compensation bonus for the portion of the calendar year preceding such
termination. The agreements also contain customary indemnification,
confidentiality, noncompetition and nonsolicitation provisions.
In connection with the May 1998 recapitalization, we also entered into
certain agreements with Messrs. Tishler and Woodbury. These agreements provide
that, in the event of a termination of employment prior to the third
anniversary of the effective time of the May 1998 recapitalization by us other
than for "Cause" (as defined in the agreements) or by the executive for "Good
Reason" (as defined in the agreements), the executive will be entitled to
special termination benefits during a salary continuation period ranging from
12 to 18 months, depending on the executive's period of service with us. These
salary continuation benefits will consist of continued payments of the
executive's average annual base salary, average annual bonus and continued
coverage under our medical insurance and other benefit plans. These agreements
also contain customary indemnification, confidentiality, noncompetition and
nonsolicitation provisions. Pursuant to the agreements, a substantial majority
of the options to purchase shares of our common stock held by Messrs. Tishler
and Woodbury prior to the May 1998 recapitalization became fully vested and
exercisable.
In connection with his resignation as Chairman, President and Chief
Executive Officer as of May 19, 1999, and subsequent retirement on July 30,
1999, we entered into a retirement agreement with Mr. Reno under which he will
receive monthly payments until May 31, 2001. Mr. Reno also received a bonus
payment of $152,000 for the portion of our fiscal year which elapsed prior to
his retirement. In addition, we agreed that Mr. Reno may hold the stock
issuable upon the exercise of certain incentive stock options, despite our
right to repurchase such shares under Mr. Reno's employment agreement. All of
Mr. Reno's other outstanding vested options were cashed out on the effective
date of his termination of employment based on the fair market value per share
of our common stock as determined by the Board of Directors in accordance with
the Amended and Restated 1994 Stock Option Plan.
64
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 30, 2000, information regarding
the beneficial ownership of our shares of common stock.
The table sets forth the number of shares beneficially owned and the
percentage ownership before the offering and after the completion offering
for:
. each person who is known by us to own beneficially more than 5% of our
outstanding shares of common stock;
. each executive officer named in our summary compensation table and each
director; and
. all executive officers and directors as a group.
As of June 30, 2000, our outstanding equity securities consisted of
187,235,650 shares of common stock.
Unless otherwise indicated below, to our knowledge, all persons listed
below have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated below, each entity or person listed
below maintains a mailing address c/o Dynatech Corporation, 3 New England
Executive Park, Burlington, Massachusetts 01803-5087.
Amount and Percent of Common
Name Nature of Stock (2)
---- Beneficial -----------------
Ownership Before After
(1) Offering Offering
----------- -------- --------
Principal Shareholders
Clayton, Dubilier & Rice Fund V Limited
Partnership (3)................................ 123,290,770 65.8%
Clayton, Dubilier & Rice Fund VI Limited
Partnership (4)................................ 30,625,000 16.4%
Directors and Executive Officers
Ned C. Lautenbach............................... 307,692 * *
John R. Peeler (5).............................. 2,738,907 1.2% *
Allan M. Kline (6).............................. 1,309,769 * *
Robert W. Woodbury (7).......................... 860,856 * *
Samuel W. Tishler (8)........................... 581,088 * *
Dennis E. Ferguson (9).......................... 522,660 * *
Mark V.B. Tremallo (10)......................... 354,489 * *
Brian H. Rowe (11).............................. 109,923 * *
Marvin L. Mann (12)............................. 105,923 * *
William O. McCoy (13)........................... 97,923 * *
Victor A. Pelson (14)........................... 88,923 * *
Peter M. Wagner (14)............................ 66,500 * *
All current Directors and Executive Officers as
a group (15 persons) (15)...................... 161,060,423 73.5%
The symbol "*" denotes less than 1% of outstanding common stock.
- ----------------------
(1) Represents shares of common stock beneficially owned on June 30, 2000.
Unless otherwise noted, each person has sole voting and investment power
with respect to such shares.
(2) Based upon 187,235,650 shares of common stock outstanding as of June 30,
2000. Common stock includes all shares of outstanding common stock plus,
as required for the purpose of determining beneficial ownership (in
accordance with Rule 13d-1 promulgated pursuant to the U.S. Securities
Exchange Act of 1934, as amended), all shares of common stock subject to
any right of acquisition by such person, through exercise of conversion
of any security, within 60 days of June 30, 2000. The percent of common
stock owned by Clayton, Dubilier & Rice Fund V Limited Partnership and by
Clayton, Dubilier & Rice Fund VI Limited Partnership is calculated based
upon the number of shares outstanding and does not include shares
issuable upon the exercise of outstanding options.
65
(3) CD&R Associates V Limited Partnership ("Associates V") is the general
partner of Clayton, Dubilier & Rice Fund V Limited Partnership ("CD&R Fund
V") and has the power to direct CD&R Fund V as to the voting and
disposition of shares held by CD&R Fund V. CD&R Investment Associates II,
Inc. ("Associates II Inc.") is the managing general partner of Associates
V and has the power to direct Associates V as to its direction of CD&R
Fund V's voting and disposition of the shares held by CD&R Fund V. No
person controls the voting and dispositive power of Associates II Inc.
with respect to the shares owned by CD&R Fund V. Each of Associates V and
Associates II Inc. expressly disclaims beneficial ownership of the shares
owned by CD&R Fund V. The business address of Associates II Inc.,
Associates V and CD&R Fund V is 1403 Foulk Road, Suite 106, Wilmington,
Delaware 19803.
(4) CD&R Associates VI Limited Partnership ("Associates VI") is the general
partner of Clayton, Dubilier & Rice Fund VI Limited Partnership ("CD&R
Fund VI") and has the power to direct CD&R Fund VI as to the voting and
disposition of shares held by CD&R Fund VI. CD&R Investment Associates VI,
Inc. ("Associates VI Inc.") is the managing general partner of Associates
VI and has the power to direct Associates VI as to its direction of CD&R
Fund VI's voting and disposition of the shares held by CD&R Fund VI. No
person controls the voting and dispositive power of Associates VI Inc.
with respect to the shares owned by CD&R Fund VI. Each of Associates VI
and Associates VI Inc. expressly disclaims beneficial ownership of the
shares owned by CD&R Fund VI. The business address of Associates VI Inc.,
Associates VI and CD&R Fund VI is 1403 Foulk Road, Suite 106, Wilmington,
Delaware 19803.
(5) Includes 2,030,866 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(6) Includes 1,293,600 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(7) Includes 860,639 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(8) Includes 580,479 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(9) Includes 522,040 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(10) Includes 338,469 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(11) Includes 5,000 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(12) Includes 5,000 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(13) Includes 5,000 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000.
(14) Does not include any shares of common stock issuable upon exercise of
stock options which are exercisable within 60 days of June 30, 2000.
(15) Includes 5,641,093 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of June 30, 2000. Includes
123,290,770 shares of common stock owned by CD&R Fund V and 30,625,000
shares of common stock owned by CD&R Fund VI. Ned C. Lautenbach, Brian D.
Finn, Joseph L. Rice, III and Richard J. Schnall may be deemed to share
beneficial ownership of the shares owned of record by the Clayton Dubilier
& Rice funds by virtue of their status as stockholders of Associates II
Inc., and Associates VI Inc., the general partners of Associates V and
Associates VI , respectively, the general partners of CD&R Fund V and CD&R
Fund VI, respectively, but each expressly disclaims such beneficial
ownership of the shares owned by CD&R Fund V and CD&R Fund VI. The voting
stockholders of Associates II Inc. and Associates VI Inc. share investment
and voting power with respect to securities owned by CD&R Fund V and CD&R
Fund VI, respectively, but no individual controls such investment or
voting power.
66
CERTAIN TRANSACTIONS
CD&R Fund V and CD&R Fund VI
Clayton, Dubilier & Rice Fund V Limited Partnership, or CD&R Fund V, is a
private investment fund managed by Clayton, Dubilier & Rice, Inc. The general
partner of CD&R Fund V is CD&R Associates V Limited Partnership, or Associates
V, a Cayman Islands exempted limited partnership. Associates V has three
general partners. The managing general partner of Associates V is CD&R
Investment Associates II, Inc., or Associates II, Inc., a Cayman Islands
exempted company. The other general partners of Associates V are CD&R Cayman
Investment Associates, Inc., a Cayman Islands exempted company and CD&R
Investment Associates, Inc., a Delaware corporation.
Clayton, Dubilier & Rice Fund VI Limited Partnership, or CD&R Fund VI, is a
private investment fund managed by Clayton, Dubilier & Rice, Inc. The general
partner CD&R Fund VI is CD&R Associates VI Limited Partnership, or Associates
VI, a Cayman Islands exempted limited partnership. The general partner of
Associates VI is CD&R Investment Associates VI, Inc., or Associates VI, Inc., a
Cayman Islands exempted company.
CD&R
Clayton, Dubilier & Rice, Inc., or CD&R, is a private investment firm which
is organized as a Delaware corporation. It is the manager of a series of
investment funds, including CD&R Fund V and CD&R Fund VI, formed to invest in
equity or equity-related securities of entities formed to effect leveraged
acquisition transactions and in the equity of corporations where the infusion
of capital coupled with the provision of managerial assistance can be expected
to generate returns on investments comparable to returns historically achieved
in leveraged acquisition transactions. CD&R generally assists in structuring
and arranging financing for and negotiating the transactions in which the funds
it manages invest. After the consummation of such transactions, it generally
provides management and financial consulting services to the companies in which
its investment funds have invested during the period of such fund's investment.
Such services include helping such companies to establish effective banking,
legal and other business relationships and assisting management in developing
and implementing strategies in improving the operational, marketing and
financial performance of such companies.
Mr. Lautenbach, who is a principal of CD&R, serves as our Chairman,
President and Chief Executive Officer. In May of 1999, we, our wholly-owned
subsidiary Dynatech LLC, and CD&R, entered into a Loanout Agreement pursuant to
which Mr. Lautenbach will not receive compensation for these services and will
continue to be an employee of CD&R and not Dynatech. Mr. Rice, who is a
principal and Chairman of CDR, is a Director and the Chairman and President of
both Associates II, Inc. and Associates VI, Inc., is a stockholder and Director
of CD&R Cayman Investment Associates, Inc., and also serves as one of our
directors. Mr. Finn, who is a principal of CD&R and is a Director of Associates
II, Inc. and Associates VI, Inc., also serves as one of our directors. Mr.
Schnall, who is a principal of CD&R and is a Director of Associates II, Inc.
and Associates VI, Inc., also serves as one of our directors.
At the time of the May 1998 recapitalization, we entered into a consulting
agreement with CD&R that provides, for so long as CD&R Fund V has an investment
in us and our subsidiaries, for (a) an annual fee initially of $500,000, for
providing management and financial consulting services to us and our
subsidiaries and (b) reimbursement of out-of-pocket expenses it incurs after
the May 1998 recapitalization. At the closing of the May 1998 recapitalization,
we paid CD&R a transaction fee of $9.2 million plus reimbursement of out-of-
pocket expenses in consideration for arranging the May 1998 recapitalization,
arranging and negotiating the financing for the May 1998 recapitalization as
well as related services. We also agreed to indemnify CD&R and certain related
parties, subject to certain limitations, against all claims and liabilities
arising out of or in connection with the U.S. Securities Act, the U.S. Exchange
Act or any other applicable securities or other laws in connection with the May
1998 recapitalization and related transactions and the operation of the
business
67
following the May 1998 recapitalization, including, without limitation, this
offering. In addition, in May 1998, we entered into a registration rights
agreement with CD&R Fund V and certain other shareholders that provides that
the parties may require us to register their shares of common stock under the
U.S. Securities Act.
In connection with the WWG merger and the concurrent establishment of our
new Senior Secured Credit Facility, we incurred approximately $40 million of
transaction fees and expenses, including $6 million payable to CD&R for
services rendered in connection with the WWG merger and the related financing.
We also agreed to indemnify CD&R and certain related parties, subject to
certain limitations, against all claims and liabilities arising out of or in
connection with the U.S. Securities Act, the U.S. Securities Exchange Act of
1934, as amended, or any other applicable securities or other laws in
connection with the WWG merger and related transactions. In addition, the
registration rights agreement which we had entered into with CD&R Fund V was
amended to include CD&R Fund VI as a party.
68
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of: (a) 350,000,000 shares of common
stock, par value $.01 per share and (b) 100,000 shares of preferred stock, par
value $1.00 per share.
Common Stock
Voting
Holders of common stock have exclusive voting rights except as otherwise
required by law and to the extent that our Board of Directors may determine
that holders of a series of preferred stock have exclusive voting rights or
have the right to vote together as a single class with the holders of shares of
common stock. Holders of common stock are entitled to one vote per share on all
matters submitted to a vote of shareholders. Approval of matters brought before
the shareholders require the affirmative vote of a majority of shares present
and voting, except where a greater or lesser voting percentage may otherwise be
required by law.
Dividends
Holders of common stock will be entitled to participate in dividends as and
when declared by our Board of Directors out of funds legally available for
their payment.
Liquidation Rights
Subject to the rights of creditors and holders of preferred stock, holders
of common stock will be entitled to share ratably in a distribution of our
assets upon our liquidation, dissolution or winding up.
Registration Rights of Certain Holders
Pursuant to an agreement among us, Clayton, Dubilier & Rice Fund V Limited
Partnership, Clayton, Dubilier & Rice Fund VI Limited Partnership and certain
other holders of shares of common stock, these shareholders are entitled to
certain demand registration rights. Pursuant to such agreement, the
shareholders may make up to four requests that we file a registration statement
under the U.S. Securities Act. Upon such request and subject to certain
conditions, we generally will be required to use our best efforts to effect any
such registration. In addition, if we propose to register any of our
securities, either for our own account or for the account of other
shareholders, we are required, with certain exceptions, to notify all holders
of registrable stock and, subject to certain limitations, to include in such
registration all of the shares of common stock requested to be included by the
holders of registrable stock. Our directors and officers and some of our other
shareholders with registration rights have agreed not to exercise their
registration rights until 135 days in the case of our directors and officers,
or 180 days in the case of the Clayton, Dubilier & Rice Funds, following the
date of this prospectus without the consent of Credit Suisse First Boston
Corporation. We generally are obligated to bear the expenses, other than
expenses sellers must pay under applicable law, underwriting discounts and
sales commissions, of all of these registrable shares.
Preemptive Rights
The common stock does not carry any preemptive rights enabling a holder to
subscribe for or receive shares of our stock of any class or any other
securities convertible into shares of our common stock, with the exception of
options to purchase common stock pursuant to our stock option plans.
Classification of the Board of Directors
Our directors are classified in three staggered classes.
69
Preferred Stock
General
Authorized shares of preferred stock may be issued from time to time by our
board of directors, without shareholder approval, in one or more series.
Subject to the provisions of our certificate of incorporation, as amended, and
the limitations prescribed by law, the board of directors is expressly
authorized to adopt resolutions to issue the authorized shares of preferred
stock, to fix the number of shares and to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, including
dividend rights (including whether dividends are cumulative), dividend rates,
terms of redemption (including sinking fund provisions), redemption prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of preferred stock, in each case without any further action or
vote by the shareholders.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage an attempt to
obtain control of us by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of our management. The
issuance of shares of the preferred stock pursuant to the board of directors'
authority described above may adversely affect the rights of the holders of
common stock. For example, our preferred stock may rank prior to the common
stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock at a premium or may otherwise adversely affect the market
price of the common stock.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations, under certain circumstances, from engaging in a
"business combination" with:
. a shareholder who owns 15% or more of our outstanding voting stock
(otherwise known as an "interested shareholder"),
. an affiliate of an interested shareholder, or
. an associate of an interested shareholder
for three years following the date that the shareholder became an "interested
shareholder." A "business combination" includes a merger or sale of more than
10% of our assets.
However, the above provisions of Section 203 do not apply if:
. our board approves the transaction that made the shareholder an
"interested shareholder", prior to the date of that transaction;
. after the completion of the transaction that resulted in the shareholder
becoming an "interested shareholder", that shareholder owned at least 85%
of our voting stock outstanding at the time the transaction commenced; or
. on or subsequent to the date of the transaction, the business combination
is approved by our board and authorized at a meeting of our shareholders
by an affirmative vote of at least two-thirds of the outstanding voting
stock not owned by the "interested shareholder".
This statute could prohibit or delay mergers or other change in control
attempts, and thus may discourage attempts to acquire us.
70
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation includes a provision that eliminates the
personal liability of its directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
shareholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by
law, our certificate of incorporation, as amended, our bylaws or
agreements; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
The limitation of liability and indemnification provisions in our
certificate of incorporation, as amended, and bylaws may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty. They may also have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though an action of
this kind, if successful, might otherwise benefit us and our shareholders.
Furthermore, a shareholder's investment may be adversely affected to the extent
we pay the costs of settlement and damage awards against directors and officers
pursuant to these indemnification provisions. However, we believe that these
indemnification provisions are necessary to attract and retain qualified
directors and officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
71
DESCRIPTION OF INDEBTEDNESS
After giving effect to this offering, we and our subsidiary Dynatech LLC
will have outstanding debt under our Senior Secured Credit Facility and our
senior subordinated notes.
Senior Secured Credit Facility
Our Senior Secured Credit Agreement provides for senior secured credit
facilities in an aggregate principal amount of up to $860 million, consisting
of (1) a revolving credit facility available to Dynatech LLC in U.S. dollars or
euros, in an aggregate principal amount of up to $175 million, (2) a Tranche A
term loan of $75 million to Dynatech LLC with a six year amortization, (3) a
Tranche B term loan of $510 million to Dynatech LLC with a seven and one-half
year amortization and (4) German term loans from certain German banks in an
aggregate amount equal to approximately euro 108 million to our German
subsidiaries with six year amortizations. The Senior Secured Credit Facility
also provides for the issuance of a letter of credit that the German banks may
draw upon in the event of the failure of our German subsidiaries to make
payments on the approximately euro 108 million loans, and our German
subsidiaries are required to reimburse the letter of credit issuer for any such
issuances. The amount of the letter of credit also may be fully drawn under
certain circumstances, and in such event the amount of the draw shall convert
into term loans to our German subsidiaries with similar amortization to the
German term loans.
Amortization. The Tranche A term loan will be amortized in four quarterly
installments of $750,000 commencing on June 30, 2000, four quarterly
installments of $2.0 million commencing on June 30, 2001, four quarterly
installments of $3.75 million commencing on June 30, 2002, four quarterly
installments of $7.5 million commencing on June 30, 2003, four quarterly
installments of $2.5 million commencing on June 30, 2004 and four quarterly
installments of $2.25 million commencing on June 30, 2005. The Tranche B term
loan will be amortized in 24 quarterly installments of $2.0 million, commencing
on June 30, 2000, four quarterly installments of $77.5 million commencing on
June 30, 2006, and two quarterly installments of $76.0 million commencing on
June 30, 2007. The German term loans will be amortized in four quarterly
installments of euro 530,000 commencing on June 30, 2000, twelve quarterly
installments of euro 790,000 million commencing on June 30, 2001, four
quarterly installments of euro 7.625 million commencing on June 30, 2004, three
quarterly installments of euro 15.78 million commencing on June 30, 2005 and
one quarterly installment of euro 18.935 million on March 31, 2006.
Use of Facility. We used the term loans to refinance certain existing
indebtedness and as part of the financing for the WWG merger. Our revolving
credit facility of $175 million is available to us from time to time for
potential acquisitions and other general corporate purposes.
Guarantee; Security. The obligations of Dynatech LLC under our revolving
credit facility and the Tranche A and Tranche B term loans and the
reimbursement obligations of our German subsidiaries under the letter of credit
relating to the German term loan is guaranteed by each active direct or
indirect U.S. subsidiary of Dynatech LLC and by Dynatech Corporation. The
obligations under our Senior Secured Credit Facility are secured by a pledge of
our equity interest in Dynatech LLC, by substantially all of the assets of
Dynatech LLC and each active direct or indirect U.S. subsidiary of Dynatech
LLC, and by a pledge of the capital stock of each such direct or indirect U.S.
subsidiary, and 65% of the capital stock of each subsidiary of Dynatech LLC
that acts as a holding company of Dynatech LLC's foreign subsidiaries.
Interest. The term loans and loans under our revolving credit facility bear
interest at floating rates based upon the interest rate option we elect.
Prepayments. Our Senior Secured Credit Facility generally permits voluntary
prepayment of loans thereunder without premium or penalty, subject to specified
limitations. Mandatory prepayments are required to be made from (a) 100% of net
proceeds from specified asset sales, casualty insurance and condemnation awards
or other similar recoveries; (b) 100% of the net proceeds from the issuance of
indebtedness by us, other than as
72
permitted by our Senior Secured Credit Facility; and (c) 50% of annual excess
cash flow for each fiscal year in which the ratio of our debt on the last day
of such fiscal year to our EBITDA for such fiscal year is greater than or equal
to 4.0 to 1.0.
Covenants and Events of Default. Our Senior Secured Credit Facility contains
covenants that, among other things, restrict our ability to dispose of assets,
incur additional debt, guarantee obligations or incur contingent liabilities,
repay our 9 3/4% Senior Subordinated Notes due 2008, pay dividends, create
liens on assets, make investments, loans or advances, engage in mergers or
consolidations, make capital expenditures or engage in certain transactions
with affiliates. Our Senior Secured Credit Facility contains customary events
of default.
This summary of the material provisions of our senior credit facility, is
qualified in its entirety by reference to all of its provisions, which have
been filed as an exhibit to the registration statement of which this prospectus
forms a part. See "Additional Information".
Senior Subordinated Notes
Our senior subordinated notes were issued in an aggregate principal amount
of $245 million and will mature on May 15, 2008. The issuer of the senior
subordinated notes is Dynatech LLC and the notes are guaranteed on a senior
subordinated basis by us. 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.
On or after May 15, 2003, the senior subordinated notes may be redeemed at
the option of Dynatech LLC, in whole or in part from time to time at a
redemption price, expressed as a percentage of principal amount, as set forth
below:
Redemption
Period Price
------ ----------
2003........................................................... 104.875%
2004........................................................... 103.250%
2005........................................................... 101.625%
2006........................................................... 100.000%
Additionally, at any time prior to May 15, 2001, we may use the proceeds
from one or more equity offerings to redeem up to 35% of the senior
subordinated notes at a redemption price equal to 109.875% of the principal
amount thereof plus accrued and unpaid interest, if any, to the redemption
date, subject to some restrictions.
This summary of the material provisions of the senior subordinated notes is
qualified in its entirety by reference to all of the provisions of the
indenture governing these notes, which has been filed as an exhibit to the
registration of which this prospectus forms a part. See "Additional
information."
73
SHARES ELIGIBLE FOR FUTURE SALE
Since May 1998, our common stock has been available on the over-the-counter
market. However, because it was not listed on a national or regional securities
exchange, it has been thinly traded. Future sales of substantial amounts of our
common stock in the public market following this offering, including shares
issued upon exercise of outstanding options or options that may be granted
after this offering, could harm market prices and could impair our ability to
raise capital through the sale of our equity securities. Sales of a substantial
amount of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price of our common stock and our
ability to raise equity capital in the future.
Upon the closing of this offering and assuming that none of our outstanding
options are exercised, we will have outstanding shares of common stock,
or shares if the underwriters exercise their over-allotment option
in full. Of these outstanding shares, all of the shares sold in this offering
will be freely tradable without restriction under the U.S. Securities Act,
except for shares purchased by our "affiliates", as that term is defined in
Rule 144 under the U.S. Securities Act. Any shares purchased by our affiliates
generally may be sold in compliance with Rule 144 as described below.
The remaining shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the U.S. Securities Act, which
are summarized below. Sales of the restricted securities in the public market,
or the availability of these shares for sale, could adversely affect the market
price of our common stock.
As of June 30, 2000, options for a total of 31,308,459 shares of common
stock had been granted under our 1994 stock option incentive plan, and options
for a total of 125,000 shares of common stock had been granted under our other
stock option plans. Approximately 15,102,000 of those options are vested and
exercisable. Of those vested shares, are subject to 135-day lock-up
agreements described below.
Based on shares outstanding as of June 30, 2000, taking into account the
lock-up agreements and assuming Credit Suisse First Boston Corporation does not
release stockholders from these agreements prior to the expiration of the
applicable lock-up periods, the following shares will be eligible for sale in
the public market at the following times:
. beginning on the effective date of the registration statement, the
shares sold in this offering will be immediately available for sale in
the public market;
. beginning 135 days after the date of this prospectus, approximately
additional shares will become eligible for sale under Rule 144 or
701, subject to volume restrictions as described below;
. beginning 180 days after the date of this prospectus, 153,915,770
additional shares will become eligible for sale from time to time
thereafter subject to compliance with the U.S. Securities Act; and
. the remainder of the restricted securities will be eligible for sale
from time to time thereafter, subject in some cases to compliance with
Rule 144.
Lock-up Agreements and Other Contractual Restrictions
Our officers and directors and some other shareholders who own in the
aggregate approximately shares, representing approximately % of our
total outstanding common stock after this offering have entered into lock-up
agreements or other contractual restrictions providing that they will not
offer, sell, contract to sell or otherwise dispose of any shares of our common
stock for a period of 135 days after the date of this prospectus, without the
prior written consent of Credit Suisse First Boston Corporation.
In addition, we and the Clayton, Dubilier & Rice funds, which own in the
aggregate 153,915,770 shares, representing % of our total outstanding common
stock after this offering, have entered into lock-up
74
agreements providing that they will not offer, sell, contract to sell or
otherwise dispose of shares of our common stock for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston Corporation.
As a result of these lock-up agreements and other contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rule 144, none of these shares will be resellable until 136 days or 181 days,
in the case of the shares held by the Clayton, Dubilier & Rice funds, after the
date of this prospectus. Credit Suisse First Boston Corporation may, in its
sole discretion and at any time without notice, release any portion of the
securities subject to lock-up agreements or other contractual restrictions. For
further details on the lock-up agreements and other contractual restrictions,
see "Underwriting."
Rule 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted shares
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding; or
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Under
Rule 144(k), a person who is not deemed to have been an affiliate of ours at
any time during the six months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell
these shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Registration Rights Agreements
Following this offering, some of our shareholders will, under certain
circumstances, have the right to require us to register their shares for future
sale. See "Description of Capital Stock --Registration Rights."
75
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation and Merrill Lynch,
Pierce, Fenner & Smith Incorporated are acting as representatives and as joint
book-running managers, the following respective numbers of shares of common
stock:
Number
Underwriter of Shares
----------- ---------
Credit Suisse First Boston Corporation............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
-----
Total.........................................................
=====
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the public offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
Underwriting Discounts
and
Commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the U.S. Securities
and Exchange Commission a registration statement under the U.S. Securities Act
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers and directors and some of our shareholders who own in the
aggregate approximately shares, representing % of our total outstanding
common stock after this offering, have agreed that they will
76
not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 135
days after the date of this prospectus.
The Clayton, Dubilier & Rice funds which own in the aggregate 153,915,770
shares, representing % of our total outstanding common stock after this
offering, have agreed that they will not offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, any shares of our common stock
or securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock,
whether any such aforementioned transaction is to be settled by delivery of our
common stock or such other securities, in cash or otherwise, or publicly
disclose the intention to make any such offer, sale, pledge or disposition, or
to enter into any such transaction, swap, hedge or other arrangement, without,
in each case, the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market, subject to official notice of issuance, under the symbol
" ".
The public offering price was determined by negotiation between the
underwriters and us. The principal factors considered in determining the public
offering price included the following:
. the information set forth in this prospectus;
. the history and the prospects for the industry in which we compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
A pricing committee of our board of directors established the public
offering price following such negotiations.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will
develop and continue after this offering.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the U.S. Securities Exchange
Act of 1934.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
77
. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the over-
allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing share in the
open market.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option--a naked short position--that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of the
common stock or preventing or retarding a decline in the market price of the
common stock. As a result the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make internet distributions on the
same basis as other allocations.
78
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent,
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
79
LEGAL MATTERS
The validity of the issuance of the securities offered in this offering will
be passed upon for us by Debevoise & Plimpton, New York, New York. Debevoise &
Plimpton also acts and may continue to act as counsel to Clayton, Dubilier &
Rice, Inc. and its affiliates and to us and our affiliates. Franci J.
Blassberg, Esq., a partner of Debevoise & Plimpton, is married to Joseph L.
Rice, III, who is one of our directors and a shareholder of the managing
general partners of the general partners of Clayton, Dubilier & Rice Fund V
Limited Partnership and Clayton, Dubilier & Rice Fund VI Limited partnership,
our controlling shareholders. Legal matters in connection with this offering
will be passed upon for the underwriters by Simpson Thacher & Bartlett, New
York, New York.
EXPERTS
The consolidated financial statements of Dynatech Corporation as of March
31, 2000 and 1999 and for each of the three years in the period ended March 31,
2000 included in this prospectus and the financial statements schedules
included in the Registration Statement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The audited consolidated financial statements of Wavetek Wandel Goltermann,
Inc. and subsidiaries for the fiscal year ended September 30, 1999 included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated financial statements of Applied Digital Access, Inc. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in accounting and auditing.
80
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the U.S. Securities and Exchange Commission a
registration statement on Form S-1 including exhibits and schedules, under the
U.S. Securities Act with respect to the common stock to be sold in this
offering. With respect to each contract, agreement or other document filed as
an exhibit to the registration statement, we refer you to the exhibit for a
more complete description of the matter involved, and each statement in this
prospectus shall be deemed qualified in its entirety by this reference.
We file annual, quarterly, special reports and other information with the
U.S. Securities and Exchange Commission. These filings are available to the
public from commercial document retrieval services and at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549,
and in New York, New York and Chicago, Illinois. Please call the SEC at 1(800)-
SEC-0330 for further information on the public reference rooms and copy
charges.
81
DYNATECH CORPORATION
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Dynatech Corporation:
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999................ F-3
Consolidated Statements of Income for the Years Ended March 31, 2000,
1999 and 1998........................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
Ended March 31, 2000, 1999 and 1998..................................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 2000,
1999 and 1998........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Report of Independent Accountants on Financial Statement Schedule........ F-33
Financial Statement Schedule, Valuation and Qualifying Accounts for the
Years Ended March 31, 2000, 1999 and 1998............................... F-34
Wavetek Wandel Goltermann, Inc.:
Report of Independent Public Accountants................................. F-35
Consolidated Balance Sheets as of September 30, 1999 and 1998............ F-36
Consolidated Statements of Operations for the Years Ended September 30,
1999, 1998 and 1997..................................................... F-37
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997....................................... F-38
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1998 and 1999..................................................... F-39
Notes to Consolidated Financial Statements............................... F-40
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
September 30, 1999 ..................................................... F-71
Consolidated Statements of Operations (unaudited) for the Three Months
Ended March 31, 2000 and 1999, and for the Six Months Ended March 31,
2000 and 1999........................................................... F-72
Consolidated Statements of Cash Flows (unaudited) for the Six Months
Ended March 31, 2000 and 1999........................................... F-73
Notes to Consolidated Financial Statements (unaudited)................... F-74
Applied Digital Access, Inc.:
Report of Independent Accountants........................................ F-87
Consolidated Balance Sheets as of December 31, 1997 and 1998............. F-88
Consolidated Statements of Operations and Comprehensive Loss for the
Years Ended December 31, 1996, 1997 and 1998............................ F-89
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997, 1998........................................... F-90
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-91
Notes to Consolidated Financial Statements............................... F-92
Condensed Consolidated Balance Sheets as of December 31, 1998 and June
30, 1999 (unaudited).................................................... F-110
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited) for the Three Months Ended June 30, 1998 and 1999 and the
Six Months Ended June 30, 1998 and 1999................................. F-111
Condensed Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended June 30, 1998 and 1999..................................... F-112
Notes to Condensed Consolidated Financial Statements..................... F-113
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Dynatech Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Dynatech Corporation and its subsidiaries (the "Company") at March 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 the
opinion expressed above.
As discussed in Note S. to the consolidated financial statements, segment
information for the fiscal years 1999 and 1998 has been restated to conform to
the requirements of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 21, 2000
F-2
DYNATECH CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31,
--------------------
2000 1999
--------- ---------
(Amounts in
thousands except
share and per share
data)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 33,839 $ 70,362
Accounts receivable (net of allowance of $1,952 and
$1,634, respectively)................................. 78,236 70,996
Inventories:
Raw materials........................................ 11,085 16,680
Work in process...................................... 12,859 13,644
Finished goods....................................... 6,308 16,947
--------- ---------
Total inventory.................................... 30,252 47,271
--------- ---------
Deferred income taxes.................................. 21,548 15,921
Other current assets................................... 16,332 6,229
--------- ---------
Total current assets............................... 180,207 210,779
--------- ---------
Property and equipment:
Leasehold improvements................................. 5,843 6,170
Machinery and equipment................................ 62,361 51,893
Furniture and fixtures................................. 18,908 14,748
--------- ---------
87,112 72,811
Less accumulated depreciation and amortization......... (59,796) (47,192)
--------- ---------
27,316 25,619
Other assets:
Net assets held for sale............................... 72,601 --
Intangible assets, net................................. 58,508 56,768
Deferred income taxes.................................. 42,689 23,852
Deferred debt issuance costs, net...................... 21,382 24,614
Other.................................................. 12,135 6,472
--------- ---------
$ 414,838 $ 348,104
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt.... $ 7,646 $ 23,191
Accounts payable....................................... 38,374 34,317
Accrued expenses:
Compensation and benefits............................ 35,036 24,420
Deferred revenue..................................... 13,564 27,141
Warranty............................................. 8,297 7,811
Interest............................................. 10,055 10,129
Other................................................ 9,270 14,874
Accrued income taxes................................... 5,703 13,398
--------- ---------
Total current liabilities.......................... 127,945 155,281
Long-term debt........................................... 572,288 504,151
Deferred compensation.................................... 11,280 5,112
Commitments and contingencies (Note Q)
Shareholders' deficit:
Serial preference stock, par value $1 per share;
authorized 100,000 shares; none issued................ -- --
Common stock, 2000 and 1999, respectively:
par value $0.01 and $0.00, authorized 200,000,000 and
50,000,000 shares; issued and outstanding 122,526,750
and 120,665,048 shares................................ 1,225 --
Additional paid-in capital............................. 344,873 322,746
Accumulated deficit.................................... (623,929) (629,941)
Unearned compensation.................................. (16,965) (7,563)
Other comprehensive loss............................... (1,879) (1,682)
--------- ---------
Total shareholders' deficit........................ (296,675) (316,440)
--------- ---------
$ 414,838 $ 348,104
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Amounts in thousands
except per share data)
Net sales........................................ $453,239 $329,532 $317,955
Cost of sales.................................... 157,090 108,618 103,923
-------- -------- --------
Gross profit..................................... 296,149 220,914 214,032
Selling, general and administrative expense...... 156,499 113,469 106,328
Product development expense...................... 61,172 42,472 42,919
Recapitalization and other related costs......... 27,942 40,767 --
Amortization of intangibles...................... 8,789 2,726 2,357
-------- -------- --------
Total operating expenses......................... 254,402 199,434 151,604
-------- -------- --------
Operating income............................... 41,747 21,480 62,428
Interest expense................................. (51,916) (46,178) (1,184)
Interest income.................................. 2,354 3,392 3,013
Other income (expense), net...................... (68) 15,703 551
-------- -------- --------
Income (loss) from continuing operations before
income taxes.................................... (7,883) (5,603) 64,808
Provision (benefit) for income taxes............. (1,169) (69) 26,521
-------- -------- --------
Income (loss) from continuing operations......... (6,714) (5,534) 38,287
Discontinued operations:
Operating income, net of income tax provision
of $7,967 in 2000, $6,903 in 1999, and $2,510
in 1998....................................... 12,726 11,979 3,489
-------- -------- --------
Net income....................................... $ 6,012 $ 6,445 $ 41,776
======== ======== ========
Income (loss) per common share--basic:
Continuing operations.......................... $ (0.05) $ (0.04) $ 1.87
Discontinued operations........................ 0.09 0.09 0.17
-------- -------- --------
$ 0.04 $ 0.05 $ 2.04
======== ======== ========
Income (loss) per common share--diluted:
Continuing operations.......................... $ (0.05) $ (0.04) $ 1.80
Discontinued operations........................ 0.09 0.09 0.16
-------- -------- --------
$ 0.04 $ 0.05 $ 1.96
======== ======== ========
Weighted average number of common shares
Basic.......................................... 148,312 129,596 20,493
Diluted........................................ 148,312 129,596 21,272
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Total
Number of Shares Retained Other Share-
----------------- Additional Earnings/ Unearned Compre- holders'
Common Treasury Common Paid-In (Accumulated Compen- hensive Treasury Equity
Stock Stock Stock Capital Deficit) sation Loss Stock (Deficit)
------- -------- ------- ---------- ------------ -------- ------- -------- ---------
(Amounts in thousands)
Balance, March 31,
1997................... 18,605 (1,812) $ 3,721 $ 9,887 $ 195,506 $ 0 $(1,247) $(47,181) $ 160,686
Net income--1998....... 41,776 41,776
Translation
adjustment............ (353) (353)
---------
Total comprehensive
income................ 41,423
---------
Purchases of treasury
stock................. (163) (5,330) (5,330)
Exercise of stock
options and other
issuances............. 234 (2,919) 7,580 4,661
Tax benefit from
exercise of stock
options............... 679 679
------- ------ ------- -------- --------- -------- ------- -------- ---------
Balance, March 31,
1998................... 18,605 (1,741) 3,721 7,647 237,282 0 (1,600) (44,931) 202,119
======= ====== ======= ======== ========= ======== ======= ======== =========
Net income--1999....... 6,445 6,445
Translation
adjustment............ (82) (82)
---------
Total comprehensive
income................ 6,363
---------
Exercise of stock
options and other
issuances............. 414 59 (111) 1,946 1,835
Tax benefit from
exercise of stock
options............... 609 609
Recapitalization and
other related costs:
Common stock
repurchased........... (18,605) 1,682 (3,721) (7,269) (873,668) 42,985 (841,673)
Issuance of new stock,
net of fees........... 120,251 298,148 298,148
Stock options expense.. 14,640 14,640
Unearned compensation.. 9,082 (9,082) --
Amortization of
unearned
compensation.......... 1,519 1,519
------- ------ ------- -------- --------- -------- ------- -------- ---------
Balance, March 31,
1999................... 120,665 0 $ 0 $322,746 $(629,941) $ (7,563) $(1,682) $ 0 $(316,440)
======= ====== ======= ======== ========= ======== ======= ======== =========
Net income--2000....... 6,012 6,012
Translation
adjustment............ (197) (197)
---------
Total comprehensive
income................ 5,815
---------
Exercise of stock
options and other
issuances............. 1,862 11 4,725 4,736
Adjustment to unearned
compensation.......... (1,143) 1,130 (13)
Stock option expense... 12,327 12,327
Redemption of stock
options............... (6,980) (6,980)
Unearned compensation
from stock option
grants................ 12,951 (12,951) --
Change in par value of
common stock.......... 1,214 (1,214) --
Amortization of
unearned
compensation.......... 2,419 2,419
Tax benefit from
exercise of stock
options............... 1,461 1,461
------- ------ ------- -------- --------- -------- ------- -------- ---------
Balance, March 31,
2000................... 122,527 0 $ 1,225 $344,873 $(623,929) $(16,965) $(1,879) $ 0 $(296,675)
======= ====== ======= ======== ========= ======== ======= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
------------------------------
2000 1999 1998
--------- --------- --------
(Amounts in thousands)
Operating activities:
Net income from operations.................... $ 6,012 $ 6,445 $ 41,776
Adjustment for noncash items included in net
income:
Depreciation.................................. 13,082 11,741 12,066
Amortization of intangibles................... 12,327 6,228 5,835
Gain on sale of subsidiary.................... -- (15,900) --
Recapitalization and other related costs...... 12,327 14,640 --
Amortization of unearned compensation......... 2,419 1,519 --
Amortization of deferred debt issuance costs.. 3,232 2,693 --
Change in net deferred income tax asset....... (2,840) (12,289) 2,638
Other......................................... 1,517 612 594
Changes in operating assets and liabilities,
net of effects of purchase acquisitions and
divestitures................................. 9,334 51,981 (17,564)
--------- --------- --------
Net cash flows provided by operating
activities................................... 57,410 67,670 45,345
--------- --------- --------
Investing activities:
Purchases of property and equipment........... (21,859) (11,323) (15,879)
Disposals of property and equipment........... 7 369 219
Proceeds from sales of businesses............. -- 21,000 507
Businesses acquired in purchase transactions,
net of cash acquired......................... (113,227) (21,365) --
Incentive earnout related to the purchase of
Advent....................................... -- (3,845) --
Other......................................... (7,172) (4,915) 144
--------- --------- --------
Net cash flows provided by (used in) investing
activities................................... (142,251) (20,079) (15,009)
--------- --------- --------
Financing activities:
Borrowings (repayments) under revolving credit
facility, net................................ 70,000 -- (5,000)
Borrowings of term loan debt.................. -- 535,000 --
Repayment of term loan debt................... (17,139) (8,000) --
Repayment of notes payable.................... -- (2,192) --
Repayment of capital lease obligations........ (212) (159) (195)
Financing fees................................ -- (38,631) --
Proceeds from issuance of common stock........ 3,257 277,035 4,513
Proceeds from exercise of stock options....... 1,479 1,800 --
Purchases of treasury stock, common stock and
stock options................................ (6,980) (806,508) (5,330)
--------- --------- --------
Net cash flows used in financing activities... 50,405 (41,655) (6,012)
Effect of exchange rate on cash................ (157) (478) 798
--------- --------- --------
Increase (decrease) in cash and cash
equivalents................................... (34,593) 5,458 25,122
Cash and cash equivalents at beginning of
year.......................................... 70,362 64,904 39,782
--------- --------- --------
Cash and cash equivalents at end of year....... $ 35,769 $ 70,362 $ 64,904
========= ========= ========
Change in operating asset and liability
components:
Decrease (increase) in trade accounts
receivable................................... $ (18,176) $ (1,114) $ 994
Decrease (increase) in inventories............ 7,185 2,503 (8,739)
Increase (decrease) in other current assets... (7,324) 2,089 (887)
Increase in accounts payable.................. 12,397 11,025 6,009
Increase in accrued expenses, taxes and
other........................................ 15,252 37,478 (14,941)
--------- --------- --------
Change in operating assets and liabilities..... $ 9,334 $ 51,981 $(17,564)
========= ========= ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest...................................... $ 48,791 $ 33,376 $ 934
Income taxes.................................. $ 14,737 $ 16,013 $ 24,307
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. FORMATION AND BACKGROUND
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 with other operations, primarily sales
offices, located in Europe and the Far East. The Company is managed in two
business segments: communications test and inflight information systems.
The communications test business, through the Company's TTC division,
manufactures and markets a broad range of communications test solutions used in
the planning, deploying, provisioning, manufacturing, managing and maintaining
of communications equipment and networks. The inflight information systems
segment, through the Company's AIRSHOW, Inc. subsidiary, provides passenger
cabin video information display systems and information services for the
general and commercial aviation markets. The Company also has other
subsidiaries that, in the aggregate, are not reportable as a segment ("Other
Subsidiaries"). These Other Subsidiaries include da Vinci Systems, Inc. which
provides digital color enhancement systems used in the production of television
commercials and programming; and Dataviews, Inc., which was sold in June 2000.
In years prior to fiscal 2000 the Company's consolidated statements of income
and the Other Subsidiaries section of Note S. Segment Information and
Geographic Areas 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 operates on a fiscal year ended March 31 in the calendar year
indicated (e.g., references to fiscal 2000 are references to the Company's
fiscal year which began April 1, 1999 and ended March 31, 2000).
B. 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 connection with its decision, the Board authorized
management to retain one or more investment banks to assist the Company with
respect to the divestiture. The segment's results of operations including net
sales, operating costs and expenses, other income and expense and income taxes
for fiscal 1998, 1999 and 2000, have been reclassified in the accompanying
statements of operations as discontinued operations. The Company's balance
sheet for fiscal 2000 reflects the net assets of the industrial computing and
communications segment as net assets held for sale within non-current assets.
The balance sheet for fiscal 1999 and the Statements of Cash Flows for fiscal
years 1998, 1999 and 2000 have not been reclassified for the discontinued
businesses. Management believes that the net proceeds from the disposition of
these companies will exceed the carrying amount of the net assets. In addition,
management does not anticipate net operating losses from the discontinued
segment through the first quarter of fiscal 2002, at which time the Company
anticipates to have sold these businesses. Accordingly, the anticipated gains
from the disposal of the segment and the operating results will not be
reflected in the statements of operations until they are realized.
F-7
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary operating results and balance sheet information of the discontinued
operations are as follows:
2000 1999 1998
-------- -------- --------
(Amounts in thousands)
Sales........................................... $203,361 $193,322 $154,993
Operating income................................ 21,304 18,638 6,036
Net income...................................... 12,726 11,979 3,489
Accounts receivable, net........................ 23,524
Inventories..................................... 28,453
Intangible assets, net.......................... 62,464
Accounts payable................................ (20,054)
Deferred revenue................................ (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 shareholders
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, 2000, CDR Fund V holds approximately 90.5% of
the Common Stock and other shareholders hold approximately 9.5% of the Common
Stock.
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 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 shareholders' equity. See Note K. Debt.
Recapitalization and other related costs from continuing operations during
fiscal 2000 totaled $27.9 million, 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. FINANCIAL POSITION OF DYNATECH CORPORATION AND DYNATECH LLC
In connection with the Recapitalization and related transactions, Dynatech
LLC (formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to indebtedness
of Dynatech Corporation, including the 9 3/4% Senior Subordinated Notes due
2008 (the "Senior Subordinated Notes") and the Senior Secured Credit
Facilities referred to elsewhere in these Notes to the Consolidated Financial
Statements.
F-8
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with no
independent operations and no significant assets other than its membership
interest in Dynatech LLC. Accordingly, the condensed consolidated financial
statements of Dynatech Corporation, presented in this report, are not
materially different from those of Dynatech LLC. Management has not included
separate financial statements of Dynatech LLC because management has determined
that they would not be material to holders of the Senior Subordinated Notes or
to the holders of Dynatech Corporation's common stock. Dynatech LLC is subject,
under agreements governing its indebtedness, to prohibitions on its ability to
make distributions to Dynatech Corporation (with limited exceptions) and other
significant restrictions on its operations. See Note K. Debt.
E. RELATED PARTY
The Company paid an annual management fee to CDR totaling $0.5 million each
in fiscal 2000 and in fiscal 1999. In return for the annual management fee, CDR
provides management and financial consulting services to the Company and its
subsidiaries.
On May 19, 1999, Ned C. Lautenbach, a principal of CDR, became the Company's
Chairman, President and Chief Executive Officer. Mr. Lautenbach does not
receive direct compensation from the Company for these services. However, his
compensation for any services is covered in the above mentioned management
agreement.
F. CHANGE OF JURISDICTION OF INCORPORATION
On September 8, 1999 the shareholders of the Company approved a proposal to
change the jurisdiction of incorporation of the Company from the Commonwealth
of Massachusetts to the State of Delaware and the jurisdiction of incorporation
changed effective on such date.
The common stock of the Company, issued when it was incorporated under the
laws of the Commonwealth of Massachusetts, had no par value per share.
Therefore, the Company did not reflect a value for the common stock on the
balance sheet. The common stock issued under the laws of the State of Delaware
has a par value of $0.01 per share, and the consolidated balance sheet reflects
a reclassification from additional paid-in capital of $1,214 (representing the
par value of 121,408,993 outstanding shares at September 30, 1999).
G. 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, 2000 and 1999. Other financial instruments include debt and
interest rate swaps. See Note K. Debt and Note L. Interest Rate Swap Contracts.
F-9
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk. Financial instruments which 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 primarily with one institution 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. In fiscal 2000 the Company
provided approximately $0.6 million for doubtful accounts ($0.5 million in
fiscal 1999 and $0.4 million in fiscal 1998).
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 debt 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.
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 amortized on a straight-line
basis over 3 to 30 years. Product technology and other intangible assets are
amortized on a straight-line basis primarily over 2 to 10 years, but in no
event longer than their expected useful lives. Amortization expense from
continuing operations related to product technology was $1.6 million in fiscal
2000, $1.5 million in fiscal 1999 and $1.5 million in fiscal 1998, and was
excluded from cost of sales. Amortization expense from continuing operations
related to goodwill was $8.8 million in fiscal 2000, $2.7 million in fiscal
1999, and $2.4 million in fiscal 1998.
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
F-10
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, the
Company incurred financing fees that are being amortized over the life of the
Senior Secured Credit Facilities and Senior Subordinated Notes. See Note K.
Debt and Note R. Subsequent Events.
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 shareholders' equity (deficit). The realized gains
or losses resulting from foreign currency transactions are included in other
income.
Other comprehensive income (loss) which is shown in the Statement of
Shareholders' Equity (Deficit) consists only of foreign currency translation
adjustments.
Stock-Based Compensation. In 1996 the Financial Accounting Standards Board
issued Statement No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"),
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. The Company has
elected footnote disclosure only. See Note O. Stock-Based Compensation.
Unearned Compensation. Since the time of the Recapitalization, the Company
has issued non-qualified stock options to primarily all employees and non-
employee directors at an exercise price equal to the fair market value as
determined by the Company's board of directors. This price may or may not be
equal to the trading price on the open market on the dates of the grants.
During fiscal 1999, the Company granted non-qualified stock options to certain
key employees to purchase 14.3 million shares of common stock at a price lower
than the closing market price. The Company recorded a charge of $9.1 million
within shareholder's deficit (under the caption "unearned compensation")
related to the difference between the market price and the grant price. This
unearned compensation is being charged to expense over a five-year vesting
period and is recorded in cost of sales, selling, general and administrative
expense, and product development expense as appropriate. During fiscal 1999 the
amortization of unearned compensation was $1.2 million for continued operations
and $0.3 million related to discontinued operations, all of which related to
stock option grants during fiscal years 2000 and 1999.
During fiscal 2000 the Company granted non-qualified stock options to
primarily all employees and non-employee directors to purchase 4.3 million
shares of common stock at a price lower than the trading price on the open
market. The Company incurred a charge of approximately $13.0 million for the
difference between the market price and the fair market value as determined by
the Board of Directors and recorded this unearned compensation within
shareholders' deficit. This charge will be amortized over the options' vesting
periods. During fiscal 2000 the amortization of unearned compensation was $1.9
million for continuing operations and $0.5 million for discontinued operations.
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 recognized for unvested options and eliminates any remaining
unearned compensation.
F-11
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition. The Company generally recognizes revenue from product
sales upon shipment provided that (1) the shipping terms of the arrangement
allow for recognizing revenue upon shipment (products sold with destination
terms are recognized upon delivery), (2) no significant post-delivery
obligations remain (including installation and acceptance), and (3) collection
of the resulting receivable is reasonably assured. When significant post-
delivery obligations exist, revenue is deferred until such obligations are
fulfilled. The Company accrues for warranty costs, sales returns, and other
allowances at the time of shipment based on its experience. Software
development and consulting services are recognized when rendered based on
contractual arrangements that allow for revenue and billing as actual time and
costs are incurred. Service revenue is recognized over the contractual period
or as services are rendered. In transactions that include multiple products
and/or services, the Company allocates the sales value among each of the
deliverables based on their relative fair values.
Product Development Expense. Costs relating to research and development are
expensed as incurred. Internal software development costs that qualify for
capitalization are not significant.
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 L. Interest Rate Swap Contracts.
Income Taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events 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.
See Note M. Income Taxes. Tax credits are generally recognized as reductions of
income tax provisions in the year in which the credits arise.
The Company does not provide for U.S. income tax liability on undistributed
earnings of its foreign subsidiaries. The earnings of non-U.S. subsidiaries,
which reflect full provision for non-U.S. income taxes, are indefinitely
reinvested in non-U.S. operations. Accordingly, no provision has been made for
taxes that might be payable upon remittance of such non-U.S. earnings.
New Pronouncements
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes the staff's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application
of the guidance in SAB 101 will be required in the Company's fourth quarter
ended March 31, 2001. The Company has evaluated the application of SAB 101
based on the current guidance and interpretations and has determined that it
will not have a significant impact.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and
among other issues clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective
F-12
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. The Company does
not expect the application of FIN 44 to have a material impact on results of
operations and financial position.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 was amended by
Statement of Financial Accounting Standards No. 137 which modified the
effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS 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. The Company is assessing the impact of the
adoption of SFAS 133 on its results of operations and financial position.
H. ACQUISITIONS AND DIVESTITURES
Acquisitions
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 Dynatech's consolidated financial statements within the inflight information
systems segment since June 19, 1998. Pacific designs and manufactures customer-
specified avionics and integrated cabin management.
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
the inflight information systems segment. Flight TECH is an inflight
entertainment manufacturer specializing in equipment for small and medium jets,
and turboprop aircraft.
Sierra Design Labs
On September 10, 1999, the Company, through one of its wholly owned
subsidiaries, purchased the outstanding stock of Sierra Design Labs ("Sierra"),
a Nevada Corporation 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 that is being amortized on a straight-line
basis over 10 years. The operating results of Sierra have been included in the
Company's consolidated financial statements within Other Subsidiaries as
presented in Note S. Segment Information and Geographic Areas since September
10, 1999. Sierra designs, manufactures, and markets uncompressed, real-time
videodisk recorders.
Applied Digital Access, Inc.
On November 1, 1999, the Company, through one of its wholly owned
subsidiaries, acquired all the outstanding stock of Applied Digital Access,
Inc. ("ADA") for a total purchase price of approximately $81 million
F-13
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in cash, (of which $60 million was borrowed to finance this acquisition). The
acquisition was accounted for using the purchase method of accounting and
resulted in $36 million of goodwill that is being amortized on a straight-line
basis over 3 years. The purchase price allocation for this acquisition is
preliminary and further refinements are likely to be made based on the
completion of final valuation studies and the Company's analysis of its
business plan of integration. The operating results of ADA have been included
in the Company's consolidated financial statements within the communications
test segment since November 1, 1999. ADA is a provider of network performance
management products that include systems, software and services used to manage
the quality, performance, availability and reliability of telecommunications
service providers' networks.
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 next year. 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.
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 which were subsidiaries of WPI, Inc. The total purchase price for Itronix
UK totaled approximately $34.8 million in cash (of which approximately $15
million was borrowed to finance this 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 purchase price allocation for this acquisition is
preliminary and further refinements are likely to be made based on the
completion of final valuation studies and the Company's analysis of its
business plan of integration. 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 next year. Itronix UK distributes
rugged field computer systems including the provision of related services for
incorporation into customers' specific applications.
F-14
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The goodwill generated from these acquisitions was calculated based on the
purchase price less the net assets acquired, as follows:
2000 1999
-------- -------
Total purchase price...................................... $126,891 $22,000
-------- -------
Less net assets acquired:
Cash.................................................... 13,664 385
Accounts receivable..................................... 12,638 2,058
Inventories............................................. 19,684 1,865
Deferred tax asset...................................... 20,099 (46)
Other assets............................................ 11,949 1,914
Notes payable........................................... (124) (2,221)
Accounts payable........................................ (11,686) (575)
Accrued liabilities..................................... (14,431) (872)
Long-term debt.......................................... (139) (238)
-------- -------
51,654 2,270
-------- -------
Goodwill.................................................. $ 75,237 $19,730
======== =======
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.
2000 1999
-------- --------
Revenue.................................................. $479,535 $369,389
Net loss from continuing operations...................... (14,687) (16,881)
Loss per share from continuing operations:
Basic.................................................. (0.10) (0.13)
Diluted................................................ (0.10) (0.13)
Weighted average shares:
Basic.................................................. 148,312 129,596
Diluted................................................ 148,312 129,596
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.
Dynatech 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.
Parallax, Inc.
During fiscal year 1999, the Company liquidated the assets and liabilities
of Parallax, Inc. ("Parallax"). The loss from the liquidation activities was
immaterial. Sales and operating results were insignificant for the periods
ended March 31, 1999 and 1998.
F-15
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I. INTANGIBLE ASSETS
Intangible assets, acquired primarily from business acquisitions, are
summarized as follows (See Note H. Acquisitions and Divestitures):
2000(a) 1999
------- -------
(Amounts in
thousands)
Product technology.......................................... $ 9,236 $17,042
Goodwill.................................................... 67,328 55,878
Other intangible assets..................................... 4,177 13,307
------- -------
80,741 86,227
Less accumulated amortization............................... 22,233 29,459
------- -------
Total..................................................... $58,508 $56,768
======= =======
- -----------------------
(a) Balances as of March 31, 2000 reflect continuing operations only.
F-16
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. EARNINGS PER SHARE
The computation for earnings per share is as follows:
2000 1999 1998
-------- -------- -------
Net income (loss):
Continuing operations.......................... $ (6,714) $ (5,534) $38,287
Discontinued operations........................ 12,726 11,979 3,489
-------- -------- -------
Net income....................................... $ 6,012 $ 6,445 $41,776
======== ======== =======
BASIC:
Common stock outstanding, net of treasury stock,
beginning of period............................. 120,665 16,864 16,793
Weighted average common stock and treasury stock
issued during the period........................ 886 104,331 144
Weighted average common stock and treasury stock
repurchased..................................... -- (14,983) (142)
-------- -------- -------
121,551 106,212 16,795
Bonus element adjustment related to rights
offering........................................ 26,761 23,384 3,698
-------- -------- -------
Weighted average common stock outstanding, net of
treasury stock, end of period................... 148,312 129,596 20,493
======== ======== =======
Net income per common share:
Continuing operations.......................... $ (0.05) $ (0.04) $ 1.87
Discontinued operations........................ 0.09 0.09 0.17
-------- -------- -------
Net income per common share...................... $ 0.04 $ 0.05 $ 2.04
======== ======== =======
DILUTED:
Common stock outstanding, net of treasury stock,
beginning of period............................. 120,665 16,871 16,803
Weighted average common stock and treasury stock
issued during the period........................ 886 104,324 134
Weighted average common stock equivalents........ -- -- 639
Weighted average common stock and treasury stock
repurchased..................................... -- (14,983) (142)
-------- -------- -------
121,551 106,212 17,434
Bonus element adjustment related to rights
offering........................................ 26,761 23,384 3,838
-------- -------- -------
Weighted average common stock outstanding, net of
treasury stock, end of period................... 148,312 129,596 21,272
======== ======== =======
Net income per common share:
Continuing operations.......................... $ (0.05) $ (0.04) $ 1.80
Discontinued operations........................ 0.09 0.09 0.16
-------- -------- -------
Net income per common share...................... $ 0.04 $ 0.05 $ 1.96
======== ======== =======
On May 23, 2000 in connection with the Wavetek Wandel Goltermann merger, the
Company issued 12.5 million and 30.625 million shares of common stock to CDR,
CDR Fund V and Clayton, Dubilier & Rice Limited Partnership, an investment
partnership managed by CDR ("CDR Fund VI"), respectively at a price of $4.00
per share. See Note R. Subsequent Events. In order to reverse the diminution of
all other common shareholders as a result of shares issued in connection with
the WWG Merger, the Company granted a rights offering to all its common stock
shareholders (including CDR Fund V) of record on April 20, 2000 (the
"Offering"). CDR elected to waive its right to participate in this Offering.
Thus, 4,983,000 shares of common
F-17
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock are covered under the Offering to shareholders other than CDR. As a
result of these transactions, the Company has effectively granted a right to
all shareholders 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, was $11.25.
For purposes of calculating weighted average shares and earnings per share,
the Company has treated the sale of common stock to CDR and the anticipated
sale of common stock to all other shareholders as a rights offer. Since the
common stock has been offered to all shareholders at a price that is less than
that of the market trading price (the "bonus element"), a retroactive
adjustment of 1.22 per share has been made to weighted average shares to
consider this bonus element.
In fiscal 2000 and 1999 the Company excluded from its diluted weighted
average shares outstanding the effect of the weighted average common stock
equivalents (11.4 million in fiscal 2000 and 5.3 million in fiscal 1999) as the
Company incurred a net loss from continuing operations. The common stock
equivalents has been excluded from the calculation of diluted weighted average
shares outstanding as inclusion would result in an antidilutive effect on net
loss per common share from continuing operations.
K. DEBT
Long-term debt is summarized below:
2000 1999
-------- --------
(Amounts in
thousands)
Senior secured credit facilities.......................... $304,861 $252,000
Senior subordinated notes................................. 275,000 275,000
Capital lease obligations(a).............................. 73 342
-------- --------
Total debt.............................................. 579,934 527,342
-------- --------
Less current portion...................................... 7,646 23,191
-------- --------
Long-term debt.......................................... $572,288 $504,151
======== ========
- -----------------------
(a) Balances as of March 31, 2000 reflect debt from continuing operations only.
The book value of the debt under the Senior Secured Credit Facilities
represent fair market value at March 31, 2000 and 1999. The fair market value
of the Senior Subordinated Notes was $250.3 million and $274.3 million at March
31, 2000 and 1999, respectively.
Senior Secured Credit Facilities
In connection with the Recapitalization, the Company entered into a senior
secured credit agreement (the "Senior Secured Credit Agreement") consisting of
a $260 million term loan facility (the "Term Loan Facility") and a $110 million
revolving credit facility (the "Revolving Credit Facility") (collectively, the
"Senior Secured Credit Facilities"). In addition, the Company incurred $275
million of debt through the sale of its 9 3/4% Senior Subordinated Notes (the
"Senior Subordinated Notes").
In connection with the Recapitalization and related transactions, Dynatech
LLC became the primary obligor with respect to the Senior Secured Credit
Facility and the Senior Subordinated Notes. See Note F. Financial Position of
Dynatech Corporation and Dynatech LLC. Dynatech Corporation has guaranteed the
Senior Secured Credit Facilities and the Senior Subordinated Notes.
F-18
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. With respect to the $260
million initially borrowed under the Term Loan Facility (which is divided into
four tranches, each of which has a different term and repayment schedule), the
Company is required to make scheduled principal payments of the $50 million
Tranche A Term Loan thereunder during its six-year term, with substantial
amortization of the $70 million Tranche B Term Loan, $70 million Tranche C Term
Loan and $70 million Tranche D Term Loan thereunder occurring after six, seven
and eight years, respectively. The $275 million of Senior Subordinated Notes
will mature in 2008, and bear interest at 9 3/4% per annum.
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 to use the $15 million in part to prepay the mandatory $8
million amortization due in fiscal 2000. Based on the Recapture calculation at
March 31, 2000, the Company will not be required to make an additional
mandatory principal reduction during fiscal 2001 based on the excess cash flow
calculation at March 31, 2000. During fiscal 1999 the Company repaid $8 million
of mandatory principal payments and repaid $40 million of indebtedness under
its $110 million Revolving Credit Facility.
The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 7.85% per annum for fiscal 2000. The Company has entered into
interest rate swaps which are effective for periods ranging from two to three
years beginning September 30, 1998 to fix the interest charged on a portion of
the total debt outstanding under the Term Loan Facility. After giving effects
to these arrangements, approximately $220 million of the debt outstanding is
subject to an effective average annual fixed rate of 5.66% (plus an applicable
margin). The terms of one interest rate swap contract provide upon termination
for a one-year option to renew 50% of the notional amount at the discretion of
the lender. See Note L. Interest Rate Swap Contracts.
At March 31, 2000, the Company had $70 million in borrowings outstanding and
$40 million undrawn under the Revolving Credit Facility. The Revolving Credit
Facility matures in 2004, with all amounts then outstanding becoming due. The
Company expects that its working capital needs will require it to obtain new
revolving credit facilities at the time that the Revolving Credit Facility
matures, by extending, renewing, replacing or otherwise refinancing the
Revolving Credit Facility. No assurance can be given that any such extension,
renewal, replacement or refinancing can be successfully accomplished or
accomplished on acceptable terms.
The mandatory repayment schedule of the Senior Secured Credit Facilities and
the Senior Subordinated Notes over the next five years and thereafter is as
follows: $8.0 million in fiscal 2001, $11.5 million in fiscal 2002, $14.5
million in fiscal 2003, $82.7 million in fiscal 2004, $64.7 million in fiscal
2005, and $398.5 million in fiscal years subsequent to fiscal 2005.
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
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 $0.4 million in
fiscal 2000 and 1999, respectively, in commitment fees.
F-19
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Facilities 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 Dynatech LLC from distributing assets to Dynatech Corporation
(which has no independent operations and no significant assets other than its
membership interest in Dynatech 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 (other than the $50 million
Tranche A Term Loan) 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.
On May 23, 2000 the Company entered into a new credit facility in connection
with the acquisition of Wavetek Wandel Goltermann. See Note R. Subsequent
Events.
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%
L. 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 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, 2000 the Company had three interest
rate swap contracts in which the Company pays a fixed interest rate and the
Company receives a three-month LIBOR interest rate.
F-20
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fixed
Swap Notional Interest Market
No. Amount Term Rate Valuation
---- -------- ---- -------- ---------
(Amounts in thousands)
1 $ 25,000 October 16, 1998--October 16, 2000 4.715% $ 307
2 $ 65,000 September 30, 1998--September 30, 2001 5.845% $1,003
3* $130,000 September 30, 1998--September 30, 2001 5.755% $1,980
- -----------------------
* This interest rate swap agreement has a one-year option to renew for 50% of
the notional amount ($65 million) at the discretion of the lender.
During fiscal 2000 and 1999, the Company recognized interest expense from
the swap contracts of $0.4 million and $0.5 million, respectively.
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 financial institution to the
Company. This valuation reflects a payment to the Company since the fixed
interest rates in the contracts is less than the three-month LIBOR interest
rate at March 31, 2000.
M. INCOME TAXES
The components of income (loss) from continuing operations before taxes are
as follows:
2000 1999 1998
------- ------- -------
(Amounts in thousands)
Domestic........................................... $(8,645) $(5,398) $63,376
Foreign............................................ 762 (205) 1,432
------- ------- -------
Total............................................ $(7,883) $(5,603) $64,808
======= ======= =======
The components of the provision (benefit) for income taxes from continuing
operations are as follows:
2000 1999 1998
------- ----- -------
(Amounts in
thousands)
Provision for income taxes:
United States..................................... $(1,334) $(469) $20,824
Foreign........................................... 213 (125) 327
State............................................. (48) 525 5,370
------- ----- -------
Total........................................... $(1,169) $ (69) $26,521
======= ===== =======
F-21
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the income tax provision are as follows:
2000 1999 1998
------- ------- -------
Current:
Federal......................................... $ 346 $ 5,435 $18,847
Foreign......................................... 213 (125) (978)
State........................................... 84 142 5,567
------- ------- -------
Total Current................................. 643 5,452 23,436
------- ------- -------
Deferred:
Federal......................................... (1,680) (5,904) 1,976
Foreign......................................... -- -- 1,305
State........................................... (132) 383 (196)
------- ------- -------
Total deferred................................ (1,812) (5,521) 3,085
------- ------- -------
Total......................................... $(1,169) $ (69) $26,521
======= ======= =======
Reconciliations between U.S. federal statutory rate and the effective tax
rate of continuing operations follow:
2000 1999 1998
------ ------ ----
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..................................... (2.9) 8.3 0.6
State income taxes, net of federal income tax
benefit............................................ (0.4) 6.1 5.4
Research and development tax credit................. -- -- (1.4)
Nondeductible amortization.......................... 31.7 7.6 0.5
Nondeductible compensation.......................... 1.4 13.9 --
Foreign sales corporation tax benefit............... (12.1) (14.2) (.7)
Non-deductible meals and entertainment expenses..... 4.0 4.1 0.5
Other............................................... (1.6) 8.0 1.0
------ ------ ----
Effective tax rate before certain charges......... (14.9)% (1.2)% 40.9%
====== ====== ====
F-22
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The principal components of the deferred tax assets and liabilities follow:
2000 1999
------- -------
(Amounts in
thousands)
Deferred tax assets:
Corporate severance......................................... $ 2,567 $ 571
Net operating loss and credit carryforwards................. 15,931 4,758
Vacation benefits........................................... 1,264 1,109
Depreciation and amortization............................... 23,979 16,349
Other accruals.............................................. 4,328 8,174
Deferred revenue............................................ 9,797 6,705
Compensation related to stock options....................... 9,708 5,126
Other deferred assets....................................... 3,616 2,755
------- -------
71,190 45,547
Valuation allowance........................................... (5,681) (4,758)
------- -------
65,509 40,789
Deferred tax liabilities:
Depreciation and amortization............................... 256 --
Other deferred liabilities.................................. 1,016 1,016
------- -------
1,272 1,016
------- -------
Net deferred tax assets....................................... $64,237 $39,773
======= =======
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.
On March 31, 2000, the Company had foreign and state net operating loss
carryforwards of $8.5 million and $43.8 million, respectively. The foreign loss
carryforwards begin to expire in the year ending March 31, 2003, and the state
net operating losses begin to expire in the year ending March 31, 2004. In
addition, as a result of certain acquisitions, the Company had at March 31,
2000, U.S. federal net operating loss carryforwards of approximately $19.8
million and $2.8 million of research credits, which begin to expire in the
years ending March 31, 2006 and March 31, 2003, respectively. The utilization
of these carryforwards is subject to a yearly limitation of approximately $4
million under Internal Revenue Code Section 382. The realization of the
remaining net deferred tax assets is considered more likely than not.
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.
N. 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.
Employees outside the U.S. are covered principally by government-sponsored
plans that are deferred contribution plans. The cost of Company-provided plans
is not material.
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
F-23
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2000 and 1999 of $11.3 million and $5.1 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 $6.2 million in
fiscal 2000, $4.9 million in fiscal 1999 and $4.5 million in fiscal 1998.
O. STOCK-BASED COMPENSATION
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:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
2000 Exercise 1999 Exercise 1998 Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- --------- --------
Shares under option,
beginning of year...... 33,903,244 $1.85 2,135,719 $26.33 1,770,560 $21.87
Impact of converting
shares on date of
Recapitalization....... -- 18,479,093
Options granted (at an
exercise price of $3.25
to $4.00 in 2000, $2.50
to $3.187 in 1999 and
$35 to $44 in 1998).... 9,537,781 3.29 16,439,511 2.54 634,800 36.25
Options exercised....... (1,194,318) 1.24 (860,120) 15.15 (148,941) 17.20
Options canceled........ (8,862,596) 1.36 (2,290,959) 9.68 (120,700) 24.26
---------- ---------- ---------
Shares under option, end
of year................ 33,384,111 $2.40 33,903,244 $ 1.85 2,135,719 $26.33
========== ========== =========
Shares exercisable...... 13,178,441 $1.66 18,420,794 $ 1.30 512,999 $18.79
As of March 31, 2000 and 1999, the Company issued approximately 4.3 million
and 14.3 million stock options, respectively, at a weighted-average exercise
price of $3.33 and $2.50, respectively, which was below the quoted market price
on the day of grant. Options available for future grants under the plans were
3.9 million, 4.2 million and 497 thousand at March 31, 2000, 1999, and 1998,
respectively.
F-24
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about currently outstanding and
exercisable stock options at March 31, 2000:
Weighted
Number of Average Weighted
Options Remaining Average
Outstanding Contractual Exercise
Range of Exercise Price At 3/31/00 Life Price
----------------------- ----------- ----------- --------
$0.00 - $1.00............................... 2,563,680 4.800 .775
$1.00 - $2.00............................... 7,753,303 6.558 1.634
$2.00 - $3.00............................... 12,892,247 8.159 2.497
$3.00 - $4.00............................... 10,174,881 9.448 3.284
----------
Total..................................... 33,384,111 7.922 2.404
==========
The fair market value of each option granted during 2000, 1999, and 1998 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
2000 1999 1998
------ ------ ------
Expected volatility.................................. 70.00% 45.00% 40.00%
Risk-free rate of return............................. 6.13% 5.38% 6.00%
Expected life (in years)............................. 5 yrs 5 yrs 5 yrs
Weighted average fair value.......................... $3.274 $1.673 $19.20
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:
2000 1999 1998
--------------- ---------------- ----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------ -------- ------- -------- -------
(Amounts in thousands except per share)
Net income............... $6,012 $2,579 $6,445 $(7,510) $41,776 $38,441
Net income per share:
Basic.................. $ 0.04 $ 0.02 $ 0.05 $ (0.06) $ 2.04 $ 1.88
Diluted................ $ 0.04 $ 0.02 $ 0.05 $ (0.06) $ 1.96 $ 1.81
The effect of applying FAS123 in this pro forma disclosure is not indicative
of future amounts. FAS123 does not apply to awards prior to 1995. Additional
awards in future years are anticipated.
P. SHAREHOLDER RIGHTS PLAN
In February 1989 the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend distribution of one Right for each outstanding share of
Dynatech's common stock. The Plan as amended entitled a qualifying shareholder
to buy shares of Dynatech junior participating cumulative preferred stock in
the case of an acquisition of, or tender offer for, more than a specified
percentage of Dynatech's common stock.
All outstanding Rights issued and outstanding under the Rights Agreement and
the Rights Agreement terminated immediately prior to the effective time of the
Recapitalization and no shares of Common Stock issued on or after the effective
time of the Recapitalization have or will have any Rights associated with them
under the Rights Agreement.
F-25
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Q. 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
2001 through 2005 under noncancelable operating leases having an original term
of more than one year are $12.1 million, $10.7 million, $8.0 million, $6.6
million, and $3.5 million, respectively. The aggregate obligation subsequent to
fiscal 2005 is $2.9 million. Rent expense was approximately $7.3 million, $7.1
million and $6.6 million in fiscal 2000, 1999 and 1998, 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
Corporation of Massachusetts. On June 27, 1996, Cincinnati Microwave, Inc.
("CMI") filed an action against the Company and Whistler in the United States
District Court for the Southern District of Ohio alleging infringement of CMI's
patent for a mute function in radar detectors. The Company responded that it
did not infringe CMI's patent and that, in any event, the patent was invalid
and unenforceable.
The Company obtained an opinion from outside counsel that CMI's patent is
invalid. The Company intends to offer that opinion (and other evidence) to
demonstrate that any alleged infringement of CMI's patent due to the Company's
prior manufacture and sale of the Whistler series radar detectors was not
valid.
On February 14, 1997, CMI filed for bankruptcy in the United States
Bankruptcy Court for the Southern District of Ohio. Pursuant to that filing,
CMI sold its mute feature patent (and other assets) to Escort Acquisition Corp.
CMI, however, retained the right to seek past damages from the Company.
On March 24, 1998, CMI and its co-plaintiff Escort filed a motion for
summary judgment. The Company opposed that motion and went on to complete
discovery, which closed on June 20, 1998. The Company then filed its own series
of summary judgment motions.
A hearing on the parties' dispositive motions was held in May 1999. On May
27, 1999, Whistler filed a Chapter 11 bankruptcy petition in the United States
District Court for the District of Massachusetts. As a result of that filing,
CMI's patent infringement litigation is stayed as to Whistler.
On February 18, 2000, the United States Magistrate issued a Report and
Recommendation on some of the pending motions, recommending that judgment be
entered in the Company's favor on half of the claims asserted by CMI. Then, on
June 9, 2000, the Magistrate issued a second Report and Recommendation,
recommending that the plaintiffs be precluded from recovering any damages for
any alleged infringement that occurred prior to June 1996. Because the Company
could not have infringed on CMI's patent after it sold its radar detector
business to Whistler in 1994, if this Recommendation is adopted by the District
Court Judge, the Company would have no liability to CMI. The parties have filed
(and will file) various objections to the two Report and Recommendations. If
necessary, trial in this matter is scheduled for November 2000. The Company
intends to continue to defend this lawsuit vigorously and does not believe that
the outcome of this litigation will have a material adverse effect on its
financial condition, results of operation, or liquidity.
F-26
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
R. SUBSEQUENT EVENTS
Increase in Authorized Shares of Common Stock
On April 28, 2000 the Company amended its Certificate of Incorporation of
the Company to increase the number of shares of authorized common stock to be
issued from 200,000,000 to 350,000,000.
Acquisition of WWG
On May 23, 2000, the Company and its wholly owned subsidiary DWW Acquisition
Corporation, a Delaware corporation ("MergerCo"), completed their merger (the
"Merger") with Wavetek Wandel Goltermann, Inc., a Delaware corporation ("WWG"),
pursuant to which WWG became an indirect, wholly owned subsidiary of Dynatech.
The Merger was consummated pursuant to an Agreement and Plan of Merger,
dated as of February 14, 2000 (the "Merger Agreement"), among Dynatech,
MergerCo and WWG. In connection with the Merger, Dynatech paid the former WWG
stockholders approximately $250 million in cash and issued approximately 15
million newly-issued shares of Dynatech common stock, valued at approximately
$130 million. In addition, Dynatech paid approximately $8 million in cash in
exchange for all outstanding WWG options and paid approximately $200 million of
WWG outstanding debt.
Dynatech financed the Merger with the proceeds from the issuance of debt and
common stock. The Company issued 43.125 million newly-issued, but unregistered
shares of the Company's common stock to funds managed by CDR for $4.00 per
share. The Company also intends to sell 4.983 million newly-issued shares of
common stock at $4.00 per share to its shareholders of record of April 20, 2000
under a rights offering. See Note J. Earning Per Share.
In addition to the issuance of common stock, the Company entered into a new
credit facility with a syndicate of lenders (the "New Credit Facility"). The
Company's new senior credit agreement (the "New Senior Credit Agreement"),
which established the New Credit Facility, provided for senior secured credit
facilities in an aggregate principal amount of up to approximately $860
million, consisting of (1) a revolving credit facility available to Dynatech
LLC in U.S. dollars or euros, in an aggregate principal amount of up to $175
million, which can also be used to issue letters of credit (the "New Revolving
Credit Facility"), (2) a Tranche A term loan of $75 million to Dynatech LLC
with a six year amortization (the "Tranche A Term Loan"), (3) a Tranche B term
loan of $510 million to Dynatech LLC with a seven and one-half year
amortization (the "Tranche B Term Loan"), and (4) German term loans from
certain German banks in an aggregate amount equal to (Euro)108.375 million to
the Company's German subsidiaries with six-year amortization periods (the
"German Term Loans") (all term loans collectively, the "New Term Loans"). The
New Credit Facility also provides for the issuance of a letter of credit that
the German banks may draw upon in the event of the failure of the Company's
German subsidiaries to make payments on the (Euro)108.375 million loans, and
the Company's German subsidiaries are required to reimburse the letter of
credit issuer for any such issuances. The amount of the letter of credit also
may be fully drawn under certain circumstances, and in such event the amount of
the draw shall convert into term loans to the Company's German subsidiaries
with similar amortization to the German term loans.
The loans under the New Credit Facility bear interest at floating rates
based upon the interest rate option elected by the Company.
The Company collectively used the New Term Loans to refinance certain
existing indebtedness of the Company and as part of the financing for the WWG
merger. The New Revolving Credit Facility is available to the Company from time
to time for potential acquisitions and other general corporate purposes.
Principal and interest payments under the New Credit Facility and interest
payments on the Senior Subordinated Notes
F-27
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
represent significant liquidity requirements for the Company. The Tranche A
Term Loan will be amortized in four quarterly installments of $750 thousand
commencing on June 30, 2000; four quarterly installments of $2.0 million
commencing on June 30, 2001; four quarterly installments of $3.75 million
commencing on June 30, 2002; four quarterly installments of $7.5 million
commencing on June 30, 2003; four quarterly installments of $2.5 million
commencing on June 30, 2004 and four quarterly installments of $2.25 million
commencing on June 30, 2005. The Tranche B Term Loan will be amortized in 24
quarterly installments of $2.0 million, commencing on June 30, 2000; four
quarterly installments of $77.5 million commencing on June 30, 2006, and two
quarterly installments of $76.0 million commencing on June 30, 2007. The German
Term Loans will be amortized in four quarterly installments of (Euro)530
thousand commencing on June 30, 2000; twelve quarterly installments of
(Euro)790 thousand commencing on June 30, 2001; four quarterly installments of
(Euro)7.625 million commencing on June 30, 2004; three quarterly installments
of (Euro)15.780 million commencing on June 30, 2005 and one quarterly
installment of (Euro)18.935 million on March 31, 2006.
Covenant Restrictions. The Company's New Credit Facility contains covenants
that, among other things, restrict the Company's ability to dispose of assets,
incur additional debt, guarantee obligations or contingent liabilities, repay
its 9 3/4% Senior Subordinated Notes due 2008, pay dividends, create liens on
assets, make investments, loans or advances, engage in mergers or
consolidations, make capital expenditures or engage in certain transactions
with affiliates. The Company's New Credit Facility contains customary events of
default. In addition, under the New Credit Facility, 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 New Credit Facility 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 following unaudited pro forma condensed consolidated financial
statements give effect to the following assuming that these transactions
occurred on the first day in the fiscal year presented:
. The merger with WWG (after giving effect to the divestitures of the
Precision Measurement and Test Tools divisions, which occurred in January
2000)
. The acquisition of Pacific Systems Corporation
. The acquisition of Flight TECH
. The acquisition of Sierra Design Labs
. The acquisition of Applied Digital Access, Inc.
. The acquisition of ICS Advent (Europe) Ltd.
. The acquisition of WPI Husky Technology, Inc., WPI Oyster Termiflex
Limited, WPI Husky Technology Limited and WPI Husky Technology GmbH
The condensed, unaudited pro forma statement of operations data listed below
is for informational purposes only and does not necessarily represent what the
Company's results of operations would have been if the above listed
transactions had in fact occurred at the beginning of the fiscal periods
presented and are not necessarily indicative of the results of operations for
any future period.
2000 1999
-------- --------
Net sales.............................................. $972,381 $803,816
Loss from operations before income taxes from
continuing operations................................. (79,991) (147,670)
Loss per common share from continuing operations:
Basic................................................ (0.43) (0.87)
Diluted.............................................. (0.43) (0.87)
F-28
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extraordinary Charge
In connection with the merger and related financing of debt, the Company
will incur a pretax extraordinary charge of approximately $10.3 million during
the first quarter of fiscal 2001 for the writeoff of unamortized debt discount
fees relating to the early extinguishment of debt that originated from the
Recapitalization.
S. SEGMENT INFORMATION AND GEOGRAPHIC AREAS
Segment Information.
The Company is currently managed in two business segments: communications
test and inflight information systems. The largest segment, communication test,
develops, manufactures and markets instruments, systems, software and services
which 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 data services, cable
services, and video delivery. The inflight information systems segment, which
is operated by the Company's AIRSHOW, Inc. subsidiary, 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. The Company also has other subsidiaries that, in the
aggregate, are not reportable as a segment ("Other Subsidiaries"). These Other
Subsidiaries include da Vinci Systems, Inc. ("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 the their
respective 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 sales
and EBITA for the two segments the Company operates in.
Corporate EBITA is comprised of corporate general and administrative expense
that has not been allocated to each segment. Corporate assets are comprised
primarily of cash, deferred financing fees, and deferred taxes.
The Company is a multi-national corporation with continuing operations
outside the United States consisting of distribution and sales offices in
Germany, England, France and the Pacific Rim.
The accounting policies for the segments are the same as those described in
the summary of significant accounting policies. See Note G. 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 1999 and 1998 has been restated.
F-29
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No single customer accounted for more than 10% of sales from continuing
operations during fiscal 2000, 1999, and 1998.
Segment 2000 1999 1998
------- ------- ------- -------
Communications test segment:
Sales.......................................... 349,886 238,942 240,432
Depreciation and amortization.................. 15,441 8,845 9,345
EBITA.......................................... 62,447 42,800 50,614
Total assets................................... 179,338 71,453 78,586
Capital expenditures........................... 13,629 5,147 8,898
Inflight information systems segment:
Sales.......................................... 70,960 58,794 34,797
Depreciation and amortization.................. 2,102 1,477 399
EBITA.......................................... 19,314 22,373 15,519
Total assets................................... 39,728 36,583 8,012
Capital expenditures........................... 1,743 2,230 740
Other subsidiaries:
Sales.......................................... 32,394 31,796 42,726
Depreciation and amortization.................. 1,218 1,114 1,731
EBITA.......................................... 8,404 7,468 4,790
Total assets................................... 13,061 5,165 8,857
Capital expenditures........................... 761 799 1,609
Discontinued operations:
Net assets held for sale....................... 72,601 N/A N/A
Total assets................................... N/A $93,753 $94,724
Capital expenditures........................... N/A 2,967 4,586
Corporate:
Depreciation and amortization.................. 95 93 125
Loss before interest, taxes and amortization... (4,941) (6,638) (5,586)
Total assets................................... 110,110 141,150 97,951
Capital expenditures........................... 31 180 46
Total Company:
Sales.......................................... 453,239 329,532 317,955
Depreciation and amortization.................. 18,856 11,529 11,610
EBITA(a)....................................... 85,224 66,003 65,337
Total assets................................... 414,838 348,104 288,130
Capital expenditures........................... 16,164 11,323 15,879
- -----------------------
(a) Non-recurring charges of $33,241, $24,867, and $0 and amortization of
unearned compensation of $1,515, $1,228 and $0, in fiscal 2000, 1999, and
1998 have been excluded from EBITA.
F-30
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Information. Information by geographic areas for the years ended
March 31, 2000, 1999, and 1998 is summarized below:
Outside U.S.
United (principally
States Europe) Combined
-------- ------------ --------
(Amounts in thousands)
Sales to unaffiliated customers
2000.................................... $432,216* $21,023 $453,239
1999.................................... $310,724* $18,808 329,532
1998.................................... $298,907* 19,048 317,955
Income (loss) before taxes from continuing
operations
2000.................................... $ (7,957) $ 74 $ (7,883)
1999.................................... $ (5,398) $ (205) $ (5,603)
1998.................................... $ 63,773 $ 1,035 $ 64,808
Long-lived assets at
March 31, 2000.......................... $ 85,122 $ 702 $ 85,824
March 31, 1999.......................... $ 81,662 $ 725 $ 82,387
March 31, 1998.......................... $ 65,134 $ 826 $ 65,960
- -----------------------
* Includes export sales of $44,798, $44,567, and $43,865 in 2000, 1999, and
1998, respectively.
Currency Income. Net income in fiscal 2000, 1999, and 1998 included currency
gains (losses) of approximately $54,500, $9,800, and $12,600, respectively.
T. SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
FY 2000
---------------------------------------------
First Second Third Fourth Year
------- -------- -------- -------- --------
(Amounts in thousands except per share
data)
Sales.......................... $90,794 $103,789 $122,225 $136,431 $453,239
Gross profit................... 60,080 69,730 81,409 84,930 296,149
Net income (loss) from
continuing operations......... (6,066) 5,642 3,934 (10,224) (6,714)
Net income (loss).............. 2,551 9,566 4,754 (10,859) 6,012
Income (loss) per common
share--basic:
Continuing operations........ $ (0.04) $ 0.04 $ 0.02 $ (0.07) $ (0.05)
Net income (loss)............ 0.02 0.06 0.03 (0.07) 0.04
Income (loss) per common
share--diluted:
Continuing operations........ $ (0.04) $ 0.04 $ 0.02 $ (0.07) $ (0.05)
Net income (loss)............ 0.02 0.06 0.03 (0.07) 0.04
Market Share Price(b)--High.... $ 4.062 $ 5.031 $ 8.000 $ 15.937
--Low................. 3.125 3.437 4.875 6.875
F-31
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FY 1999
-------------------------------------------
First Second Third Fourth Year
-------- ------- ------- ------- --------
Sales............................ $ 75,192 $84,429 $90,219 $79,692 $329,532
Gross profit..................... 50,214 57,050 60,744 52,906 220,914
Net income (loss) from continuing
operations...................... (11,983) 2,463 4,564 (578) (5,534)
Net income (loss)................ (11,933) 3,662 6,949 7,767 6,445
Income (loss) per common share--
basic:
Continuing operations.......... $ (0.15) $ 0.02 $ 0.03 $ 0.00 $ (0.04)
Net income (loss).............. (0.15) 0.02 0.05 0.05 0.05
Income (loss) per common share--
diluted:
Continuing operations.......... $ (0.15) $ 0.02 $ 0.03 $ 0.00 $ (0.04)
Net income (loss)................ (0.15) 0.02 0.04 0.05 0.05
Market Share Price(a)--High...... $ 4.312 $ 3.438 $ 3.000 $ 3.500
--Low................... 3.125 2.687 2.375 2.718
- -----------------------
(a) From January 28, 1997 to May 21, 1998, shares of Common Stock of the
Company were traded on the New York Stock Exchange. No cash dividends were
paid on shares of Common Stock of the Company. As a result of the
Recapitalization on May 21, 1998, trading in the Old Common Stock was
halted and the Common Stock is traded only in the over-the-counter market.
The market share prices reflect the high and low close prices after May 21,
1998.
F-32
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Dynatech Corporation:
Our audits of the consolidated financial statements referred to in our
report dated June 21, 2000 appearing in this Registration Statement on Form S-1
of Dynatech Corporation also included an audit of the financial statement
schedule, Valuation and Qualifying Accounts for the years ended March 31, 2000,
1999 and 1998. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 21, 2000
F-33
DYNATECH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended March 31, 2000, 1999 and 1998
Reserve for Doubtful Accountants (in thousands)
Balance, March 31, 1997................................................. $1,872
Additions charged to income........................................... 425
Writeoff of uncollectible accounts, net............................... (533)
------
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
Adjustments for discontinued operations................................. (527)
------
Balance, March 31, 2000................................................. $1,952
======
F-34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Wavetek Wandel Goltermann, Inc.
We have audited the accompanying consolidated balance sheets of Wavetek
Wandel Goltermann, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wavetek Wandel Goltermann,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Raleigh, North Carolina,
December 2, 1999.
F-35
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands, Except Per Share Data)
September 30,
------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 17,089 $ 35,544
Accounts receivable (less allowance for doubtful accounts
of $4,608 in 1999 and $4,432 in 1998)..................... 102,532 92,281
Inventories................................................ 62,515 74,886
Deferred income taxes...................................... 8,922 17,095
Other current assets....................................... 13,636 12,736
-------- --------
Total current assets..................................... 204,694 232,542
Property, plant and equipment, net........................... 60,575 66,597
Intangible assets, net....................................... 162,482 178,675
Other non-current assets..................................... 6,982 6,710
-------- --------
Total assets............................................. $434,733 $484,524
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................. $ 17,510 $113,085
Current portion of long-term obligations................... 6,202 30,222
Current portion of long-term obligations to related
parties................................................... 10,721 11,746
Trade payables............................................. 31,549 37,612
Accrued compensation....................................... 26,626 25,907
Income taxes payable....................................... 4,250 5,956
Other current liabilities.................................. 38,838 41,848
-------- --------
Total current liabilities................................ 135,696 266,376
Long-term obligations, net of current portion................ 228,083 121,595
Pension liabilities.......................................... 35,671 35,511
Deferred income taxes........................................ 7,957 25,582
Other non-current liabilities................................ 9,389 10,046
-------- --------
Total liabilities........................................ 416,796 459,110
-------- --------
Commitments and contingencies (Notes 1, 3, 4, 5, 6, and 11)
Stockholders' equity:
Common stock, par value $.01, 50,000 shares authorized,
13,202 shares issued and outstanding...................... 132 132
Additional paid-in capital................................. 72,948 72,948
Accumulated deficit........................................ (65,641) (57,645)
Other comprehensive income................................. 10,498 9,979
-------- --------
Total stockholders' equity............................... 17,937 25,414
-------- --------
Total liabilities and stockholders' equity............... $434,733 $484,524
======== ========
See Notes to Consolidated Financial Statements.
F-36
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and Shares in Thousands, Except Per Share Data)
Years Ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
Net sales........................................ $497,258 $327,888 $281,887
Cost of goods sold............................... 204,733 130,863 113,812
-------- -------- --------
Gross margin................................... 292,525 197,025 168,075
Operating expenses:
Marketing and selling.......................... 146,387 95,338 82,687
Research and development....................... 71,439 47,730 37,322
General and administrative..................... 42,074 24,837 24,263
Amortization of intangible assets.............. 19,967 1,182 1,346
Acquired in-process research and development... -- 32,925 1,743
Provisions for restructuring operations and
other
non-recurring charges......................... 2,379 9,369 --
-------- -------- --------
Total operating expenses..................... 282,246 211,381 147,361
-------- -------- --------
Operating income (loss)........................ 10,279 (14,356) 20,714
Other (income) expense, net:
Interest income............................... (677) (977) (1,610)
Interest expense.............................. 20,965 7,629 8,509
Other, net.................................... 1,069 4,814 (790)
-------- -------- --------
Other (income) expense, net.................. 21,357 11,466 6,109
-------- -------- --------
Income (loss) before provision (benefit) for
income taxes
and minority interest in income (loss).......... (11,078) (25,822) 14,605
Provision (benefit) for income taxes............. (3,082) 6,541 7,362
Minority interest in income (loss)............... -- (5,096) 185
-------- -------- --------
Net income (loss)................................ $ (7,996) $(27,267) $ 7,058
======== ======== ========
Basic and diluted earnings (loss) per share...... $ (0.61) $ (3.28) $ 0.85
======== ======== ========
Weighted average number of shares outstanding.... 13,202 8,317 8,317
======== ======== ========
See Notes to Consolidated Financial Statements.
F-37
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997, 1998 and 1999
(Dollars and Shares in Thousands)
Common Stock Additional Other Total
------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
------ ------ ---------- ----------- ------------- -------------
Balance, September 30,
1996................... 8,317 $ 83 $32,930 $(31,856) $ 8,251 $ 9,408
Sales of stock by
subsidiaries......... -- -- 505 -- -- 505
Dividends............. -- -- -- (1,987) -- (1,987)
Net income............ -- -- -- 7,058 -- 7,058
Foreign currency
translation
adjustments.......... -- -- -- -- 3,623 3,623
------ ---- ------- -------- ------- --------
Balance, September 30,
1997................... 8,317 83 33,435 (26,785) 11,874 18,607
Sales of stock by
subsidiaries......... -- -- 662 -- -- 662
Shares issued in
connection with the
Exchange Transaction
with Wavetek
Corporation.......... 4,885 49 38,851 -- -- 38,900
Dividends............. -- -- -- (3,593) -- (3,593)
Net loss.............. -- -- -- (27,267) -- (27,267)
Foreign currency
translation
adjustments.......... -- -- -- -- (1,895) (1,895)
------ ---- ------- -------- ------- --------
Balance, September 30,
1998................... 13,202 132 72,948 (57,645) 9,979 25,414
Net loss.............. -- -- -- (7,996) -- (7,996)
Foreign currency
translation
adjustments.......... -- -- -- -- 519 519
------ ---- ------- -------- ------- --------
Balance, September 30,
1999................... 13,202 $132 $72,948 $(65,641) $10,498 $ 17,937
====== ==== ======= ======== ======= ========
See Notes to Consolidated Financial Statements.
F-38
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended September 30,
-----------------------------
1999 1998 1997
--------- -------- --------
OPERATING ACTIVITIES:
Net income (loss)............................. $ (7,996) $(27,267) $ 7,058
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Minority interest in net income (loss)...... -- (5,096) 185
Depreciation and amortization expense....... 35,468 10,214 9,704
Acquired in-process research and
development................................ -- 32,925 1,743
Restructuring and other non-recurring
charges.................................... 2,379 2,937 --
Deferred income taxes....................... (12,985) 1,978 4,600
Changes in operating assets and liabilities,
net of effect of purchased businesses:
Accounts receivable....................... (14,083) (4,415) (6,520)
Inventories............................... 16,995 2,282 (8,239)
Other current assets...................... (1,610) 1,876 (3,643)
Accounts payable and accrued expenses..... (15,024) 2,174 10,051
Income taxes payable, net................. (2,342) 1,572 2,383
Pension liabilities....................... 484 3,180 698
Other, net................................ 3,025 (438) (507)
--------- -------- --------
Net cash provided by operating
activities.............................. 4,311 21,922 17,513
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired
of $1,363 and $1,312 in 1998 and 1997,
respectively............................... -- (45,207) (6,658)
Cash acquired in connection with Exchange
Transaction................................ -- 31,329 --
Proceeds from sale of investments in
affiliates................................. -- 1,757 1,890
Purchase of property, equipment, and
intangibles................................ (16,760) (10,416) (9,356)
Proceeds from sale of property, plant and
equipment.................................. 1,977 -- 3,999
Purchase of short-term investments,
available for sale......................... -- (41,100) (76,160)
Sale of short-term investments, available
for sale................................... -- 41,100 76,160
Payments received for notes receivable from
related parties............................ -- 6,042 740
Increases in notes receivable from related
parties.................................... -- (1,081) (1,607)
--------- -------- --------
Net cash used in investing activities.... (14,783) (17,576) (10,992)
FINANCING ACTIVITIES:
Proceeds from revolving lines of credit and
long-term obligations...................... 212,711 56,241 1,961
Principal payments on revolving lines of
credit and long-term obligations........... (218,659) (35,647) (12,084)
Cash dividends paid to stockholders......... -- (2,043) (1,188)
Proceeds from long-term obligations to
related parties............................ -- 3,364 63
Principal payments on long-term obligations
to related parties......................... -- (258) --
Other, net.................................. (672) -- --
--------- -------- --------
Net cash provided by (used in) financing
activities.............................. (6,620) 21,657 (11,248)
Effect of exchange rate changes on cash and
cash equivalents........................... (1,363) 141 (289)
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................ (18,455) 26,144 (5,016)
Cash and cash equivalents at beginning of
year....................................... 35,544 9,400 14,416
--------- -------- --------
Cash and cash equivalents at end of year.... $ 17,089 $ 35,544 $ 9,400
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest...................... $ 14,028 $ 7,103 $ 8,314
========= ======== ========
Cash paid for income taxes, net of income
tax refunds received....................... $ 5,444 $ 2,038 $ 3,346
========= ======== ========
See Notes to Consolidated Financial Statements.
F-39
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
On September 30, 1998, Wavetek Corporation, a Delaware corporation
("Wavetek"), and Wandel & Goltermann Management Holding GmbH, a German limited
liability company ("WG"), consummated an exchange transaction whereby the
stockholders of WG became stockholders of Wavetek, and WG became a subsidiary
of Wavetek (the "Exchange Transaction"). Following the Exchange Transaction,
Wavetek was ultimately renamed Wavetek Wandel Goltermann, Inc. (the "Company").
The Exchange Transaction was accounted for as a purchase of Wavetek by WG in
accordance with Accounting Principles Board Opinion ("APB") No. 16, Business
Combinations. Accordingly, the financial statements of the Company included
herein as of any date or for any period prior to September 30, 1998, are the
historical financial statements of WG.
The Company is a leading global designer, manufacturer and marketer of a
broad range of communications test instruments used to develop, manufacture,
install and maintain communications networks and equipment. The Company
conducts its business in two principle business areas, communications test
business and other test products. The Company conducts its communications test
business, which addresses most sectors of the communications test market, in
four product areas: (1) Telecom Networks (traditional voice/data transmissions
and new multi-service networks), (2) Enterprise Networks (local and wide-area
network infrastructures), (3) Multimedia (cable television and digital video
broadcast) and (4) Wireless (mobile telephony and data). These products provide
comprehensive testing solutions to a wide range of end users. The Company's
high-end instruments are used during the product development phase to stress
test product functionality and performance. Other products are used during the
production process to verify conformance to manufacturing specifications, while
the Company's enhanced portable field service tools enable field technicians to
quickly install, repair and maintain complex network infrastructure as well as
validate service levels. The Company also provides distributed remote test
systems to many of its service provider customers, which allow such customers
to more efficiently utilize their network engineers to monitor and test service
levels, and designs, manufactures and sells precision measurement instruments
and general-purpose handheld test tools. In addition, the Company provides
repair, upgrade and calibration services, as well as value-added professional
services such as consulting, training and rental services on a worldwide basis.
The Company's operating expenses are substantially impacted by marketing and
selling activities as well as by research and development activities. Marketing
and selling expenses are primarily driven by: (1) sales volume, with respect to
sales force expenses and commission expenses; (2) the extent of market research
activities for new product design efforts; (3) advertising and trade show
activities and (4) the number of new products launched in the period. In recent
periods, the Company has increased its spending on research and development
activities primarily to accelerate the timing of new product introductions.
General and administrative expenses primarily include costs associated with the
Company's administrative employees, facilities and functions. The Company
incurs expenses in foreign countries primarily in the functional currencies of
such locations. As a result of the Company's substantial international
operations, the United States dollar amount of its expenses is impacted by
changes in foreign currency exchange rates. The Company's ability to maintain
and grow its sales depends on a variety of factors including its ability to
maintain its competitive position in areas such as technology, performance,
price, brand identity, quality, reliability, distribution and customer service
and support, and its ability to continue to introduce new products that respond
to technological change and market demand in a timely manner.
The accompanying consolidated financial statements include the operations of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain items
in the prior years have been reclassified to conform with the current year
presentation.
F-40
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency
The accounts of foreign subsidiaries consolidated herein have been
translated from their respective functional currencies into U.S. dollars based
on the current exchange rates at the end of the period for the balance sheet
and an average rate for the period on the statements of operations. Cumulative
translation adjustments are included as a separate component of stockholders'
equity as "Other Comprehensive Income." Exchange gains and losses from foreign
currency transactions are included in "Other (income) expense, net" in the
accompanying consolidated statements of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates include, among other things, assessing the
collectibility of accounts receivable, the use and recoverability of inventory,
costs of future product returns under warranty and provisions for contingencies
expected to be incurred. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments, Available for Sale
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents approximate their fair values. As part of the Company's
cash management program, the Company invests in highly liquid investments,
primarily investment grade commercial paper, U.S. Treasury Securities,
guaranteed obligations of the U.S. government or its agencies, mutual funds
which invest in U.S. Treasury Securities, preferred stock and municipal bonds.
The interest and dividend rates on these securities are reset on a frequent
basis. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
these securities are classified as "available-for-sale" securities. The Company
held no available-for-sale securities as of September 30, 1999 and 1998. For
purposes of financial statement presentation, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. The Company evaluates the financial strength of the institutions
in which significant investments are made and believes that related credit risk
is limited to an acceptable level.
Inventories
Inventories are valued at cost determined on the first-in, first-out basis,
not in excess of market. Costs include direct material, labor and manufacturing
overhead.
Inventories consist of the following:
September 30,
---------------
1999 1998
------- -------
(In Thousands)
Materials................................................. $13,997 $19,217
Work-in-progress.......................................... 18,172 21,469
Finished goods............................................ 30,346 34,200
------- -------
$62,515 $74,886
======= =======
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation for
financial statement purposes is computed using the straight-line method based
upon the estimated useful lives of the various classes of assets which range
from 3 to 50 years for buildings and improvements and from 3 to 10 years for
fixtures and equipment.
F-41
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, plant and equipment consists of the following:
September 30,
------------------
1999 1998
-------- --------
(In Thousands)
Land.................................................. $ 4,750 $ 6,073
Building and improvements............................. 47,468 52,699
Fixtures and equipment................................ 104,178 107,626
156,396 166,398
Less: accumulated depreciation and amortization....... (95,821) (99,801)
-------- --------
$ 60,575 $ 66,597
======== ========
Intangible Assets
The Company has various intangible assets which include the excess of
purchase price over net tangible assets of businesses acquired (goodwill),
acquired core technologies, as well as other intangible assets. All the values
and lives were based on independent appraisals.
Goodwill represents the amount by which the purchase price of businesses
acquired exceeds the fair market value of the net tangible and identifiable
intangible assets acquired under the purchase method of accounting associated
with three acquisitions: the Exchange Transaction, WGTI (See Note 3), and STS
(See Note 3). Goodwill associated with these acquisitions is being amortized on
a straight-line basis over fifteen (15) years for the Exchange Transaction and
five (5) years for WGTI and STS.
Acquired core technologies was recorded in connection with the acquisitions
of WGTI ($3.3 million) and STS ($2.6 million) as well as the Exchange
Transaction ($84.1 million). The amortization period in connection with the
acquisitions of WGTI and STS is five (5) years and for the Exchange Transaction
is ten (10) years.
Other intangible assets include assembled work force associated with the
Exchange Transaction and WGTI, deferred financing costs associated with the
multi-currency and senior subordinated notes described in Note 5, and a patent
license. These intangible assets are being amortized over five (5) to fifteen
(15) years.
Intangible assets consist of the following:
September 30,
------------------
1999 1998
-------- --------
(In Thousands)
Goodwill.............................................. $ 71,016 $ 69,802
Less accumulated amortization....................... (7,187) (739)
Acquired core technologies............................ 90,032 90,032
Less accumulated amortization....................... (10,277) (660)
Other................................................. 36,648 29,537
Less accumulated amortization....................... (17,750) (9,297)
-------- --------
$162,482 $178,675
======== ========
The Company, at each balance sheet date, evaluates the recoverability of the
carrying amount of its intangible assets if circumstances suggest that it has
been impaired. If this review indicates that the value of the intangible assets
is not recoverable, as principally determined based on the estimated
undiscounted cash flows of the entity which gave rise to the intangible asset,
over the remaining amortization period, then the Company's carrying value of
the intangible asset would be reduced by the estimated shortfall in cash flows.
F-42
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-lived Assets
The Company, at each balance sheet date, evaluates the recoverability of the
carrying amount of its long-lived assets in accordance with SFAS no. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." If this review indicates that the value of such assets is
not recoverable over the remaining amortization period, then the Company's
carrying value of the asset would be reduced based upon the estimated fair
value.
Debt Instruments
The carrying amounts of the Company's debt instruments approximate their
fair values. The fair value of the Company's debt instruments is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Revenue and Credit Risk
The Company recognizes revenues when the following four criteria are met as
specified in the AICPA's Statement of Position No. 97-2, "Software Revenue
Recognition": (1) Persuasive evidence of an arrangement exists, (2) Delivery
has occurred, (3) The vendor's fee is fixed or determinable, and (4)
Collectibility is probable. These criteria are normally met at the time of
shipment to the customer. Service revenues are recognized as services are
performed. The Company accrues related product return reserves and warranty
expenditures, as products shipped include a one-year warranty, at the time of
sale.
The Company grants credit to its customers based on an evaluation of the
customers' financial condition and generally collateral is not required. Credit
losses have traditionally been minimal and within management's expectations.
Net Income (loss) Per Share
Effective October 1, 1997 the Company adopted SFAS No. 128, EARNINGS PER
SHARE. SFAS No. 128 replaced the calculation of primary and fully diluted net
income (loss) per share with basic and diluted net income (loss) per share. Net
income (loss) per share--basic is based only on net income (loss) of the
Company and the weighted average number of common shares outstanding. Net
income (loss) per share--diluted includes the dilutive effect of the Company's
outstanding stock options in the calculation of the number of weighted average
number of common shares outstanding. The Company has a simple capital structure
and, accordingly, the only difference in the Company's computations of basic
and diluted net income (loss) per share is the dilutive effect of outstanding
stock options. For the fiscal year ended September 30, 1999, the effect of
outstanding stock options would have been anti-dilutive and, therefore, was not
considered in the computation of diluted loss per share for such periods. All
net income (loss) per share amounts for all periods have been presented, and
where necessary, restated to conform to the requirements of SFAS No. 128.
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions
of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but requires pro forma
disclosure in the footnotes to the consolidated financial statements as if the
measurement provisions of SFAS No. 123 had been adopted. The Company has
continued accounting for its stock-based compensation in accordance with the
provisions of APB 25. See Note 6 for discussion of SFAS No. 123 disclosures.
F-43
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative Financial Instruments
The Company uses derivative financial instruments, primarily forward
exchange contracts and collars, in the ordinary course of business to mitigate
its exposure to changes in foreign currency exchange rates relating to cash,
accounts receivable, accounts payable, significant transactions and anticipated
future sales denominated in foreign currencies. The terms of these contracts
are generally less than one year. The Company also uses interest rate cap
agreements to mitigate its exposure to changes in interest rates on variable
interest rate debt instruments. The terms of such agreements are generally in
excess of one year. The Company's risk management policies prohibit financial
instruments to be used for trading purposes. Gains and losses on financial
instruments that qualify as hedges of existing assets or liabilities or firm
commitments are recognized in income as adjustments of carrying amounts when
the hedged transaction occurs. Financial instruments that are not designated as
hedges of specific assets, liabilities, firm commitments or anticipated
transactions are marked to market and any resulting unrealized gains or losses
are recorded in "other (income) expense, net" in the accompanying consolidated
statements of operations. At September 30, 1999 and 1998, the Company had
foreign exchange contracts outstanding in an aggregate notional amount of $18.4
million and $25.8 million, respectively. While it is not the Company's
intention to terminate any of these contracts, the estimated fair value of
these contracts indicated that termination of the forward currency exchange
contracts at September 30, 1999 and 1998 would have resulted in a gain of $0.1
million and a loss of $0.6 million, respectively. Due to the volatility of
currency exchange rates, these estimated results may or may not be realized. At
September 30, 1999 and 1998, the Company had interest rate cap agreements
outstanding with notional values of $10.9 million and $8.9 million,
respectively, which had carrying values that approximated fair value.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by
SFAS No. 137, an amendment to SFAS No. 133. This statement requires companies
to record derivatives on the balance sheet as assets and liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. These statements are not expected to
have a material impact on the Company's consolidated financial statements. This
statement is effective for fiscal years beginning after June 15, 2000, with
earlier adoption encouraged. The Company will adopt this accounting standard in
fiscal 2001.
2. EXCHANGE TRANSACTION
On September 30, 1998, Wavetek and WG consummated the Exchange Transaction
whereby the stockholders of WG received 8,317,463 shares of Common Stock of
Wavetek valued by an independent appraisal at $38.7 million plus cash of 2.0
million Deutsche marks ($1.2 million) and WG became a subsidiary of Wavetek.
Following the Exchange Transaction, Wavetek was ultimately renamed Wavetek
Wandel Goltermann, Inc. The Exchange Transaction was accounted for as a
purchase of Wavetek by WG. Accordingly, the financial statements of the Company
included herein as of any date or for any period prior to September 30, 1998,
are the historical financial statements of WG. In addition, the historical
stockholders' equity of the Company has been retroactively restated to reflect
the equivalent number of shares issued in connection with the Exchange
Transaction.
The purchase price of Wavetek, including expenses of the transaction, was
deemed to be $41.5 million and was allocated to the assets acquired and
liabilities assumed, based on their estimated fair values as determined by an
independent valuation. The fair value of assets acquired was $271.1 million,
including $56.7 million of goodwill which is being amortized over 15 years, and
liabilities assumed was $229.6 million. The Company allocated $11.8 million of
the purchase price to in-process research and development projects that had not
reached technological feasibility, which the Company expensed at the date of
the Exchange Transaction.
F-44
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Exchange Transaction and related restructuring
activities, the Company recorded approximately $4.5 million of restructuring
and other non-recurring charges in fiscal 1998. This expense included
elimination of one duplicate product line, costs of consolidation of certain
sales and service operations, accounting and tax consulting charges and
severance payments.
3. ACQUISITIONS
Purchase Of The Minority Interest In Wandel & Goltermann Technologies, Inc.
During fiscal 1997, the Company's ownership interests in its then publicly-
traded U.S. subsidiary, Wandel & Goltermann Technologies, Inc. ("WGTI"), was
increased by the repurchases of common shares of WGTI on the open market. The
Company's ownership interest was increased from 57% as of September 30, 1996,
to 62% as of September 30, 1997. The total purchase cost of shares acquired was
$4.5 million and was accounted for as a purchase. The Company allocated $1.4
million of the purchase price to in-process research and development projects
that had not reached technological feasibility, which the Company expensed at
the date of acquisition. In addition, $1.2 million of the purchase price was
allocated to goodwill and other intangibles and is being amortized over five
years.
On September 18, 1998, the Company purchased the remaining outstanding
minority interest in WGTI for $15.90 per share, or $32.3 million. The Company
allocated $14.3 million of the purchase price to in-process research and
development projects that had not reached technological feasibility, which the
Company expensed at the date of acquisition. In addition, $11.5 million of the
purchase price was allocated to goodwill and other intangibles and is being
amortized over five years. In connection with the acquisition of WGTI, the
Company incurred non-recurring charges of $4.8 million in fiscal 1998. These
costs included $3.4 million of stock option compensation, $0.9 million of
severance expenses and $0.5 million of legal and consulting expenses incurred
by WGTI.
Purchase Of Digital Transport Systems, Inc.
On September 30, 1998, Wavetek U.S. Inc., a U.S. subsidiary of the Company,
acquired privately-held Digital Transport Systems, Inc. ("DTS"), a digital
broadcast test equipment company based in San Diego, California. Under the
terms of the acquisition, Wavetek U.S. Inc. acquired all of the outstanding
stock of DTS for an initial payment of $1.1 million, plus subsequent fixed and
contingent payments for four years after the acquisition. The Company accounted
for the transaction as a purchase and the assets acquired and the liabilities
assumed were recorded at their estimated fair values aggregating $0.5 million
and $0.9 million, respectively. In addition, $1.5 million of the purchase price
was allocated to in-process research and development projects that had not
reached technological feasibility, which the Company charged to expense on the
acquisition date. Fixed payments are due November 15, 1999, 2000, 2001 and 2002
of $0.5 million, $0.4 million, $0.4 million and $0.4 million, respectively.
Contingent payments, based upon future annual sales of DTS, are also due
annually for the next four years in amounts between $0.2 million and $0.5
million. All subsequent payments are being expensed as incurred and are not
material to the Company.
Purchase Of Switching Test Solutions AG
In fiscal 1997, the Company purchased 40% of the outstanding capital stock
of Switching Test Solutions AG, ("STS") for $2.0 million. The Company allocated
$0.3 million of the purchase price to in-process research and development
projects that had not reached technological feasibility, which the Company
expensed at the date of acquisition. In addition, $0.6 million of the purchase
price was allocated to goodwill and other intangibles and is being amortized
over five years. This investment was accounted for using the equity method of
accounting in fiscal 1997.
F-45
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the beginning of fiscal 1998, the Company purchased the remaining 60%
interest in STS for a purchase price of $6.5 million. The Company allocated
$1.4 million of the purchase price to in-process research and development
projects that had not reached technological feasibility, which the Company
expensed at the date of acquisition. In addition, $3.3 million of the purchase
price was allocated to goodwill and other intangibles and is being amortized
over five years. The accounts and results of STS have been included in the
Company's consolidated financial statements from the date of the acquisition of
the remaining 60% interest.
In February 1998, the Company sold 400 shares, or 10%, of the common stock
of STS to the new CEO of the Company for a purchase price of $0.8 million,
which was paid in April 1998. In connection with this transaction, the CEO and
two principal owners and directors of the Company entered into put and call
options related to the shares sold to the CEO. In September 1998, the two
shareholders exercised the call options and purchased the shares of common
stock of STS held by the CEO. Subsequently, the Company purchased these shares
from the two principal owners for $0.8 million in cash. The Company allocated
$0.1 million of the purchase price to in-process research and development
projects that had not reached technological feasibility, which the Company
expensed at the date of acquisition. In addition, $0.3 million of the purchase
price has been allocated to goodwill and other intangibles and is being
amortized over five years.
Other Acquisitions
In January 1998, the Company acquired privately-held Tinwald Networking
Technologies Inc. ("Tinwald"), an Ontario Canada-based developer of software
analysis tools. Under the terms of the transaction, the Company acquired all of
the outstanding common stock of Tinwald for an initial payment of approximately
$5.0 million, plus the possibility of contingent payments for up to three years
after the acquisition. The Company accounted for the transaction as a purchase.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as determined by an independent valuation.
The fair value of tangible assets acquired was approximately $1.6 million and
liabilities assumed was approximately $0.3 million. In addition, approximately
$3.9 million of the purchase price was allocated to in-process research and
development projects that had not reached technological feasibility, which the
Company expensed at the date of the acquisition. The remainder of the purchase
price, including expenses related to the purchase, of $0.3 million has been
allocated to goodwill and is being amortized over five years.
In March 1998, the Company acquired the assets of privately held Network
Intelligence, Inc. ("NI"), a California-based developer of network performance
management software. Under the terms of the transaction, the Company acquired
all of the assets of NI for an initial payment of $1.3 million. The Company
accounted for the transaction as a purchase. The total purchase price of
approximately $1.5 million, including expenses related to the purchase, was
allocated to in-process research and development projects that had not reached
technological feasibility, which the Company expensed at the date of the
acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Exchange Transaction and the
acquisitions of WGTI, STS, Tinwald and NI had all occurred as of the beginning
of each period presented:
For The Year
Ended September
30,
------------------
1998 1997
-------- --------
(In Thousands)
Revenues............................................. $469,773 $437,485
Loss before extraordinary items...................... (51,542) (45,781)
Net loss............................................. (56,053) (50,292)
Net loss per share................................... $ (4.25) $ (3.81)
F-46
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense
as a result of goodwill and other intangible assets. They do not purport to be
indicative of the results of operations which would have resulted had the
combinations been consummated on the first day of each period presented. In
addition, the pro forma results are not intended to be a projection of future
results of operations of the consolidated entities.
4. NOTES PAYABLE
Notes payable are as follows:
September 30,
----------------
1999 1998
------- --------
(Dollars In
Thousands)
Notes payable -- banks................................... $17,148 $112,685
Notes payable -- other................................... 362 400
------- --------
Total.................................................. $17,510 $113,085
======= ========
At September 30, 1998, $59.6 million of the notes payable to banks was
outstanding, as described in Note 5 below, in connection with the Bank Pooling
Agreement. These amounts were repaid in January 1999.
On September 30, 1998, the Company borrowed money from two German banks,
aggregating $29.7 million, at interest rates ranging from 5.0625% to 6.7%, on
an unsecured basis in order to repay the New Credit Agreement, as defined
below. These amounts were repaid on January 4, 1999.
Certain of the Company's foreign subsidiaries have agreements with banks
providing for short-term revolving advances and overdraft facilities in an
aggregate total amount of approximately $17.9 million. At September 30, 1999
and 1998, aggregate amounts of $6.0 million and $19.0 million, respectively,
had been borrowed under these facilities. Revolving borrowings under these
agreements bear interest at variable rates ranging from 2.1875% to 7.0% as of
September 30, 1999. Certain of these bank agreements also provide for long-term
borrowings and are generally secured by the assets of the local subsidiary and
the guarantee of the Company. Most of these agreements do not have stated
expiration dates, but are cancelable by the banks at any time. At September 30,
1999, the Company was contingently liable for outstanding letters of credit and
bank guarantees aggregating $7.4 million.
F-47
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM BORROWINGS
Long-term obligations are as follows:
September 30,
------------------
1999 1998
-------- --------
(Dollars In
Thousands)
Senior Subordinated Notes; total principal balance due June
15, 2007; interest payable semi-annually on June 15 and
December 15 at 10.125%..................................... $ 85,000 $ 85,000
Multi-Currency Revolving Credit Facility and Bilateral
Ancillary Facilities due December 2000; interest payable
over variable periods at LIBOR plus 1.5% (7.58% and 7.46%
for three and six month loans, respectively, at September
30, 1999).................................................. 118,352 --
Term loan payable to banks, interest was payable at LIBOR
plus 2.5% (8.125%)......................................... -- 24,000
Term loans payable to banks under Bank Pooling Agreement;
payable in quarterly installments through 2011; interest
payable at rates set on dates of borrowing ranging from
5.5% to 7.75%; secured by certain inventories, trade
Receivables, fixed assets and other assets of the Company
and the share capital of certain subsidiaries.............. -- 20,906
Term loans payable to banks; payable in semi-annual
installments through 2007; interest ranging from 3.5% to
6.95%; secured by mortgages on certain facilities.......... 23,840 12,617
Credit facilities with banks with various maturity dates;
interest rates ranging from 4.12% to 10.5% payable semi-
annually................................................... 3,524 4,735
Other obligations.......................................... 625 874
-------- --------
Unsecured non-interest bearing promissory note recorded at
present value on issuance date at implied interest rate of
8.1875%; issued in connection with license of technology;
payable in six annual installments of $0.8 million
commencing January 1999.................................... 2,944 3,685
Less: current maturities................................... (6,202) (30,222)
-------- --------
Total long-term obligations................................ 234,285 151,817
Long-term obligations, less current maturities............. $228,083 $121,595
======== ========
F-48
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999, the future annual principal payments on long-term
obligations outstanding at September 30, 1999, were as follows (in thousands):
2000.......................................................... $ 6,202
2001.......................................................... 118,049
2002.......................................................... 4,326
2003.......................................................... 4,259
2004.......................................................... 3,029
Thereafter.................................................... 98,420
--------
Total long-term obligations................................. 234,285
Less: current portion......................................... (6,202)
--------
$228,083
========
On June 11, 1997, Wavetek issued $85.0 million in aggregate principal amount
of Senior Subordinated Notes (the "Notes") pursuant to an Indenture (the
"Indenture") between the Company and the Bank of New York, as trustee. The
Notes bear interest at 10.125%, payable semi-annually on each June 15 and
December 15. The total principal balance of the Notes is due June 15, 2007. On
or after June 15, 2002, the Notes will be redeemable at the option of the
Company, in whole or in part, at the following redemption prices (expressed as
percentages of principal amount) plus accrued and unpaid interest and
liquidated damages, if any; 105.063% if redeemed during the twelve-month period
beginning on June 15, 2002; 103.375% if redeemed during the twelve-month period
beginning on June 15, 2003; 101.688% if redeemed during the twelve month period
beginning of June 15, 2004, and 100% thereafter. Notwithstanding the foregoing,
during the first three years following the issue date of the Notes, the Company
may redeem up to 33 1/3% of the aggregate principal amount of the Notes with
the proceeds of one or more public equity offerings, as defined in the
Indenture, at a redemption price of 110.125% of the principal amount thereof,
in each case plus accrued and unpaid interest and liquidated damages, if any.
The Notes are guaranteed on a senior subordinated basis by the Company's
current and future subsidiaries in the United States. The Indenture requires
the Company to comply with various affirmative and negative covenants. The
Company believes it was in compliance with all such covenants at September 30,
1999. The fair market value of the Notes was $71.0 million as of December 20,
1999.
In June 1997, Wavetek also entered into a credit agreement with a group of
five lending banks (the "Lenders") including DLJ Capital Funding Inc. as
Syndication Agent and Fleet National Bank as Administrative Agent. The Company
had $24.0 million outstanding under the term facility and $4.8 million
outstanding under the revolving credit facility at September 30, 1998; which
was repaid on October 2, 1998 with the proceeds from the proceeds of unsecured
short-term loans from two German banks (see Note 4). Accordingly, all such
amounts were classified as current liabilities in the accompanying consolidated
balance sheet as of September 30, 1998. This facility was superceded by the
Credit Facility described below.
In November 1997, WG and one of its German subsidiaries entered into a
collateral pooling agreement with six banks (the "Bank Pooling Agreement"). The
collateral pooling agreement had an indefinite term, however, it could be
terminated by either party with a notice period of three months prior to the
end of any calendar quarter, but not before December 31, 1998. In January 1999,
the Company repaid the outstanding amounts with proceeds from the issuance of
the Credit Facility, defined below. The Bank Pooling Agreement provided for
term loans and revolving credit facilities up to a maximum of approximately
$116 million at terms and interest rates negotiated at the date of each
borrowing. Under the Bank Pooling Agreement, the Company had short-term
borrowings outstanding of $59.6 million at September 30, 1998 which has been
classified as "Notes payable to banks." The short-term borrowings bore interest
rates ranging from 5.5% to 7.75% at
F-49
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1998. The Bank Pooling Agreement was secured by certain
inventories, trade receivables, fixed assets and other assets of WG and the
share capital of certain of its subsidiaries. This facility was superceded by
the Credit Facility described below.
In December 1998, the Company entered into a Facilities Agreement, due
December 2000, in relation to a Multi-Currency Revolving Credit Facility and
Bilateral Ancillary Facilities (the "Credit Facility") with a syndicate of four
German banks, providing for revolving borrowings, letters of credit and bank
guarantees aggregating up to a maximum amount of 280 million Deutsche marks
($152.7 million at September 30, 1999). The Credit Facility, which was amended
on May 28, 1999 to reduce the interest coverage ratio, as defined in the Credit
Facility, includes a commitment fee of 0.25% of the daily average unutilized
portion of the Credit Facility, and requires proceeds from certain transactions
to repay the Exceeding Amount, as defined in the Credit Facility. The Credit
Facility has a two-year term and all borrowings thereunder bear interest at
LIBOR plus 0.9% through May 31, 1999 and at LIBOR plus 1.5% thereafter.
Borrowings under the Credit Facility are secured by the pledge of 65% of the
shares of Wavetek Wandel Goltermann GmbH, a subsidiary of the Company. In
addition, a $45.0 million tranche of the Credit Facility, which refinanced and
replaced the previously existing bank credit facility of Wavetek, is guaranteed
by a U.S. subsidiary of the Company. The Credit Facility, as amended, requires
the Company to comply with certain covenants and maintain certain minimum
financial ratios. The Company was in compliance with all requirements of the
Credit Facility, as amended, at September 30, 1999. The Company pledged 65% of
WG shares and $45.0 million related to WGTI as guarantees. At September 30,
1999, the Company had drawn $118.3 million under the Credit Facility, as
amended, and $33.2 million was available for future borrowings. In January
1999, additional amounts were borrowed under the Credit Facility to refinance
certain bank debt at the Company's subsidiaries, and certain bank guarantees
were provided under the Credit Facility to secure other subsidiary bank
borrowings.
6. STOCKHOLDERS' EQUITY
In September 1998, the Company increased its authorized capital stock to 55
million shares, of which 50 million shares were designated as Common Stock and
5 million shares were designated as Preferred Stock. Previously, the Company
had authorized capital stock of 15 million shares, all of which was designated
as Common Stock. All authorized shares have a par value of $.01 per share. No
preferred stock has been issued by the Company.
No dividends were declared or paid in fiscal 1999. In fiscal 1998, the
Company declared dividends of $3.6 million of which $2.0 million was paid in
cash, $0.7 million was paid as a decrease to notes receivable from related
parties and $0.9 million was paid as an increase to long-term obligations to
related parties. In fiscal 1997, the Company declared dividends of $2.0 million
of which $1.2 million was paid in cash, $0.4 million was paid as a decrease to
notes receivable from related parties and $0.4 million was paid as an increase
to long-term obligations to related parties.
Prior to the Exchange Transaction, Wavetek had, and immediately following
the Exchange Transaction, the Company had 513,298 options outstanding under the
Company's Amended and Restated Stock Option Plan ("the Stock Option Plan") at
prices ranging from $1.25 to $17.91 per share and which expire through 2009.
Under the Stock Option Plan, options to purchase an aggregate of up to
1,320,232 shares of Common Stock may be issued at an exercise price equal to
the fair value of the shares at the date of grant. The Stock Option Plan
provides for the issuance of both incentive and non-qualified stock options.
Options may be granted under the Stock Option Plan through August 1, 2008,
generally vest and become exercisable over three to four years, and have a ten
(10) year term.
F-50
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock option activity is as follows:
Weighted
Average
Shares Exercise Price
-------- --------------
Outstanding at September 30, 1997.............. -- --
Options of Wavetek............................. 513,298 $10.48
Grants......................................... -- --
Exercises...................................... -- --
Cancellations.................................. -- --
--------
Outstanding at September 30, 1998.............. 513,298 10.48
Grants......................................... 477,263 14.50
Exercises...................................... -- --
Cancellations.................................. (110,352) 13.51
--------
Outstanding at September 30, 1999.............. 880,209 12.28
========
Weighted average fair value of options granted
during 1999................................... $ 2.92
Exercise prices and weighted average remaining contractual lives for the
options outstanding under the Stock Option Plan as of September 30, 1999 are as
follows:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Number of Average
Options Life Exercise Options Exercise
Exercisable Prices Outstanding (years) Price Exercisable Price
------------------ ----------- ----------- -------- ----------- --------
$1.25--$2.57.......... 121,750 3.86 $ 1.71 121,750 $ 1.71
$5.21................. 105,750 5.77 $ 5.21 60,500 $ 5.21
$12.50--$14.50........ 472,493 9.24 $14.44 82,752 $14.31
$17.91................ 180,216 7.95 $17.91 93,658 $17.91
------- ---- ------ ------- ------
$1.25--$17.91......... 880,209 7.82 $12.28 358,660 $ 9.44
======= ==== ====== ======= ======
As of September 30, 1999, options have a weighted average remaining
contractual life of approximately 7.82 years. Options to purchase 358,660
shares were exercisable and 420,023 shares are available for future grant under
the Stock Option Plan.
The Company uses APB Opinion No. 25 to account for all stock-based employee
compensation arrangements, however, SFAS No. 123 requires pro forma information
to be disclosed regarding the amount of net income (loss) determined as if the
Company had accounted for its employee stock options under the fair value
method prescribed by SFAS No. 123. For the purpose of determining such pro
forma net income, the fair value of these options was estimated as of the date
of grant using the Black-Scholes option pricing model with the following
assumptions for 1999: risk-free interest rate of 4.49%, no annual dividends and
an expected option life of five years. The pro forma effects of applying SFAS
No. 123 to options granted in fiscal 1999 on the Company's net loss and basic
and diluted net loss per share, are $(0.3) million and $(0.02), respectively.
There are no pro forma effects of applying SFAS No. 123 to net income (loss)
and net income (loss) per share in fiscal 1998 and 1997.
F-51
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. OTHER COMPREHENSIVE INCOME (LOSS)
On October 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which established standards for reporting and displaying
comprehensive loss and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
loss includes net loss and other comprehensive income (loss). The Company's
current and accumulated other comprehensive income (loss) as of the year ended
September 30, 1999, 1998 and 1997 is comprised solely of foreign currency
translation adjustments and is included in the Statements of Stockholders'
Equity.
Comprehensive income (loss) is as follows:
Years Ended September 30,
-------------------------------
1999 1998 1997
-------- --------- --------
(in thousands)
Net income (loss)...................... $(7,996) $(27,267) $ 7,058
Foreign currency translation
adjustments........................... 519 (1,895) 3,623
-------- --------- --------
Comprehensive income (loss)............ $(7,477) $(29,162) $10,681
======== ========= ========
8. INCOME TAXES
The provision (benefit) for income taxes is comprised as follows:
Years Ended
September 30,
------------------------
1999 1998 1997
------- ------- ------
(in thousands)
Federal:
Current...................................... $ -- $ (866) $ (123)
Deferred..................................... (3,818) (2,151) 57
------- ------- ------
(3,818) (3,017) (66)
------- ------- ------
State:
Current...................................... 191 -- 73
Deferred..................................... 132 -- (7)
------- ------- ------
323 -- 66
------- ------- ------
Foreign:
Current...................................... 6,179 5,429 2,812
Deferred..................................... (5,766) 4,129 4,550
------- ------- ------
413 9,558 7,362
------- ------- ------
Total provision (benefit) for income
taxes..................................... $(3,082) $ 6,541 $7,362
======= ======= ======
F-52
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of income taxes computed at the U.S. federal statutory
tax rate to income tax provision (benefit) is as follows:
Years Ended
September 30,
--------------------
1999 1998 1997
----- ----- ----
Federal income tax at statutory rate.............. (35.0)% (35.0)% 35.0%
State income taxes, net of federal tax benefit.... 7.8 -- 0.5
Foreign tax rate differential..................... (10.2) 6.3 10.3
Benefit from foreign sales corporation............ -- -- (1.1)
Acquired in-process research and development and
amortization of goodwill......................... 28.5 45.8 --
Recognition of tax loss carryforwards............. (19.8) -- --
Other, net........................................ 4.3 (1.6) (0.5)
----- ----- ----
(24.4) 15.5 44.2
Changes in valuation allowance.................... (3.4) 9.8 6.2
----- ----- ----
Effective income tax rate......................... (27.8)% 25.3% 50.4%
===== ===== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of September 30, 1999
and 1998 are set forth in the following table.
The significant components of deferred tax assets and liabilities at
September 30, 1999 and 1998 result from:
1999 1998
-------- --------
(In Thousands)
Deferred tax assets:
Inventories........................................ $ 5,908 $ 6,845
Accrued and unpaid expenses........................ 2,426 6,508
Property, plant and equipment...................... 2,641 1,138
Intangible assets.................................. 1,870 3,089
Pension plans...................................... 2,414 3,253
Tax credit carryforwards........................... 3,562 3,179
Net operating loss carryforwards................... 32,543 24,707
Other.............................................. 377 946
-------- --------
Total deferred tax assets........................ 51,741 49,665
Deferred tax liabilities:
Intangible assets.................................. (34,847) (39,736)
Property, plant and equipment...................... (1,157) (1,480)
Pension plans...................................... -- (1,551)
Other.............................................. -- (233)
-------- --------
Total deferred tax liabilities................... (36,004) (43,000)
-------- --------
Valuation allowance.............................. (14,772) (15,152)
-------- --------
Net deferred tax assets (liabilities)............ $ 965 $ (8,487)
======== ========
F-53
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999, the Company's German subsidiaries had net
operating loss carryforwards of approximately $56.2 million, which can be used
indefinitely. The Company's U.S. subsidiaries had net operating loss
carryforwards of approximately $16.2 million and tax credit carryforwards of
approximately $2.6 million which can be used through 2019, subject to certain
restrictions on amounts which may be used in each year. The Company's French
subsidiaries had net operating loss carryforwards of approximately $4.4 million
which expire on various dates during the next five years. The Company's other
various worldwide subsidiaries have net operating loss carryforwards of
approximately $8.6 million which expire on various dates beyond the next five
years.
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Management believes
sufficient uncertainty exists regarding the realizability of deferred tax
assets that a valuation allowance is required. The Company continually reviews
the adequacy of the valuation allowance and is recognizing these benefits only
as reassessment indicates that it is more likely than not that the benefits
will be realized.
9. RETIREMENT BENEFITS
Defined Benefit Plans
The Company sponsors several qualified and non-qualified pension plans for
its employees. For those Company 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. The Company'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 years ended September 30, 1999 and 1998:
September 30,
------------------------
1999 1998
----------- -----------
(Dollars in Thousands)
Obligation at October 1......................... $ 49,743 $ 40,557
Service cost.................................... 1,688 3,116
Interest cost................................... 3,024 2,739
Actuarial gain/loss............................. 2,656 912
Foreign currency exchange rate changes.......... 111 2,466
Benefits paid................................... (2,204) (1,785)
Plan amendments................................. -- 1,738
Business combinations........................... 72 --
----------- -----------
Obligation at September 30...................... $55,090 $49,743
=========== ===========
F-54
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of the changes in the fair
value of assets under the benefits plans for the years ended September 30, 1999
and 1998:
September 30,
-------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Fair value of plan assets at October 1....... $ 10,984 $ 11,603
Actual return on plan assets................. 3,462 (623)
Foreign currency exchange rate changes....... 113 (384)
Employer contributions....................... 775 640
Benefits paid................................ (347) (252)
Business combinations........................ 73 --
Divestitures................................. (101) --
-------- --------
Fair value of plan assets at September 30.... $ 14,959 $ 10,984
======== ========
The following table represents a statement of the funded status for the
years ended September 30, 1999 and 1998:
September 30,
------------------
1999 1998
-------- --------
(Dollars in
Thousands)
Net amount recognized............................. $(35,671) $(35,511)
Unrecognized net gain/loss........................ (4,459) (3,248)
-------- --------
Funded status..................................... $(40,130) $(38,759)
======== ========
The following table provides the amounts recognized in the consolidated
balance sheets as of September 30, 1999 and 1998:
September 30,
------------------
1999 1998
-------- --------
(Dollars in
Thousands)
Prepaid benefit cost.............................. $ 805 $ 736
Accrued benefit liability......................... (36,476) (36,247)
-------- --------
Net amount recognized............................. $(35,671) $(35,511)
======== ========
The following table provides the components of the net periodic benefit cost
for the plans for the years ended September 30, 1999 and 1998:
September 30,
--------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Service cost................................... $ 1,688 $ 3,116
Interest cost.................................. 3,024 2,739
Expected return of plan assets................. (1,097) (623)
Amortization of net gain/loss.................. 179 --
--------- --------
Net periodic pension cost...................... $ 3,794 $ 5,232
========= ========
F-55
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table as of September 30, 1999 and 1998:
Weighted average assumptions as of:
September 30,
---------------
1999 1998
------ ------
(Dollars in
Thousands)
Discount rate........................................... 6.5% 6.3%
Expected return on plan assets.......................... 7.5 7.5
Rate of compensation increase........................... 1.0 3.9
Defined Contribution Plans
In certain countries, the Company's employees participate in Company
sponsored defined contribution plans. Contributions by the Company to these
plans were $1.4 million, $0.8 million and $0.7 million in fiscal 1999, 1998 and
1997, respectively.
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," as of September 30, 1999. SFAS No. 131
establishes annual and interim reporting standards for an enterprise's
operating segment and related disclosures about its products, services,
geographic areas and major customers.
Based on its organizational structure, the Company operates in two
reportable segments: communications test and other test products. The Company's
reportable segments represent business units that primarily offer similar
products and services. The Company's communications test business includes
Telecom Networks, Enterprise Networks, Multimedia, Wireless and the Service
business. Other test products include Test Tools, Precision Measurement
Instruments and electromagnetic measurement instruments.
The Company's chief operating decision makers utilize revenue and operating
income (loss) information, as defined below, in assessing performance and
making overall operating decisions and resource allocations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
F-56
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operating segments for the fiscal year ended
September 30, 1999 is as follows (in thousands):
Communications Other Test
Test Products Corporate Total
-------------- ---------- --------- ---------
Revenues:
Revenues from external
customers................... $468,231 $29,011 $ 16 $ 497,258
Intersegment revenues........ 225,662 32,282 -- 257,944
Elimination of intersegment
revenues.................... (225,662) (32,282) -- (257,944)
-------- ------- --------- ---------
Total revenues........... $468,231 $29,011 $ 16 $ 497,258
======== ======= ========= =========
Operating income (loss):
Operating income (loss) on
reportable segments(1)...... $ 36,486 $ 2,261 $ (5,837) $ 32,910
Amortization of intangible
assets...................... 2,488 154 17,325 19,967
Restructuring and other non-
recurring charges........... -- -- 2,379 2,379
Elimination of intersegment
profits..................... -- -- 285 285
-------- ------- --------- ---------
Operating income (loss)
(2)....................... 33,998 2,107 (25,826) 10,279
Net interest expense:
Interest (revenue)......... (615) (38) (24) (677)
Interest expense........... 4,682 290 15,993 20,965
-------- ------- --------- ---------
Net interest expense..... 4,067 252 15,969 20,288
Other expense, net........... -- 1,368 (299) 1,069
-------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income
(loss)........................ $ 29,931 $ 487 $ (41,496) $ (11,078)
======== ======= ========= =========
Assets:
Total assets from reportable
segments.................... $187,502 $10,351 $ 154,905 $ 352,758
Elimination of receivables
from corporate.............. (58,076) (3,602) -- (61,678)
-------- ------- --------- ---------
129,426 6,749 154,905 291,080
Unallocated goodwill......... -- -- 53,860 53,860
Unallocated acquired core
technologies................ -- -- 74,290 74,290
Unallocated other
intangibles................. -- -- 15,503 15,503
-------- ------- --------- ---------
Total assets............. $129,426 $ 6,749 $ 298,558 $ 434,733
======== ======= ========= =========
Capital expenditures........... $ 15,382 $ 954 $ 424 $ 16,760
Depreciation and amortization:
Depreciation................. 11,596 719 687 13,002
Amortization of intangible
assets...................... 5,306 329 16,831 22,466
- -----------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), including intersegment profits, and excluding
amortization of intangible assets and restructuring and other non-recurring
charges.
(2) Per consolidated statement of operations.
F-57
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operating segments for the fiscal year ended
September 30, 1998 is as follows (in thousands):
Communications Other Test
Test Products Corporate Total
-------------- ---------- --------- ---------
REVENUES:
Revenues from external
customers................... $318,745 $ 9,061 $ 82 $ 327,888
Intersegment revenues........ 37,289 -- -- 37,289
Elimination of intersegment
revenues.................... (37,289) -- -- (37,289)
-------- ------- --------- ---------
Total revenues............. $318,745 $ 9,061 $ 82 $ 327,888
======== ======= ========= =========
OPERATING INCOME (LOSS):
Operating income (loss) on
reportable segments(1)...... $ 28,464 $ (200) $ 1,972 $ 30,236
Amortization of intangible
assets...................... 1,182 -- -- 1,182
Acquired in-process research
and development............. 21,125 -- 11,800 32,925
Restructuring and other non-
recurring charges........... 9,369 -- -- 9,369
Elimination of intersegment
profits..................... -- -- 1,116 1,116
-------- ------- --------- ---------
Operating income (loss)
(2)....................... (3,212) (200) (10,944) (14,356)
Net interest expense:
Interest (revenue)......... (580) (16) (381) (977)
Interest expense........... 3,938 112 3,579 7,629
-------- ------- --------- ---------
Net interest expense....... 3,358 96 3,198 6,652
Other (income) expense, net.. (1,969) (126) 6,909 4,814
-------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income
(loss)........................ $ (4,601) $ (170) $ (21,051) $ (25,822)
======== ======= ========= =========
ASSETS:
Total assets from reportable
segments.................... $218,421 $ 9,856 $ 145,335 $ 373,612
Elimination of receivables
from corporate.............. (43,759) (1,242) -- (45,001)
-------- ------- --------- ---------
174,662 8,614 145,335 328,611
Unallocated goodwill......... -- -- 56,789 56,789
Unallocated acquired core
technologies................ -- -- 84,100 84,100
Unallocated other
intangibles................. -- -- 15,024 15,024
-------- ------- --------- ---------
Total assets............... $174,662 $ 8,614 $ 301,248 $ 484,524
======== ======= ========= =========
Capital expenditures........... $ 9,902 $ 514 $ -- $ 10,416
DEPRECIATION AND AMORTIZATION:
Depreciation................. 7,434 211 -- 7,645
Amortization of intangible
assets...................... 1,182 -- -- 1,182
- -----------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), including intersegment profits, and excluding
amortization of intangible assets, acquired in-process research and
development and restructuring and other non-recurring charges.
(2) Per consolidated statement of operations.
F-58
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operating segments for the fiscal year ended
September 30, 1997 is as follows (in thousands):
Communications Other Test
Test Products Total
-------------- ---------- --------
REVENUES:
Revenues from external customers........ $274,135 $7,752 $281,887
Intersegment revenues................... 29,944 847 30,791
Elimination of intersegment revenues.... (29,944) (847) (30,791)
-------- ------ --------
Total revenues...................... $274,135 $7,752 $281,887
======== ====== ========
OPERATING INCOME (LOSS):
Operating income (loss) on reportable
segments (1)........................... $ 23,233 $ 570 $ 23,803
Amortization of intangible assets....... 1,346 -- 1,346
Acquired in-process research and devel-
opment................................. 1,743 -- 1,743
-------- ------ --------
Operating income (loss) (2)........... 20,144 570 20,714
Net interest expense:
Interest (revenue).................... (1,566) (44) (1,610)
Interest expense...................... 8,275 234 8,509
-------- ------ --------
Net interest expense................ 6,709 190 6,899
Other (income) expense, net............. (768) (22) (790)
-------- ------ --------
Income (loss) before provision (benefit)
for income taxes and minority
interest in income (loss)............... $ 14,203 $ 402 $ 14,605
======== ====== ========
ASSETS:
Total assets from reportable segments... $211,752 $5,988 $217,740
Unallocated goodwill.................... 4,345 123 4,468
-------- ------ --------
Total assets........................ $216,097 $6,111 $222,208
======== ====== ========
Capital expenditures.................... $ 9,099 $ 257 $ 9,356
DEPRECIATION AND AMORTIZATION:
Depreciation............................ 8,689 246 8,935
Amortization of intangible assets....... 1,346 -- 1,346
- -----------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), excluding amortization of intangible assets and
acquired in-process research and development.
(2) Per consolidated statement of operations.
F-59
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operations by geographic areas is shown in
the table below. The Company manages its operations in two primary geographic
areas: (i) North American operations which includes the United States, Canada,
Mexico, Central and South America, and (ii) European Operations which includes
Europe and Asia-Pacific.
Net sales represents the locations of sales to the Company's customers.
Income (loss) before provision (benefit) for income taxes and total assets is
reported based on the location of the Company's facilities. Intercompany
transfers are made at arm's length between the various geographic areas.
Years Ended September 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Net sales:
Europe...................................... $ 231,494 $ 176,437 $ 148,037
Canada, Mexico, Central and South America... 76,281 69,725 62,922
Asia-Pacific................................ 71,933 44,258 40,417
United States............................... 117,550 37,468 30,511
--------- --------- ---------
Consolidated net sales........................ $ 497,258 $ 327,888 $ 281,887
========= ========= =========
Income (loss) before provision (benefit) for
income taxes and minority interest in
income (loss):
Europe...................................... $ 17,361 $ 14,871 $ 28,056
Canada, Mexico, Central and South America... (232) 131 1,668
Asia-Pacific................................ 726 864 (203)
United States............................... (28,090) (38,495) (1,329)
Eliminations................................ (843) (3,193) (13,587)
--------- --------- ---------
Consolidated income (loss) before provision
(benefit) for income taxes and minority
interest in income (loss).................... $ (11,078) $ (25,822) $ 14,605
========= ========= =========
Total assets:
Europe...................................... $ 421,078 $ 515,203 $ 364,722
Canada, Mexico, Central and South America... 24,927 26,174 12,786
Asia-Pacific................................ 21,493 14,341 14,095
United States............................... 424,741 263,101 42,432
Eliminations................................ (457,506) (334,295) (211,827)
--------- --------- ---------
Consolidated total assets..................... $ 434,733 $ 484,524 $ 222,208
========= ========= =========
For fiscal 1999, no one customer accounted for more than 5% of the Company's
sales, and the top ten customers, each of which is a global company with global
affiliates, represented approximately 18% of the Company's sales.
F-60
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company rents certain facilities under operating leases. The leases
generally provide that the Company pay the taxes, insurance and maintenance
expenses related to the leased property. Certain leases include renewal options
and/or options to purchase the leased property. The Company also rents
equipment and other facilities on a month-to-month basis. Total rent expense
was $8.2 million, $5.8 million, and $4.4 million for fiscal 1999, 1998 and
1997, respectively.
In 1991, Wavetek entered into a sale/leaseback arrangement for its San Diego
manufacturing facility with an affiliate of a major stockholder. The lease runs
through June 2006 with the minimum annual rental of $0.6 million, subject to
annual consumer price index adjustments. The original gain on the transaction
was deferred and is being amortized over the original ten-year lease term.
The Company's U.S. corporate headquarters located in North Carolina and the
office and manufacturing facilities of two of the Company's U.S. subsidiaries
are leased from a partnership affiliated with certain major stockholders of the
Company. Under these leases, which expire on September 30, 2005 and 2010,
annual rent of $1.2 million is payable in monthly installments and is adjusted
annually for changes in the consumer price index.
At September 30, 1999, the annual future minimum lease payments under
noncancelable operating leases and the future minimum annual lease receipts
under noncancelable subleases are as follows:
Lease Lease
Payments Receipts
-------- --------
(In Thousands)
2000.................................................... $ 8,989 $ 484
2001.................................................... 7,890 492
2002.................................................... 5,084 492
2003.................................................... 4,420 492
2004.................................................... 4,306 492
Later years............................................. 18,872 82
------- ------
Total minimum lease payments.......................... $49,561 $2,534
======= ======
Litigation and Other Claims
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. It is management's opinion that the likely
outcome of any such proceedings and claims would not have a material adverse
effect on the Company's future results of operations or financial position.
In May 1999, the Company resolved its dispute with certain beneficial owners
of the Company's 10.125% Senior Subordinated Notes due 2007 arising from the
Exchange Transaction. The Company made a cash payment to the holders of the
Notes and entered into a supplemental indenture with the Trustee providing for
amendments to the Indenture under which the Notes were issued. In connection
with such agreement, the Company will become obligated to pay $2.125 million to
certain holders of the Notes on June 30, 2000, in cash or additional notes, in
the event that the Company does not consummate an initial public offering
producing gross cash proceeds in excess of $75 million by such date.
The Company hired a new chief financial officer as of October 1, 1999 and
terminated his employment on December 14, 1999. The individual has disputed the
basis for his termination and is claiming that he is entitled
F-61
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to his compensation for the remainder of the two year term of his employment
contract. The Company does not believe the magnitude of this dispute is
material to the Company.
12. RELATED PARTY TRANSACTIONS
At September 30, 1999 and 1998, the Company had unsecured notes payable to
stockholders of $10.7 million and $12.3 million, respectively. These
obligations bear interest at 7.75%, payable quarterly, and are due at the
earlier of an initial public offering of the Company's Common Stock or December
2000. The Company recorded interest expense related to these obligations of
$0.8 million, $0.8 million and $0.9 million, in 1999, 1998 and 1997,
respectively.
The Company leases its facility in Research Triangle Park, North Carolina,
including its corporate headquarters and the facilities of its subsidiaries
Wandel & Goltermann Technologies, Inc. and Wandel & Goltermann ATE Systems,
Inc., from a partnership which is owned by a member of the Company's board of
directors and his children, who are all also shareholders of the Company, and
certain other family members. Under the leases, which expire in September 2005
and September 2010, annual rent of $1.5 million is payable in monthly
installments and is adjusted annually for changes in the consumer price index.
The Company leases its headquarters for its local area network and Test
Tools business in San Diego, California from a corporation controlled by the
co-chairman of the Company's board of directors for an annual rent of $0.6
million, plus annual consumer price index adjustments, not to exceed 3% per
annum. The lease expires in June 2006.
The Company leases certain offices and manufacturing facilities in Eningen,
Germany for one of its German subsidiaries from the mother of the co-chairman
of the Company's board of directors. The Company paid annual rent of $0.3
million under the lease, which was terminated in July 1999.
In February 1998, the Company sold 400 shares, or 10%, of the common stock
of its then wholly-owned subsidiary Switching Test Solutions AG ("STS") to the
Company's president and chief executive officer for a purchase price of $0.8
million, which was paid in April 1998. In connection with this transaction, the
president and chief executive officer, a member of the Company's board of
directors, and a co-chairman of the Company's board of directors and
shareholder, entered into put and call options related to the shares sold to
the president and chief executive officer. In September 1998, a member of the
Company's board of directors and a co-chairman of the Company's board of
directors exercised the call options and purchased the shares of STS held by
the Company's president and chief executive officer. Subsequently, the Company
purchased these shares from a member of the Company's board of directors and a
co-chairman of the Company's board of directors for $0.8 million.
13. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under the Notes are guaranteed by all of
the Company's current and future domestic subsidiaries (collectively, the
"Subsidiary Guarantors"). WGTI and Wandel & Goltermann ATE Systems, Inc., which
became Subsidiary Guarantors upon completion of the Exchange Transaction, are
shown as Subsidiary Guarantors for all periods presented. Wavetek U.S. Inc. and
its subsidiary, Digital Transport Systems, Inc., are also Subsidiary
Guarantors. Such guarantees are full and unconditional and joint and several.
Separate financial statements of the Subsidiary Guarantors are not presented
because the Company's management has deemed that they would not be material to
investors. The following supplemental condensed consolidating financial data
sets forth, on an unconsolidated basis, balance sheets, statements of
operations and statements of cash flows data for (i) the Company (Wavetek
Wandel Goltermann, Inc., formerly Wavetek Corporation, issuer of the Notes),
(ii) the current Subsidiary Guarantors and (iii) the Company's foreign
subsidiaries (the "Foreign Subsidiaries"). The supplemental financial data
reflects the investments of the Company in the Subsidiary Guarantors and the
Foreign Subsidiaries using the equity method of accounting.
F-62
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING BALANCE SHEETS
As of September 30, 1999
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 11 $ 4,578 $ 12,500 $ -- $ 17,089
Accounts receivable
(less allowance for
doubtful accounts of
$4,608).............. 42,956 46,715 87,312 (74,451) 102,532
Inventories........... -- 13,884 52,388 (3,757) 62,515
Deferred income
taxes................ 561 4,482 3,879 -- 8,922
Other current assets.. 156 1,917 11,563 -- 13,636
-------- -------- -------- ---------- --------
Total current assets.... 43,684 71,576 167,642 (78,208) 204,694
Property, plant and
equipment, net......... 1,361 8,013 51,201 -- 60,575
Intangible assets, net.. 5,617 110,170 46,695 -- 162,482
Investment in
subsidiaries........... 167,992 -- -- (167,992) --
Other non-current
assets................. 6 1,988 4,988 -- 6,982
-------- -------- -------- ---------- --------
Total assets........ $218,660 $191,747 $270,526 $ (246,200) $434,733
======== ======== ======== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......... $ -- $ -- $ 17,510 $ -- $ 17,510
Long-term
obligations--
current.............. -- 685 5,517 -- 6,202
Long-term obligations
to related parties--
current.............. -- -- 10,721 -- 10,721
Trade payables........ 17,236 17,322 61,873 (64,882) 31,549
Accrued compensation.. 396 6,734 19,496 -- 26,626
Income taxes payable.. (18,986) 18,978 4,258 -- 4,250
Other current
liabilities.......... 4,516 5,786 28,536 -- 38,838
-------- -------- -------- ---------- --------
Total current
liabilities........ 3,162 49,505 147,911 (64,882) 135,696
Long-term obligations--
non-current............ 198,080 7,784 31,695 (9,476) 228,083
Pension liabilities..... -- -- 35,671 -- 35,671
Deferred income taxes... (519) 19,953 (11,477) -- 7,957
Other non-current
liabilities............ -- 4,088 5,301 -- 9,389
-------- -------- -------- ---------- --------
Total liabilities... 200,723 81,330 209,101 (74,358) 416,796
-------- -------- -------- ---------- --------
Commitments and
contingencies
Stockholders' equity:
Common stock.......... 132 -- -- -- 132
Additional paid-in
capital.............. 72,948 171,121 87,187 (258,308) 72,948
Accumulated deficit... (65,641) (60,682) (36,282) 96,964 (65,641)
Other comprehensive
income (loss)........ 10,498 (22) 10,520 (10,498) 10,498
-------- -------- -------- ---------- --------
Total stockholders'
equity............. 17,937 110,417 61,425 (171,842) 17,937
-------- -------- -------- ---------- --------
Total liabilities
and stockholders'
equity............. $218,660 $191,747 $270,526 $ (246,200) $434,733
======== ======== ======== ========== ========
F-63
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING BALANCE SHEETS
As of September 30, 1998
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents............ $ 19 $ 31,143 $ 4,382 $ -- $ 35,544
Accounts receivable
(less allowance for
doubtful accounts of
$4,432)................ 8,710 27,364 81,907 (25,700) 92,281
Inventories............. -- 18,033 59,942 (3,089) 74,886
Deferred income taxes... 3,592 4,408 9,095 -- 17,095
Other current assets.... 1,244 1,884 9,608 -- 12,736
-------- -------- -------- --------- --------
Total current assets.. 13,565 82,832 164,934 (28,789) 232,542
Property, plant and
equipment, net........... 1,611 8,015 56,971 -- 66,597
Intangible assets, net.... 7,953 120,428 50,294 -- 178,675
Investment in
subsidiaries............. 143,579 -- 29,932 (173,511) --
Other assets.............. 213 2,763 3,794 (60) 6,710
-------- -------- -------- --------- --------
Total assets.......... $166,921 $214,038 $305,925 $(202,360) $484,524
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........... $ 34,463 $ 373 $ 78,249 $ -- $113,085
Long-term obligations--
current................ 24,000 741 5,481 -- 30,222
Long-term obligations to
related parties--
current................ -- -- 11,746 -- 11,746
Trade payables.......... 4,003 20,322 35,845 (22,558) 37,612
Accrued compensation.... 714 5,478 19,715 -- 25,907
Income taxes payable.... (10,839) 9,978 6,817 -- 5,956
Other current
liabilities............ 3,683 8,967 30,986 (1,788) 41,848
-------- -------- -------- --------- --------
Total current
liabilities.......... 56,024 45,859 188,839 (24,346) 266,376
Long-term obligations--
non-current.............. 85,000 4,299 33,711 (1,415) 121,595
Pension liabilities....... -- -- 35,511 -- 35,511
Deferred income taxes..... 238 25,156 188 -- 25,582
Other non-current
liabilities.............. 245 2,142 7,659 -- 10,046
-------- -------- -------- --------- --------
Total liabilities..... 141,507 77,456 265,908 (25,761) 459,110
-------- -------- -------- --------- --------
Commitments and
contingencies
Stockholders' equity:
Common stock............ 132 -- -- -- 132
Additional paid-in
capital................ 72,948 168,071 85,153 (253,224) 72,948
Accumulated deficit..... (57,645) (31,463) (55,115) 86,578 (57,645)
Other comprehensive
income (loss).......... 9,979 (26) 9,979 (9,953) 9,979
-------- -------- -------- --------- --------
Total stockholders'
equity............... 25,414 136,582 40,017 (176,599) 25,414
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity.. $166,921 $214,038 $305,925 $(202,360) $484,524
======== ======== ======== ========= ========
F-64
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Year Ended September 30, 1999
(Dollars In Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $158,576 $392,999 $ (54,317) $497,258
Cost of goods sold...... 39 76,419 181,924 (53,649) 204,733
-------- -------- -------- --------- --------
Gross margin............ (39) 82,157 211,075 (668) 292,525
Operating expenses:
Marketing and
selling.............. 1,801 38,574 106,012 -- 146,387
Research and
development.......... -- 22,506 48,933 -- 71,439
General and
administrative....... 2,809 11,218 28,047 -- 42,074
Amortization of
intangible assets.... 136 12,189 7,642 -- 19,967
Provisions for
restructuring and
other non-recurring
charges.............. 286 296 1,797 -- 2,379
-------- -------- -------- --------- --------
Total operating
expenses........... 5,032 84,783 192,431 -- 282,246
-------- -------- -------- --------- --------
Operating income
(loss)................. (5,071) (2,626) 18,644 (668) 10,279
Other (income) expense,
net:
Interest income....... (1,187) (227) (450) 1,187 (677)
Interest expense...... 14,468 737 6,947 (1,187) 20,965
Equity in net income
(loss) of
subsidiaries......... (4,866) -- -- 4,866 --
Other, net............ (563) 79 1,553 -- 1,069
-------- -------- -------- --------- --------
Total other (income)
expense, net 7,852 589 8,050 4,866 21,357
-------- -------- -------- --------- --------
Income (loss) before
provision (benefit)
for income taxes..... (12,923) (3,215) 10,594 (5,534) (11,078)
Provision (benefit) for
income taxes........... (4,927) 3,745 (1,633) (267) (3,082)
-------- -------- -------- --------- --------
Net income (loss)....... $ (7,996) $ (6,960) $ 12,227 $ (5,267) $ (7,996)
======== ======== ======== ========= ========
F-65
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Year Ended September 30, 1998
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $ 59,261 $305,916 $(37,289) $327,888
Cost of goods sold...... -- 32,278 137,680 (39,095) 130,863
----- -------- -------- -------- --------
Gross margin............ -- 26,983 168,236 1,806 197,025
Operating expenses:
Marketing and
selling.............. -- 17,181 78,157 -- 95,338
Research and
development.......... -- 13,891 33,839 -- 47,730
General and
administrative....... -- 5,281 19,556 -- 24,837
Amortization of
intangible assets.... -- -- 1,182 -- 1,182
Acquired in-process
research
and development...... -- 24,342 8,583 -- 32,925
Provisions for
restructuring and
other non-recurring
charges.............. -- 4,820 4,549 -- 9,369
----- -------- -------- -------- --------
Total operating
expenses........... -- 65,515 145,866 -- 211,381
----- -------- -------- -------- --------
Operating income
(loss)................. -- (38,532) 22,370 1,806 (14,356)
Other (income) expense,
net: --
Interest income....... -- (351) (807) 181 (977)
Interest expense...... -- 181 7,629 (181) 7,629
Other, net............ -- 133 4,681 -- 4,814
----- -------- -------- -------- --------
Total other (income)
expense, net....... -- (37) 11,503 -- 11,466
----- -------- -------- -------- --------
Income (loss) before
provision (benefit)
for income taxes and
minority interest in
income (loss)........ -- (38,495) 10,867 1,806 (25,822)
Provision (benefit) for
income taxes........... -- (3,017) 9,558 -- 6,541
Minority interest in
income (loss).......... -- -- 124 (5,220) (5,096)
----- -------- -------- -------- --------
Net income (loss)....... $ -- $(35,478) $ 1,185 $ 7,026 $(27,267)
===== ======== ======== ======== ========
F-66
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Year Ended September 30, 1997
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $61,302 $258,945 $(38,360) $281,887
Cost of goods sold...... -- 27,311 125,944 (39,443) 113,812
----- ------- -------- -------- --------
Gross margin............ -- 33,991 133,001 1,083 168,075
Operating expenses:
Marketing and
selling.............. -- 15,870 66,817 -- 82,687
Research and
development.......... -- 12,510 24,812 -- 37,322
General and
administrative....... -- 5,324 18,939 -- 24,263
Amortization of
intangible assets.... -- -- 1,346 -- 1,346
Acquired in-process
research and
development.......... -- 1,401 342 -- 1,743
----- ------- -------- -------- --------
Total operating
income............. -- 35,105 112,256 -- 147,361
----- ------- -------- -------- --------
Operating income
(loss)................. -- (1,114) 20,745 1,083 20,714
Other (income) expense,
net:
Interest income....... -- (639) (1,094) 123 (1,610)
Interest expense...... -- 123 8,509 (123) 8,509
Other, net............ -- 217 (1,007) -- (790)
----- ------- -------- -------- --------
Total other (income)
expense, net....... -- (299) 6,408 -- 6,109
----- ------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interest in income... -- (815) 14,337 1,083 14,605
Provision for income
taxes.................. -- -- 7,362 -- 7,362
Minority interest in
income................. -- -- -- 185 185
----- ------- -------- -------- --------
Net income (loss)....... $ -- $ (815) $ 6,975 $ 898 $ 7,058
===== ======= ======== ======== ========
F-67
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 1999
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............. $ (26,343) $20,955 $ 9,699 $ -- $ 4,311
INVESTING ACTIVITIES
Purchase of property,
plant and equipment.. (483) (3,928) (12,349) -- (16,760)
Proceeds from sale of
property, plant and
equipment............ -- -- 1,977 -- 1,977
Transfer of
subsidiaries......... (28,536) -- 28,536 -- --
--------- ------- -------- ----- --------
Net cash provided by
(used in) investing
activities......... (29,019) (3,928) 18,164 -- (14,783)
FINANCING ACTIVITIES
Proceeds from
revolving lines of
credit and long-term
obligations.......... 126,475 6,464 79,772 -- 212,711
Principal payments on
revolving lines of
credit and long-term
obligations.......... (71,859) (6,837) (139,963) -- (218,659)
Dividend from
subsidiary to Wavetek
Wandel Goltermann,
Inc.................. 22,000 (22,000) -- -- --
Capital contribution
from Wavetek Wandel
Goltermann, Inc. to
subsidiary........... (4,215) -- 4,215 -- --
Loans to subsidiaries
from Wavetek Wandel
Goltermann, Inc...... (62,195) 8,738 53,457 -- --
Repayment of loan from
subsidiary to Wavetek
Wandel Goltermann,
Inc.................. 53,320 (29,196) (24,124) -- --
Repayment of loans
from subsidiaries.... (7,500) (1,818) 9,318 -- --
Other, net............ (672) 1,057 (1,057) -- (672)
--------- ------- -------- ----- --------
Net cash provided by
(used in) financing
activities......... 55,354 (43,592) (18,382) -- (6,620)
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- (1,363) -- (1,363)
--------- ------- -------- ----- --------
Increase (decrease) in
cash and cash
equivalents............ (8) (26,565) 8,118 -- (18,455)
Cash and cash
equivalents at
beginning of period.... 19 31,143 4,382 -- 35,544
--------- ------- -------- ----- --------
Cash and cash
equivalents at end of
period................. $ 11 $ 4,578 $ 12,500 $ -- $ 17,089
========= ======= ======== ===== ========
F-68
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 1998
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............. $ -- $ (7,100) $ 20,522 $ 8,500 $ 21,922
INVESTING ACTIVITIES:
Purchases of
businesses, net of
cash acquired........ -- (39,182) (6,025) -- (45,207)
Cash acquired in
connection with the
Exchange
Transaction.......... 19 30,438 872 -- 31,329
Purchase of short-term
investments.......... -- (41,100) -- -- (41,100)
Proceeds from sale of
short-term
investments.......... -- 41,100 -- -- 41,100
Purchase of property,
plant and equipment.. -- (1,779) (8,637) -- (10,416)
Other, net............ -- 302 6,416 -- 6,718
----- -------- -------- ------- --------
Net cash provided
by (used in)
investing
activities....... 19 (10,221) (7,374) -- (17,576)
FINANCING ACTIVITIES:
Proceeds from
revolving lines of
credit and long-term
obligations.......... -- 1,455 54,786 -- 56,241
Principal payments on
revolving lines of
credit and long-term
obligations.......... -- (1,087) (34,560) -- (35,647)
Capital contributions
from the Company to
subsidiaries......... -- 34,695 (34,695) -- --
Cash dividends paid to
stockholders......... -- -- (2,043) -- (2,043)
Other, net............ -- -- 3,106 -- 3,106
----- -------- -------- ------- --------
Net cash provided
by (used in)
financing
activities....... -- 35,063 (13,406) -- 21,657
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- 141 -- 141
----- -------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ 19 17,742 (117) 8,500 26,144
Cash and cash
equivalents at
beginning of year...... -- 13,401 4,499 (8,500) 9,400
----- -------- -------- ------- --------
Cash and cash
equivalents at end of
year................... $ 19 $ 31,143 $ 4,382 $ -- $ 35,544
===== ======== ======== ======= ========
F-69
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For The Year Ended September 30, 1997
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES.. $ -- $ 3,411 $ 22,602 $(8,500) $ 17,513
INVESTING ACTIVITIES:
Purchase of
businesses, net of
cash acquired....... (6,658) (6,658)
Purchase of short-
term investments.... -- (76,160) -- -- (76,160)
Proceeds from sale of
short-term
investments......... -- 76,160 -- -- 76,160
Purchase of property,
plant and
equipment........... -- (1,728) (7,628) -- (9,356)
Other, net........... -- 1,413 3,609 -- 5,022
----- -------- -------- ------- --------
Net cash used in
investing
activities........ -- (315) (10,677) -- (10,992)
FINANCING ACTIVITIES:
Proceeds from
revolving lines of
credit and long-term
obligations......... -- -- 1,961 -- 1,961
Principal payments on
revolving lines of
credit and long-term
obligations......... -- -- (12,084) -- (12,084)
Cash dividends paid
to stockholders..... -- (1,188) -- (1,188)
Other, net........... -- -- 63 -- 63
----- -------- -------- ------- --------
Net cash used in
financing
activities........ -- -- (11,248) -- (11,248)
Effect of exchange rate
changes on cash and
cash equivalents...... -- -- (289) -- (289)
----- -------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents........... -- 3,096 388 (8,500) (5,016)
Cash and cash
equivalents at
beginning of year..... -- 10,305 4,111 -- 14,416
----- -------- -------- ------- --------
Cash and cash
equivalents at end of
year.................. $ -- $ 13,401 $ 4,499 $(8,500) $ 9,400
===== ======== ======== ======= ========
F-70
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares In Thousands, Except Per Share Data)
March 31, September 30,
2000 1999
----------- -------------
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 17,974 $ 17,089
Accounts receivable (less allowance for doubtful
accounts of $4,071 at March 31, 2000 (unaudited)
and $4,608 at September 30, 1999) ................ 92,113 102,532
Inventories ....................................... 71,506 62,515
Deferred income taxes ............................. 6,467 8,922
Other current assets .............................. 13,997 13,636
-------- --------
Total current assets ............................ 202,057 204,694
Property, plant and equipment, net .................. 53,066 60,575
Intangible assets, net .............................. 136,903 162,482
Other non-current assets ............................ 5,457 6,982
-------- --------
Total assets .................................... $397,483 $434,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ............................ $ 9,094 $ 17,510
Current portion of long-term obligations .......... 5,079 6,202
Current portion of long-term obligations to related
parties .......................................... 9,582 10,721
Trade payables .................................... 34,307 31,549
Accrued compensation .............................. 22,811 26,626
Income taxes payable .............................. 4,105 4,250
Other current liabilities ......................... 42,283 38,838
-------- --------
Total current liabilities ....................... 127,261 135,696
Long-term obligations, net of current portion ..... 199,942 228,083
Pension liabilities ............................... 33,455 35,671
Deferred income taxes ............................. 4,418 7,957
Other non-current liabilities ..................... 7,582 9,389
-------- --------
Total liabilities ............................... 372,658 416,796
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01, 50,000 shares
authorized, 13,320 shares at March 31, 2000 and
13,202 shares at September 30, 1999 issued and
outstanding ...................................... 133 132
Additional paid-in capital ........................ 73,222 72,948
Accumulated deficit ............................... (59,387) (65,641)
Other comprehensive income ........................ 10,857 10,498
-------- --------
Total stockholders' equity ...................... 24,825 17,937
-------- --------
Total liabilities and stockholders' equity ...... $397,483 $434,733
======== ========
- ---------------------
Note: The balance sheet at September 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
The Accompanying Notes to Consolidated Financial Statements are an Integral
Part of these Balance Sheets.
F-71
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and Shares in Thousands, Except Per Share Data)
(Unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net sales ............................. $127,155 $114,466 $262,731 $240,931
Cost of goods sold .................... 50,434 47,927 103,428 102,562
-------- -------- -------- --------
Gross margin .......................... 76,721 66,539 159,303 138,369
Operating expenses:
Marketing and selling ............... 35,974 34,915 73,042 70,437
Research and development ............ 18,454 18,771 36,231 36,615
General and administrative .......... 10,634 11,538 21,270 23,626
Amortization of intangible assets ... 4,049 4,874 8,488 9,690
Provisions for restructuring
operations and other non-recurring
charges ............................ 1,652 -- 2,020
-------- -------- -------- --------
Total operating expenses .......... 70,763 70,098 141,051 140,368
-------- -------- -------- --------
Operating income (loss) ............... 5,958 (3,559) 18,252 (1,999)
Other (income) expense, net:
Interest income ..................... (307) (242) (567) (475)
Interest expense .................... 4,606 5,244 9,968 10,435
Other, net .......................... (3,834) 370 (2,522) 131
-------- -------- -------- --------
Other (income) expense, net ....... 465 5,372 6,879 10,091
-------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes............ 5,493 (8,931) 11,373 (12,090)
Provision (benefit) for income taxes .. 2,471 (5,716) 5,119 (7,738)
-------- -------- -------- --------
Net income (loss) ..................... $ 3,022 $ (3,215) $ 6,254 $ (4,352)
======== ======== ======== ========
Basic net income (loss) per share ..... $ .23 $ (0.24) $ .47 $ (0.33)
======== ======== ======== ========
Weighted average number of shares
outstanding-basic .................... 13,313 13,202 13,288 13,202
======== ======== ======== ========
Diluted net income (loss) per share ... $ .22 $ (0.24) $ .46 $ (0.33)
======== ======== ======== ========
Weighted average number of shares
outstanding--diluted ................. 13,653 13,202 13,567 13,202
======== ======== ======== ========
The Accompanying Notes to Consolidated Financial Statements are an Integral
Part of these Statements of Operations.
F-72
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
March 31,
--------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 6,254 $ (4,352)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization expense ................ 14,428 17,308
Restructuring and other non-recurring charges ........ 2,020 --
Deferred income taxes ................................ (1,082) (7,984)
Changes in operating assets and liabilities:
Accounts receivable ................................ 10,462 1,989
Inventories ........................................ (8,958) 5,558
Other current assets ............................... 488 6
Accounts payable and accrued expenses .............. (1,425) (16,267)
Income taxes payable, net .......................... (144) 14
Pension liabilities ................................ (2,200) 2,033
Gain on sale of assets ............................. (3,229) --
Other, net ......................................... 1,890 1,278
--------- ---------
Net cash provided by (used in) operating activities .... 18,504 (417)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment .............. (6,365) (7,642)
Exercise of stock options .............................. 275 --
Proceeds from sale of assets ........................... 29,400 --
--------- ---------
Net cash provided (used in) by investing activities .... 23,310 (7,642)
FINANCING ACTIVITIES:
Proceeds from long-term obligations .................... 107,477 139,059
Principal payments on long-term obligations ............ (147,407) (145,702)
Other, net ............................................. -- (672)
--------- ---------
Net cash used in financing activities .................. (39,930) (7,315)
Effect of exchange rate changes on cash and cash
equivalents ........................................... (999) (3,047)
--------- ---------
Increase (decrease) in cash and cash equivalents ....... 885 (18,421)
Cash and cash equivalents at beginning of period ....... 17,089 35,544
--------- ---------
Cash and cash equivalents at end of period ............. $ 17,974 $ 17,123
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest ................................. $ 10,406 $ 9,067
========= =========
Cash paid for income taxes ............................. $ 3,223 $ 3,653
========= =========
The Accompanying Notes to Consolidated Financial Statements are an Integral
Part of these Statements of Cash Flows.
F-73
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Wavetek Wandel Goltermann, Inc., (the "Company") is a leading global
designer, manufacturer, and marketer of a broad range of communications test
instruments used to develop, manufacture, install, and maintain communications
networks and equipment. The Company conducts its communications test business,
which addresses most sectors of the communications test market, in four product
areas: (1) telecom networks (traditional voice/data transmissions and new
multi-service networks), (2) enterprise networks (local and wide-area network
infrastructures), (3) multimedia (cable television and digital video
broadcast), and (4) wireless (mobile telephony and data). These products
provide comprehensive testing solutions to a wide range of end users. The
Company's high-end instruments are used during the product development phase to
stress test product functionality and performance. Other products are used
during the production process to verify conformance to manufacturing
specifications, while the Company's enhanced portable field service tools
enable field technicians to quickly install, repair and maintain complex
network infrastructures, as well as validate service levels. The Company also
provides distributed remote test systems to many of its service provider
customers, which allow such customers to more efficiently utilize their network
engineers to monitor and test service levels. In addition, the Company provides
repair, upgrade, and calibration services, as well as value-added professional
services such as consulting and training on a worldwide basis.
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The consolidated balance sheet as of
September 30, 1999 has been taken from the audited financial statements as of
that date. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K for the fiscal year ended September 30, 1999.
The consolidated financial statements included herein reflect all
adjustments (none of which are other than normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation of the
information included. All significant intercompany accounts and transactions
have been eliminated in consolidation. Interim results are not necessarily
indicative of results to be expected for the full year. For comparative
purposes, certain amounts have been reclassified to conform with the fiscal
2000 presentation.
2. NET INCOME (LOSS) PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE ("SFAS
128"). Basic net income (loss) per share is based only on average common shares
outstanding and excludes the dilutive effects of the Company's outstanding
stock options. Diluted net income (loss) per share includes the dilutive effect
of the Company's outstanding stock options. The Company has a simple capital
structure and, accordingly, the only difference in the Company's computations
of basic and diluted net income (loss) per share is the dilutive effect of
outstanding stock options. For the three and six months ended March 31, 1999,
the effect of outstanding stock options would have been anti-dilutive and,
therefore, was not considered in the computation of diluted loss per share for
such periods. All net income (loss) per share amounts for all periods have been
presented in accordance with the requirements of SFAS 128.
F-74
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. FINANCIAL STATEMENT DETAILS
Inventories consist of the following:
March 31, September 30,
2000 1999
--------- -------------
(dollars in thousands)
Materials ......................................... $17,919 $13,997
Work-in-progress .................................. 14,718 18,172
Finished goods .................................... 38,869 30,346
------- -------
$71,506 $62,515
======= =======
4. OTHER COMPREHENSIVE INCOME (LOSS)
On October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which established standards for reporting and displaying
comprehensive income (loss) and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income (loss) includes net income (loss) and other comprehensive income (loss).
The Company's current and accumulated other comprehensive income (loss) as of
and for the three and six month periods ended March 31, 2000 and 1999 is
comprised solely of foreign currency translation adjustments.
Comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ----------------
2000 1999 2000 1999
--------- --------- ----------------
(dollars in thousands)
Net income (loss) .................. $ 3,022 $(3,215) $ 6,254 $(4,352)
Foreign currency translation
adjustments........................ (764) (345) 360 (671)
-------- --------- ------- --------
Comprehensive income (loss) ........ $ 2,258 $(3,560) $ 6,614 $(5,023)
======== ========= ======= ========
5. SEGMENT INFORMATION
Based on its organizational structure prior to January 2000, the Company
previously operated in two reportable segments: communications test and other
test products. The Company's communications test business includes telecom
networks, enterprise networks, multimedia, wireless and the service business.
In the second quarter of 2000, the Company divested itself of its other test
products business, which included test tools, precision measurement
instruments, and electromagnetic measurement instruments.
The Company's chief operating decision makers utilize revenue and operating
income (loss) information, as defined below, in assessing performance and
making overall operating decisions and resource allocations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
F-75
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Information about the Company's operating segments for the three months
ended March 31, 2000 and 1999 is as follows (in thousands):
Communications Other Test Corporate/
Test Products Other Total
-------------- ---------- ---------- --------
Revenues:
2000 ..................... $124,592 $ 2,563 $ -- $127,155
1999 ..................... 106,825 7,641 -- 114,466
Operating income (loss):
2000(1) .................. 10,764 333 562 11,659
1999(1) .................. 2,846 204 (1,735) 1,315
Information about the Company's operating segments for the six months ended
March 31, 2000 and 1999 is as follows (in thousands):
Communications Other Test Corporate/
Test Products Other Total
-------------- ---------- ---------- --------
Revenues:
2000 ..................... $250,564 $12,167 $ -- $262,731
1999 ..................... 226,090 14,841 -- 240,931
Operating income (loss):
2000 (1) ................. 28,423 287 51 28,760
1999(1) .................. 14,176 937 (7,422) 7,691
Information about the Company's operating segments as of March 31, 2000 and
September 30, 1999 is as follows (in thousands):
Communications Other Test Corporate/
Test Products Other(2) Total
-------------- ---------- ---------- --------
Total Assets:
March 31, 2000 ........... $117,619 $ 3,934 $275,931 $397,483
September 30, 1999 ....... 129,426 6,749 298,558 434,733
- -----------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), including intersegment profits, and excluding
amortization of intangible assets and restructuring and other non-recurring
charges.
(2) Corporate/Other assets include purchased intangible assets and investments
in subsidiaries at March 31, 2000 and September 30, 1999 totaling $203,433
and $237,499, respectively.
6. SALE OF PRECISION MEASUREMENT AND TEST TOOLS DIVISIONS
In January 2000, the Company completed the sale of its precision measurement
and test tools divisions to Fluke Electronics Corporation, a subsidiary of
Danaher Corporation. It was determined that these businesses were not a
strategic fit with the Company's core communications test business. Sales for
the three months ended December 31, 1999 amounted to $8.8 million and fiscal
year 1999 sales totaled $25.8 million. There were no significant gains or
losses realized on the sale of these two divisions.
F-76
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. SALE OF SAFETY TEST SOLUTION BUSINESS
In February 2000, the Company completed the sale of its safety test solution
business to L-3 Communications Corporation. It was determined that this
business was not a strategic fit with the Company's core communications test
business. Sales for the three months ended December 31, 1999 amounted to $.8
million and fiscal year 1999 sales totaled $4.4 million. Sales from January 1,
2000 to the closing date of the sale were immaterial. The gain realized on the
sale was approximately $3.2 million.
8. MERGER WITH DYNATECH CORPORATION
On February 14, 2000, the Company, Dynatech corporation, a Delaware
corporation ("Dynatech"), and DWW Acquisition Corporation, a Delaware
corporation and indirect subsidiary of Dynatech ("Mergerco"), entered into an
Agreement and Plan of Merger pursuant to which Mergerco would merge with the
Company, with the Company as the surviving corporation. The merger is subject
to customary closing conditions, including obtaining applicable competition law
approvals. In the merger, at the election of holders of the Company's common
stock, such holders will be entitled to receive with respect to each share of
common stock of the Company (i) $25.00 or (ii) 4.49 shares of common stock of
Dynatech. The aggregate transaction value is approximately $600 million, which
includes approximately $224 million of the Company's indebtedness.
The merger will constitute a change in control with respect to the Company's
10.125% Senior Subordinated Notes due June 14, 2007. As a result, the Company
will be obligated to send to the holders of the notes within ten days following
the closing of the merger an offer to purchase the notes at 101% of their
principal amount. Such offer must specify a day not less than 30 and not more
than 60 days from the date the Company's notice mailed on which the Company
will purchase all notes tendered to the Company. On March 14, 2000, the Company
launched a tender offer to repurchase all of the outstanding notes. The tender
offer for the notes is conditioned upon the closing of the merger.
In connection with the merger, Dynatech intends to enter into a new multi-
currency senior credit facility with a syndicate of banks for an aggregate
principal amount of approximately $860 million including revolver and term
loans, and to sell newly-issued common stock to Clayton, Dubilier & Rice Fund V
Limited Partnership ("Fund V"), Dynatech's controlling stockholder, and Clayton
Dublier & Rice Fund VI Limited Partnership ("Fund VI"), an affiliate of
Dynatech's controlling stockholder, at a price per share of $4.00. In addition,
Dynatech expects to make a rights offering to the Company's other stockholders
to purchase newly issued shares at the same price per share offered to Fund V
and Fund VI.
The Company anticipates the customary closing conditions, including
obtaining applicable competition law approvals will be finalized by late May
2000 and the Company estimates that the closing of the merger will occur
shortly thereafter.
Peter Wagner, the Company's Chief Executive Officer, has indicated that he
will remain with the Company through the closing of the Merger with Dynatech.
However, Mr. Wagner has accepted employment with another company as of June 1,
2000. In the event that the Merger is not consummated by such time, the Company
will appoint an interim Chief Executive Officer or make other interim
arrangements.
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under its 10.125% Senior Subordinated
Notes are guaranteed by all of the Company's current and future domestic
subsidiaries (collectively, the "Subsidiary Guarantors"). WGTI,
F-77
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Wandel & Goltermann ATE Systems, Inc., and Wavetek U.S. Inc. and its
subsidiary, Digital Transport Systems, Inc. are shown as Subsidiary Guarantors
for all periods presented. Such guarantees are full and unconditional and joint
and several. Separate financial statements of the Subsidiary Guarantors are not
presented because the Company's management has deemed that they would not be
material to investors. The following supplemental condensed consolidating
financial data sets forth, on an unconsolidated basis, balance sheets,
statements of operations, and statements of cash flows data for (i) the Company
(Wavetek Wandel Goltermann, Inc., formerly Wavetek Corporation, the issuer of
the Notes), (ii) the current Subsidiary Guarantors, and (iii) the Company's
foreign subsidiaries (the "Foreign Subsidiaries"). The supplemental financial
data reflects the investments of the Company in the Subsidiary Guarantors and
the Foreign Subsidiaries using the equity method of accounting.
F-78
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONSOLIDATING BALANCE SHEETS
As of March 31, 2000
(Dollars and Shares in Thousands)
Wavetek Wandel
Goltermann Subsidiary Foreign
Inc. Guarantors Subsidiaries Eliminations Consolidated
-------------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 663 $ 4,424 $ 12,887 $ -- $ 17,974
Accounts receivable
(less allowance for
doubtful accounts of
$4,071).............. 44,998 62,503 79,405 (94,793) 92,113
Inventories........... -- 19,161 57,564 (5,219) 71,506
Deferred income
taxes................ 2,912 3,932 (876) 499 6,467
Other current assets.. 57 1,009 12,931 -- 13,997
-------- -------- -------- --------- --------
Total current assets.... 48,630 91,029 161,911 (99,513) 202,057
Property, plant and
equipment, net......... 1,322 7,266 44,478 -- 53,066
Intangible assets, net.. 5,922 100,875 30,106 -- 136,903
Investment in
subsidiaries........... 166,712 -- -- (166,712) --
Other non-current
assets................. 3 (434) 2,618 3,270 5,457
-------- -------- -------- --------- --------
Total assets........ $222,589 $198,736 $239,113 $(262,955) $397,483
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......... $ -- $ -- $ 9,094 $ -- $ 9,094
Current portion of
long-term obligations
..................... -- 633 4,446 -- 5,079
Current portion of
long-term obligations
to related parties .. -- -- 9,582 -- 9,582
Trade payables........ 31,105 28,127 62,870 (87,795) 34,307
Accrued compensation.. 1,195 4,551 17,065 -- 22,811
Income taxes payable.. (21,650) 21,419 4,336 -- 4,105
Other current
liabilities.......... 3,814 8,122 32,667 (2,320) 42,283
-------- -------- -------- --------- --------
Total current
liabilities............ 14,464 62,852 140,060 (90,115) 127,261
Long-term obligations,
net of current
portion................ 172,565 1,626 29,323 (3,572) 199,942
Pension liabilities..... -- 203 33,252 -- 33,455
Deferred income taxes... (519) 22,662 (15,696) (2,029) 4,418
Other non-current
liabilities............ -- 2,140 5,442 -- 7,582
-------- -------- -------- --------- --------
Total liabilities 186,510 89,483 192,381 (95,716) 372,658
-------- -------- -------- --------- --------
Commitments and
contingencies
Stockholders' equity:
Common stock.......... 133 -- (1,466) 1,466 133
Additional paid-in
capital.............. 73,222 171,122 85,506 (256,628) 73,222
Accumulated deficit... (59,386) (61,841) (33,946) 95,786 (59,387)
Other comprehensive
income (loss)........ 22,110 (28) (3,362) (7,863) 10,857
-------- -------- -------- --------- --------
Total stockholders'
equity............. 36,079 109,253 46,732 (167,239) 24,825
-------- -------- -------- --------- --------
Total liabilities
and stockholders'
equity............. $222,589 $198,736 $239,113 $(262,955) $397,483
======== ======== ======== ========= ========
F-79
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONSOLIDATING BALANCE SHEETS
As of September 30, 1999
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 11 $ 4,578 $ 12,500 $ -- $ 17,089
Accounts receivable
(less allowance for
doubtful accounts of
$4,608).............. 42,956 46,715 87,312 (74,451) 102,532
Inventories........... -- 13,884 52,388 (3,757) 62,515
Deferred income
taxes................ 561 4,482 3,879 -- 8,922
Other current assets.. 156 1,917 11,563 -- 13,636
-------- -------- -------- --------- --------
Total current
assets............. 43,684 71,576 167,642 (78,208) 204,694
Property, plant and
equipment, net......... 1,361 8,013 51,201 -- 60,575
Intangible assets, net.. 5,617 110,170 46,695 -- 162,482
Investment in
subsidiaries........... 167,992 -- -- (167,992) --
Other non-current
assets................. 6 1,988 4,988 -- 6,982
-------- -------- -------- --------- --------
Total assets........ $218,660 $191,747 $270,526 $(246,200) $434,733
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......... $ -- $ -- $ 17,510 $ -- $ 17,510
Current portion of
long-term
obligations.......... -- 685 5,517 -- 6,202
Current portion of
long-term obligations
to related parties... -- -- 10,721 -- 10,721
Trade payables........ 17,236 17,322 61,873 (64,882) 31,549
Accrued compensation.. 396 6,734 19,496 -- 26,626
Income taxes payable.. (18,986) 18,978 4,258 -- 4,250
Other current
liabilities.......... 4,516 5,786 28,536 -- 38,838
-------- -------- -------- --------- --------
Total current
liabilities........ 3,162 49,505 147,911 (64,882) 135,696
Long-term obligations,
net of current
portion................ 198,080 7,784 31,695 (9,476) 228,083
Pension liabilities..... -- -- 35,671 -- 35,671
Deferred income taxes... (519) 19,953 (11,477) -- 7,957
Other non-current
liabilities............ -- 4,088 5,301 -- 9,389
-------- -------- -------- --------- --------
Total liabilities... 200,723 81,330 209,101 (74,358) 416,796
-------- -------- -------- --------- --------
Commitments and
contingencies
Stockholders' equity:
Common stock.......... 132 -- -- -- 132
Additional paid-in
capital.............. 72,948 171,121 87,187 (258,308) 72,948
Accumulated deficit... (65,641) (60,682) (36,282) 96,964 (65,641)
Other comprehensive
income (loss)........ 10,498 (22) 10,520 (10,498) 10,498
-------- -------- -------- --------- --------
Total stockholders'
equity............. 17,937 110,417 61,425 (171,842) 17,937
-------- -------- -------- --------- --------
Total liabilities
and stockholders'
equity............. $218,660 $191,747 $270,526 $(246,200) $434,733
======== ======== ======== ========= ========
F-80
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Three Months Ended March 31, 2000
(Dollars in Thousands)
Wavetek Wandel
Goltermann Subsidiary Foreign
Inc. Guarantors Subsidiaries Eliminations Consolidated
-------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $46,224 $100,851 $(19,920) $127,155
Cost of goods sold...... -- 21,908 47,534 (19,008) 50,434
------- ------- -------- -------- --------
Gross margin............ -- 24,316 53,317 (912) 76,721
Operating expenses:
Marketing and
selling.............. 552 9,764 25,658 -- 35,974
Research and
development.......... -- 5,881 12,573 -- 18,454
General and
administrative....... 17 3,148 7,469 -- 10,634
Amortization of
intangible assets.... (52) 2,993 1,108 -- 4,049
Provisions for
restructuring
operations and other
non-recurring
charges.............. 521 779 641 (289) 1,652
------- ------- -------- -------- --------
Total operating
expenses........... 1,038 22,565 47,449 (289) 70,763
------- ------- -------- -------- --------
Operating income
(loss)................. (1,038) 1,751 5,868 (623) 5,958
Other (income) expense,
net:
Interest income....... (514) (174) (133) 514 (307)
Interest expense...... 3,260 264 1,596 (514) 4,606
Equity in net (income)
loss of
subsidiaries.........
Other, net............ (386) 85 (5,321) 1,788 (3,834)
------- ------- -------- -------- --------
Other (income)
expense, net....... 2,360 175 (3,858) 1,788 465
------- ------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes .......... (3,398) 1,576 9,726 (2,411) 5,493
Provision (benefit) for
income taxes........... (6,420) (128) 6,800 2,219 2,471
------- ------- -------- -------- --------
Net income (loss)....... 3,022 1,704 2,926 (4,630) 3,022
======= ======= ======== ======== ========
F-81
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $36,025 $94,383 $(15,942) $114,466
Cost of goods sold...... 11 17,274 47,122 (16,480) 47,927
------- ------- ------- -------- --------
Gross margin............ (11) 18,751 47,261 538 66,539
Operating expenses:
Marketing and
selling.............. 487 8,994 25,434 -- 34,915
Research and
development.......... 2 5,846 12,923 -- 18,771
General and
administrative....... 1,824 2,388 7,326 -- 11,538
Amortization of
intangible assets.... 85 3,008 1,781 -- 4,874
------- ------- ------- -------- --------
Total operating
expenses........... 2,398 20,236 47,464 -- 70,098
------- ------- ------- -------- --------
Operating income
(loss)................. (2,409) (1,485) (203) 538 (3,559)
Other (income) expense,
net:
Interest income....... (305) (85) (157) 305 (242)
Interest expense...... 3,694 153 1,702 (305) 5,244
Equity in net (income)
loss of
subsidiaries......... (439) -- -- 439 --
Other, net............ (558) (35) 963 -- 370
------- ------- ------- -------- --------
Other (income)
expense, net....... 2,392 33 2,508 439 5,372
------- ------- ------- -------- --------
Income (loss) before
provision (benefit) for
income taxes .......... (4,801) (1,518) (2,711) 99 (8,931)
Provision (benefit) for
income taxes........... (1,586) (112) 2,024 (6,042) (5,716)
------- ------- ------- -------- --------
Net income (loss)....... $(3,215) $(1,406) $(4,735) $ 6,141 $ (3,215)
======= ======= ======= ======== ========
F-82
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Six Months Ended March 31, 2000
(dollars In Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $92,877 $209,460 $(39,606) $262,731
Cost of goods sold...... -- 43,587 97,985 (38,144) 103,428
------- ------- -------- -------- --------
Gross margin............ -- 49,290 111,475 (1,462) 159,303
Operating expenses:
Marketing and
selling.............. 1,082 19,502 52,458 -- 73,042
Research and
development.......... -- 11,566 24,665 -- 36,231
General and
administrative....... 306 6,497 14,467 -- 21,270
Amortization of
intangible assets.... (73) 6,080 2,481 -- 8,488
Provisions for non-
recurring charges.... 521 783 1,005 (289) 2,020
------- ------- -------- -------- --------
Total operating
expenses........... 1,836 44,428 95,076 (289) 141,051
------- ------- -------- -------- --------
Operating income
(loss)................. (1,836) 4,862 16,399 (1,173) 18,252
Other (income) expense,
net:
Interest income....... (1,031) (199) (368) 1,031 (567)
Interest expense...... 7,201 541 3,257 (1,031) 9,968
Equity in net (income)
loss of
subsidiaries......... (5,105) -- -- 5,105 --
Other, net............ 87 338 (4,735) 1,788 (2,522)
------- ------- -------- -------- --------
Other (income)
expense, net....... 1,152 680 (1,846) 6,893 6,879
------- ------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes .......... (2,988) 4,182 18,245 (8,066) 11,373
Provision (benefit) for
income taxes........... (9,242) 1,567 11,572 1,222 5,119
------- ------- -------- -------- --------
Net income (loss)....... $ 6,254 $ 2,615 $ 6,673 $ (9,288) $ 6,254
======= ======= ======== ======== ========
F-83
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Six Months Ended March 31, 1999
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
Net sales............... $ -- $74,859 $198,864 $(32,792) $240,931
Cost of goods sold...... 39 38,032 95,829 (31,338) 102,562
------- ------- -------- -------- --------
Gross margin............ (39) 36,827 103,035 (1,454) 138,369
Operating expenses:
Marketing and
selling.............. 1,512 18,054 50,871 -- 70,437
Research and
development.......... 2 11,189 25,424 -- 36,615
General and
administrative....... 2,885 5,377 15,364 -- 23,626
Amortization of
intangible assets.... 121 6,016 3,553 -- 9,690
------- ------- -------- -------- --------
Total operating
expenses........... 4,520 40,636 95,212 -- 140,368
------- ------- -------- -------- --------
Operating income
(loss)................. (4,559) (3,809) 7,823 (1,454) (1,999)
Other (income) expense,
net:
Interest income....... (339) (135) (306) 305 (475)
Interest expense...... 6,563 293 3,884 (305) 10,435
Equity in net (income)
loss of
subsidiaries......... (2,451) -- 1,452 999 --
Other, net............ (693) (288) 1,112 -- 131
------- ------- -------- -------- --------
Other (income)
expense, net....... 3,080 (130) 6,142 999 10,091
------- ------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes........... (7,639) (3,679) 1,681 (2,453) (12,090)
Provision (benefit) for
income taxes........... (3,287) 119 5,979 (10,549) (7,738)
------- ------- -------- -------- --------
Net income (loss)....... $(4,352) $(3,798) $ (4,298) $ 8,096 $ (4,352)
======= ======= ======== ======== ========
F-84
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For The Six Months Ended March 31, 2000
(Dollars in Thousands)
Wavetek Wandel
Goltermann Subsidiary Foreign
Inc. Guarantors Subsidiaries Eliminations Consolidated
-------------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net cash provided by
(used in) operating
activities............. $ (764) $ 6,795 $ 12,473 $ -- $ 18,504
INVESTING ACTIVITIES
Purchase of property and
equipment.............. (230) (1,209) (4,926) -- (6,365)
--------- ------- -------- ----- ---------
Net cash provided by
(used in) investing
activities............. 25,345 (8,024) 5,989 -- 23,310
FINANCING ACTIVITIES
Proceeds from long-term
obligations............ 95,077 -- 12,400 -- 107,477
Principal payments on
long-term obligations.. (119,007) -- (28,400) -- (147,407)
Capital contribution
from Wavetek Wandel
Goltermann, Inc. to
subsidiary............. -- 650 (650) -- --
Loans to subsidiaries
from Wavetek Wandel
Goltermann, Inc. ...... (1,461) -- 1,461 -- --
Repayment of loan from
subsidiary to Wavetek
Wandel Goltermann, Inc.
....................... 297 (26) (271) -- --
Repayment of loans from
subsidiaries........... (1,575) -- 1,575 -- --
Other, net.............. 2,739 451 (3,190) -- --
--------- ------- -------- ----- ---------
Net cash provided by
(used in) financing
activities ............ (23,930) 1,075 (17,075) -- (39,930)
Effect of exchange rate
changes on cash and
cash equivalets ....... -- -- (999) -- (999)
--------- ------- -------- ----- ---------
Increase (decrease) in
cash and cash
equivalents ........... 651 (154) 388 -- 885
Cash and cash
equivalents at
beginning of period ... 11 4,578 12,500 -- 17,089
--------- ------- -------- ----- ---------
Cash and cash
equivalents at end of
period................. $ 662 $ 4,424 $ 12,888 $ -- $ 17,974
========= ======= ======== ===== =========
F-85
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 1999
(Dollars in Thousands)
Wavetek Wandel Subsidiary Foreign
Goltermann Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net cash provided by
(used in) operating
activities ............ $(23,865) $ 22,301 $ 1,147 $ -- $ (417)
INVESTING ACTIVITIES
Purchase of property and
equipment.............. (264) (1,588) (5,790) -- (7,642)
Transfer of
subsidiaries........... (28,536) -- 28,536 -- --
-------- -------- -------- ----- ---------
Net cash provided by
(used in) investing
activities ............ (28,800) (1,588) 22,746 -- (7,642)
FINANCING ACTIVITIES
Proceeds from long-term
obligations............ 107,352 1,402 30,305 -- 139,059
Principal payments on
long-term obligations.. (59,408) (1,775) (84,519) -- (145,702)
Dividend from subsidiary
to Wavetek Wandel
Goltermann, Inc. ...... 22,000 (22,000)
Capital contribution
from Wavetek Wandel
Goltermann, Inc. to
subsidiary ............ (2,034) -- 2,034 -- --
Loans to subsidiaries
from Wavetek Wandel
Goltermann, Inc. ...... (36,078) 6,203 29,875 -- --
Repayment of loan from
subsidiary to Wavetek
Wandel Goltermann, Inc.
....................... 28,996 (28,996) -- -- --
Repayment of loans from
subsidiaries........... (7,500) (1,818) 9,318 -- --
Other, net.............. (672) -- -- -- (672)
-------- -------- -------- ----- ---------
Net cash provided by
(used in) financing
activities ............ 52,656 (46,984) (12,987) -- (7,315)
Effect of exchange rate
changes on cash and
cash equivalents ...... -- -- (3,047) -- (3,047)
-------- -------- -------- ----- ---------
Increase (decrease) in
cash and cash
equivalents ........... (9) (26,271) 7,859 -- (18,421)
Cash and cash
equivalents at
beginning of period ... 19 31,143 4,382 -- 35,544
-------- -------- -------- ----- ---------
Cash and cash
equivalents at end of
period................. $ 10 $ 4,872 $ 12,241 $ -- $ 17,123
======== ======== ======== ===== =========
F-86
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders ofApplied Digital Access, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, of changes in
stockholder(s) equity and of cash flows present fairly, in all material
respects, the financial position of Applied Digital Access, Inc. and its
subsidiary at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Diego, California
January 28, 1999, except as to Note 10which is as of March 31, 1999
F-87
APPLIED DIGITAL ACCESS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------
1997 1998
-------- --------
(Dollars in
thousands, except
per share data)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 4,400 $ 12,513
Investments.............................................. 8,779 --
Trade accounts receivable, net........................... 12,981 6,111
Inventory, net........................................... 5,859 5,679
Deferred income taxes.................................... 130 130
Prepaid expenses and other current assets................ 3,775 1,700
-------- --------
Total current assets................................... 35,924 26,133
Property and equipment, net................................ 6,165 5,466
Intangible assets, net..................................... 2,822 1,247
Deferred income taxes...................................... 1,372 1,426
-------- --------
Total assets........................................... $ 46,283 $ 34,272
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 3,478 $ 2,922
Accrued expenses......................................... 2,846 2,333
Accrued warranty expense................................. 1,323 1,264
Current portion of capital lease obligations............. 18 41
Deferred revenue......................................... 1,471 2,817
-------- --------
Total current liabilities.............................. 9,136 9,377
Capital lease obligations, net of current portion.......... 15 --
-------- --------
Total liabilities...................................... 9,151 9,377
-------- --------
Commitments and contingencies (Note 4)
Shareholders' equity:
Preferred stock, no par value; 7,500,000 shares
authorized; no shares issued............................ -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 12,605,082 and 12,909,315 shares issued and
outstanding at December 31, 1997 and 1998,
respectively............................................ 13 13
Additional paid-in capital............................... 54,089 54,897
Accumulated other comprehensive income................... 84 163
Accumulated deficit...................................... (17,054) (30,178)
-------- --------
Total shareholders' equity............................. 37,132 24,895
-------- --------
Total liabilities and shareholders' equity............. $ 46,283 $ 34,272
======== ========
The accompanying notes are an integral part of these financial statements.
F-88
APPLIED DIGITAL ACCESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
(Dollars in thousands, except per
share data)
Revenue................................. $ 24,422 $ 34,050 $ 29,217
Cost of revenue......................... 12,609 15,116 13,587
----------- ----------- -----------
Gross profit.......................... 11,813 18,934 15,630
----------- ----------- -----------
Operating expenses:
Research and development.............. 7,356 9,164 14,313
In-process research and development
related to acquisitions.............. 3,286 1,578 --
Sales and marketing................... 6,312 7,995 9,801
General and administrative............ 3,529 5,252 5,129
----------- ----------- -----------
Total operating expenses............ 20,483 23,989 29,243
----------- ----------- -----------
Operating loss...................... (8,670) (5,055) (13,613)
Interest income......................... 1,673 904 675
----------- ----------- -----------
Loss before income taxes............ (6,997) (4,151) (12,938)
----------- ----------- -----------
Provision for income taxes.............. 123 132 186
----------- ----------- -----------
Net loss............................ (7,120) (4,283) (13,124)
Other comprehensive income (loss)
Foreign currency translation
adjustments.......................... (1) 68 91
Unrealized gains (losses) on
securities........................... (121) (9) (12)
----------- ----------- -----------
Other comprehensive income (loss)..... (122) 59 79
----------- ----------- -----------
Comprehensive loss...................... $ (7,242) $ (4,224) $ (13,045)
=========== =========== ===========
Net loss per share, basic and
diluted............................ $ (.59) $ (.34) $ (1.03)
=========== =========== ===========
Shares used in per share
computations....................... 12,084,242 12,459,511 12,711,203
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-89
APPLIED DIGITAL ACCESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
----------------- Paid-In Deferred Comprehensive Accumulated
Shares Amount Capital Compensation Income (Loss) Deficit Total
---------- ------ ---------- ------------ ------------- ----------- --------
(Dollars in thousands)
Balance, December 31,
1995................... 11,899,216 $ 12 $51,480 $(101) $ 147 $ (5,651) $ 45,887
---------- ---- ------- ----- ----- -------- --------
Net loss................ -- -- -- -- -- (7,120) (7,120)
Foreign currency
translation
adjustment............. -- -- -- -- (1) -- (1)
Unrealized loss on
investments............ -- -- -- -- (121) -- (121)
Amortization of deferred
compensation for stock
options................ -- -- -- 51 -- -- 51
Issuance of common stock
upon exercise of stock
options................ 149,261 -- 115 -- -- -- 115
Issuance of common stock
under stock purchase
plan................... 56,857 -- 428 -- -- -- 428
Issuance of common stock
in connection with
acquisition............ 150,000 -- 1,088 -- -- -- 1,088
---------- ---- ------- ----- ----- -------- --------
Balance, December 31,
1996................... 12,255,334 12 53,111 (50) 25 (12,771) 40,327
Net loss................ -- -- -- -- -- (4,283) (4,283)
Foreign currency
translation
adjustment............. -- -- -- -- 68 -- 68
Unrealized loss on
investments............ -- -- -- -- (9) -- (9)
Amortization of deferred
compensation for stock
options................ -- -- -- 50 -- -- 50
Issuance of common stock
upon exercise of stock
options................ 221,235 1 380 -- -- -- 381
Issuance of common stock
under stock purchase
plan................... 128,513 -- 598 -- -- -- 598
---------- ---- ------- ----- ----- -------- --------
Balance, December 31,
1997................... 12,605,082 13 54,089 -- 84 (17,054) 37,132
Net loss................ -- -- -- -- -- (13,124) (13,124)
Foreign currency
translation
adjustment............. -- -- -- -- 91 -- 91
Unrealized loss on
investments............ -- -- -- -- (12) -- (12)
Issuance of common stock
upon exercise of stock
options................ 91,649 -- 192 -- -- -- 192
Issuance of common stock
under stock purchase
plan................... 212,584 -- 616 -- -- -- 616
---------- ---- ------- ----- ----- -------- --------
Balance, December 31,
1998................... 12,909,315 $ 13 $54,897 $ -- $ 163 $(30,178) $ 24,895
========== ==== ======= ===== ===== ======== ========
The accompanying notes are an integral part of these financial statements.
F-90
APPLIED DIGITAL ACCESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net loss........................................ $ (7,120) $ (4,283) $(13,124)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 1,819 3,089 3,703
Amortization of discount (accretion of premium)
on investments................................ 95 (119) 41
Amortization of deferred compensation.......... 51 50 --
Acquired in-process research and development... 3,286 1,578 --
Change in inventory reserves................... (68) 101 104
Changes in operating assets and liabilities:
Trade accounts receivable..................... (1,440) (6,183) 6,870
Inventory..................................... (723) 1,403 76
Deferred taxes................................ -- -- (54)
Prepaid expenses and other current assets..... 207 (2,686) 2,075
Accounts payable.............................. 300 1,358 (556)
Accrued expenses.............................. 648 1,355 (513)
Accrued warranty expense...................... 93 (75) (59)
Deferred revenue.............................. 587 884 1,346
-------- -------- --------
Net cash used by operating activities........ (2,265) (3,528) (91)
-------- -------- --------
Cash flows from investing activities:
Purchases of investments........................ (20,923) (18,517) (10,903)
Maturities of investments....................... 30,923 29,792 19,640
Purchases of property and equipment............. (1,709) (2,432) (1,806)
Purchase costs related to asset acquisitions.... (6,356) (3,382) --
Reimbursement of costs related to acquisition... -- -- 500
Purchase of license agreement................... (350) -- --
-------- -------- --------
Net cash provided by investing activities.... 1,585 5,461 7,431
-------- -------- --------
Cash flows from financing activities:
Principal payments on capital lease
obligations.................................... (32) (16) (35)
Proceeds from exercise of stock options and
warrants....................................... 115 381 192
Proceeds from issuance of common stock.......... 428 598 616
-------- -------- --------
Net cash provided by financing activities.... 511 963 773
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. (169) 2,896 8,113
Cash and cash equivalents at beginning of year... 1,673 1,504 4,400
-------- -------- --------
Cash and cash equivalents at end of year........ $ 1,504 $ 4,400 $ 12,513
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.......... $ 7 $ 4 $ 2
Cash paid during the year for income taxes...... -- 229 104
Noncash investing and financing activities:
Issuance of common stock in connection with
acquisition.................................... 1,088 -- --
Assets acquired under capital lease............. -- -- 43
The accompanying notes are an integral part of these financial statements.
F-91
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Applied Digital Access, Inc. (the "Company") designs, engineers and
manufactures network test and performance monitoring systems and software and
provides services for the management and testing of telecommunications
circuits. The Company has two core business segments: Network Systems and
Network Management. The Network Systems business unit provides test and
performance management products and services whereas the Network Management
business unit focuses on the design and manufacture of operations systems
software.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Applied Digital Access Canada ("ADA Canada").
All significant intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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
reporting period. Actual results could differ from estimates.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION during
the year ended December 31, 1998. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. Under SFAS 131, operating segments are to be
determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. Disclosures required under this Statement include information
about products and services, geographic areas and major customers. The
presentation of segment information in prior periods has been reclassified to
conform to the current year presentation.
Revenue Recognition
The Company's revenues are primarily derived from hardware product sales,
software product sales and perpetual license fees. In addition, the Company
also derives revenues from installation and implementation services,
maintenance agreement sales and software royalties.
Revenue from sales of hardware and software products is generally recognized
upon shipment. For shipments of products involving significant acceptance
requirements, revenue is recognized when the Company has met substantially all
its performance requirements and acceptance criteria have been met.
Revenue from perpetual license arrangements is recognized upon delivery of
the related software and customer acceptance when the Company has no
significant continuing obligations and collection is probable.
F-92
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
Revenue from installation and implementation services is recognized as the
services are performed while revenue from maintenance contracts is recognized
ratably over the related contract terms.
Royalty revenue is generally recognized as earned in accordance with the
terms of respective license agreements. For certain of the Company's license
agreements, royalty revenue is recognized when reasonable estimates of such
amounts can be made.
Amounts received on uncompleted contracts in excess of incurred costs are
classified depending upon the nature of the contract as either deferred
revenue or payments in excess of billings on contracts.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of 90 days or less when purchased. At December 31, 1998,
cash in excess of daily requirements was invested in marketable securities
consisting of obligations of the U.S. Government and commercial paper with
original maturities of less than 90 days.
Investments
The Company determines the appropriate classification of its debt
securities at the time of purchase and assesses such designations at each
balance sheet date. Realized gains and losses are determined using the
specific identification method and are included in other income. Gross
unrealized holding gains or losses are excluded from earnings and reported,
net of the related tax effect, as a separate component of shareholders'
equity. The amortized cost of debt securities is adjusted for the amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest income. Fair value is determined based on quoted market
prices.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Significant renewals and
improvements are capitalized while maintenance and repairs are expensed as
incurred. Depreciation is computed over estimated useful lives using the
straight-line method.
Useful lives for property and equipment are as follows:
Computer equipment................................................. 3-6 years
Machinery and equipment............................................ 3-6 years
Office furniture and equipment..................................... 3-7 years
Purchased computer software........................................ 3-6 years
Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or the estimated useful lives of such
improvements.
Upon retirement or other disposition, the cost and related accumulated
depreciation or amortization are removed from the accounts and any resulting
gain or loss is reflected in income.
F-93
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
Intangible Assets
Intangible assets consist of goodwill, purchased technology, customer
contracts and license agreement fees. Goodwill represents the excess of the
purchase price over net assets of businesses acquired. Purchased technology,
customer contracts and license agreement fees are stated at cost. Intangible
assets are amortized on a straight-line basis over periods of three to five
years.
The carrying value of intangible assets is periodically reviewed by the
Company and impairment recognized if events indicate that the expected future
cash flows from such intangibles are less than their carrying value. The
Company did not recognize any impairment on its intangible assets during the
years ended December 31, 1996, 1997, and 1998.
During the year ended December 31, 1998, the Company received amounts
determined to be contingent consideration related to an acquisition in the
prior period. Accordingly, goodwill related to the acquisition was decreased by
the amount of $500 representing contingent consideration received.
Advertising
Advertising costs are expensed as incurred. Advertising expense was
approximately $217, $250 and $302 for the years ended December 31, 1996, 1997
and 1998, respectively.
Stock-Based Compensation
The Company measures compensation cost for its stock-based employee and non-
employee director compensation plans using the intrinsic value method. Pro
forma disclosures of net loss and net loss per common share are provided as if
the fair value method had been applied in measuring compensation expense.
Foreign Currency Translation
The local currency is the functional currency for ADA Canada. Assets and
liabilities are translated at the exchange rate on the balance sheet date while
revenues and expenses are translated at average rates of exchange prevailing
during the year. Adjustments resulting from translating ADA Canada's financial
statements into U.S. dollars are reported as a separate component of
shareholders' equity and classified as other comprehensive income (loss). For
the years ended December 31, 1996, 1997 and 1998, the effect of exchange rate
changes on cash has not been significant.
Concentrations
The market for the Company's products is characterized by rapid
technological advances, evolving industry transmission standards, changes in
customer requirements and frequent new product introductions and enhancements.
The introduction of telephone network test and performance monitoring products
involving superior technologies or the evolution of alternative technologies or
new industry transmission standards could render the Company's existing
products, as well as products currently under development, obsolete and
unmarketable.
The Company operates in an environment significantly affected by recent
merger and acquisition activity among its customers. Such activity may
substantially reduce the number of customers for the Company's products and may
have a material and adverse effect upon the Company's results of operations and
financial position.
F-94
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
A significant portion of the Company's revenues and trade receivables are
concentrated with a limited number of telecommunications service providers or
affiliated companies in the United States and Canada.
The Company's customers consist primarily of Regional Bell Operating
Companies, long distance carriers, local exchange carriers and independent
telephone companies. Sales are typically made on credit with varying terms
depending upon the customer and nature of the product. The Company does not
hold collateral to secure payment as the Company considers its customers to be
large companies with substantial financial resources. Although the Company
deems its reserve for uncollectible receivables to be adequate, a default on
payment of a significant customer receivable could materially and adversely
affect the Company's operating results and financial position.
From time to time, the Company may have cash in excess of federally insured
limits held at certain banks. The Company has not experienced any losses on its
cash or cash equivalents to date.
All the Company's investments at December 31, 1997 consisted of obligations
of the U.S. Government and its agencies.
The Company currently buys certain key components of its products from a
limited number of suppliers. Although there are a limited number of suppliers
of the components, management believes that other suppliers could provide
similar key components on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing and a possible loss of sales, which would
adversely affect operating results.
Income Taxes
The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. Deferred income taxes are
recognized for the tax consequences in future years for differences between the
tax basis of assets and liabilities ("temporary differences") and their
financial reporting amounts at each year end based on enacted tax laws and
statutory rates applicable to the periods in which the temporary differences
are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares and potential
common shares outstanding during the period using the treasury stock method.
For the years ended December 31, 1996, 1997, and 1998, the weighted average
number of common shares outstanding for both basic and diluted earnings (loss)
per common share is comparable as the inclusion of potential common shares for
diluted earnings (loss) per share would have been antidilutive due to the
Company's losses from continuing operations. There are no reconciling items in
calculating the numerator and denominator for basic and diluted earnings (loss)
per share for any periods presented.
Comprehensive Income
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME during the
year ended December 31, 1998. This Statement requires the Company to report all
changes in equity from non-owner sources, including unrealized gains and losses
on certain investments in debt and equity securities and foreign currency
translation adjustments, as components of other comprehensive income. Such
amounts are presented
F-95
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
as a separate component of equity entitled "Accumulated Other Comprehensive
Income" in the statement of financial position. The individual components of
other comprehensive income are also reported with net income (loss) as
"Comprehensive Income" in the results of operations. The income tax expense
(benefit) related to items of other comprehensive income is not significant for
the years ended December 31, 1996, 1997, and 1998. Financial statements for
earlier periods have been reclassified for comparative purposes.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
Statement establishes accounting and reporting standards for derivatives and
hedging activities. In accordance with this Statement, all derivatives must be
recognized as assets or liabilities and measured at fair value. This Statement
will be effective for the Company's fiscal year 2000. The Company has not yet
determined the impact of the adoption of this new accounting pronouncement on
its consolidated financial position or results of operations.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2. INVESTMENTS
At December 31, 1997, all marketable debt securities consisted of
obligations of the U.S. Government and its agencies and were classified as
available-for-sale. The estimated fair value of such investments approximated
its amortized cost and, therefore, there were no significant unrealized gains
or losses.
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31
----------------
1997 1998
------- -------
Inventories:
Raw materials............................................ $ 3,419 $ 3,266
Work-in-process.......................................... 2,223 2,389
Finished goods........................................... 787 698
------- -------
6,429 6,353
Less reserves............................................ (570) (674)
------- -------
$ 5,859 $ 5,679
======= =======
Property and equipment:
Computer equipment....................................... $ 5,655 $ 6,031
Machinery and equipment.................................. 2,967 4,062
Office furniture and equipment........................... 1,815 1,166
Purchased computer software.............................. 1,371 2,136
Leasehold improvements................................... 911 1,129
------- -------
12,719 14,524
Less accumulated depreciation and amortization........... (6,554) (9,058)
------- -------
$ 6,165 $ 5,466
======= =======
F-96
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
Depreciation expense was $1,368, $1,904 and $2,629 for the years ended
December 31, 1996, 1997 and 1998, respectively. Of these amounts, $140, $194
and $412 related to amortization of purchased software costs for the years
ended December 31, 1996, 1997 and 1998, respectively.
December 31
----------------
1997 1998
------- -------
Intangible Assets:
Goodwill................................................. $ 3,619 $ 3,119
Technology and customer contracts........................ 337 337
Licenses................................................. 350 350
------- -------
4,306 3,806
Less accumulated amortization............................ (1,484) (2,559)
------- -------
$ 2,822 $ 1,247
======= =======
Accrued expenses:
Accrued payroll and related costs........................ $ 902 $ 287
Accrued vacation......................................... 583 773
Accrued income taxes..................................... 388 425
Accrued contract costs................................... -- 448
Payments in excess of billings on contracts.............. -- 250
Acquisition costs payable................................ 867 --
Other accrued liabilities................................ 106 150
------- -------
$ 2,846 $ 2,333
======= =======
4. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company had unconditional purchase obligations under contracts for
inventory purchases. The portion of such obligations not completed at year end
represent unrecorded commitments of approximately $2,500 and $3,003 at December
31, 1997 and 1998, respectively.
F-97
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
Leases
The Company leases certain facilities and equipment under both operating and
capital leases.
Commitments for minimum lease payments under non-cancelable leases with the
initial or remaining terms greater than twelve months as of December 31, 1998
are as follows:
Capital Operating
Leases Leases
------- ---------
Year Ending December 31,
1999..................................................... $43 $1,203
2000..................................................... -- 897
2001..................................................... -- 789
2002..................................................... -- 1,047
2003..................................................... -- 859
Thereafter............................................... 269
--- ------
43 $5,064
======
Less amounts representing interest....................... (2)
---
Present value of net minimum lease payments.............. $41
===
Property and equipment includes the following amounts for capitalized
leases:
December 31
------------
1997 1998
----- -----
Machinery and equipment........................................ $ -- $ 43
Office furniture and equipment................................. 67 67
Leasehold improvements......................................... 149 149
----- -----
216 259
Less accumulated amortization.................................. (140) (182)
----- -----
$ 76 $ 77
===== =====
Capital lease agreements of certain equipment contain bargain purchase
options whereby the Company has the option to purchase the equipment for a
nominal amount at the end of the lease term.
Certain of the Company's operating leases contain purchase options and
renewal options. Rent expense incurred under such leases was approximately
$613, $673 and $1,259 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Litigation
Various claims arising in the ordinary course of business, seeking monetary
damages and other relief, are pending. The amount of the liability, if any,
from such claims cannot be determined with certainty.
F-98
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
5. COMMON STOCK WARRANTS
In conjunction with an acquisition in June 1997, the Company issued three
year warrants to purchase 150,000 shares of common stock at $12 per share.
6. SEGMENT REPORTING
In accordance with SFAS No. 131, information regarding the Company's
business segments is reported for financial statement purposes consistently
with the manner in which these segments are evaluated for internal reporting
and management's assessment of performance. The Company evaluates the
performance of its segment and allocates resources to them based on segment
earnings before allocation of corporate costs.
The Company is organized primarily on the basis of products which are broken
down into Network Systems and Network Management. Network Systems products
include T3AS products and services, including CTS and PAAS, as well as the
Remote Module product. Network Management products focus on Operating System
("OS") software products which include .Provisioner, TDC&E, FMS and OS design
services.
The table below presents information about revenues, operating income (loss)
and total assets for reportable segments for the years ended December 31:
Operating
Income Total
Revenues (Loss) Assets
-------- --------- -------
1996:
Network Systems............................... $18,144 $ (782) $14,565
Network Management............................ 6,278 (2,603) 4,533
------- -------- -------
Total for reportable segments............... 24,422 (3,385) 19,098
Reconciling items............................. -- (5,285) 26,874
------- -------- -------
Consolidated totals........................... $24,422 $ (8,670) $45,972
======= ======== =======
1997:
Network Systems............................... $17,061 $ (3,209) $18,573
Network Management............................ 16,989 4,961 6,432
------- -------- -------
Total for reportable segments............... 34,050 1,752 25,005
Reconciling items............................. -- (6,807) 21,278
------- -------- -------
Consolidated totals........................... $34,050 $ (5,055) $46,283
======= ======== =======
1998:
Network Systems............................... $16,455 $ (7,186) $13,312
Network Management............................ 12,762 1,556 3,944
------- -------- -------
Total for reportable segments............... 29,217 (5,630) 17,256
Reconciling items............................. -- (7,983) 17,016
------- -------- -------
Consolidated totals........................... $29,217 $(13,613) $34,272
======= ======== =======
F-99
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
The table below presents the reconciliation of operating income (loss) for
reportable segments to consolidated loss before income taxes for the years
ended December 31:
1996 1997 1998
------- ------- --------
Operating income (loss) for reportable
segments..................................... $(3,385) $ 1,752 $ (5,630)
Other segment expenses........................ (5,285) (6,807) (7,983)
Other unallocated income...................... 1,673 904 675
------- ------- --------
Consolidated loss before income taxes....... $(6,997) $(4,151) $(12,938)
======= ======= ========
Operating income (loss) for reportable segments includes segment revenues
with deductions made for related selling costs and certain expenses
controllable by segment managers. Other segment expenses consist of corporate
selling, general and administrative expenses allocated to each segment based on
segment revenues. Other unallocated income consists of interest income on
investments held at the corporate level.
The table below presents the reconciliation of total assets for reportable
segments to consolidated total assets at December 31:
1996 1997 1998
------- ------- -------
Total assets for reportable segments................ $19,098 $25,005 $17,256
Other segment assets................................ 3,525 6,492 2,925
Other unallocated assets:
Cash.............................................. 1,504 4,400 12,513
Investments....................................... 19,956 8,779 --
Other............................................. 1,889 1,607 1,578
------- ------- -------
Consolidated total assets....................... $45,972 $46,283 $34,272
======= ======= =======
Total assets for reportable segments includes amounts attributable to trade
accounts receivable, inventory and property and equipment. Other segment assets
consist primarily of intangible assets obtained in conjunction with certain
acquisitions. Other unallocated assets consists principally of deferred taxes
and prepaid expenses.
F-100
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
The table below presents information about other significant items included
in segment operating income and segment assets as of and for the years ended
December 31:
Expenditures for
Depreciation and Additions to
Amortization Expense Long-Lived Assets
-------------------- -----------------
1996:
Network Systems..................... $1,024 $1,239
Network Management.................. 344 374
Reconciling items................... 451 96
------ ------
Consolidated totals................. $1,819 $1,709
====== ======
1997:
Network Systems..................... $1,131 $1,573
Network Management.................. 773 694
Reconciling items................... 1,185 165
------ ------
Consolidated totals................. $3,089 $2,432
====== ======
1998:
Network Systems..................... $1,595 $1,449
Network Management.................. 1,033 284
Reconciling items................... 1,075 73
------ ------
Consolidated totals................. $3,703 $1,806
====== ======
Depreciation expense on segment property and equipment included as a
component of total segment assets utilized by management in assessing segment
operating performance is included in operating income for reportable segments.
For each of the years ended December 31, 1996, 1997, and 1998, the reconciling
item to arrive at consolidated depreciation and amortization expense consists
of amortization expense related to intangible assets.
The table below presents information about revenue and long-lived assets by
geographic area as of and for the years ended December 31:
1996 1997 1998
------- ------- -------
Revenues:
United States...................................... $20,071 $24,189 $25,571
Canada............................................. 4,351 9,861 3,646
------- ------- -------
Consolidated totals.............................. $24,422 $34,050 $29,217
======= ======= =======
Long-lived assets:
United States...................................... $ 4,109 $ 4,515 $ 4,156
Canada............................................. 827 1,650 1,310
------- ------- -------
Consolidated totals.............................. $ 4,936 $ 6,165 $ 5,466
======= ======= =======
F-101
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
The table below presents information about segment revenues from major
customers as a percentage of total revenues for the years ended December 31:
1996 1997 1998
---- ---- ----
Network Systems:
US WEST..................................................... 31% 4% 3%
Bell Atlantic (NYNEX)....................................... 23% 8% 12%
BellSouth................................................... 7% 17% 26%
MCI WorldCom................................................ -- 18% 7%
Network Management:
Northern Telecom, Inc. ..................................... 15% 20% --
MCI WorldCom................................................ -- 10% 16%
7. EMPLOYEE BENEFIT PLANS
Employee Savings and Retirement Plan
The Company has a 401(k) defined contribution plan that allows eligible
employees who have been employed by the Company for a minimum of one month to
contribute up to 15% of their salary, subject to annual limits. The Company may
also elect to make discretionary contributions to the accounts of employees who
have completed 1,000 hours of service during the plan year. Such discretionary
employer contributions vest ratably over a four year period. The Company did
not make any contributions related to this Plan for the years ended December
31, 1996, 1997, or 1998.
Profit Sharing Plan
The Company has a profit sharing plan available to all employees which
provides compensation to employees when the Company exceeds certain targeted
performance objectives. Employees are eligible to participate in the first full
quarter after their employment with the Company begins. The Compensation
Committee of the Board of Directors determines the annual amount allocable to
the Plan and such amount expensed was $418 for the year ended December 31,
1997. No amounts were expensed under the Plan for either of the years ended
December 31, 1996 or 1998.
Stock Option Plans
Options to purchase common stock of the Company have been granted to
employees and non-employee Directors under the 1994 Stock Option/Stock Issuance
Plan, as amended (the "1994 Plan"), and to non-officer, non-director employees
and consultants under the 1996 Non-Qualified Stock Option Plan, as amended (the
"1996 Plan"), which collectively comprise the "Stock Option Plans." A
description of each plan follows.
. The 1994 Plan superceded and consolidated the 1988 Stock Option Plan and
Restricted Stock Purchase Plan (the "1988 Plan"). Outstanding stock
options and unvested share issuances under the 1988 Plan were
incorporated into and assumed in the 1994 Plan.
. The 1994 Plan authorizes up to 4,100,000 shares to be granted no later
than February 2004. The 1994 Plan provides for the grant of both
incentive and non-qualified stock options which are exercisable for up to
ten years from the grant date. The 1994 Plan has three components as
follows:
F-102
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
. The Discretionary Option Grant Program for selected employees and
consultants has both incentive and non-qualified components. Non-
qualified options granted under the Discretionary Option Grant Program
may be purchased at not less than 85% of fair market value of the stock
at the date of grant whereas incentive options may be purchased at fair
market value. Such options generally vest over a period not exceeding
five years.
. The Automatic Option Grant Program provides for non-qualified stock
options to be granted to non-employee directors at fair market value.
Options generally vest over a period not exceeding five years.
. The Stock Issuance Program provides for the issuance of shares of
common stock which may be purchased by eligible employees and certain
other qualified individuals at a price not less than 85% of fair market
value. Such options may be immediately exercisable or may vest over a
period not exceeding five years.
. The 1996 Plan authorizes up to 1,450,000 shares to be granted no later
than September 2008. Under terms of the 1996 Plan, the Company may grant
options to selected non-officer non-director employees and consultants.
The options are generally exercisable at not less than 85% of fair market
value. Options generally vest over periods not exceeding five years and
have a maximum term of ten years.
. Additionally, a fully-exercisable non qualified option to purchase 17,087
shares of common stock at an exercise price of $0.14 was outstanding at
December 31, 1995, 1996, 1997, and 1998. This option was not issued
pursuant to any of the Company's stock option plans. This option expires
in May 2001.
In September 1998, the Compensation Committee of the Company's Board of
Directors authorized a program to cancel and regrant option grants made under
the 1994 and 1996 Plans that were granted at exercise prices exceeding the fair
market value of common stock as of the effective date of the program, October
23, 1998. The exercise price of each regranted option was $2.75, based on the
closing market price of the Company's common stock on October 23, 1998. Each
optionee holding such an option had the opportunity to (i) elect to retain the
old option or (ii) accept a new option with an exercise price equal to the fair
market value of the Company's common stock on the effective date and cancel the
older, higher-priced option. Each regranted option covered the same number of
shares subject to the higher-priced option at the time of cancellation and
maintained the same vesting period as the previously cancelled option. The
regranted option is subject to the condition that the options cannot be
exercised, and employment is not terminated, prior to April 23, 1999. Any
employee voluntarily leaving the Company during the suspended vesting period
will lose the affected options, including previously vested portions of those
options.
In October 1998, the Compensation Committee of the Company's Board of
Directors authorized a program to cancel and regrant option grants made under
the 1994 Plan to officer employees of the Company that were granted at exercise
prices exceeding the fair market value of common stock as of the effective date
of the program, November 3, 1998. The exercise price of each regranted option
was $2.75, based on the closing market price of the Company's common stock on
November 3, 1998. Each optionee holding such an option had the opportunity to
(i) elect to retain the old option or (ii) accept new options with exercise
prices equal to the fair market value of the Company's common stock on the
effective date and cancel the older, higher-priced option. Each regranted
option covered one half the number of shares subject to the higher-priced
option at the time of cancellation. One of the regranted options maintained the
same vesting period as the previously cancelled option. The other regranted
option vests in equal monthly installments over a 48 month period beginning on
the effective date of the program. The regranted options are subject to the
condition that the
F-103
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
options cannot be exercised, and employment is not terminated, prior to May 3,
1999. Any officer employee voluntarily leaving the Company during the
suspended vesting period will lose the affected options, including previously
vested portions of those options.
A summary of stock option transactions for the 1994 and 1996 Plans
described above is as follows:
1994 and 1996 Stock Option Plans
---------------------------------------
Options
Options Outstanding Exercisable
-------------------- ------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
---------- -------- --------- --------
Balance at December 31, 1995........ 1,671,309 $ 5.63 787,291 $2.17
Options granted................... 874,887 9.01
Options exercised................. (149,261) .77
Options canceled.................. (598,732) 18.30
---------- ------ --------- -----
Balance at December 31, 1996........ 1,798,203 5.54 813,939 2.49
Options granted................... 1,404,976 6.58
Options exercised................. (252,337) 6.34
Options canceled.................. (299,984) 7.65
---------- ------ --------- -----
Balance at December 31, 1997........ 2,650,858 6.20 1,185,372 5.02
Options granted................... 2,990,941 3.49
Options exercised................. (91,649) 5.23
Options canceled.................. (2,571,217) 7.32
---------- ------ --------- -----
December 31, 1998................... 2,978,933 $ 2.60 675,253 $1.52
========== ====== ========= =====
The following table summarizes information about all stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
--------------------------------- --------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices of Shares Contractual Life Exercise Price of Shares Exercise Price
--------------- --------- ---------------- ---------------- --------- ----------------
$0.14
to
$2.69 496,526 3.77 $0.36 475,713 $0.27
$2.75 2,295,415 8.71 2.75 142,525 2.75
$3.00
to
$16.13 204,079 9.00 6.34 57,015 8.81
--------- ---- ----- ------- -----
2,996,020 7.91 $2.60 675,253 $1.52
========= ==== ===== ======= =====
Employee Stock Purchase Plans
The Company has three Employee Stock Purchase Plans which provide eligible
employees the opportunity to purchase the Company's common stock through
payroll deductions. The Company's employees in the United States are eligible
to participate in the 1994 Employee Stock Purchase Plan, as amended and the
1998 Employee Stock Purchase Plan whereas the Company's Canadian employees are
eligible to participate in a separate 1998 Employee Stock Purchase Plan. Each
of the Plans has substantially identical terms. Under the terms of the Plans,
employees qualify if they have been employed at least 20 hours per week for
more than five months. After three months of service, qualifying employees are
eligible to participate in the Plans in the quarter following the period in
which the eligibility requirement is fulfilled. Employees may elect to have up
to
F-104
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
15% of their regular compensation withheld through regular payroll deductions.
At each quarter-end, amounts accumulated in the participant's account are used
to purchase shares of the Company's common stock at the lower of 85% of the
fair market value of the stock at either the date of the participant's entry
into the Plan or the last day of the quarter. The initial option period for
each of the Plans is generally twelve to twenty-four months with subsequent
option periods covering one twelve month period. Each Plan terminates either at
the end of the respective option periods or when the maximum number of shares
available for issuance under the Plan have been issued. Under these Plans,
56,857, 128,513, and 212,584 shares of common stock were issued during the
years ended December 31, 1996, 1997, and 1998, respectively. At December 31,
1998, 218,443 shares of common stock were available for future purchases. No
shares remained available for future purchases under the 1994 Employee Stock
Purchase Plan, as amended.
Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25 ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES and related Interpretations. Under the provisions of APB
25, the Company measures compensation cost using the intrinsic value method
rather than the fair value method prescribed by SFAS No. 123 ACCOUNTING FOR
STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized
in the Company's results of operations. The Company has adopted the disclosure-
only provisions of SFAS No. 123 which require the presentation of pro forma
information related to net income (loss) and net income (loss) per share as if
the Company accounted for its stock-based compensation plans using the fair
value method. Such pro forma information is as follows:
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
Net loss:
As reported................................... $(7,120) $(4,283) $(13,124)
Pro forma..................................... (8,352) (6,830) (15,979)
Net loss per common share:
As reported, basic and diluted................ $ (.59) $ (.34) $ (1.03)
Pro forma, basic and diluted.................. $ (.69) $ (.55) $ (1.26)
The fair value of options granted under the Stock Option Plans and shares
issued under the Employee Stock Purchase Plans reported below have been
estimated at the date of grant using the Black-Scholes option-pricing model
based on the following weighted-average assumptions:
Stock Option Employee Stock
Plans Purchase Plans
------------------- -------------------
1996 1997 1998 1996 1997 1998
----- ----- ----- ----- ----- -----
Risk-free interest rate............ 6.21% 6.17% 5.10% 6.21% 6.17% 4.69%
Dividend yield..................... 0% 0% 0% 0% 0% 0%
Expected volatility................ 65.09% 69.76% 74.17% 65.09% 69.76% 74.17%
Expected life (in years)........... 5 5 5 .25 .25 .25
The estimated fair value of options granted under the Stock Option Plans at
December 31, 1996, 1997 and 1998 was $4.22, $3.40, and $2.33 per share,
respectively. The estimated fair value of shares issued under the Employee
Stock Purchase Plans at December 31, 1996, 1997, and 1998 was $9.56, $6.58, and
$1.05 per share, respectively.
F-105
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
8. ACQUISITIONS
In February 1996, the Company acquired certain assets of Applied Computing
Devices, Inc. ("ACD"), a company that developed and marketed operations systems
software used primarily by independent telephone companies to manage certain
functions in their networks. The customer set and products of ACD complement
those of the Company and the Company intends to continue to market and enhance
these products. The Company acquired the assets for $1,700 in cash and incurred
approximately $200 in related costs. The assets were acquired at an auction
held in Federal Bankruptcy Court, Southern District of Indiana. The
transaction, which was accounted for as a purchase, included the acquisition of
in-process research and development valued at approximately $1,200, property
and equipment valued at approximately $377 and purchased technology valued at
approximately $337. The Company recorded a one-time charge in the first quarter
of 1996 for approximately $1,186 associated with purchased research and
development costs.
In July 1996, the Company acquired certain assets of MPR Teltech, a
subsidiary of British Columbia Telecom, Inc. The assets acquired were part of
MPR Teltech's operating unit commonly known as the Special Services Network
division ("SSN"). The Company and its Canadian subsidiary, ADA Canada, acquired
the assets for $4,200 in cash, 150,000 shares of the Company's common stock and
incurred approximately $200 in related costs. SSN was an operations systems
software development group with expertise in the development of network
management systems for public carriers. SSN developed operations systems
software primarily for Northern Telecom ("Nortel"). SSN has become part of ADA
Canada and will develop network performance management operations systems
software products for the Company and its customers, including Nortel. The
transaction, which was accounted for as a purchase, included the acquisition of
in-process research and development valued at approximately $2,100, property
and equipment valued at approximately $900 and goodwill and know-how valued at
approximately $2,588. The Company recorded a one-time charge in the third
quarter of 1996 for the $2,100 associated with purchased research and
development costs.
In June 1997, the Company acquired an exclusive worldwide license to
Nortel's Digital Support System II-TM- ("DSSII") operations system software
product, subject to certain residual rights retained by Nortel. The Company
acquired the license and certain assets related to the DSSII product for a
purchase price of $3,100. Of this amount, $3,100 was paid in cash. The Company
recorded a charge of approximately $1,578 for purchased research and
development associated with the acquisition of the license and the assets. As
part of the transaction, the Company also issued Nortel three-year warrants to
purchase 150,000 shares of the Company common stock at an exercise price of $12
per share.
F-106
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
The following condensed pro forma results of operations information has been
presented to give effect to the acquisitions as if such transactions had
occurred at the beginning of each of the periods presented. The historical
results of operations have been adjusted to reflect additional depreciation and
amortization expense based upon the value allocated to assets acquired in the
purchases. The pro forma results of operations information is presented for
information purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisitions been consummated as of
the beginning of the periods presented, nor is it necessarily indicative of
future operating results.
Condensed Pro Forma Results of Operations
(Unaudited)
Year Ended
December 31
----------------
1996 1997
------- -------
Revenue.................................................... $29,660 $34,050
Net loss................................................... (7,474) (4,283)
Net loss per share, basic and diluted...................... (.61) (.34)
Weighted average shares used in computation................ 12,165 12,605
9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 consists of current taxes for foreign operations.
Differences between the statutory rate and the effective tax rate for the
year ended December 31, 1996, 1997 and 1998 are as follows:
1996 1997 1998
----- ----- -----
Taxes at federal statutory rate..................... (34.0%) (34.0%) (34.0%)
Foreign income taxes................................ 1.8% 3.2% 1.4%
Net operating loss carryforwards and research and
development tax credits (utilized) not utilized.... 33.0% 33.0% 33.0%
Other............................................... 1.0% 1.0% 1.0%
----- ----- -----
Provision for income taxes.......................... 1.8% 3.2% 1.4%
===== ===== =====
F-107
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
The components of the deferred tax assets at December 31, 1997 and 1998 are
as follows:
Year Ended
December 31
-----------------
1997 1998
------- --------
Allowances and reserves................................... $ 780 $ 818
Vacation accrual.......................................... 178 250
Capitalized research and development...................... 2,577 2,982
Net operating loss carryforwards.......................... 5,908 10,383
Tax credits............................................... 1,991 2,691
Accelerated depreciation.................................. (287) (145)
Other..................................................... 10 10
------- --------
Total gross deferred tax asset.......................... 11,157 16,989
Less valuation allowance.................................. (9,655) (15,433)
------- --------
$ 1,502 $ 1,556
======= ========
Realizability of the deferred tax asset is dependent on the Company
generating sufficient taxable income or utilizing tax planning strategies
available to the Company prior to expiration of the net operating loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that the net deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $27,642, of which $5,458 is
attributable to disqualifying dispositions of stock options. The Company also
has net operating loss carryforwards for California tax purposes of
approximately $13,796 at December 31, 1998, of which $2,804 is attributable to
disqualifying dispositions of stock options. The amount attributable to the
disposition of stock options will not impact the Company's effective tax rate
in future periods as the impact will be reflected as a component of equity when
recognized.
The Company also has research and development tax credit carryforwards of
approximately $2,162 for federal and $802 for California tax purposes at
December 31, 1998. These carryforwards will begin expiring, if unused, in 2003.
The Internal Revenue Code imposes limits on the availability of net
operating loss carryforwards and certain tax credits that arose prior to
certain cumulative changes in a corporation's ownership resulting in a change
of control of the Company. The Company's use of approximately $1,166 of its
federal net operating loss carryforwards and $408 of its federal and $105 of
its California tax credit carryforwards are significantly limited because the
Company underwent "ownership-changes" in January 1989 and March 1991. In each
year following the change, the Company will be able to offset taxable income by
a limited amount of the pre-ownership change carryforwards. This limitation is
determined by the value of the Company immediately prior to the ownership
change multiplied by the long-term tax-exempt rate. Net operating losses and
tax credits that are unavailable in any year as a consequence of this
limitation may be carried forward for future use subject to certain
restrictions.
F-108
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Dollars in Thousands)
10. SUBSEQUENT EVENTS
Termination of Joint Development Agreement
On March 3, 1999, the Company's Joint Development Agreement (the
"Agreement") with Nortel was terminated. The Agreement, dated September 29,
1997, was for the development of SONET network element products for the
telecommunications industry. Under the terms of the Agreement, the Company and
Nortel each contributed technology and resources and shared development costs
related to the project. Nortel is obligated to continue providing funding for
the project for three months after the termination date. While the Company has
retained the intellectual property rights associated with the jointly developed
technology, Nortel has the right to receive royalties to recover its portion of
development costs paid to the Company should the Company sell products
utilizing the jointly developed technology. The amount potentially reimbursable
to Nortel was $6,117 at December 31, 1998.
On March 31, 1999 the Company announced a reduction in its workforce of
approximately 65 people, or 22% of its total workforce. Of the reduction in
workforce, 23 were temporary positions. The Company determined the reduction
was necessary in order to align its current operations with the Company's
objectives of focusing on market opportunities in its core business, reducing
expenses including expenses related to its recently terminated JDA with Nortel
and improving operating results. The majority of the reduction in workforce
were engineers focused on development conducted under JDA. As a result of the
reduction in workforce, the Company will close its office in Richardson, Texas.
The Company will incur a significant one-time charge in the first quarter
ending March 31, 1999, related to the reduction in workforce. The Company's
restructuring plan includes the identification of the affected personnel,
facility closures, asset write downs, and lease terminations. The Company has
not completed its analysis of the total dollar amount associated with the
restructuring charge, but will complete this process prior to issuing its first
quarter operating results.
F-109
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1999
------------ ---------
Unaudited
(Dollars in thousands,
except per share data)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 12,513 $ 9,465
Investments........................................... -- 4,867
Trade accounts receivable, net........................ 6,111 5,161
Inventory, net........................................ 5,679 4,227
Deferred income taxes................................. 130 130
Prepaid expenses and other current assets............. 1,700 1,365
-------- --------
Total current assets................................ 26,133 25,215
Property and equipment, net............................. 5,466 3,472
Intangible assets, net.................................. 1,247 681
Deferred income taxes................................... 1,426 1,510
-------- --------
Total assets........................................ $ 34,272 $ 30,878
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,922 $ 3,089
Accrued expenses...................................... 2,374 1,491
Accrued warranty expense.............................. 1,264 1,149
Deferred revenue...................................... 2,817 3,003
-------- --------
Total current liabilities........................... 9,377 8,732
======== ========
Shareholders' equity:
Preferred stock, no par value; 7,500,000 shares
authorized; no shares issued......................... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 13,118,571 and 12,909,315 shares issued
and outstanding at June 30, 1999 and December 31,
1998 respectively.................................... 13 13
Additional paid-in capital............................ 54,897 55,289
Accumulated other comprehensive income................ 163 191
Accumulated deficit................................... (30,178) (33,347)
-------- --------
Total shareholders' equity.......................... 24,895 22,146
-------- --------
Total liabilities and shareholders' equity.......... $ 34,272 $ 30,878
======== ========
The accompanying notes are an integral part of the financial statements.
F-110
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)
(Unaudited) (Unaudited)
Revenue.................... $ 8,580 $ 8,863 $ 13,852 $ 16,065
Cost of revenue............ 3,741 3,531 7,405 6,425
----------- ----------- ----------- -----------
Gross profit............. 4,839 5,332 6,447 9,640
----------- ----------- ----------- -----------
Operating expenses:
Research and
development............. 3,777 2,761 7,320 5,946
Restructuring charge..... -- -- -- 1,335
Engineering
Reimbursement........... -- -- -- (1,361)
Sales and marketing...... 2,551 2,147 4,831 4,426
General and
administrative.......... 1,295 1,353 2,414 2,614
----------- ----------- ----------- -----------
Total operating
expenses.............. 7,623 6,261 14,565 12,960
----------- ----------- ----------- -----------
Operating loss......... (2,784) (929) (8,118) (3,320)
Interest income............ 168 134 342 254
Other expense, net......... (6) (7) (16) (8)
----------- ----------- ----------- -----------
Loss before income
taxes................. (2,622) (802) (7,792) (3,074)
Provision for income
taxes..................... 36 41 73 95
----------- ----------- ----------- -----------
Net loss............... $ (2,658) $ (843) $ (7,865) $ (3,169)
=========== =========== =========== ===========
Other comprehensive income
(loss):
Foreign currency
translation
adjustments............. (93) 67 (12) 28
----------- ----------- ----------- -----------
Comprehensive loss..... $ (2,751) $ (776) $ (7,877) $ (3,141)
----------- ----------- ----------- -----------
Net loss per share,
basic and diluted..... $ (.21) (.06) $ (.62) $ (.24)
----------- ----------- ----------- -----------
Shares used in per
share computations.... 12,675,219 13,037,132 12,649,983 12,977,203
----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
F-111
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six
Months Ended
June 30,
----------------
1998 1999
------- -------
(Dollars in
thousands)
(Unaudited)
Cash flows from operating activities:
Net loss.................................................... $(7,865) $(3,169)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization.............................. 1,853 1,783
Writeoff of assets associated with restructuring........... -- 866
Other...................................................... (101) 108
Changes in operating assets and liabilities:
Trade accounts receivable................................. 3,978 950
Inventory................................................. (65) 1,452
Prepaid expenses and other current assets................. 1,340 251
Accounts payable.......................................... 1,647 167
Acquisition payments due licensor......................... (867) --
Accrued expenses.......................................... (743) (851)
Accrued warranty expense.................................. (8) (115)
Deferred revenue.......................................... 1,047 186
------- -------
Net cash provided by operating activities................ 216 1,628
------- -------
Cash flows from investing activities:
Purchases of investments.................................... (7,854) (4,867)
Maturities of investments................................... 6,835 --
Purchases of property and equipment......................... (1,370) (169)
Purchase costs related to asset acquisition................. 500 --
------- -------
Net cash used by investing activities.................... (1,889) (5,036)
------- -------
Cash flows from financing activities:
Principal payments on capital lease obligations............. (9) (32)
Proceeds from issuance of common stock...................... 416 392
------- -------
Net cash provided by financing activities................ 407 360
------- -------
Net decrease in cash and cash equivalents................ (1,266) (3,048)
Cash and cash equivalents at beginning of period........... 4,400 12,513
------- -------
Cash and cash equivalents at end of period................. $ 3,134 $ 9,465
======= =======
The accompanying notes are an integral part of the financial statements.
F-112
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 1999 And 1998
(Dollars in Thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Applied Digital Access, Inc. (the "Company" or "ADA")
and its wholly owned subsidiary: Applied Digital Access--Canada, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance with
the interim reporting requirements of Form 10-Q, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six month period ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. These financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Risks and Uncertainties, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed
with the SEC.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivative and
hedging activities. In accordance with SFAS No. 133 all derivatives must be
recognized as assets or liabilities and measured at fair value. This Statement
will be effective for the Company's fiscal year 2001. The Company has not yet
determined the impact of the adoption of this new accounting pronouncement on
its consolidated financial position or results of operations.
3. INVENTORY
Inventory is valued at the lower of cost (determined using the first-in,
first-out method) or market. Inventory was as follows:
December 31, June 30,
1998 1999
------------ --------
Inventories:
Raw materials........................................ $3,266 $2,649
Work-in-process...................................... 2,389 1,641
Finished goods....................................... 698 667
------ ------
6,353 4,957
Less reserves........................................ (674) (730)
------ ------
$5,679 $4,227
====== ======
4. RESTRUCTURING CHARGE FOR TERMINATION OF JOINT DEVELOPMENT AGREEMENT
On March 3, 1999, the Company announced the termination of its joint
development agreement ("JDA") with Northern Telecom, Inc. ("Nortel"). The
Company and Nortel entered into the JDA in September 1997 to
F-113
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three and Six Months Ended June 30, 1999 and 1998
(Dollars in Thousands)
develop Synchronous Optical Network ("SONET") network element products for the
telecommunications industry. The intellectual property rights associated with
the jointly developed technology will become the property of the Company. Under
the JDA, the Company and Nortel each contributed technology and development
resources to the project and shared the development costs. The Company's
development costs associated with the JDA have been expensed as incurred.
For the six months ended June 30, 1999, the Company incurred a one-time
restructuring charge of $1,435, of which $1,335 is included as a separate
component of operating expenses and $100 is included in costs of revenue. Cash
expenditures are estimated to be $469 which consists of employee severance
costs, a facility closure in Richardson, Texas and other costs. The significant
components of the restructuring charge are:
Amounts incurred as of Estimated amounts to be
Component Amount June 30, 1999 paid in the future
--------- ------ ---------------------- -----------------------
Severance and related
personnel costs........ $ 264 $ 264 $ 0
Capital asset
writeoffs.............. 866 866 0
Facility closure........ 152 72 80
Excess inventory
writedown.............. 100 100 0
Other costs............. 53 10 43
------ ------ ----
Total restructuring
costs................ $1,435 $1,312 $123
====== ====== ====
Severance costs related to the termination of approximately 65 people, the
majority of which were engineers focused on the JDA. The capital asset
writeoffs related to software development tool kits acquired specifically for
the JDA that had no on-going business use. The facility in Richardson, Texas is
a leased facility which the Company has the ability to sub-lease. The Company
has estimated the costs associated with leasing the facility until a sub-lessee
can be found. The inventory write down related to excess quantities of
components used in the JDA product design that were purchased in advance. Other
costs are associated with legal services and other professional services
required to complete the termination of the JDA. The majority of the
expenditures have been concluded however, there may be costs associated with
the closure of the leased facility in Richardson, Texas that could continue in
to the future.
5. PER SHARE INFORMATION
Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants for all periods. There are no reconciling items in the
numerator and denominator for basic and diluted EPS.
6. SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", information regarding the Company's
business segments is reported for financial statement purposes consistently
with the manner in which these segments are evaluated for internal reporting
and management's assessment of performance. The Company evaluates the
performance of its segment and allocates resources to them based on segment
earnings before allocation of corporate costs.
F-114
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three and Six Months Ended June 30, 1999 and 1998
(Dollars in Thousands)
The Company has two business units, Network Systems and Network Management,
that are organized around the Company's product lines. The Network Systems
business unit is formed around the Company's network test and performance
monitoring products and services, including its T3AS Test and Performance
Monitoring System ("T3AS"), Centralized Test System ("CTS"), Remote Module, a
network interface unit ("NIU"), OPTIS (previously named Test OS), Network
Embedded Protocol Access System ("NEPA"), and Sectionalizer. The Network
Management business unit focuses on the Company's Operations Support System
("OSS") software products including Provisioner, Traffic Data Collection and
Engineering System ("TDC&E"), Fault Management System ("FMS"), and OS design
services.
The table below presents information about revenues and operating loss for
reportable segments for the three and six months ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
Revenues:
Network Systems................ $ 5,437 $ 5,821 $ 8,929 $ 10,616
Network Management............. 3,143 3,042 4,923 5,449
--------- --------- -------- --------
Consolidated totals.......... $ 8,580 $ 8,863 $ 13,852 $ 16,065
========= ========= ======== ========
Operating loss:
Network Systems................ $ (2,342) $ (36) $ (5,934) $ (1,265)
Network Management............. 861 354 164 373
--------- --------- -------- --------
Total for reportable
segments.................... (1,481) 318 (5,770) (892)
Reconciling items.............. (1,303) (1,247) (2,348) (2,428)
--------- --------- -------- --------
Consolidated totals.......... $ (2,784) $ (929) $ (8,118) $ (3,320)
========= ========= ======== ========
The table below presents the reconciliation of operating loss for reportable
segments to consolidated loss before income taxes for the three and six months
ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
Operating loss for reportable
segments........................ $ (1,481) $ 318 $ (5,770) $ (892)
Other unallocated segment
expenses........................ (1,309) (1,254) (2,364) (2,436)
Other unallocated income......... 168 134 342 254
--------- --------- -------- --------
Consolidated loss before income
taxes......................... $ (2,622) $ (802) $ (7,792) $ (3,074)
========= ========= ======== ========
Operating loss for reportable segments includes segment revenues with
deductions made for related development and selling costs and certain expenses
controllable by segment managers. Other unallocated segment expenses consist of
corporate selling, general and administrative expenses allocated to each
segment based on segment revenues. Other unallocated income consists of
interest income on investments held at the corporate level.
F-115
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three and Six Months Ended June 30, 1999 and 1998
(Dollars in Thousands)
The table below presents the reconciliation of total assets for reportable
segments to consolidated total assets at:
December 31, June 30,
1998 1999
------------ --------
Total assets for reportable segments................. $17,256 $12,859
Other unallocated assets:
Cash and investments............................... 12,513 14,332
Other.............................................. 4,503 3,687
------- -------
Consolidated total assets........................ $34,272 $30,878
======= =======
Total assets for reportable segments includes amounts attributable to trade
accounts receivable, inventory and property and equipment. Other unallocated
assets principally consists of deferred taxes, intangible assets obtained in
conjunction with certain acquisitions and prepaid expenses.
F-116
[LOGO OF DYNATECH]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses, other than underwriting
discounts and commissions, to be paid in connection with the sale of common
stock being registered, all of which will be paid by the Registrant. All
amounts are estimates except for the registration fee, The Nasdaq National
Market listing fee and the NASD filing fee.
Registration fee.................................................... $ 30,360
Nasdaq National Market listing fee.................................. 35,000
NASD filing fee..................................................... 30,500
Accounting fees and expenses........................................ 500,000
Printing and engraving expenses..................................... 200,000
Legal fees and expenses (other than Blue Sky)....................... 500,000
Blue Sky fees and expenses.......................................... 15,000
Transfer agent and registrar fees................................... 25,000
Miscellaneous expenses.............................................. 25,000
----------
Total............................................................. $1,360,860
==========
Item 14. Indemnification of Directors and Officers
Dynatech Corporation is incorporated under the laws of the State of
Delaware. Section 145 of the Delaware Corporation Law, as amended, and
Subsection (e) of Article Sixth of Dynatech's Certificate of Incorporation
provides for the indemnification, except in certain circumstances set forth
below, of officers, directors, employees and agents of Dynatech for certain
expenses incurred in connection with any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, and for the purchase and maintenance of insurance by Dynatech on
behalf of officers, directors, employees and agents of Dynatech and its
subsidiaries against any liability asserted against, and incurred by, any such
officer, director, employee or agent in such capacity. Set forth below is the
text of Section 145 and the text of Subsection (e) of Article Sixth of
Dynatech's Certificate of Incorporation.
Section 145 of the Delaware Corporation Law, as amended, provides as
follows:
"SECTION 145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS; INSURANCE. -- (a) A corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that the person is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if this person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
this person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation
II-1
to procure a judgment in its favor by reason of the fact that the person is
or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the present or former director, officer, employee or agent is proper in
the circumstances because the person has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (4) by the
shareholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity
while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not
the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to "the corporation' shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of
II-2
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this section with respect to the
resulting or surviving corporation as such person would have with respect
to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises'
shall include employee benefit plans; references to "fines' shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation' shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation' as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorney's fees)."
Subsection (e) of Article Sixth of the Amended and Restated Certificate of
Incorporation of Dynatech provides as follows:
(e) No director of the Corporation shall be liable to the Corporation or
its shareholders for monetary damages for breach of his or her fiduciary
duty as a director, provided that nothing contained in this Certificate of
Incorporation shall eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware or (iv)
for any transaction from which the director derived an improper personal
benefit.
As permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended, Dynatech has purchased and maintains insurance providing
for reimbursement to elected directors and officers of Dynatech and its
subsidiaries, subject to certain exceptions, of amounts they may be legally
obligated to pay, including but not limited to damages, judgments, settlements,
costs and attorneys' fees (but not including fines, penalties or matters not
insurable under the law), as a result of claims and legal actions instituted
against them to recover for their acts while serving as directors or officers.
II-3
Item 15. Recent Sales of Unregistered Securities
To finance the WWG Merger, on May 23, 2000 we sold 12.5 million and 30.625
million newly-issued but unregistered shares of Common Stock to Clayton,
Dubilier & Rice Fund V Limited Partnership and Clayton, Dubilier & Rice Fund VI
Limited Partnership, respectively, for an aggregate purchase price of $172.5
million.
Pursuant to the Dynatech Corporation Directors Stock Purchase Plan, the
following directors purchased unregistered shares of Common Stock on the dates,
in the amounts, and for the consideration set forth below:
Date of Number Consideration
Director Sale of Shares Paid
-------- ------- --------- -------------
Ned C. Lautenbach.......................... 10/1/99 307,692 $1,000,000
Marvin L. Mann............................. 10/1/99 76,923 $ 250,000
William O. McCoy........................... 10/1/99 76,923 $ 250,000
Victor A. Pelson........................... 10/1/99 76,923 $ 250,000
Brian H. Rowe.............................. 10/1/99 76,923 $ 250,000
Peter M. Wagner............................ 6/5/00 62,500 $ 250,000
Item 16. Exhibits and Financial Statement Schedules
Exhibit
No. Description of Exhibit
------- ----------------------
1 Form of Underwriting Agreement. (1)
2.1 Agreement and Plan of Merger, dated as of December 20, 1997, by and
between CDRD Merger Corporation and Dynatech Corporation. (2)
2.2 Agreement and Plan of Merger, dated as of September 7, 1999, by and
among Dynatech Corporation, Dynatech Acquisition Corporation and
Applied Digital Access, Inc. (3)
2.3 Agreement and Plan of Merger, dated as of February 14, 2000, by and
among Dynatech Corporation, DWW Acquisition Corporation and Wavetek
Wandel Goltermann, Inc. (4)
2.4 Agreement for the Sale and Purchase of Shares in WPI Husky Technology
Ltd., dated February 23, 2000, by and among Dynatech Nominees Limited,
WPI Group (UK), and WPI Group, Inc. (5)
2.5 Asset Purchase Agreement, dated as of June 27, 2000, among Dynatech
Corporation, Superior Electronics Group, Inc. d/b/a Cheetah
Technologies and the shareholders of Superior Electronics Group, Inc.
party thereto. (1)
3.1 Amended and Restated Certificate of Incorporation of Dynatech
Corporation. (5)
3.2 Amended and Restated Bylaws of Dynatech Corporation. (6)
4.1 Indenture, dated May 21, 1998, among Dynatech Corporation, TTC Merger
Co. LLC (now known as Dynatech LLC) and State Street Bank and Trust
Company, as Trustee. (7)
4.2 Form of 9 3/4% Senior Subordinated Note due 2008 (included in Exhibit
4.1).
4.3 First Supplemental Indenture, dated May 21, 1998, between
Telecommunications Techniques Co., LLC and State Street Bank and Trust
Company, as Trustee. (7)
4.4 Registration Rights Agreement, dated May 21, 1998, by and among
Dynatech Corporation, Telecommunications Techniques Co., LLC, Credit
Suisse First Boston Corporation and J.P. Morgan Securities Inc. (7)
4.5 Registration Rights Agreement, dated as of May 21, 1998, among
Dynatech 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. (7)
II-4
Exhibit
No. Description of Exhibit
------- ----------------------
4.6 Amendment No. 1, dated as of May 23, 2000, among Dynatech Corporation
("Dynatech"), 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
Dynatech, Fund V and the other parties thereto. (5)
4.7 Form of Piggyback Registration Rights Agreement, dated as of February
29, 2000, by and among Wavetek Wandel Goltermann, Inc. ("WWG"),
Dynatech Corporation and each stockholder of WWG party thereto. (5)
4.8 Form of Subscription Warrant to Subscribe for Shares of Dynatech
Corporation Common Stock. (8)
5.0 Opinion of Debevoise & Plimpton as to the legality of the securities
being registered. (1)
10.1 Credit Agreement, dated May 23, 2000, among Dynatech LLC, Wavetek
Wandel Goltermann GmbH and Dynatech 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
Dynatech LLC, certain of its subsidiaries and Morgan Guaranty and
Trust Company of New York as administrative agent. (5)
10.3 Indemnification Agreement, dated May 21, 1998, among Dynatech
Corporation, Telecommunications Techniques Co., LLC, Clayton, Dubilier
& Rice, Inc. and Clayton, Dubilier & Rice Fund V Limited Partnership.
(7)
10.4 Indemnification Agreement, dated as of May 23, 2000, by and among
Dynatech Corporation, Clayton, Dubilier & Rice Fund VI Limited
Partnership and Clayton, Dubilier & Rice, Inc. (5)
10.5 Consulting Agreement, dated May 21, 1998, by and among Dynatech
Corporation, Telecommunications Techniques Co., LLC and Clayton,
Dubilier & Rice, Inc. (7)
10.6 Agreement, dated as of May 23, 2000, by and between Clayton, Dubilier
& Rice, Inc. and Dynatech Corporation. (5)
10.7 Tax Sharing Agreement, dated May 21, 1998, between Dynatech
Corporation and Telecommunications Techniques Co., LLC. (7)
10.8 Form of Letter Agreement by and between Dynatech Corporation
("Dynatech") and certain officers of Dynatech. (9)
10.9 Form of Management Equity Agreement among Dynatech Corporation,
Clayton, Dubilier & Rice Fund V Limited Partnership and Messrs. Kline
and Peeler. (9)
10.10 Form of Management Equity Agreement among Dynatech Corporation
("Dynatech"), Clayton, Dubilier & Rice Fund V Limited Partnership and
certain officers of Dynatech. (9)
10.11 Amended and Restated Employment Agreement, entered into on November 1,
1998, by and between Dynatech Corporation and Allan M. Kline. (10)
10.12 Amended and Restated Employment Agreement, entered into on November 1,
1998, by and between Dynatech Corporation and John R. Peeler. (10)
10.13 Form of Nondisclosure, Noncompetition and Nonsolicitation Agreement by
and between Dynatech Corporation ("Dynatech") and certain executives
of Dynatech. (9)
10.14 Dynatech Corporation 1992 Stock Option Plan. (7)
10.15 Dynatech Corporation Amended and Restated 1994 Stock Option and
Incentive Plan. (11)
10.16 Dynatech Corporation Non-Employee Directors Stock Incentive Plan. (11)
10.17 Dynatech Corporation Directors Stock Purchase Plan. (6)
II-5
Exhibit
No. Description of Exhibit
------- ----------------------
10.18 Form of Non-Employee Director Stock Subscription Agreement between
Dynatech Corporation ("Dynatech") and non-employee directors of
Dynatech. (12)
10.19 Loanout Agreement, dated as of May 19, 1999, by and among Dynatech
Corporation, Dynatech LLC and Clayton, Dubilier & Rice, Inc. (13)
21 Subsidiaries of Dynatech Corporation. (5)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Debevoise & Plimpton (included in Exhibit 5). (1)
24 Powers of Attorney (included on signature page).
- -----------------------
(1) To be filed by amendment.
(2) Incorporated by reference to Dynatech Corporation's Report on Form 8-K
(File No. 0-7438).
(3) Incorporated by reference to Dynatech Corporation's Schedule 14D-1 (File
No. 5-44783).
(4) Incorporated by reference to Dynatech Corporation's Report on Form 8-K
(File No. 1-12657), filed May 31, 2000.
(5) Incorporated by reference to Dynatech Corporation's Report on Form 10-K
for the year ended March 31, 2000.
(6) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended September 30, 1999.
(7) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-4 (Registration No. 333-60893).
(8) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-3 (Registration No. 333-35476).
(9) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-4 (File No. 333-44933).
(10) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended December 31, 1998.
(11) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-8 (File No. 333-75797).
(12) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended December 31, 1999.
(13) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended June 30, 1999.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue;
(b) for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A
II-6
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective; and
(c) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Dynatech
Corporation has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Burlington, Massachusetts, on the 18th day of July, 2000.
DYNATECH CORPORATION
/s/ Mark V.B. Tremallo
By: _________________________________
Name: Mark V.B. Tremallo
Title: Corporate Vice President
-- General Counsel
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Allan M. Kline and Mark V.B. Tremallo, and each
of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Dynatech Corporation ("Dynatech"), the
Registration Statement of Dynatech on Form S-1 (the "Registration Statement"),
for the registration of shares of newly issued common stock of Dynatech, and
any and all supplements and amendments (including, without limitation, post-
effective amendments and any subsequent registration statements pursuant to
Rule 462(b) under the Securities Act of 1933, as amended) to the Registration
Statement, and file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Act"), and any and all
other instruments which either of said attorneys-in-fact and agents deem
necessary or advisable to enable Dynatech to comply with the Act, the rules,
regulations and requirements of the SEC in respect thereof, and the securities
or Blue Sky laws of any state or other governmental subdivision, giving and
granting to each of said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing whatsoever necessary or
appropriate to be done in and about the premises as fully to all intents as he
or she might or could do if personally present at the doing thereof, with full
power of substitution and resubstitution, hereby ratifying and confirming all
that his or her said attorney-in-fact and agents or substitutes may or shall
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ned C. Lautenbach Chairman, President and July 18, 2000
______________________________________ Chief Executive Officer
Ned C. Lautenbach
/s/ Allen M. Kline Director, Corporate Vice July 18, 2000
______________________________________ President, Chief
Allen M. Kline Financial Officer and
Treasurer
/s/ John R. Peeler Director, Corporate Vice July 18, 2000
______________________________________ President
John R. Peeler
II-8
Signature Title Date
--------- ----- ----
/s/ Joseph L. Rice, III Director July 18, 2000
______________________________________
Joseph L. Rice, III
/s/ Brian D. Finn Director July 18, 2000
______________________________________
Brian D. Finn
/s/ Marvin L. Mann Director July 18, 2000
______________________________________
Marvin L. Mann
/s/ Brian H. Rowe Director July 18, 2000
______________________________________
Brian H. Rowe
/s/ William O. McCoy Director July 18, 2000
______________________________________
William O. McCoy
/s/ Peter M. Wagner Director July 18, 2000
______________________________________
Peter M. Wagner
/s/ Victor A. Pelson Director July 18, 2000
______________________________________
Victor A. Pelson
/s/ Richard J. Schnall Director July 18, 2000
______________________________________
Richard J. Schnall
/s/ Mark V.B. Tremallo
By: __________________________________
Mark V.B. Tremallo
Attorney-in-Fact
II-9
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ----------------------
1 Form of Underwriting Agreement. (1)
2.1 Agreement and Plan of Merger, dated as of December 20, 1997, by and
between CDRD Merger Corporation and Dynatech Corporation. (2)
2.2 Agreement and Plan of Merger, dated as of September 7, 1999, by and
among Dynatech Corporation, Dynatech Acquisition Corporation and
Applied Digital Access, Inc. (3)
2.3 Agreement and Plan of Merger, dated as of February 14, 2000, by and
among Dynatech Corporation, DWW Acquisition Corporation and Wavetek
Wandel Goltermann, Inc. (4)
2.4 Agreement for the Sale and Purchase of Shares in WPI Husky Technology
Ltd., dated February 23, 2000, by and among Dynatech Nominees Limited,
WPI Group (UK), and WPI Group, Inc. (5)
2.5 Asset Purchase Agreement, dated as of June 27, 2000, among Dynatech
Corporation, Superior Electronics Group, Inc. d/b/a Cheetah
Technologies and the shareholders of Superior Electronics Group, Inc.
party thereto. (1)
3.1 Amended and Restated Article of Organization of Dynatech Corporation.
(5)
3.2 Amended and Restated Bylaws of Dynatech Corporation. (6)
4.1 Indenture, dated May 21, 1998, among Dynatech Corporation, TTC Merger
Co. LLC (now known as Dynatech LLC) and State Street Bank and Trust
Company, as Trustee. (7)
4.2 Form of 9 3/4% Senior Subordinated Note due 2008 (included in Exhibit
4.1).
4.3 First Supplemental Indenture, dated May 21, 1998, between
Telecommunications Techniques Co., LLC and State Street Bank and Trust
Company, as Trustee. (7)
4.4 Registration Rights Agreement, dated May 21, 1998, by and among
Dynatech Corporation, Telecommunications Techniques Co., LLC, Credit
Suisse First Boston Corporation and J.P. Morgan Securities Inc. (7)
4.5 Registration Rights Agreement, dated as of May 21, 1998, among
Dynatech 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. (7)
4.6 Amendment No. 1, dated as of May 23, 2000, among Dynatech Corporation
("Dynatech"), 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
Dynatech, Fund V and the other parties thereto. (5)
4.7 Form of Piggyback Registration Rights Agreement, dated as of February
29, 2000, by and among Wavetek Wandel Goltermann, Inc. ("WWG"),
Dynatech Corporation and each stockholder of WWG party thereto. (5)
4.8 Form of Subscription Warrant to Subscribe for Shares of Dynatech
Corporation Common Stock. (8)
5.0 Opinion of Debevoise & Plimpton as to the legality of the securities
being registered. (1)
10.1 Credit Agreement, dated May 23, 2000, among Dynatech LLC, Wavetek
Wandel Goltermann GmbH and Dynatech 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
Dynatech LLC, certain of its subsidiaries and Morgan Guaranty and
Trust Company of New York as administrative agent. (5)
Exhibit
No. Description of Exhibit
------- ----------------------
10.3 Indemnification Agreement, dated May 21, 1998, among Dynatech
Corporation, Telecommunications Techniques Co., LLC, Clayton, Dubilier
& Rice, Inc. and Clayton, Dubilier & Rice Fund V Limited Partnership.
(7)
10.4 Indemnification Agreement, dated as of May 23, 2000, by and among
Dynatech Corporation, Clayton, Dubilier & Rice Fund VI Limited
Partnership and Clayton, Dubilier & Rice, Inc. (5)
10.5 Consulting Agreement, dated May 21, 1998, by and among Dynatech
Corporation, Telecommunications Techniques Co., LLC and Clayton,
Dubilier & Rice, Inc. (7)
10.6 Agreement, dated as of May 23, 2000, by and between Clayton, Dubilier
& Rice, Inc. and Dynatech Corporation. (5)
10.7 Tax Sharing Agreement, dated May 21, 1998, between Dynatech
Corporation and Telecommunications Techniques Co., LLC. (7)
10.8 Form of Letter Agreement by and between Dynatech Corporation
("Dynatech") and certain officers of Dynatech. (9)
10.9 Form of Management Equity Agreement among Dynatech Corporation,
Clayton, Dubilier & Rice Fund V Limited Partnership and Messrs. Kline
and Peeler. (9)
10.10 Form of Management Equity Agreement among Dynatech Corporation
("Dynatech"), Clayton, Dubilier & Rice Fund V Limited Partnership and
certain officers of Dynatech. (9)
10.11 Amended and Restated Employment Agreement, entered into on November 1,
1998, by and between Dynatech Corporation and Allan M. Kline. (10)
10.12 Amended and Restated Employment Agreement, entered into on November 1,
1998, by and between Dynatech Corporation and John R. Peeler. (10)
10.13 Form of Nondisclosure, Noncompetition and Nonsolicitation Agreement by
and between Dynatech Corporation ("Dynatech") and certain executives
of Dynatech. (9)
10.14 Dynatech Corporation 1992 Stock Option Plan. (7)
10.15 Dynatech Corporation Amended and Restated 1994 Stock Option and
Incentive Plan. (11)
10.16 Dynatech Corporation Non-Employee Directors Stock Incentive Plan. (11)
10.17 Dynatech Corporation Directors Stock Purchase Plan. (6)
10.18 Form of Non-Employee Director Stock Subscription Agreement between
Dynatech Corporation ("Dynatech") and non-employee directors of
Dynatech. (12)
10.19 Loanout Agreement, dated as of May 19, 1999, by and among Dynatech
Corporation, Dynatech LLC and Clayton, Dubilier & Rice, Inc. (13)
21 Subsidiaries of Dynatech Corporation. (5)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Debevoise & Plimpton (included in Exhibit 5). (1)
24 Powers of Attorney (included on signature page).
- -----------------------
(1) To be filed by amendment.
(2) Incorporated by reference to Dynatech Corporation's Report on Form 8-K
(File No. 0-7438).
(3) Incorporated by reference to Dynatech Corporation's Schedule 14D-1 (File
No. 5-44783).
(4) Incorporated by reference to Dynatech Corporation's Report on Form 8-K
(File No. 1-12657), filed May 31, 2000.
(5) Incorporated by reference to Dynatech Corporation's Report on Form 10-K
for the year ended March 31, 2000.
(6) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended September 30, 1999.
(7) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-4 (Registration No. 333-60893).
(8) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-3 (Registration No. 333-35476).
(9) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-4 (File No. 333-44933).
(10) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended December 31, 1998.
(11) Incorporated by reference to Dynatech Corporation's Registration
Statement on Form S-8 (File No. 333-75797).
(12) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended December 31, 1999.
(13) Incorporated by reference to Dynatech Corporation's Form 10-Q for the
quarter ended June 30, 1999.