-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LCmIPP8Tu4Ce2w8zYwUs1I1dJ2eQViQc98MUgkFbfGWzyY5GHT5LsGZlITV14WGr LwbggbLa80/NZ7COfUyilg== 0000927016-02-000841.txt : 20020414 0000927016-02-000841.hdr.sgml : 20020414 ACCESSION NUMBER: 0000927016-02-000841 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTERNA CORP CENTRAL INDEX KEY: 0000030841 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 042258582 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12657 FILM NUMBER: 02542720 BUSINESS ADDRESS: STREET 1: 3 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803-5087 BUSINESS PHONE: 6172726100 MAIL ADDRESS: STREET 1: 3 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803-5087 FORMER COMPANY: FORMER CONFORMED NAME: DYNATECH CORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 Commission file number 000-07438 ACTERNA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2258582 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 20410 Observation Drive Germantown, Maryland 20876 (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (301) 353-1550 (3 New England Executive Park Burlington, Massachusetts 01803-5087) (Previous address of principal executive offices) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. At January 31, 2002 there were 192,247,507 shares of common stock of the registrant outstanding. PART I. Financial Information Item 1. Financial Statements ACTERNA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, 2001 2000 2001 2000 --------- --------- --------- --------- (In thousands except per share data) Net sales $ 248,785 $ 369,982 $ 920,197 $ 972,955 Cost of sales 132,264 150,875 430,488 443,233 --------- --------- --------- --------- Gross profit 116,521 219,107 489,709 529,722 Selling, general & administrative expense 105,184 138,838 352,280 351,936 Product development expense 38,146 44,713 124,417 118,814 Impairment of net assets held for sale -- -- 17,918 -- Goodwill impairment 3,947 -- 3,947 -- Recapitalization and other related costs -- -- -- 9,194 Restructuring 9,347 -- 17,244 -- Purchased incomplete technology -- -- -- 56,000 Amortization of intangibles 9,935 34,853 32,086 84,162 --------- --------- --------- --------- Total operating expense 166,559 218,404 547,892 620,106 --------- --------- --------- --------- Operating income (loss) (50,038) 703 (58,183) (90,384) Interest expense (22,693) (27,941) (73,669) (73,803) Interest income 140 808 1,520 2,604 Other income (expense) (990) 702 (6,269) (2,378) --------- --------- --------- --------- Loss from continuing operations before income taxes and extraordinary item (73,581) (25,728) (136,601) (163,961) Provision (benefit) for income taxes 425 (3,261) 81,037 (13,668) --------- --------- --------- --------- Net loss from continuing operations before extraordinary item (74,006) (22,467) (217,638) (150,293) Income (loss) from discontinued operations -- 4,161 (10,039) 9,863 --------- --------- --------- --------- Net loss before extraordinary item (74,006) (18,306) (227,677) (140,430) Extraordinary item -- -- -- (10,659) --------- --------- --------- --------- Net loss $ (74,006) $ (18,306) $(227,677) $(151,089) ========= ========= ========= ========= Income (loss) per common share - Basic and diluted: Continuing operations $ (0.39) $ (0.12) $ (1.14) $ (0.82) Discontinued operations -- 0.02 (.05) .05 Extraordinary loss -- -- -- (0.06) --------- --------- --------- --------- Net loss per common share - Basic and diluted $ (0.39) $ (0.10) $ (1.19) $ (0.83) ========= ========= ========= ========= Weighted average number of common shares: Basic and diluted 192,183 190,300 191,739 181,634 ========= ========= ========= =========
- ---------- See notes to consolidated financial statements. 2 ACTERNA CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, March 31, 2001 2001 ------------ ----------- ASSETS (In thousands) Current assets: Cash and cash equivalents $ 50,978 $ 63,054 Accounts receivable, net 139,996 233,371 Inventories: Raw materials 49,622 61,009 Work in process 37,198 48,266 Finished goods 44,837 48,206 ----------- ----------- Total inventory 131,657 157,481 Deferred income taxes 12,493 37,961 Other current assets 38,879 39,610 ----------- ----------- Total current assets 374,003 531,477 Property, plant and equipment, net 124,443 124,566 Other assets: Net assets held for sale -- 37,908 Goodwill, net 432,330 435,478 Other intangible assets, net 162,765 195,093 Deferred debt issuance costs, net 25,621 25,908 Other assets, net 27,491 32,549 ----------- ----------- $ 1,146,653 $ 1,382,979 =========== =========== LIABILITIES & STOCKHOLDERS' DEFICIT Current Liabilities: Notes payable $ 2,004 $ 10,919 Current portion of long-term debt 26,887 22,248 Accounts payable 67,239 112,155 Accrued expenses: Compensation and benefits 41,339 71,836 Deferred revenue 39,048 47,743 Taxes other than income taxes 11,695 14,112 Other 65,262 60,191 Accrued income taxes 29,504 7,616 ----------- ----------- Total current liabilities 282,978 346,820 Long-term debt 1,061,505 1,056,383 Deferred income taxes 26,630 2,915 Pensions and other long-term compensation 66,150 57,838 Stockholders' deficit: Common stock 1,922 1,910 Additional paid-in capital 790,111 801,080 Accumulated deficit (1,023,423) (795,746) Unearned compensation (60,110) (90,986) Other comprehensive income 890 2,765 ----------- ----------- Total stockholders' deficit (290,610) (80,977) ----------- ----------- $ 1,146,653 $ 1,382,979 =========== =========== - ---------- See notes to consolidated financial statements. 3 ACTERNA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended December 31, 2001 2000 --------- --------- (In thousands) Operating activities: Net loss $(227,677) $(151,089) Adjustments for non-cash items included in net loss: Depreciation 26,255 14,700 Amortization of intangibles 32,086 76,086 Amortization of inventory step-up -- 35,750 Amortization of unearned compensation 16,964 15,195 Amortization of deferred debt issuance costs 4,293 2,943 Writeoff of deferred debt issuance costs -- 10,019 Purchased incomplete technology -- 56,000 Recapitalization and other related costs -- 9,194 Change in deferred income taxes 72,135 (4,538) Loss from discontinued operations 10,039 Impairment of assets held for sale and goodwill impairment 21,865 Other 2,777 125 Change in operating assets and liabilities 40,219 (91,782) --------- --------- Net cash flows used in operating activities, net of assets acquired (1,044) (27,397) Investing activities: Purchases of property and equipment (28,658) (23,474) Proceeds from sale of business 23,800 3,500 Businesses acquired in purchase transaction, net of cash acquired (1,495) (407,034) Other (4,266) (4,709) --------- --------- Net cash flows used in investing activities (10,619) (431,717) Financing activities: Net borrowings of debt 1,782 323,015 Repayment of capital lease obligations (68) (17) Capitalized debt issuance costs (4,006) (18,519) Proceeds from issuance of common stock, net of expenses 2,082 199,609 --------- --------- Net cash flows provided by (used in) financing activities (210) 504,088 Effect of exchange rate change on cash (203) (7,023) --------- --------- Increase (decrease) in cash and cash equivalents (12,076) 37,951 Cash and cash equivalents at beginning of year 63,054 33,839 --------- --------- Cash and cash equivalents at end of period $ 50,978 $ 71,790 ========= =========
- ---------- See notes to consolidated financial statements. 4 ACTERNA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. FORMATION, BACKGROUND AND RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION Acterna Corporation was formed in 1959 and is a global communications equipment company focused on network technology solutions. The Company's operations are conducted by wholly owned subsidiaries located principally in the United States of America and Europe with other operations, primarily sales offices, located in Asia and Latin America. The Company is managed in two business segments: communications test and industrial computing and communications. The Company also has other subsidiaries that, in the aggregate, are not reportable as a segment. The Company previously reported the industrial computing and communications segment as discontinued operations. This segment is comprised of two subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the Company divested its ICS Advent subsidiary (see Note M. Sale of ICS Advent and Other Subsidiary), but decided to retain Itronix based on current market conditions. The decision to retain Itronix required the Company to make certain reclassifications to its Statements of Operations and Balance Sheets for all periods presented. The Statements of Operations were reclassified to include the results of operations of ICS Advent and Itronix. The Balance Sheets as of December 31, 2001 and March 31, 2001 include the assets and liabilities of Itronix. The Balance Sheet at March 31, 2001 reflects the net assets of ICS Advent classified as net assets held for sale. The Statement of Cash Flows was not reclassified as these statements were not previously presented on a discontinued basis. The communications test business develops, manufactures and markets instruments, systems, software and services used to test, deploy, manage and optimize communications networks, equipment and services. The industrial computing and communications segment provides computer products to the ruggedized computer market. ICS Advent sold computer products and systems designed to withstand excessive temperatures, dust, moisture and vibration in harsh operating environments. Itronix sells ruggedized portable communications and computing devices used by field service workers. In addition the Company also operates two subsidiaries, AIRSHOW, Inc., and da Vinci Systems. AIRSHOW is the leading provider of systems that deliver real-time news, information and flight data to aircraft passengers. da Vinci manufactures systems that correct or enhance the accuracy of color during the process of transferring film-based images to videotape. The Company operates on a fiscal year ended March 31 in the calendar year indicated (e.g., references to fiscal 2002 are references to the Company's fiscal year which began April 1, 2001 and will end March 31, 2002). Unless the context otherwise requires, the "Company" or "Acterna" refers to Acterna Corporation and its subsidiaries. B. RECENT DEVELOPMENTS AND LIQUIDITY The current global economic downturn has further impacted a previously existing downturn in the Company's communications test segment and in its other 5 businesses. The Company continues to experience diminished product demand, excess manufacturing capacity and erosion of average selling prices. In response to the decline in product demand, the Company continues to implement cost reduction programs aimed at aligning its ongoing operating costs with its expected revenues. In the third quarter of fiscal 2002, the Company's headcount was further reduced to 5,200 (down from 6,380 at the beginning of fiscal 2002), and the corporate headquarters was relocated from Burlington, Massachusetts to Germantown, Maryland. Given the severity of current market conditions, however, the Company cannot make any assurance that these cost reduction programs will actually align the Company's operating expenses and revenues, be sufficient to avoid operating losses, or that additional cost reduction programs will not be necessary in the future. On December 27, 2001 the Company amended its senior secured credit facility. (See Note J. Senior Secured Credit Agreement Amendment.) The continuing effectiveness of this amendment was conditioned upon the Company raising new financing of $75 million within a specified time. This was completed on January 15, 2002. (See Note Q. Subsequent Event - Issuance and Sale of $75 Million 12% Senior Secured Convertible Notes.) As of December 31, 2001, the Company was in compliance with the covenants under its senior secured credit facility as amended. The Company's cash requirements for debt service and ongoing operations are substantial. While there can be no assurance that the Company will have sufficient funds or available funds to meet its cash needs over the next twelve months, as a result of the amendment of the senior secured credit agreement and the issuance at par of $75 million of 12% Senior Secured Convertible Notes in January 2002, the Company believes that funds generated by ongoing operations and funds available under its senior secured credit facility will be sufficient to meet its cash needs over the next twelve-month period. These and other risks associated with the Company's business are described in the Company's Securities and Exchange Commission reports, including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001. C. CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited consolidated balance sheet at December 31, 2001, and the unaudited consolidated statements of operations and unaudited consolidated statements of cash flows for the interim periods ended December 31, 2001 and 2000 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly these financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The year-end balance sheet data was derived from audited financial statements, but does not include disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the Company's most recent Form 10-K as of March 31, 2001. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Significant estimates in these financial statements include allowances for accounts receivable, net realizable value of inventories, purchased 6 incomplete technology, warranty accruals and tax valuation reserves. Actual results could differ from those estimates. D. NEW PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. FAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. FAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is before June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years beginning after December 15, 2001; however, the Company elected to early adopt the provisions effective April 1, 2001. In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". FAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations- Reporting the Effects of Disposal of a Segment of a Business". FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, on April 1, 2002. Management is currently determining what effect, if any, FAS 144 will have on its financial position and results of operations. E. INCOME TAXES During the quarter ended September 30, 2001 the Company recorded a valuation allowance of approximately $71 million against all of its U.S. net deferred tax assets. Statement of Financial Accounting Standards No. 109 requires a valuation allowance to be recorded against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. As a result of the downturn in the telecommunications test equipment sector, the Company has incurred significant and previously unanticipated financial accounting and taxable losses in the U.S. for the first half of the current fiscal year, and the current outlook indicates that significant uncertainty will continue for the remainder of this fiscal year and into the next fiscal year. These cumulative losses, together with the Company's prior fiscal financial accounting and taxable losses in the U.S., resulted in management's decision that it is more likely than not that all of its U.S. deferred tax assets will not be realized. The Company will continue to provide a valuation allowance against primarily all of its U.S. net deferred tax assets until it returns to an appropriate level of financial accounting and taxable income in the U.S. The ultimate realization of these deferred tax assets depends upon the Company's ability to generate sufficient future taxable income in the U.S. If the Company is successful in generating sufficient future taxable income in the U.S., the Company will reduce the valuation allowance through a reduction in income tax expense in the future. 7 F. ACQUIRED INTANGIBLE ASSETS As of December 31, 2001 Gross Carrying Accumulated Amount Amortization -------------- ----------- (In thousands) Amortized intangible assets: Core technology $ 236,415 $ 74,526 Other intangible assets 17,969 17,093 ---------- --------- Total $ 254,384 $ 91,619 ========== ========= Aggregate amortization expense: For the nine months ended December 31, 2001 $ 32,086 Estimated amortization expense: For the year ended March 31, 2002 42,004 For the year ended March 31, 2003 38,704 For the year ended March 31, 2004 36,137 For the year ended March 31, 2005 35,327 For the year ended March 31, 2006 35,327 Core technology is amortized over a weighted average of 6 years and all other intangible assets are amortized on a weighted average of 2 years. G. GOODWILL The changes in the carrying amount of goodwill during the nine months ended December 31, 2001 are as follows:
Reporting Units ------------------------------------------------------------------ Communications Test Itronix Airshow da Vinci Total -------------- -------- ------- -------- --------- (In thousands) Balance as of April 1, 2001 $377,187 $ 34,036 $19,039 $ 5,216 $ 435,478 Goodwill adjustments 3,099 (2,300) -- (3,947) (3,148) -------- -------- ------- ------- --------- Balance as of December 31, 2001 $380,286 $ 31,736 $19,039 $ 1,269 $ 432,330 ======== ======== ======= ======= =========
The goodwill adjustments in the communications test reporting unit resulted primarily from final adjustments to the purchase price allocation for the Wavetek Wandel Goltermann merger (See Note L. Acquisitions) and to the deferred tax adjustment in respect to reclassifying certain intangible assets as goodwill on adoption of FAS 142. The goodwill adjustment for the Itronix reporting unit is related to the disposition of a subsidiary of Itronix during the second quarter of fiscal 2002. The goodwill adjustment for da Vinci relates to the goodwill impairment as a result of the closure of a subsidiary of da Vinci Systems, Inc. during the third quarter of fiscal 2002. 8 H. GOODWILL AND OTHER INTANGIBLE ASSETS - Adoption of FAS 142
Three Months Ended Nine Months Ended December 31, December 31, 2000 2000 ----------- ----------- Net loss from continuing operations before extraordinary item $ (22,467) $ (150,293) Add back goodwill amortization 21,705 50,361 Add back other intangible amortization 1,848 7,426 ----------- ----------- Adjusted net income (loss) from continuing operations before extraordinary item $ 1,086 $ (92,506) =========== =========== Basic and diluted loss per share: Reported net loss from continuing operations before extraordinary item $ (0.12) $ (0.82) Goodwill amortization 0.12 0.28 Other intangible amortization 0.01 0.04 ----------- ----------- Adjusted basic and diluted loss per share from continuing operations before extraordinary item $ 0.01 $ (0.50) =========== ===========
The Company completed its transitional impairment test of goodwill during the quarter ended September 30, 2001 for all reporting units required under FAS 142 as of March 31, 2001 and determined that goodwill was not impaired. The impairment testing was based on discounted cash flow analyses of expectations of future earnings for each of the reporting units over the remaining estimated lives of the separately identifiable intangible assets. The Company's annual impairment test will be performed as of March 31, 2002. If the Company's expectations as to future results are diminished significantly, goodwill may be impaired and any resulting noncash impairment charge may have an adverse effect on results of operations. I. DISCONTINUED OPERATIONS In May 2000, the Board of Directors approved a plan to divest the industrial computing and communications segment, which consists of ICS Advent and Itronix Corporation subsidiaries. In October 2001, the Company divested its ICS Advent subsidiary (see Note M. Sale of ICS Advent and Other Subsidiary), but decided to retain Itronix based on current market conditions. The decision to retain Itronix required the Company to make certain reclassifications to its Statements of Operations and Balance Sheets for all periods presented. Management had previously expected that proceeds on disposal of both businesses comprising the segment would exceed net assets, including operating losses incurred subsequent to May 2000, and accordingly these operating losses were deferred. The net operating losses for ICS Advent and Itronix included in continuing operations for the three and nine months ended December 31, 2000 were offset by an equal net income amount presented on the discontinued operations line within the Statement of Operations. Therefore, the net loss in total for the Company as previously reported for these periods did not change. The charge reported as discontinued operations for the nine months ended December 31, 2001 represents the cumulative net operating losses previously deferred from April 1, 2000 to June 30, 2001 for ICS Advent and Itronix. The Balance Sheets as of December 31, 2001 and March 31, 2001 include the assets and liabilities of Itronix. The Balance Sheet at March 31, 2001 reflects the net assets of ICS Advent classified as net assets held for sale. The Statement of Cash Flows was not reclassified as these statements were not previously presented on a discontinued basis. 9 J. SENIOR SECURED CREDIT AGREEMENT AMENDMENT On December 27, 2001, the Company entered into an amendment to the credit agreement governing its senior secured credit facility. Under the amendment, the lenders under the credit agreement, among other things, agreed to waive the minimum interest coverage and maximum leverage covenants of the Company under the credit agreement through June 30, 2003 and consented to the issuance and sale of the 12% Senior Secured Convertible Notes Due 2007 (See Note Q. Subsequent Event - Issuance and Sale of $75 Million 12% Senior Secured Convertible Notes.). Under the amendment, the Company also became subject to certain additional covenants and restrictions, including, without limitation, new minimum liquidity and EBITDA requirements and additional restrictions on the Company's ability to make capital expenditures, incur and guarantee debt, make investments, optionally prepay the 9.75% Senior Subordinated Notes Due 2008 and dispose of assets. The amendment also, among other things, adds additional prepayment requirements for certain transactions, establishes additional guarantees and pledges of collateral and increases the interest rates on loans under the senior secured credit facility by 0.75%. On June 30, 2003, the Company will again become subject to its minimum interest coverage and maximum leverage covenants under the credit agreement. The Company can make no assurance that it will be in compliance with these covenants upon such reversion. The Company incurred a $2.9 million fee payable to the lenders under its senior secured credit facility in connection with the consummation of the amendment and has been capitalized as deferred debt issuance costs that will be amortized over the remaining life of the senior secured credit agreement. K. RESTRUCTURING Due to the downturn in the Company's communications test segment and its other businesses, the Company announced on August 1, 2001 a comprehensive cost reduction program that includes the reduction of (1) approximately 400 jobs worldwide; (2) outside contractors and consultants; (3) operating expenses; and (4) manufacturing costs through procurement programs to lower materials costs. As a result of these measures, the Company recorded a charge of $8 million during the quarter ended September 30, 2001 relating primarily to severance and terminated 328 employees and paid approximately $1.9 million in severance and other related costs. In October 2001, the Company announced an expanded cost reduction plan that included (1) a reduction of 500 additional positions excluding the employees of the sold ICS Advent subsidiary; (2) consolidating certain of its development and marketing offices; (3) instituting a reduced workweek at selected manufacturing locations; and (4) reducing capital expenditures. In addition, the Company announced the relocation of its Burlington, Massachusetts corporate headquarters to Germantown, Maryland. The Company incurred a restructuring charge of $9.3 million in connection with this plan in the quarter ended December 31, 2001 and terminated 394 employees under this plan. The following table summarizes the restructuring expenses and payments incurred during the three and nine months ended December 31, 2001: 10
For The Three Months Ended December 31, 2001 Balance Balance September 30, December 31, 2001 Expense Paid 2001 ------------- -------- -------- ------------ Workforce-related $ 5,452 $ 8,935 $ (5,172) $ 9,215 Facilities 95 412 -- 507 Other 32 -- -- 32 ------------ -------- -------- ------------ Total $ 5,579 $ 9,347 $ (5,172) $ 9,754 ============ ======== ======== ============ For The Nine Months Ended December 31, 2001 Balance Balance April 1, December 31, 2001 Expense Paid 2001 ---------- --------- ------- ------------ Workforce-related $ -- $ 16,620 $ (7,405) $ 9,215 Facilities -- 592 (53) 539 Other -- 32 (32) -- ----------- -------- --------- ------------- Total $ -- $ 17,244 $ (7,490) $ 9,754 =========== ======== ========= =============
L. ACQUISITIONS Wavetek Wandel Goltermann, Inc. On May 23, 2000, a subsidiary of the Company merged with Wavetek Wandel Goltermann, Inc. ("WWG"), pursuant to which WWG became an indirect, wholly owned subsidiary of the Company (the "WWG Merger") for a purchase price of $402.0 million. Superior Electronics Group, Inc., doing business as Cheetah Technologies On August 23, 2000 the Company acquired Superior Electronics Group, Inc., a Florida corporation doing business as Cheetah Technologies ("Cheetah") for a purchase price of $171.5 million. Pro Forma Financial Information The following unaudited pro forma information presents a summary of consolidated results of operations, excluding the effects of adopting FAS 142, of the Company for the nine months ended December 31, 2000 as if the acquisitions had occurred at the beginning of the fiscal year presented, with pro forma adjustments to give effect to amortization of goodwill and intangibles, interest expense on acquisition debt, and certain other adjustments, together with related income tax effect. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions had occurred as of the beginning of the periods presented, or that may be obtained in the future. 11 Nine Months Ended December 31, 2000 ------------------ (In thousands, except per share data) Revenue $ 1,071,541 Net loss from continuing operations before extraordinary item (181,262) Loss per share from continuing operations before extraordinary item: Basic and diluted $ (1.00) Weighted average shares: Basic and diluted 181,634 Other Acquisitions and Divestitures In the normal course of business, the Company has acquired and sold small companies, that, in the aggregate, do not have a material impact on the financial results of the Company for the periods presented. M. SALE OF ICS ADVENT AND OTHER SUBSIDIARY On October 31, 2001, the Company sold its ICS Advent subsidiary for $23 million in cash proceeds. The Company wrote down the net assets of ICS Advent at September 30, 2001, to the cash to be received less expenses related to the sale, which resulted in an impairment charge of $15 million in the Statement of Operations in the quarter ended September 30, 2001. In addition, the Company recorded a charge of $2.9 million relating to the disposition of a subsidiary of Itronix Corporation during the second quarter of fiscal 2002. N. EXTRAORDINARY ITEM In connection with the WWG Merger in May 2000, the Company recorded an extraordinary charge of $10.7 million (net of an income tax benefit of $6.6 million), of which $7.3 million (pretax) related to a premium paid by the Company to WWG's former bondholders to repurchase WWG's senior subordinated debt outstanding prior to the WWG Merger. In addition, the Company booked a charge of $10.0 million (pretax) for the unamortized deferred debt issuance costs which originated at the time of the recapitalization of the Company in May of 1998. O. LOSS PER SHARE Loss per share is calculated as follows:
Three Months Ended Nine Months Ended December 31, December 31, 2001 2000 2001 2000 --------- --------- --------- --------- (In thousands, except per share data) Net income (loss): Continuing operations $ (74,006) $ (22,467) $(217,638) $(150,293) Discontinued operations -- 4,161 (10,039) 9,863 Extraordinary item -- -- -- (10,659) --------- --------- --------- --------- Net loss $ (74,006) $ (18,306) $(227,677) $(151,089) ========= ========= ========= ========= BASIC AND DILUTED: Common stock outstanding, beginning of period 192,089 190,070 190,953 122,527 Weighted average common stock issued during the period 94 230 786 53,578 Bonus element adjustment related to rights offering -- -- -- 5,529 --------- --------- --------- --------- Weighted average common stock outstanding, end of period 192,183 190,300 191,739 181,634 ========= ========= ========= ========= Income (loss) per common share: Continuing operations $ (0.39) $ (0.12) $ (1.14) $ (0.82) Discontinued operations -- 0.02 (0.05) 0.05 Extraordinary item -- -- -- (0.06) --------- --------- --------- --------- Net loss per common share $ (0.39) $ (0.10) $ (1.19) $ (0.83) ========= ========= ========= =========
12 The Company did not have any common stock equivalents for the three and nine month period ended December 31, 2001. For the three and nine months ending December 31, 2000, the Company excluded from its diluted weighted average shares outstanding the effect of the weighted average common stock equivalents of 12.7 million and 14.5 million, respectively, as the Company incurred a net loss. The inclusion of the common stock equivalents has been excluded from the calculation of diluted weighted average shares outstanding as inclusion would have an antidilutive effect on net loss per common share. P. SEGMENT INFORMATION Net sales, earnings before interest, taxes and amortization ("EBITA") and total assets for the three and nine months ended December 2001 and 2000 are shown below:
Three Months Ended Nine Months Ended December 31, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- (In thousands) Communications test segment: Net sales $ 187,215 $ 296,244 $ 707,673 $ 754,100 EBITA (23,967) 41,139 25,263 100,429 Total assets 944,445 1,147,015 944,445 1,147,015 Industrial computing and communications segment: Sales 41,139 45,878 143,285 135,470 EBITA 1,625 (853) (94) (4,471) Total assets 91,300 136,918 91,300 136,918 Other subsidiaries: Sales 20,431 27,860 69,239 83,385 EBITA 3,757 6,705 12,262 19,198 Total assets 49,152 57,381 49,152 57,381 Corporate: Loss before interest and taxes (3,498) (1,504) (7,705) (4,563) Total assets 61,756 87,519 61,756 87,519 Total company: Sales 248,785 369,982 920,197 972,955 EBITA (22,083) 45,487 29,726 110,593 Total assets $ 1,146,653 1,428,833 $ 1,146,653 1,428,833
13 The following are excluded from the calculation of EBITA: Amortization of inventory step up $ -- $ 562 $ -- $ 35,750 Purchased incomplete technology -- -- -- 56,000 Amortization of unearned compensation 4,897 6,630 16,964 15,195 Restructuring and other charges 9,347 2,036 21,959 2,829 Recapitalization and other related costs -- -- -- 9,194 Impairment of assets 3,947 -- 21,865 -- One-time and other special charges 820 -- 1,305 -- ------- ------ ------- -------- Total excluded items $19,011 $9,228 $62,093 $118,968 ======= ====== ======= ========
Q. SUBSEQUENT EVENT - ISSUANCE AND SALE OF $75 MILLION 12% SENIOR SECURED CONVERTIBLE NOTES On January 15, 2002, Acterna LLC, a wholly-owned subsidiary of the Company, issued and sold at par $75 million aggregate principal amount of 12% Senior Secured Convertible Notes Due 2007 (the "Notes") to Clayton, Dubilier & Rice Fund VI Limited Partnership. The Company used the proceeds of the issuance and sale of the Notes (net of fees and expenses) to repay a portion of its indebtedness under its revolving credit facility. The amounts repaid remain available to be reborrowed by the Company. Interest on the Notes is payable semi-annually in arrears on each March 31st and September 30th, with interest payments commencing on March 31, 2002. At the option of Acterna LLC, interest is payable in cash or in-kind by the issuance of additional Notes. Due to limitations imposed by the senior secured credit facility, Acterna LLC expects to pay interest on the Notes in-kind by issuing additional Notes. The Notes are secured by a second lien on all of the assets of the Company and its subsidiaries that secure the senior secured credit facility, and are guaranteed by the Company and its domestic subsidiaries. Subject to prior approval of the Company's stockholders (as described below), at the option of Clayton, Dubilier & Rice Fund VI Limited Partnership (or any subsequent holder of Notes), at any time prior to December 31, 2007, the maturity date of the Notes, the Notes may be converted into newly-issued shares of common stock of the Company at a conversion price of $3.00 per share, subject to customary antidilution adjustments. On the date of issuance, the conversion price of the Notes exceeded the public market price per share of common stock of the Company. If in the future any Note is issued with a conversion price that is less than the public market price on January 15, 2002 (the date of original issuance) as a result of an anti-dilution adjustment of the conversion price, then the Company would be required to take a charge to its results of operations to reflect the discount of the adjusted conversion price to the market price of the common stock on the date of original issuance. Acterna LLC may redeem the Notes, in whole or in part, and without penalty or premium, at any time prior to the maturity date. In addition, Acterna LLC is required to offer to repurchase the Notes upon a change of control and upon the disposition of certain assets. If any Note is redeemed, repurchased or repaid for any reason prior to the maturity date, the holder will be entitled to receive from the Company a warrant to purchase a number of newly-issued shares of common stock of the Company equal to the number of shares of common stock that such Note was convertible into immediately prior to its redemption, repurchase or repayment. The exercise price of such warrant will be the conversion price in effect immediately prior to such warrant's issuance, subject to customary antidilution adjustments. Subject to the approval of the Company's 14 stockholders (as described below), warrants will be exerciseable upon issuance and will expire on the maturity date of the Notes. The Company is required to classify the contingently issuable warrants as liabilities. Because the warrants are only issuable upon redemption, repurchase or repayment prior to maturity, which requires the consent of the lenders under the Company's senior secured credit facility, the Company has valued the warrants at zero as of the date of issuance. The fair value of the warrants upon issuance will be recorded as a charge to operations. In order to comply with the rules of the Nasdaq National Market, where the common stock of the Company is listed, the terms of the Notes provide, and, if issued, the terms of the warrants will provide, that no Note or warrant may be converted or exercised, as the case may be, until the stockholders of the Company have approved the issuance of the shares of common stock upon such conversion or exercise. The Company expects to obtain such approval by obtaining the written consent of its stockholders. Without giving effect to the issuance and sale of the Notes, Clayton, Dubilier & Rice Fund V Limited Partnership and Clayton, Dubilier & Rice Fund VI Limited Partnership collectively own approximately 80% of the outstanding common stock of the Company. Each intends to vote its shares to approve the issuance of the shares of common stock upon conversion of the Notes or exercise of the warrants, thereby assuring that the Company will receive the stockholder approval necessary to comply with the Nasdaq rules. The Company incurred a $2.2 million fee payable to Clayton, Dubilier & Rice, Inc. in connection with the issuance and sale of the Notes. R. SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF ACTERNA CORPORATION AND ACTERNA LLC In connection with the Company's recapitalization and related transactions, Acterna LLC became the primary obligor with respect to substantially all of the indebtedness of Acterna Corporation, including the 9 3/4% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"). Acterna Corporation has fully and unconditionally guaranteed the Senior Subordinated Notes. Acterna Corporation, however, is a holding company with no independent operations and no significant assets other than its membership interest in Acterna LLC. Certain other subsidiaries of the Company are not guarantors of the Senior Subordinated Notes. The condensed consolidating financial statements presented herein include the statement of operations, balance sheets, and statements of cash flows without additional disclosure as the Company has determined that the additional disclosure is not material to investors. 15 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Nine Months Ended December 31, 2001 (Unaudited)
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated --------- --------- ------------- ----------- ------------ (In thousands) Net sales $ -- $ 259,391 $ 660,806 $ -- $ 920,197 Cost of sales -- 118,882 311,606 -- 430,488 --------- --------- --------- -------- --------- Gross profit -- 140,509 349,200 -- 489,709 Selling, general and administrative expense -- 169,259 183,021 -- 352,280 Product development expense -- 43,972 80,445 -- 124,417 Impairment of assets held for sale -- -- 17,918 -- 17,918 Other asset impairment -- -- 3,947 -- 3,947 Restructuring -- 11,289 5,955 -- 17,244 Amortization of intangibles -- 2,607 29,479 -- 32,086 --------- --------- --------- -------- --------- Totaling operating expense -- 227,127 320,765 -- 547,892 --------- --------- --------- -------- --------- Operating income (loss) -- (86,618) 28,435 -- (58,183) Interest (expense) -- (64,611) (9,058) -- (73,669) Interest income -- 264 1,256 -- 1,520 Intercompany interest income (expense) -- 169 (169) -- -- Intercompany royalty income (expense) -- 2,569 (2,569) -- -- Other income (expense) -- 954 (7,223) -- (6,269) --------- --------- --------- -------- --------- Income (loss) from continuing operations before income taxes -- (147,273) 10,672 -- (136,601) Provision for income taxes -- 33,961 47,076 -- 81,037 --------- --------- --------- -------- --------- Net income (loss) from continuing operations -- (181,234) (36,404) -- (217,638) Loss from discontinued operations -- -- (10,039) -- (10,039) Equity income (loss) (227,677) (46,443) -- 274,120 -- --------- --------- --------- -------- --------- Net income (loss) $(227,677) $(227,677) $ (46,443) $274,120 $(227,677) ========= ========= ========= ======== =========
16 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Nine Months Ended December 31, 2000 (Unaudited)
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated --------- --------- ------------- ------------ ------------ (In thousands) Net sales $ -- $ 318,162 $ 654,793 $ -- $ 972,955 Cost of sales -- 113,548 329,685 -- 443,233 --------- --------- --------- -------- --------- Gross profit -- 204,614 325,108 -- 529,722 Selling, general and administrative expense -- 161,305 190,631 -- 351,936 Product development expense -- 38,719 80,095 -- 118,814 Recapitalization and other related costs -- 9,194 -- -- 9,194 Purchased incomplete technology -- -- 56,000 -- 56,000 Amortization of intangibles -- 229 83,933 -- 84,162 --------- --------- --------- -------- --------- Total operating expense -- 209,447 410,659 -- 620,106 Operating loss -- (4,833) (85,551) -- (90,384) Interest expense -- (65,777) (8,026) -- (73,803) Interest income -- 1,149 1,455 -- 2,604 Other income (expense) -- 258 (2,636) -- (2,378) --------- --------- --------- -------- --------- Loss from continuing operations before income taxes and extraordinary item -- (69,203) (94,758) -- (163,961) Provision (benefit) for income taxes -- (3,915) (9,753) -- (13,668) --------- --------- --------- -------- --------- Net loss from continuing operations before extraordinary item -- (65,288) (85,005) -- (150,293) Income from discontinued operations -- -- 9,863 -- 9,863 Equity income (loss) (151,089) (75,142) -- 226,231 -- Extraordinary item -- (10,659) -- -- (10,659) --------- --------- --------- -------- --------- Net income (loss) $(151,089) $(151,089) $ (75,142) $226,231 $(151,089) ========= ========= ========= ======== =========
17 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET December 31, 2001 (Unaudited)
Acterna Acterna Non-Guarantor Total ASSETS Corp LLC Subsidiaries Elimination Consolidated ----------- --------- ------------- ----------- ------------ (In thousands) Current assets: Cash and cash equivalents $ -- $ 19,801 $ 31,177 $ -- $ 50,978 Accounts receivable, net -- 49,891 90,105 139,996 Inventory -- 27,184 104,473 131,657 Other current assets -- 21,778 29,594 -- 51,372 ----------- --------- --------- ----------- ----------- Total current assets -- 118,654 255,349 -- 374,003 Property and equipment, net -- 29,633 94,810 -- 124,443 Investments in and advances to consolidated subsidiaries (225,380) 278,805 (602,614) 549,189 -- Goodwill -- -- 432,330 432,330 Intangible assets, net -- -- 162,765 -- 162,765 Other -- 33,077 20,035 53,112 ----------- --------- --------- ----------- ----------- $ (225,380) $ 460,169 $ 362,675 $ 549,189 $ 1,146,653 =========== ========= ========= =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current portion of long-term debt $ -- $ 21,250 $ 7,641 $ -- $ 28,891 Accounts payable -- 21,288 45,951 -- 67,239 Accrued expenses -- 68,643 118,205 -- 186,848 ----------- --------- --------- ----------- ----------- Total current liabilities -- 111,181 171,797 282,978 Long-term debt -- 948,750 112,755 -- 1,061,505 Deferred income taxes -- 23,092 3,538 -- 26,630 Deferred compensation -- 11,338 54,812 -- 66,150 Stockholders' equity (deficit): Common stock 1,922 1,221 16,935 (18,156) 1,922 Additional paid-in capital 790,111 418,845 171,408 (590,253) 790,111 Accumulated earnings (deficit) (1,017,413) (993,628) (169,980) 1,157,598 (1,023,423) Unearned compensation -- (60,110) -- -- (60,110) Other comprehensive income (loss) -- (520) 1,410 -- 890 ----------- --------- --------- ----------- ----------- Total stockholders' equity (deficit) (225,380) (634,192) 19,773 549,189 (290,610) ----------- --------- --------- ----------- ----------- $ (225,380) $ 460,169 $ 362,675 $ 549,189 $ 1,146,653 =========== ========= ========= =========== ===========
18 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2001 (Unaudited)
Acterna Acterna Non-Guarantor Total ASSETS Corp LLC Subsidiaries Elimination Consolidated --------- --------- ------------- ----------- ------------ (In thousands) Current assets: Cash and cash equivalents $ -- $ 22,179 $ 40,875 $ -- $ 63,054 Accounts receivable, net -- 67,637 165,734 -- 233,371 Inventory -- 28,053 129,428 -- 157,481 Other current assets -- 38,799 38,772 -- 77,571 --------- --------- --------- ----------- ----------- Total current assets -- 156,668 374,809 -- 531,477 Property and equipment, net -- 26,641 97,925 -- 124,566 Investments in and advances to consolidated subsidiaries 13,255 259,637 (547,301) 274,409 -- Goodwill -- -- 435,478 -- 435,478 Intangible assets, net -- -- 195,093 -- 195,093 Net assets held for sale -- -- 37,908 -- 37,908 Other -- 28,166 30,291 -- 58,457 --------- --------- --------- ----------- ----------- $ 13,255 $ 471,112 $ 624,203 $ 274,409 $ 1,382,979 ========= ========= ========= =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current portion of debt $ -- $ 16,000 $ 17,167 $ -- $ 33,167 Accounts payable -- 31,623 80,532 -- 112,155 Accrued expenses -- 53,331 148,167 -- 201,498 --------- --------- --------- ----------- ----------- Total current liabilities -- 100,954 245,866 -- 346,820 Long-term debt -- 875,100 181,283 -- 1,056,383 Deferred income taxes -- (77,765) 80,680 -- 2,915 Deferred compensation -- 10,624 47,214 -- 57,838 Stockholders' equity (deficit): Common stock 1,910 1,221 17,595 (18,816) 1,910 Additional paid-in capital 801,080 418,845 171,408 (590,253) 801,080 Accumulated equity (deficit) (789,735) (765,953) (123,536) 883,478 (795,746) Unearned compensation -- (90,986) -- -- (90,986) Other comprehensive income (loss) -- (928) 3,693 -- 2,765 --------- --------- --------- ----------- ----------- Total stockholders' equity (deficit) 13,255 (437,801) 69,160 274,409 (80,977) --------- --------- --------- ----------- ----------- $ 13,255 $ 471,112 $ 624,203 $ 274,409 $ 1,382,979 ========= ========= ========= =========== ===========
19 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For The Nine Months Ended December 31, 2001 (Unaudited)
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated --------- --------- ------------- ----------- ------------- (In thousands) Operating activities: Net income (loss) from operations $(227,677) $(227,677) $(46,443) $ 274,120 $(227,677) Adjustment for noncash items included in net income (loss): Depreciation -- 9,049 17,206 -- 26,255 Amortization of intangibles -- 2,608 29,478 -- 32,086 Amortization of unearned compensation -- 8,023 8,941 -- 16,964 Amortization of deferred debt issuance costs -- 4,293 -- -- 4,293 Change in deferred income taxes -- 72,135 -- -- 72,135 Loss from discontinued operations -- -- 10,039 -- 10,039 Impairment of net assets held for sale -- -- 21,865 -- 21,865 Other -- 2,047 730 -- 2,777 Changes in operating assets and liabilities, net of effects of purchase acquisitions and divestitures -- 22,942 17,277 -- 40,219 Changes in intercompany 227,677 107,080 (60,637) (274,120) -- --------- --------- -------- --------- --------- Net cash flows provided by (used in) operating activities -- 500 (1,544) -- (1,044) Investing activities: Purchases of property and equipment -- (11,380) (17,278) -- (28,658) Proceeds from sale of business -- -- 23,800 -- 23,800 Businesses acquired in purchase transaction, net of cash acquired and non-cash issuance of common stock -- -- (1,495) -- (1,495) Other -- (2,574) (1,692) -- (4,266) --------- --------- -------- --------- --------- Net cash flows provided by investing activities -- (13,954) 3,335 -- (10,619) Financing activities: Net borrowing (repayment) of debt -- 13,000 (11,218) -- 1,782 Repayment of capital lease obligations -- (68) -- (68) Capitalized debt issuance costs -- (4,006) -- -- (4,006) Proceeds from issuance of common stock, net of expenses -- 2,082 -- -- 2,082 --------- --------- -------- --------- --------- Net cash flows (used in) provided by financing activities -- 11,076 (11,286) -- (210) Effect of exchange rate on cash -- (203) -- (203) --------- --------- -------- --------- --------- Decrease in cash and cash equivalents -- (2,378) (9,698) -- (12,076) Cash and cash equivalents at beginning of year -- 22,179 40,875 -- 63,054 --------- --------- -------- --------- --------- Cash and cash equivalents at end of period $ -- $ 19,801 $ 31,177 $ -- $ 50,978 ========= ========= ======== ========= =========
20 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For The Nine Months Ended December 31, 2000 (Unaudited)
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated --------- --------- -------------- ----------- ------------- (In thousands) Operating activities: Net income (loss) from operations $(151,089) $(151,089) $ (75,142) $ 226,231 $(151,089) Adjustment for noncash items included in net income (loss): Depreciation -- 6,172 8,528 -- 14,700 Amortization of intangibles -- -- 76,086 -- 76,086 Amortization of inventory step-up -- 35,750 -- -- 35,750 Amortization of unearned compensation -- 7,500 7,695 -- 15,195 Amortization of deferred debt issuance costs -- 2,943 -- -- 2,943 Write off of deferred debt issuance cost -- 10,019 -- -- 10,019 Purchased incomplete technology -- 56,000 -- -- 56,000 Recapitalization and other related costs -- 9,194 -- -- 9,194 Other -- -- 125 -- 125 Changes in deferred income taxes -- (4,538) -- -- (4,538) Changes in operating assets and liabilities, net of effects of purchase acquisitions and divestitures -- (11,164) (80,618) -- (91,782) Changes in intercompany 151,089 (43,016) 118,158 (226,231) -- --------- --------- --------- --------- --------- Net cash flows provided by (used in) operating activities -- (82,229) 54,832 -- (27,397) Investing activities: Purchases of property and equipment -- (9,946) (13,528) -- (23,474) Proceeds from sale of business -- 3,500 -- -- 3,500 Businesses acquired in purchase transactions, net of cash acquired and non-cash items -- (407,034) -- -- (407,034) Other -- (2,920) (1,789) -- (4,709) --------- --------- --------- --------- --------- Net cash flows used in investing activities -- (416,400) (15,317) -- (431,717) Financing activities: Net borrowings of debt -- 323,015 -- -- 323,015 Repayment of capital lease obligations -- -- (17) -- (17) Capitalized debt issuance costs -- (18,519) -- -- (18,519) Proceeds from issuance of common stock, net of expenses -- 199,609 -- -- 199,609 --------- --------- --------- --------- --------- Net cash flows provided by (used in) financing activities -- 504,105 (17) -- 504,088 Effect of exchange rate on cash -- (7,023) -- -- (7,023) --------- --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents -- (1,547) 39,498 -- 37,951 Cash and cash equivalents at beginning of year -- 19,359 14,480 -- 33,839 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period $ -- $ 17,812 $ 53,978 $ -- $ 71,790 ========= ========= ========= ========= =========
21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Form 10-Q contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, product demand and market acceptance risks, the effect of economic conditions, the effect of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraints or difficulties, availability of capital resources, general business and economic conditions, the effect of the Company's accounting policies, and other risks detailed in the Company's most recent Form 10-K as of March 31, 2001 and below. OVERVIEW The Company is managed in two business segments: communications test and industrial computing and communications. The Company also has other subsidiaries that, in the aggregate, are not reportable as a segment. The current global economic downturn has further impacted a previously existing downturn in the Company's communications test segment as well as its other businesses. As in past downturns, the Company continues to experience diminished product demand, excess manufacturing capacity and erosion of average selling prices. In the third quarter of the current fiscal year, the Company's bookings increased to approximately $223.8 million from approximately $201.7 million in the second quarter but down significantly from approximately $369.6 million in the third quarter of last year (excluding bookings related to ICS Advent). At present, the Company cannot predict the duration or severity of this downturn, but based on the historical correlation between the Company's bookings and its revenue, the Company expects fourth quarter revenue in its communications test segment to be down substantially as compared with the same period last year. The Company continues to implement cost reduction programs aimed at aligning its ongoing operating costs with its expected revenues. In the third quarter of fiscal 2002, the Company's headcount was further reduced to 5,200 (down from 6,380 at the beginning of fiscal 2002), and the corporate headquarters was relocated from Burlington, Massachusetts to Germantown, Maryland. Given the severity of current market conditions, however, the Company cannot make any assurance that these cost reduction programs will actually align the Company's operating expenses and revenues, be sufficient to avoid operating losses, or that additional cost reduction programs will not be necessary in the future. On August 1, 2001 the Company announced a comprehensive cost reduction program that includes a reduction of: (1) approximately 400 jobs worldwide; (2) outside contractors and consultants; (3) operating expenses; and (4) manufacturing costs through procurement programs to lower materials costs. The Company expects these steps to result in annualized cost savings in excess of $50 million. As a result of these measures, the Company terminated 328 employees and recorded a charge of $8 million relating primarily to severance in the second quarter of fiscal 2002. In October 2001, the Company announced an expanded cost reduction plan which included (1) a reduction of 500 additional positions excluding the employees of the sold ICS Advent subsidiary; (2) consolidating certain of its development and 22 marketing offices; (3) instituting a reduced workweek at selected manufacturing locations; (4) reducing capital expenditures, and (5) the relocation of its corporate headquarters. The Company incurred a restructuring charge of $9.3 million for this plan. During the nine months ended December 31, 2001, the Company paid approximately $7.5 million in severance and other related costs. At December 31, 2001 approximately $9.8 million was left to be paid for this restructuring; the Company anticipates that this amount will be paid primarily during the fourth quarter of fiscal 2002. (See Note K. Restructuring.) The Company previously reported the industrial computing and communications segment as discontinued operations. This segment is comprised of two subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the Company divested its ICS Advent subsidiary and decided to retain Itronix based on current market conditions. The decision to retain Itronix required the Company to make certain reclassifications to its Statements of Operations and Balance Sheets for all periods presented. The Statements of Operations were reclassified to include the results of operations of ICS Advent and Itronix. The balance sheet reflects the assets and liabilities of Itronix, and the net assets of ICS Advent are classified as net assets held for sale on the March 31, 2001 balance sheet. On October 31, 2001, the Company sold its ICS Advent subsidiary for $23 million in cash. The Company recorded an impairment charge of $15 million in the Statement of Operations for this transaction during the quarter ended September 30, 2001. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards Number 141, ("FAS 141"), "Business Combinations" and Number 142 ("FAS 142"), "Goodwill and Other Intangible Assets". FAS Number 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. FAS Number 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. FAS Number 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is before June 30, 2001. The provisions of FAS Number 142 will be effective for fiscal years beginning after December 15, 2001; however, the Company elected to early adopt the provisions effective April 1, 2001. RESULTS OF OPERATIONS For the Three Months Ended December 31, 2001 as Compared to Three Months Ended December 31, 2000 on a Consolidated Basis Net sales. For the three months ended December 31, 2001, consolidated net sales decreased $121.2 million to $248.8 million as compared to $370 million for the three months ended December 31, 2000. The decrease is primarily attributable to reduced demand for the Company's communications tests products partially offset by an increase in sales at Itronix. Gross profit. Consolidated gross profit decreased $102.6 million to $116.5 million or 46.8% of consolidated net sales for the three months ended December 31, 2001 as compared to $219.1 million or 59.2% of consolidated net sales for the three months ended December 31, 2000. The decrease in gross profit is in part due to a charge of $15 million for inventory adjustments and other reserves recorded during the third quarter of fiscal 2002 within the communications test segment in response to the reduced forecasted demand due to the continuing economic downturn. Excluding 23 the impact of the $15 million charge, gross profit was $131.5 million or 53% of consolidated net sales. The reduction in gross profit is also a result of shipping fewer optical transport products, which carry a higher gross profit than other communications test products. Operating expenses. Operating expenses consist of selling, general and administrative expense; product development expense; goodwill impairment; restructuring; and amortization of intangibles. Total operating expenses were $166.6 million or 66.9% of consolidated net sales for the three months ended December 31, 2001, as compared to $218.4 million or 59.0% of consolidated net sales for the three months ended December 31, 2000. Excluding the impact of the $3.9 million goodwill impairment charge and the $9.3 million restructuring charge within the third quarter of fiscal 2002, total operating expenses were $153.3 million or 61.6% of consolidated net sales for the three months ended December 31, 2001. The decrease in operating expenses during the current quarter is in part a result of restructuring and reduced employee expenses as described above. The decrease is also attributable to the Company's early adoption of FAS 142 in the first quarter of fiscal 2002, which eliminated the amortization of goodwill expense of approximately $27.3. Included in both cost of sales ($0.3 million and $2.2 million) and operating expenses ($4.6 million and $4.4 million) (for the three months ending December 31, 2001 and 2000, respectively,) is the amortization of unearned compensation which relates to the issuance of non-qualified stock options to employees and non-employee directors at a grant price lower than fair market value (defined as the closing price on the open market at the date of issuance). The Company discontinued the practice of issuing stock options at grant prices lower than fair-market value during fiscal 2001. Therefore, the Company has not incurred any additional charges for unearned compensation during fiscal 2002. Selling, general and administrative expense was $105.2 million or 42.3% of consolidated sales for the three months ended December 31, 2001, as compared to $138.8 million or 37.5% of consolidated net sales for the three months ended December 31, 2000. The decrease in these expenses is a result of the Company's restructuring efforts to reduce operating costs of the business as well as a result of the sale of ICS Advent. The Company has reduced its headcount by 710 employees since the end of the second quarter of fiscal 2002 of which 430 were due to the restructuring and 280 were due to the sale of ICS Advent. The increase as a percentage of sales is due to the reduction in sales caused by the continuing economic downturn. Product development expense was $38.1 million or 15.3% of consolidated net sales for the three months ended December 31, 2001 as compared to $44.7 million or 12.1% of consolidated sales for the same period a year ago. The Company recorded a charge of $3.9 million during the third quarter of fiscal 2002 related to goodwill impairment as a result of the closure of a subsidiary of da Vinci Systems, Inc. During the quarter, the Company incurred a charge of $9.3 million related to the additional restructuring of the business. (See Note K. Restructuring). This charge is primarily related to severance and other related costs. Amortization of intangibles was $9.9 million for the three months ended December 31, 2001, as compared to $34.9 million for the amortization of intangibles and goodwill in the same period a year ago. The decrease was primarily attributable to the Company's early adoption of FAS 142 in the first quarter of fiscal 2002, which eliminates the amortization of goodwill. 24 Interest. Interest expense, net of interest income, was $22.6 million for the three months ended December 31, 2001 as compared to $27.1 million for the same period a year ago. The decrease in interest expense was primarily attributable to lower interest rates on borrowings during the third quarter of fiscal 2002 as compared to the same period last year. Taxes. During the third quarter of fiscal 2002 the Company recorded a tax provision of $425 thousand. This represents a provision for taxes on earnings in tax jurisdictions where the Company is profitable. The Company did not record a tax benefit for losses incurred in the tax jurisdictions where the benefit of the loss may not be realized. (See Note E. Income Taxes.) Nine Months Ended December 31, 2001 as Compared to Nine Months Ended December 31, 2000 on a Consolidated Basis Net sales. For the nine months ended December 31, 2001, consolidated net sales decreased $52.8 million or 5.4% to $920.2 million as compared to $973.0 million for the nine months ended December 31, 2000. The decrease in net sales is primarily a result of a reduction in net sales of optical transport products within the communications test segment. The Company also derived lower revenues from Airshow and daVinci, but higher revenues at Itronix, as compared to the same period last year. Gross profit. Consolidated gross profit decreased $40.0 million to $489.7 million or 53.2% of consolidated net sales for the nine months ended December 31, 2001 as compared to $529.7 million or 54.4% of consolidated net sales for the nine months ended December 31, 2000. Excluding the $35.8 million included in cost of sales for the amortization of the inventory step-up from the acquisitions of WWG and Cheetah during the same period last year, consolidated gross profit was 58.1% of consolidated net sales. The decrease in gross profit was primarily attributable to the erosion of gross margins as the Company experienced pressure from its customers to reduce selling prices and a shift in product mix toward the Company's lower-margin products. Operating expenses. Operating expenses consist of selling, general and administrative expense; product development expense; impairment of assets; recapitalization and other related costs; restructuring; purchased incomplete technology; and amortization of intangibles. Total operating expenses were $547.9 million or 59.5% of consolidated net sales for the nine months ended December 31, 2001, as compared to $620.1 million or 63.7% of consolidated net sales for the nine months ended December 31, 2000. Excluding the impact of $21.9 million of asset impairment charges and $17.2 million of restructuring charges in the first nine months of fiscal 2002, and a $56 million writeoff of purchased incomplete technology and $9.2 million of recapitalization and other costs (related to the departure of an executive of the Company during fiscal 2000) during the first nine months of fiscal 2001, total operating expenses were $508.8 million or 55.3% of consolidated net sales and $554.9 million or 57.0% of consolidated net sales for the nine months ended December 31, 2001 and 2000, respectively. Included in both cost of sales ($1.1 million and $5.0 million) and operating expenses ($15.9 million and $10.2 million) (for the nine months ending December 31, 2001 and 2000, respectively), is the amortization of unearned compensation which relates to the issuance of non-qualified stock options to employees and non-employee directors at a grant price lower than fair market value (defined as the closing price on the open market at the date of issuance). The Company discontinued the practice of issuing stock options at grant prices lower than fair-market value during fiscal 2001. 25 Selling, general and administrative expense was $352.3 million or 38.3% of consolidated net sales for the nine months ended December 31, 2001 as compared to $351.9 million or 36.2% of consolidated net sales for the nine months ended December 31, 2000. Product development expense was $124.4 million or 13.5% of consolidated net sales for the nine months ended December 31, 2001 as compared to $118.8 million or 12.2% of consolidated sales for the same period a year ago. The Company recorded a charge of $3.9 million during the third quarter of fiscal 2002 related to goodwill impairment as a result of the closure of a subsidiary of da Vinci Systems, Inc. During the nine months ended December 31, 2001, the Company incurred a charge of $17.2 million related to the restructuring of the business. (See Note K. Restructuring). This charge is primarily related to severance and other related costs. The Company wrote down the net assets of ICS Advent at September 30, 2001 to the cash to be received upon the sale of ICS Advent less transaction-related expenses, which resulted in an impairment charge of $15 million. ICS Advent was sold on October 31, 2001. In addition, the Company recorded a charge of $2.9 million relating to the disposition of a subsidiary of Itronix Corporation. Amortization of intangibles was $32.1 million for the nine months ended December 31, 2001, as compared to $84.2 million for the amortization of intangibles and goodwill in the same period a year ago. The decrease was attributable to the Company's early adoption of FAS 142 in the first quarter of fiscal 2002, which eliminates the amortization of goodwill as well as only approximately one month of goodwill amortization related to the WWG Merger during the first three months of fiscal 2001. Interest. Interest expense, net of interest income, was $72.1 million for the nine months ended December 31, 2001 as compared to $71.2 million for the same period a year ago. Taxes. For the nine months ended December 31, 2001, the effective tax rate was not meaningful due to the provision of a $71 million valuation allowance against the Company's U.S. net deferred tax assets that was recorded in the second quarter ended September 30, 2001. (See Note E. Income Taxes.) Extraordinary item. In connection with the WWG Merger, the Company recorded an extraordinary charge of approximately $10.7 million (net of an income tax benefit of $6.6 million), of which $7.3 million (pretax) related to a premium paid by the Company to WWG's former bondholders for the repurchase of WWG's senior subordinated debt outstanding prior to the WWG Merger. In addition, the Company booked a charge of $10.0 million (pretax) for the unamortized deferred debt issuance costs that originated at the time of the May 1998 Recapitalization. Segment Disclosure The Company measures the performance of its subsidiaries by their respective new orders received ("bookings"), net sales and earnings before interest, taxes and amortization ("EBITA") which excludes non-recurring and one-time charges. Included in each segment's EBITA is an allocation of corporate expenses. The information below includes bookings, net sales and EBITA for the two segments the Company operates as well as other subsidiaries that, in the aggregate, are not reportable as a segment. 26
Three Months Ended Nine Months Ended December 31, December 31, SEGMENT 2001 2000 2001 2000 --------- --------- --------- --------- (In thousands) Communications test segment: Bookings $ 169,122 $ 309,154 $ 535,579 $ 781,766 Net sales 187,215 296,244 707,673 754,100 EBITA (23,967) 41,139 25,263 100,429 Industrial computing and communications segment: Bookings 39,788 53,384 107,940 161,550 Net sales 41,139 45,878 143,285 135,470 EBITA 1,625 (853) (94) (4,471) Other subsidiaries: Bookings 14,896 29,382 61,189 83,846 Net sales 20,431 27,860 69,239 83,385 EBITA 3,757 6,705 12,262 19,198
Three and Nine Months Ended December 31, 2001 Compared to Three and Nine Months Ended December 31, 2000 - Communications Test Products Bookings for communications test products decreased to $169.1 million for the three months ended December 31, 2001 as compared to $309.2 million for the same period a year ago. For the nine months ended December 31, 2001, bookings for communications test products decreased to $535.6 million as compared to $781.8 million for the same period a year ago. The decrease is a result of the current global economic slowdown and capital spending cutbacks in the communications industry. Net sales of communications test products were $187.2 million for the three months ended December 31, 2001 as compared to $296.2 million for the same period a year ago. For the nine months ended December 31, 2001, net sales of communications test products were $707.7 million as compared to $754.1 million for the nine months ended December 31, 2000. The decrease for the third quarter of fiscal 2002 is within all five areas of the communications test businesses, with the most significant decline for optical transport products. The decrease for the nine months ended December 31, 2001 is a result of the reduced bookings as well as the continued pressure on the Company from its customers to reduce selling prices. EBITA for the communications test products decreased to a loss of $24.0 million for the three months ended December 31, 2001 as compared to income of $41.1 million for the same period a year ago. For the nine months ended December 31, 2001, EBITA decreased to $25.3 million as compared to $100.4 million for the same period a year ago. The decrease is primarily a result of the factors described above. In addition, the Company recorded a charge of $15 million for inventory adjustments and other reserves during the third quarter of fiscal 2002 further reducing EBITA for the periods. Three and Nine Months Ended December 31, 2001 Compared to Three and Nine Months Ended December 31, 2000 - Industrial Computing and Communications Products 27 Bookings for industrial computing and communications products decreased $13.6 million to $39.8 million for the three months ended December 31, 2001 as compared to $53.4 million for the same period a year ago. For the nine months ended December 31, 2001 bookings for this segment decreased $53.7 million to $107.9 million from $161.6 million for the same period a year ago. The decrease is in part a result of the sale of ICS Advent during the quarter as well as a slight decrease in orders at Itronix, as compared to the same period last year. Net sales of industrial computing and communications products decreased $4.8 million to $41.1 million for the three months ended December 31, 2001 as compared to $45.9 million for the same period a year ago. For the nine months ended December 31, 2001 sales within this segment increased $7.8 million to $143.3 million as compared to $135.5 million for the same period a year ago. The increase for the nine months ended December 31, 2001 was primarily due to increased shipments of Itronix's new rugged laptop PC which was introduced to the market in December 2000. EBITA for the industrial computing and communications segment was $1.6 million for the three months ended December 31, 2001 as compared to a loss of $0.9 million for the same period a year ago. For the nine months ended December 31, 2001 EBITA was a loss of $0.1 million as compared to a loss of $4.5 million for the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES General. The Company's liquidity needs arise primarily from debt service on the substantial indebtedness incurred in connection with the WWG Merger and from the funding of working capital and capital expenditures. As of December 31, 2001, the Company had $1,088.4 million of indebtedness, primarily consisting of $275.0 million principal amount of senior subordinated notes, $787.4 million in borrowings under the Company's senior secured credit facility and $26.0 million under other debt obligations. In addition, on January 15, 2002, Acterna LLC, a wholly-owned subsidiary of the Company, issued and sold at par $75 million aggregate principal amount of 12% Senior Secured Convertible Notes Due 2007 (the "Notes") to Clayton, Dubilier & Rice Fund VI Limited Partnership. The Company used the proceeds of the issuance and sale of the Notes (net of fees and expenses) to repay a portion of its indebtedness under its revolving credit facility. The amounts repaid remain available to be reborrowed by the Company. As a result of the repayment, the Company currently has $96 million of availability under its revolving credit facility. On December 27, 2001, the Company entered into an amendment to the credit agreement (the "Amendment") governing its senior secured credit facility. Under the Amendment, the lenders under the credit agreement, among other things, agreed to waive the minimum interest coverage and maximum leverage covenants of the Company under the credit agreement through June 30, 2003 and consented to the issuance and sale of the Notes. Under the Amendment, the Company also became subject to certain additional covenants and restrictions, including, without limitation, new minimum liquidity and EBITDA requirements and additional restrictions on the Company's ability to make capital expenditures, incur and guarantee debt, make investments, optionally prepay the 9.75% Senior Subordinated Notes Due 2008 and dispose of assets. The Amendment also, among other things, adds additional prepayment requirements for certain transactions, establishes additional guarantees and pledges of collateral and increases the interest rates on loans under the senior secured credit facility by 0.75%. On June 30, 2003, the Company will again become subject to its minimum interest coverage and maximum leverage covenants under the 28 senior secured credit agreement. The Company can make no assurance that it will be in compliance with these covenants upon such reversion. The Company's $40 million short-term credit facility expired on December 31, 2001. Cash Flows. The Company's cash and cash equivalents decreased $12.1 million during the nine months ended December 31, 2001. Working Capital. For the nine months ended December 31, 2001, the Company's working capital decreased as its operating assets and liabilities provided $40.2 million of cash. Accounts receivable decreased, creating a source of cash of $92.8 million primarily due to the decrease in sales as well as enhanced efforts to reduce the number of days sales outstanding. Inventory levels decreased, creating a source of cash of net $15.5 million primarily due to increased focus on reducing overall inventory levels. Accounts payable decreased, creating a use of cash of $50.4 million primarily as a result of the Company paying accounts payable outstanding at March 31, 2001. Other current liabilities decreased, creating a use of cash of $28.0 million due in part to management incentive payments made during the first quarter of fiscal year 2002 relating to bonuses earned during fiscal 2001 as well as the payment of the semi-annual interest payment on the senior subordinated notes. Investing activities. The Company's net investing activities totaled $10.6 million for the nine months ended December 31, 2001 due primarily to capital expenditures of $28.7 million as a result of the WWG Merger. This was offset by the sale of ICS Advent and another smaller subsidiary for gross cash proceeds of $23.8 million. Financing Activities. The Company's financing activities provided $0.2 million in net cash during the first nine months of fiscal 2002, primarily due to additional borrowings of cash under the Company's revolving credit facility and the proceeds from the sale of common stock offset by $4.0 million in debt financing fees incurred for the Company's credit agreement amendment and the short-term credit facility. Future Financing Sources and Cash Flows. As of December 31, 2001, the Company had $133.0 million of borrowings and $17.0 million of letters of credit outstanding under its revolving credit facility and $25 million of additional availability under the facility. The Company's cash requirements for debt service and ongoing operations are substantial. While there can be no assurance that the Company will have sufficient funds or available funds to meet its cash needs over the next twelve months, as a result of the amendment of the senior secured credit agreement and the issuance at par of $75 million of 12% Senior Secured Convertible Notes in January 2002, the Company believes that funds generated by ongoing operations and funds available under its senior secured credit facility will be sufficient to meet its cash needs over the next twelve-month period. In addition, the Company's future operating performance and ability to repay, extend or refinance the senior secured credit facility (including the revolving credit facility) or any new borrowings, and to service and repay or refinance the 12% Senior Secured Convertible Notes due 2007 and the 9.75% Senior Subordinated Notes due 2008, will be subject to future economic, financial and business conditions and other factors, including demand for communications test equipment, many of which are beyond the Company's control. These and other risks associated with the Company's business are described in the Company's Securities and Exchange Commission reports, including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001. From time to time, the Company or its affiliates may purchase debt of the Company on the open market or otherwise, subject to the 29 terms of the Company's senior and subordinated debt agreements and depending upon market conditions. New Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, ("FAS 141"), "Business Combinations" and No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. FAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. FAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is before June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years beginning after December 15, 2001; however, the Company has elected to early adopt the provisions effective April 1, 2001. In October 2001, the Financial Accounting Standards Board Statement of Financial Accounting Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". FAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations- Reporting the Effects of Disposal of a Segment of a Business". FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, on April 1, 2002. Management is currently determining what effect, if any, FAS 144 will have on its financial position and results of operations. Quantitative and Qualitative Disclosures about Market Risk The Company operates manufacturing facilities and sales offices in over 80 countries. The Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes the political and economic risks related to its foreign operations are mitigated due to the stability of the countries in which its facilities are located. The Company's principal currency exposures against the U.S. dollar are in the Euro and in Canadian currency. The Company does use foreign currency forward exchange contracts to mitigate fluctuations in currency. The Company's market risk exposure to currency rate fluctuations is not material. The Company does not hold derivatives for trading purposes. The Company uses derivative financial instruments consisting primarily of interest rate hedge agreements to manage exposures to interest rate changes. The Company's objective in managing its exposure to changes in interest rates (on its variable rate debt) is to limit the impact of such changes on earnings and cash flow and to lower its overall borrowing costs. At December 31, 2001, the Company had $787.4 million of variable rate debt outstanding, which represents approximately 72% of the Company's total outstanding debt. The Company currently has one interest rate swap contract with notional amounts totaling $130 million which fixed its variable rate debt to a fixed interest rate for periods of two years in which the Company pays a fixed interest 30 rate on a portion of its outstanding debt and receives interest at the three-month LIBOR rate. At December 31, 2001, the swap contract currently outstanding and the swap contract that expired had fixed interest rates higher than the three-month LIBOR quoted by its financial institutions. The Company therefore recognized an increase in interest expense (calculated as the difference between the interest rate in the swap contracts and the three-month LIBOR rate) for the first nine months of fiscal 2002 of $1.0 million. The Company performed a sensitivity analysis assuming a hypothetical 10% adverse movement in the floating interest rate on the interest rate sensitive instruments described above. The Company believes that such a movement is reasonably possible in the near term. As of December 31, 2001, the analysis demonstrated that such movement would cause the Company to recognize additional interest expense of approximately $0.2 million, and accordingly, would cause a hypothetical loss in cash flows of approximately $0.2 million on an annual basis. The Company has significant debt and resulting debt service obligations. A substantial portion of the debt is subject to variable rate interest expense. The weighted average interest rate for the nine months ended December 31, 2001 was 8.1%. Interest rates are at historically low rates and an increase in interest rates in the future could have a material impact on the results of operations and financial position of the Company. An increase of 100 basis points in interest rates would increase interest expense by approximately $8.0 million on an annual basis. 31 PART II. Other Information Item 1. Legal Proceedings The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company believes that the final outcome should not have a material adverse effect on the Company's operations or financial position. In 1994, the Company sold its radar detector business to Whistler Communications of Massachusetts. On June 27, 1996, Cincinnati Microwave, Inc. ("CMI"), filed an action in the United States District Court for the Southern District of Ohio against the Company and Whistler Corporation, alleging willful infringement of CMI's patent for a mute function in radar detectors. On September 26, 2000, the Federal District Court Judge granted the Company's motion for partial summary judgment on the affirmative defense of laches, and the case was administratively terminated. The decision was appealed by CMI, and on December 17, 2001, the United States Court of Appeals for the Federal Circuit affirmed the ruling in favor of the Company by the Federal District Court. Item 2. Changes in Securities and Use of Proceeds None Item 4. Submission of Matters to a Vote None Item 5. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K (1) The Company filed a Current Report on Form 8-K dated December 27, 2001 relating to the Company's issuance and sale of $75 million aggregate principal amount of 12% Senior Secured Convertible Notes Due 2007. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTERNA CORPORATION Date February 13, 2002 /s/ JOHN D. RATLIFF ----------------------------------- John D. Ratliff Senior Vice President and Chief Financial Officer Date February 13, 2002 /s/ ROBERT W. WOODBURY, JR. ----------------------------------- Robert W. Woodbury, Jr. Vice President, Corporate Controller and Principal Accounting Officer 33 -----END PRIVACY-ENHANCED MESSAGE-----