10-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________ to ___________ 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) 20400 Observation Drive Germantown, MD 20876 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (301) 353-1550 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) 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__. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At May 31, 2002, the aggregate market value of the Common Stock of the registrant held by non-affiliates was $ 49,185,556 At May 31, 2002, there were 192,247,507 shares of Common Stock of the registrant outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the 2002 Annual Meeting of Stockholders are incorporated by reference in Part III. ================================================================================ ITEM 1. BUSINESS. GENERAL Acterna Corporation (the "Company" or "Acterna"), formerly Dynatech Corporation, was formed in 1959 and is a global communications equipment company focused on network technology solutions. The Company's operations are conducted 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 currently managed in four business segments: communications test, industrial computing and communications, AIRSHOW, and da Vinci. The communications test segment develops, manufactures and markets instruments, systems, software and services to test, deploy, manage and optimize communications networks and equipment. The Company offers products that test and manage the performance of equipment found in modern, converged networks, including optical transmission systems for data communications, voice services, wireless voice and data services, cable services, and video delivery. Industrial computing and communications (Itronix) provides portable computer products to the ruggedized personal computer market. AIRSHOW provides systems that deliver real-time news, information and flight data to aircraft passengers. AIRSHOW systems are marketed to commercial airlines and private aircraft owners. 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. The information presented in this Report reflects the sale of ICS Advent. The Company previously reported the industrial computing and communications segment as discontinued operations. This segment was comprised of two subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the Company divested its ICS Advent subsidiary (See Note F. Acquisitions and Divestitures to the Consolidated Financial Statements) and due to market conditions, decided to retain the Itronix business. 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 within continuing operations. 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. On June 13, 2002, the Company signed a definitive agreement to sell its AIRSHOW business to Rockwell Collins, Inc. for $160 million in cash, subject to adjustment. The Company expects to record a gain in relation to this transaction. Consummation of the sale is subject to customary closing conditions, including regulatory approvals and consent of the Company's lenders under its Senior Secured Credit Facility. The Company intends to use the net proceeds of the sale (after fees and expenses) to repay a portion of its debt or invest in its business. The Company's principal offices are located at 20400 Observation Drive, Germantown, Maryland 20876. Unless the context otherwise requires, the "Company" or "Acterna" refers to Acterna Corporation and its subsidiaries. Clayton, Dubilier & Rice Fund V Limited Partnership ("CDR Fund V") and Clayton, Dubilier & Rice Fund VI Limited Partnership ("CDR Fund VI"), each of which are investment partnerships managed by 2 Clayton, Dubilier & Rice, Inc. ("CDR"), collectively held approximately 80.1% of the Company's common stock at March 31, 2002. The current global economic downturn has exacerbated the severe downturn in the Company's communications test segment and in its other businesses. As a result, the Company continues to experience diminished product demand, excess manufacturing capacity and erosion of average selling prices. The downturn in the communications test business results from among other things a significant decrease in network expansion activity and capital spending generally by the Company's telecommunications customers. The dramatic slowdown is reflected in the company's bookings decline to approximately $175.3 million for the fourth quarter of fiscal 2002, which is down from approximately $223.8 in the third quarter of fiscal 2002, and down significantly from approximately $425.4 million in the fourth quarter of fiscal 2001. In response to this decline in product demand and the downturn in the Company's markets generally, the Company has been and is continuing to implement cost reduction programs aimed at aligning its ongoing operating costs with its currently expected revenues over the near term. For example, at the end of the fourth quarter of fiscal 2002, the Company's headcount was 4,973, down from 6,380 at the beginning of fiscal 2002. In addition, the Company relocated its corporate headquarters from Burlington, Massachusetts to Germantown, Maryland. Based on current estimates of its revenues and operating profitability and losses, the Company plans to take additional and significant cost reduction actions in order to remain in compliance with its financial covenant requirements under its Senior Secured Credit Facility. (See Note B. Liquidity, to the Company's Consolidated Financial Statements.) These cost reduction programs include among other things: an additional reduction of 400 employees, a reduction of new hires, reductions to employee compensation, consolidation of identified facilities and an exit from certain product lines. A portion of these actions have been implemented in the first quarter of fiscal 2003 and are intended to reduce costs by an estimated $75 million in fiscal 2003. These new actions coupled with the fourth quarter restructuring programs will result in reducing headcount to approximately 4,100 employees by the third quarter of fiscal 2003. 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 or 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 to, among other things, waive the Company's minimum interest coverage and maximum leverage covenants through June 30, 2003 and to impose new minimum liquidity and EBITDA requirements. (See Note K. Notes Payable and Debt, to the Company's Consolidated Financial Statements contained elsewhere in this report.) As of March 31, 2002, 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. The Company's debt obligations are also substantial. (See Note B. Liquidity, to the Consolidated Financial Statements.) As a result of the amendment of the Senior Secured Credit Facility 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 3 Credit Facility will be sufficient to meet its cash needs over the next twelve-month period ended March 31, 2003. COMMUNICATIONS TEST SEGMENT The Company develops, manufactures and markets a broad range of instruments, systems, software and services used by communications service providers, equipment manufacturers and service users to optimize the development, manufacture, deployment and management of advanced communications networks. The Company's extensive knowledge of communications technologies, combined with the broad capabilities of its test and management products and services, enable the Company to provide integrated test and management systems to its customers. Integrated test and management systems enable its customers to simplify and automate the deployment and maintenance of modern, converged networks by combining multiple functions historically found in discrete instruments into a single platform. The Company's test and management systems currently support a wide array of transmission technologies, protocols and standards, including: .. optical transmission, including SONET/SDH and DWDM equipment; .. broadband access technologies, including xDSL and HFC cable; .. data services, including IP, ATM and frame relay; .. wireless telephony and wireless broadband access; and .. traditional voice and time division multiplexed (TDM) services. The Company's products are designed to address its customers' desire to deploy new technologies and provide new services rapidly, optimize utilization of existing networks, decrease operating and maintenance costs and improve service reliability. The Company's products address the challenges of deploying and managing a variety of technologies and segments of a network including optical transmission systems, data services, voice services, wireless service, cable services, and video delivery. The Company markets to three primary groups of customers: communications service providers, communications equipment manufacturers and service users. Communications service providers rely on the Company's products and services to configure, test and manage network elements and the traffic that runs across the network. Equipment manufacturers rely on these products to shorten the product development phase and verify the proper functioning of their products during final assembly and to monitor the performance of their products during installation and maintenance in their customers' networks. Finally, service users rely on these products to ensure the proper functioning of their communications networks. The instruments, systems, and services described below offer focused solutions to these customer-specific needs. Instruments. Instruments are devices that perform specific communications test and monitoring functions. Designed to be mobile devices, these products assist technicians in assessing the performance of devices and network segments or verifying the integrity of the information being transmitted across the network. These instruments incorporate high levels of intelligence and have user interfaces that are designed to simplify the operation of these products and decrease the training required to use 4 them. The Company currently markets more than 100 instruments, including products to address the performance of optical transmission equipment, broadband access technologies (xDSL and cable modems), data, voice, wireless and cable networks. The Company's instruments are used by service providers, equipment manufacturers and service users. Systems. The Company's systems are test and management devices that reside in its customers' communication networks. They can be accessed remotely using an intelligent terminal and allow multiple users to simultaneously perform specific communications test and management functions. Typically, these systems consist of hardware and software components that are derived from core instrument products. Using an integrated test and management system, the Company's customers are able to analyze a variety of network elements, transmission technologies and protocols from a single console, thereby simplifying the process of deploying, provisioning and managing network equipment and services. From a centralized location, technicians in their network operations center can have access to the test systems within the network and perform simultaneous test and monitoring functions on one or more systems, either manually or in an automated fashion. These capabilities decrease the need for technicians to make on-site service calls and allow service providers to respond to potential network faults proactively. In tandem with the core instrument products, the Company's software components help assess the quality of the services, or QoS, delivered. QoS refers to the achievement of specific performance benchmarks defined by agreements between communications service providers and the customer. These agreements are commonly called service level agreements, or SLAs, and specify such things as network availability, maximum allowable transmission latencies, guaranteed levels of bandwidth or maximum acceptable data loss. The Company's applications allow service providers and users to track SLAs more readily. Customers typically begin using the Company's instruments for initial deployments and start using systems within a year of the completion of deployment. By reusing the technology from its instrument products, the Company is able to enter new markets rapidly with new test and monitoring functionality that is very similar, in scope, to the existing instrument functions. The Company expects that a growing proportion of sales will be derived from its systems products. Services. The Company offers a range of product support and professional services geared to comprehensively address its customers' requirements. The Company provides repair, calibration and software support services for its products and also provides technical assistance on a global basis for a wide array of test equipment. In addition, the Company offers customers training services that are aimed at both product and technology areas. Project management services are an integral part of the professional service offerings. These professional services are provided in conjunction with system integration projects that include installation and implementation services. Custom software and interface development are key offerings that build upon process consulting and software development expertise. The Company provides both product and process consulting to its customers. Industrial Computing and Communications Itronix, headquartered in Spokane, WA, is a global provider of mobile, wireless, ruggedized computing solutions, including laptop and handheld computing devices. Itronix also provides a wide range of support services including long-term maintenance contracts, implementation support, product installation, and asset management. Itronix offers a broad product and service line, including computing devices across the full continuum of semi-rugged to fully-rugged configurations. Itronix products 5 and services are sold worldwide through its direct sales force as well as resellers and manufacturers representatives. AIRSHOW, Inc. AIRSHOW is the leading supplier of inflight video information systems and services for passengers of private and commercial aircraft. The Company markets AIRSHOW products to airlines, aircraft manufacturers, avionics installation centers and owners and operators of corporate aircraft. AIRSHOW's key products are: The AIRSHOW moving map system, which provides passengers with a graphical representation of the aircraft's location, heading, altitude and other information displayed in real time; The AIRSHOW Network, which delivers to passengers of private aircraft text-based network broadcasts of stock quotes, news briefs, business updates, and customized financial reports. AIRSHOW currently has agreements to provide up-to-the-minute content from CNN, Wall Street Journal Interactive, Bloomberg, SportsTicker and Intellicast weather products; and AIRSHOW TV, which provides direct broadcast satellite TV to corporate aircraft. On June 13, 2002, the Company signed a definitive agreement to sell its AIRSHOW business to Rockwell Collins, Inc. for $160 million in cash, subject to adjustment. The Company expects to record a gain in relation to this transaction. Consummation of the sale is subject to customary closing conditions, including regulatory approvals and consent of the Company's lenders under its Senior Secured Credit Facility. The Company intends to use the net proceeds of the sale (after fees and expenses) to repay a portion of its debt or invest in its business. da Vinci Systems da Vinci manufactures and sells digital color correction systems used by video post-production and commercial production facilities to correct and enhance color saturation levels as video images are transferred from film to video tape for editing and distribution. da Vinci systems are sold worldwide through its direct sales force in the United States, as well as in conjunction with manufacturers of related products. da Vinci benefits from changes in technology such as the transition from analog to digital production systems and digital high-definition television, or HDTV, broadcast standards. MANUFACTURING The Company manufactures a portion of its products and outsources to third parties a portion of its manufacturing activities, such as the assembly of printed circuit boards and the fabrication of some mechanical parts. The Company generally performs its own final assembly and testing of its products. The Company operates 11 manufacturing and assembly facilities worldwide. All the facilities are certified in ISO 9001. In addition, one facility is certified TL 9000. In 1996, the Company received ISO 14001 certification, which relates to environmental compliance in Germany. The components used to build the Company's products are generally available from a number of suppliers. The Company relies on a number of limited-source suppliers for 6 specific components and parts. Although the Company has entered into long-term purchasing contracts with some of these suppliers, the Company cannot assure that these suppliers will be able to meet the Company's needs or that component shortages will not be experienced. If the Company was required to locate new suppliers or additional sources of supply, a disruption in operations could occur or additional costs could be incurred in procuring required materials. Due to the long lead times and exclusive nature of some of the components purchased by its suppliers, the Company may have contractual obligations to purchase some of this inventory from certain suppliers. COMPETITION The markets for communications test products and services are rapidly evolving and highly competitive. The principal competitive factors affecting the business include: . quality and breadth of product offerings; . adaptability to evolving technologies and standards; . speed of new product introductions; . depth and breadth of customer relationships; . price and financing terms; . research and design capabilities; . scale of installed base; . technical support training and customer service training; . strength of distribution channels; and . product scalability and flexibility. The Company believes it competes favorably with respect to the above factors. Its principal competitors in the communications test and management markets include Agilent Technologies, Tektronix, Spirent and Anritsu. The Company also competes with a number of other companies that offer products that address discrete portions of its markets, including EXFO Electro-Optical Engineering, Sunrise Telecom, Inc., Digital Lightwave, and Ixia. Some of these competitors have greater sales, marketing, research and financial resources than the Company does. In addition, new competitors with significant market presence and financial resources may enter markets that the Company competes in and reduce its market share. CUSTOMERS The Company markets its communication test products to three primary groups of customers: communications service providers, equipment manufacturers and service users. Communications Service Providers Communications service providers offer telecommunications, wireless and, increasingly, data communication services to end users, enterprises or other service providers. Typically, communications service providers utilize a variety of network equipment and software to originate, transport and terminate communications sessions. Communications service providers rely on the Company's products and services to configure, test and manage network elements and the traffic that runs across them. Also, the Company's products help to ensure smooth operation of networks and increase the reliability of services to customers. 7 The Company's products and services are sold to virtually all inter-exchange carriers, or IXCs; incumbent local exchange carriers, or ILECs; competitive local exchange carriers, or CLECs; internet service providers, or ISPs; integrated communications providers, or ICPs; wireless network operators; cable service providers; international post, telephone and telegraph companies, or PTTs; and other service providers. Equipment Manufacturers Communications equipment manufacturers design, develop, install and maintain voice, data and video communications equipment. These products include switches, routers, voice gateways, cellular base stations, cable headends, optical access and multiplexing devices and other types of communications systems. Network equipment manufacturers rely on the Company's products to verify the proper functioning of their products during final assembly and testing. Increasingly, because communications service providers are choosing to outsource installation and maintenance functions to the equipment manufacturers themselves, equipment manufacturers are using the Company's instruments and systems to assess the performance of their products during installation and maintenance of a customer's network. Service Users The Company also sells test and management instruments, systems, and services to large corporate customers, government operators and educational institutions. AIRSHOW products are marketed to airlines, aircraft manufacturers, avionics installation centers and owners and operators of corporate aircraft. Itronix products and services are sold to customers with wireless mobile computing needs in the communication, home and business services, utility, insurance, emergency services, military, and field service markets. da Vinci systems are sold to video post-production and commercial production facilities. None of the Company's customers represented more than 10 percent of its sales during fiscal 2002. The Company is not dependent upon any one customer, or group of customers, to the extent that the loss of such customers would have a material adverse effect on the Company. SALES, MARKETING AND CUSTOMER SUPPORT The Company's communications test products and services are primarily sold through its direct sales force. In addition, the Company's communications test products and services are sold through third party distributors and sales representatives in areas where direct sales efforts are less developed. Through distributors, sales representatives and its direct sales force, the Company has a presence in over 80 countries. In addition, the Company uses the Internet, advertisements in the trade press, direct mail, seminars, trade shows and quarterly newsletters to raise awareness of its products. The Company's communications test sales and marketing staff consists primarily of engineers and technical professionals. They undergo extensive training and ongoing 8 professional development and education. The skill level of the sales and marketing staff has been instrumental in building longstanding customer relationships. In addition, the Company's frequent dialogue with its customers provides it with valuable input on systems and features they desire in future products. The Company's consultative sales approach and product and market knowledge differentiates its sales force from those of its primary competitors. The local sales forces are highly knowledgeable of their respective markets, customer operations and strategies, and regulatory environments. In addition, the representatives' familiarity with local languages and customs enables them to build close relationships with the Company's customers. The Company provides installation, repair and training services to enable its customers to improve performance of their networks. Service centers are located near many of the Company's major customers. The Company also offers on-line support services to supplement its on-site application engineering support. Customers can also access the Company's products remotely through its technical assistance center. SEASONALITY; BACKLOG As a result of purchasing patterns of the Company's telecommunications customers, which tend to place large orders periodically, typically during the third quarter and at the end of the Company's fourth fiscal quarters, the Company expects that its results of operations may vary on a quarterly basis, as they have in the past. The Company estimates that its backlog of orders at March 31, 2002 and 2001 was approximately $213.1 million and $487.2 million, respectively. The decrease in backlog is primarily a result of the downturn in the communications test industry. The Company expects it will be able to fill the majority of the backlog during fiscal 2003. PRODUCT DEVELOPMENT For the year ended March 31, 2002, the Company invested approximately $160.2 million in research and development activities of which approximately $130.1 million applied to the Company's communications test segment. The market for the Company's products and services is characterized by rapidly changing technologies, new and evolving industry standards and protocols and product and service introductions and enhancements that may render the Company's existing offerings obsolete or unmarketable. Automation in the Company's targeted markets for communications test equipment or a shift in customer emphasis from employee-operated communications test to automated test and monitoring systems could likewise render the Company's existing product offerings obsolete or unmarketable, or reduce the size of one or more of its targeted markets. In particular, incorporation of self-testing functions in the equipment currently addressed by the Company's communications test instruments could render some of the Company's offerings redundant and unmarketable. The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends and the incurrence of substantial research and development costs. INTERNATIONAL 9 The Company maintains manufacturing facilities and sales subdivisions or branches for its communications test business in major countries in Europe, and sales subdivisions in Latin America and Asia and has distribution agreements in other countries where sales volume does not warrant a direct sales organization. The Company's foreign sales (excluding WWG in fiscal 2000 and including exports from North America directly to foreign customers) were approximately 12%, 39%, and 42% of consolidated net sales in fiscal 2000, 2001 and 2002, respectively. Accordingly, the Company's domestic sales were 88%, 61% and 58% of consolidated net sales in fiscal 2000, 2001 and 2002, respectively. Because the Company sells its products worldwide, the Company's business is subject to risks associated with doing business internationally. In addition, many of the Company's manufacturing facilities and suppliers are located outside the United States. Accordingly, the Company's future results could be harmed by a variety of factors, including changes in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, particularly in emerging markets, trade protection measures and import or export licensing requirements, and potentially negative consequences from changes in tax laws and other regulatory requirements. PATENTS AND PROPRIETARY RIGHTS The Company relies primarily on trade secrets, trademark laws, confidentiality procedures and contractual restrictions to establish and protect its proprietary rights. The Company owns a number of U.S. and foreign patents and patent applications that are collectively important to its business. The Company does not believe, however, that the expiration of any patent or group of patents would materially affect its business. GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS The Company designs its products to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. In the United States, these products must comply with various regulations defined by the U.S. Federal Communications Commission and Underwriters Laboratories as well as industry standards established by Telcordia Technologies, Inc., formerly Bellcore, and the American National Standards Institute. Internationally, these products must comply with standards established by the European Committee for Electrotechnical Standardization, the European Committee for Standardization, the European Telecommunications Standards Institute, telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving standards could negatively impact the ability to sell products. ENVIRONMENTAL MATTERS Federal, state and local laws or regulations concerning the discharge of materials into the environment have not had and, under present conditions, the Company does not foresee that they will have, a material adverse effect on capital expenditures, earnings or the competitive position of the Company. 10 EMPLOYEES As of March 31, 2002, the Company employed approximately 4,973 persons. Some of the European employees are members of a workers' council, principally due to applicable legal requirements in the jurisdictions in which they work. However, none of the Company's other employees are represented by labor unions and the Company believes its employee relations are good. ITEM 2. PROPERTIES. The following table describes the Company's largest design and manufacturing facilities. The Company also has sales offices and facilities in Europe, South America and elsewhere. Location Square Title Feet Eningen, Germany 779,000 Owned Germantown, Maryland 272,000 Leased Indianapolis, Indiana 140,000 Leased Bradenton, Florida 124,000 Leased Research Triangle Park, North Carolina 93,100 Leased Plymouth, United Kingdom 86,400 Owned San Diego, California 62,368 Leased Tustin, California 52,000 Leased Munich, Germany 51,000 Leased Research Triangle Park, North Carolina 50,800 Leased Kirkland, Washington 50,500 Leased Liberty Lake, Washington 41,000 Leased Spokane, Washington 35,000 Leased Coventry, England 30,000 Leased The Company believes its facilities are in good operating condition. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company believes that the final outcome should not have a material adverse effect on the Company's business, operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the fourth quarter of fiscal 2002, in connection with the issuance and sale by Acterna LLC on January 15, 2002 of $75 million aggregate principal amount of 12% Senior Secured Convertible Notes Due 2007 (the "Convertible Notes") to Clayton, Dubilier & Rice Fund VI Limited Partnership ("Fund VI"), Fund VI and Clayton, Dubilier & Rice Fund V Limited Partnership, as holders of approximately 80% of the outstanding Common Stock of the Company, approved by written consent the conversion features of the Convertible Notes. Consent was not solicited from any other stockholder. The effective date of the stockholder approval was March 29, 2002. For more information concerning the Convertible Notes, see Note K. Notes Payable and Debt to the Consolidated Financial Statements of the Company. For more information concerning the 11 stockholder approval of the conversion features of the Convertible Notes, see the Company's Information Statement on Schedule 14C filed with the Securities and Exchange Commission on February 22, 2002. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is currently traded on the NASDAQ National Market under the symbol "ACTR". From May 21, 1998 to November 8, 2000, the common stock was traded on the over-the-counter market under the symbol "DYNA". Since November 9, 2000, the common stock has been trading on the NASDAQ National Market. The Company has filed to transfer from the NASDAQ National Market to the NASDAQ Small Cap Market. The Company expects the transfer to occur in June 2002. As of March 31, 2002, there were 581 registered holders of the common stock and the price of the common stock on the NASDAQ was $1.50. The following table sets forth the high and low sales prices of the Company's common stock on the over-the-counter market and the NASDAQ National Market for each quarterly period within the two most recent fiscal years. Quarter Ended High Low March 31, 2002 $ 3.99 $ 1.48 December 31, 2001 4.71 2.40 September 30, 2001 11.00 2.43 June 30, 2001 13.15 3.25 March 31, 2001 21.44 6.00 December 31, 2000 29.13 7.81 September 30, 2000 41.38 16.44 June 30, 2000 20.25 8.00 Since April 1, 1995, the Company has not declared or paid cash dividends to the holders of common stock. The Company intends to retain earnings for use in the operation and expansion of its business. In addition, restrictions in the Company's credit agreements limit the Company's ability to pay cash dividends. The following table sets forth information concerning compensation plans previously approved by security holders and not previously approved by security holders.
Equity Compensation Plan Information -------------------------------------------------------------------------------------------------------------- Number of Weighted-average Number of securities Plan Category securities to exercise remaining available be issued price of for upon outstanding future issuance under exercise of options, warrants equity compensation outstanding options, and rights plans options (excluding securities warrants reflected in and column (a)) rights (c) (a) (b) -------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by 37,732,018 $4.45 18,017,982 security holders -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
12 -------------------------------------------------------------------------------------------------------------- Equity compensation plans 0 0 0 not approved by security holders -------------------------------------------------------------------------------------------------------------- Total 37,732,018 $4.45 18,017,982 --------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA. The information requested by this Item is attached as Appendix A. ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information requested by this Item is attached as Appendix B. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information requested by this Item is included in Appendix B. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information requested by this Item is attached as Appendix C. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Reference is made to the information responsive to Items 401 and 405 of Regulation S-K contained in the Company's definitive Proxy Statement relating to its fiscal 2002 Annual Meeting of Stockholders which will be filed with the U.S. Securities and Exchange Commission within 120 days after the close of the Company's fiscal year ended March 31, 2002, pursuant to Rule 14a-6(b) under the Securities Exchange Act of 1934, as amended; said information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Reference is made to the information responsive to Item 402 of Regulation S-K contained in the Company's definitive Proxy Statement relating to its fiscal 2002 Annual Meeting of Stockholders which will be filed with the U.S. Securities and Exchange Commission within 120 days after the close of the Company's fiscal year ended March 31, 2002, pursuant to Rule 14a-6(b) under the Securities Exchange Act of 1934, as amended; said information is incorporated herein by reference. 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the information responsive to Item 403 of Regulation S-K contained in the Company's definitive Proxy Statement relating to its fiscal 2002 Annual Meeting of Stockholders which will be filed with the U.S. Securities and Exchange Commission within 120 days after the close of the Company's fiscal year ended March 31, 2002, pursuant to Rule 14a-6(b) under the Securities Exchange Act of 1934, as amended; said information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information responsive to Item 404 of Regulation S-K contained in the Company's definitive Proxy Statement relating to its fiscal 2002 Annual Meeting of Stockholders which will be filed with the U.S. Securities and Exchange Commission within 120 days after the close of the Company's fiscal year ended March 31, 2002, pursuant to Rule 14a-6(b) under the Securities Exchange Act of 1934, as amended; said information is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Financial statements The following financial statements and schedules of the Company are included as Appendix C to this Report. I. Report of Independent Accountants. II. Consolidated Balance Sheets-March 31, 2002 and 2001. III. Consolidated Statements of Operations-Fiscal Years Ended March 31, 2002, 2001, and 2000. IV. Consolidated Statements of Stockholders' Deficit-Fiscal Years Ended March 31, 2002, 2001, and 2000. V. Consolidated Statements of Cash Flows-Fiscal Years Ended March 31, 2002, 2001, and 2000. VI. Notes to Consolidated Financial Statements. (2) Financial Statements schedule - Schedule II Schedules other than those listed above have been omitted because they are either not required or not applicable or because the required information has been included elsewhere in the financial statements or notes thereto. (b) Reports on Form 8-K Current Report on Form 8-K concerning the issuance and sale by Acterna LLC, a Delaware limited liability company that is wholly-owned and controlled by Acterna Corporation, of $75,000,000 aggregate principal amount 12% Senior Secured Convertible Notes due 2007 to Clayton, Dubilier & Rice Fund VI Limited Partnership, filed with the SEC on January 16, 2002. 14 Current Report on Form 8-K concerning the sale of AIRSHOW business to Rockwell Collins, Inc. for $160 million in cash, subject to adjustment, filed with the SEC on June 14, 2002. (c) Exhibits The exhibits that are filed with this report or that are incorporated herein by reference are set forth in Appendix D. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACTERNA CORPORATION June 18, 2002 By: /s/ Ned C. Lautenbach ----------------------- Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ned C. Lautenbach Chairman of the Board, Chief June 18, 2002 --------------------- Executive Officer and Director Ned C. Lautenbach /s/ John R. Peeler Corporate Vice President, President June 18, 2002 ------------------ and Director John R. Peeler /s/ John D. Ratliff Corporate Vice President, Chief June 18, 2002 ------------------- Financial Officer John D. Ratliff /s/ Robert W. Woodbury, Jr. Corporate Vice President, Controller June 18, 2002 --------------------------- (Principal Accounting Officer) Robert W. Woodbury, Jr. /s/ Brian D. Finn Director June 18, 2002 ----------------- Brian D. Finn /s/ Donald Gogel Director June 18, 2002 ---------------- Donald Gogel /s/ Allan M. Kline Director June 18, 2002 ------------------ Allan M. Kline /s/ Marvin L. Mann Director June 18, 2002 ------------------ Marvin L. Mann /s/ William O. McCoy Director June 18, 2002 -------------------- William O. McCoy /s/ Victor A. Pelson Director June 18, 2002 -------------------- Victor A. Pelson /s/ Brian H. Rowe Director June 18, 2002 ----------------- Brian H. Rowe /s/ Richard J. Schnall Director June 18, 2002 ---------------------- Richard J. Schnall /s/ Peter M. Wagner Director June 18, 2002 ------------------- Peter M. Wagner 16 APPENDIX A Selected Historical Consolidated Financial Data The following tables set forth selected historical consolidated financial data of the Company for the five fiscal years ended March 31, 2002 which, as of March 31, 2002 and 2001 and for the three years in the period ended March 31, 2002, have been derived from, and should be read in conjunction with, the audited Consolidated Financial Statements, and related notes thereto, of the Company contained elsewhere in this report.
Years Ended March 31, 2002 2001* 2000 1999 1998 ---------- ---------- --------- --------- ---------- (Amounts in thousands, except per share data) RESULTS OF OPERATIONS Net sales $1,132,661 $1,366,257 $ 656,601 $ 522,854 $ 472,948 Cost of sales 540,048 606,860 285,531 228,572 205,522 ---------- ---------- --------- --------- ---------- Gross profit 592,613 759,397 371,070 294,282 267,426 Selling, general and administrative expense 444,387 486,598 192,286 149,926 138,310 Product development expense 160,219 168,117 75,398 54,356 54,995 Amortization of intangibles 42,271 120,151 12,326 6,228 5,835 Restructuring expense 33,989 --- --- --- --- Impairment of net assets held for sale 17,918 --- --- --- --- Goodwill impairment 3,947 --- --- --- --- Impairment of acquired intangible assets 151,322 --- --- --- --- Recapitalization and other related costs --- 9,194 27,942 43,652 --- Purchased incomplete technology --- 56,000 --- --- --- ---------- ---------- --------- --------- ---------- Operating income (loss) (261,440) (80,663) 63,118 40,120 68,286 Interest expense (96,625) (102,158) (51,949) (46,198) (1,221) Interest income 1,625 3,322 2,373 3,398 3,012 Other income (expense), net (7,615) (4,491) (720) 15,959 730 ---------- ---------- --------- --------- ---------- Income (loss) from continuing operations before income taxes and extraordinary item (364,055) (183,990) 12,822 13,279 70,807 Provision for (benefit from) income taxes 799 (12,793) 6,810 6,834 29,031 ----------- ---------- --------- --------- ---------- Income (loss) from continuing operations before extraordinary item (364,854) (171,197) 6,012 6,445 41,776 Income (loss) from discontinued operations (10,039) 10,039 --- --- --- ---------- ---------- --------- --------- ---------- Income (loss) before extraordinary item (374,893) (161,158) 6,012 6,445 41,776 Extraordinary item, net of income tax benefit of $6,603 --- (10,659) --- --- --- ---------- ---------- --------- --------- ---------- Net income (loss) $ (374,893) $ (171,817) $ 6,012 $ 6,445 $ 41,776 ========== ========== ========= ========= ========== Net income (loss) per common share-basic: Continuing operations $ (1.90) $ (0.93) $ 0.04 $ 0.05 $ 2.04 Discontinued operations (0.05) 0.06 --- --- --- Extraordinary item --- (0.06) --- --- --- ---------- ---------- --------- --------- ---------- $ (1.95) $ (0.93) $ 0.04 $ 0.05 $ 2.04 ========== ========== ========= ========= ========== Net income (loss) per common share-diluted:
A-1 Continuing operations $ (1.90) $ (0.93) $ 0.04 $ 0.05 $ 1.96 Discontinued operations (0.05) 0.06 --- --- --- Extraordinary item --- (0.06) --- --- --- ---------- ---------- --------- --------- --------- $ (1.95) $ (0.93) $ 0.04 $ 0.05 $ 1.96 ========== ========== ========= ========= ========= Weighted average number of shares: Basic 191,868 183,881 148,312 129,596 20,493 Diluted 191,868 183,881 162,273 136,004 21,272 ========== ========== ========= ========= ========= BALANCE SHEET DATA Net working capital $ 103,626 $ 184,657 $ 39,125 $ 55,498 $ 117,791 Total assets $1,014,556 $1,382,979 $ 463,649 $ 348,104 $ 288,130 Long-term debt $1,056,062 $1,056,383 $ 572,345 $ 504,151 $ 83 Stockholders' equity (deficit) $ (436,775) $ (80,977) $(296,675) $(316,440) $ 202,119 Shares of stock outstanding 192,248 190,953 122,527 120,665 16,864 Stockholders' equity (deficit) per share $ (2.27) $ (0.42) $ (2.42) $ (2.62) $ 11.99
* The Results of Operations for fiscal 2001 include the results of operations of Wavetek Wandel Goltermann, Inc. since May 23, 2000, the date of its acquisition, and the results of operations of Cheetah Technologies since August 23, 2000, the date of its acquisition. A-2 APPENDIX B Management Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The following discussion of the results of operations, financial condition and liquidity of the Company should be read in conjunction with the information contained in the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Unless otherwise noted, the information presented in this Appendix B reflects the business of the Company and its subsidiaries, including the results of operations of the businesses the Company has acquired during fiscal 2002. Wavetek Wandel Goltermann, Inc. ("WWG")'s results of operations are included in the statements of operations since May 23, 2000; Cheetah Technologies ("Cheetah")'s results of operations are included since August 23, 2000. Applied Digital Access, Inc. ("ADA")'s results of operations are included since November 3, 1999. The results of ICS Advent are included through October 31, 2001, the date it was sold by the Company. The statements contained in this report (other than the Company's consolidated financial statements and other statements of historical fact) include forward-looking statements, as described below in greater detail in "Forward-Looking Statements." Business Segments The Company reports its results of operations in four business segments that the Company refers to as communications test, industrial computing and communications, AIRSHOW and da Vinci. The communications test segment develops, manufactures and markets instruments, systems and services 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. This segment was comprised of two subsidiaries: ICS Advent and Itronix. On October 31, 2001, the ICS Advent subsidiary was disposed through a sale, See Note F. Acquisitions and Divestitures to the Consolidated Financial Statements. 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. AIRSHOW is a provider of systems that deliver real-time news, information and flight data to aircraft passengers. AIRSHOW markets its systems to commercial airlines and private aircraft owners. On June 13, 2002, the Company signed a definitive agreement to sell its AIRSHOW business to Rockwell Collins, Inc. for $160 million in cash, subject to adjustment. The Company expects to record a gain in relation to this transaction. Consummation of the sale is subject to customary closing conditions, including regulatory approvals and consent of the B-1 Company's lenders under its Senior Secured Credit Facility. The Company intends to use the net proceeds of the sale (after fees and expenses) to repay a portion of its debt or invest in its business. da Vinci Systems, Inc. ("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 markets. Related Party The Company's controlling stockholders are Clayton, Dubilier & Rice Fund V Limited Partnership ("CDR Fund V") and Clayton, Dubilier & Rice Fund VI Limited Partnership ("CDR Fund VI", collectively the "CDR Funds"). The CDR Funds are managed by Clayton, Dubilier & Rice, Inc. ("CDR"), an investment management firm, and collectively held approximately 80.1% of the outstanding shares of common stock of the Company at March 31, 2002. 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 "Convertible Notes") to CDR Fund VI. Interest on the Convertible Notes is payable semi-annually in arrears on each March 31/st/ and September 30/th/, 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 Convertible Notes. Due to limitations imposed by the Company's Senior Secured Credit Facility, Acterna LLC expects to pay interest on the Convertible Notes in-kind by issuing additional Convertible Notes. The Convertible 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. The Company used the net proceeds of $69 million from the issuance and sale of the Convertible 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 re-borrowed by the Company. As a result of the repayment, the Company had $95 million of availability under its Revolving Credit Facility as of March 31, 2002. (For additional information concerning the Convertible Notes see Note K. Notes Payable and Debt, to the Company's Consolidated Financial Statements included elsewhere in this report.) The Company paid an annual management fee to CDR totaling $ 1.6 million, $0.5 million and $0.5 million in the three fiscal years ending March 31, 2002, 2001 and 2000, respectively. In return for the annual management fee, CDR provides management and financial consulting services to the Company and its subsidiaries. In fiscal 2002, the Company also paid CDR a $2.3 million financing fee in connection with the issuance of the Senior Secured Convertible Notes. In connection with the merger (the "WWG Merger") between a subsidiary of the Company and Wavetek Wandel Goltermann, Inc. ("WWG") in May 2000 and the concurrent establishment of the Company's new Senior Secured Credit Facility, the Company paid CDR $6.0 million for services provided in connection with the WWG Merger and the related financing, of which $3.0 million has been allocated to deferred debt issuance costs and $3.0 million allocated to additional paid-in capital in connection with the rights offering to the Company's other stockholders undertaken by the Company in June 2000. B-2 On May 19, 1999, Ned C. Lautenbach, a principal of CDR, became the Company's Chairman and Chief Executive Officer. Mr. Lautenbach has not received direct compensation from the Company for these services. However, his compensation for any services is covered in the above mentioned management and consulting arrangement. Asset Impairment The current global economic slowdown and a downturn in the telecommunications industry has negatively impacted the Company's communications test segment as well as its other businesses. As in past downturns, the Company is experiencing diminished product demand, excess manufacturing capacity and erosion of average selling prices. In the fourth quarter of fiscal 2002, the Company's bookings decreased to approximately $175.3 million, which included $28 million of de-bookings originally booked in the fourth quarter of fiscal 2001, from approximately $223.8 million in the third quarter, and down significantly from approximately $425.4 million in the fourth quarter of fiscal 2001 (excluding bookings related to ICS Advent). At present, the Company cannot predict the duration or severity of this downturn, but based on the current bookings trends, the Company expects fiscal 2003 revenue in its communications test segment to be down substantially as compared with fiscal 2002. During the fourth quarter of fiscal 2002, as a result of the substantial declining financial performance in the communication test segment and resulting reduced expectations for future revenues and earnings, management performed an assessment of the carrying values of long-lived assets within the communications test segment. This assessment resulted in the impairment of acquired intangible assets (principally core technology) and a pre-tax charge of $151.3 million was recorded. (See Note H. Acquired Intangible Assets) Cash and Debt Service During the year ended March 31, 2002, the Company took actions to reduce its operating costs by reducing its existing workforce and by disposing of its ICS Advent subsidiary, which was a business not considered strategic. The Company also issued and sold at par $75 million aggregate principal amount of the Convertible Notes to CDR Fund VI and used the net proceeds to repay a portion of its debt under its Revolving Credit Facility, which amounts remain available to be re-borrowed by the Company. In addition, during the fourth quarter of the fiscal year ended March 31, 2002, new U.S. tax legislation was enacted that increased the period over which net operating losses may be carried back, from two years to five. As a result, the Company obtained a refund during the first quarter of fiscal 2003 of approximately $61 million of taxes paid in prior years. The Company currently anticipates that its available cash coupled with funds available under its current borrowing arrangements will be sufficient to meet its anticipated working capital and capital expenditure requirements through March 31, 2003. The Company's continuing operations beyond March 31, 2003 is dependent upon its ability to achieve significant operating profitability and cash flows from operations to fund the business and its 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 Convertible Notes and the Senior Subordinated Notes. There is no assurance that the Company will be able to achieve this level of operating profitability and cash flows from operations or repay, extend or refinance its debt. In the event its operations are not profitable or do not generate sufficient cash to fund the business, the Company may fail to comply with its restrictions, covenants and other obligations under the Credit Facility, which could result in a default. This could result in the Company's Lenders requiring immediate repayment of debt and could limit the availability of borrowings under the current borrowing facility. The Company may have to immediately find other sources of capital and further substantially reduce its level of operations. B-3 Beyond March 31, 2003, based on current forecasts of revenues and results of operations, assuming timely completion and execution of the cost reduction programs, and based on the increasing and significant debt repayment obligations beginning in 2003, the Company believes that its current capital structure will need to be renegotiated, extended or refinanced. There can be no guarantee that in the event the Company is required to extend, refinance or repay its debt, that new or additional sources of financing will be available or will be available on terms acceptable to the Company. Inability to repay the debt obligations or source alternative finance will likely have a material negative impact on the business, financial position and results of operations of the Company. 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 Convertible Notes and the Senior Subordinated Notes, will be subject to future economic, financial and business conditions and other factors, including demand for communications test equipment, many of which are beyond the Company's control. Restructuring Activity The Company continues to implement cost reduction programs aimed at aligning its ongoing operating costs with its expected revenues. At the end of the fourth quarter of fiscal 2002, the Company's headcount was 4,973 (down from 6,380 at the beginning of fiscal 2002), and the corporate headquarters was relocated from Burlington, Massachusetts to Germantown, Maryland. Based on current estimates of its revenues and operating profitability and losses, the Company plans to take additional and significant cost reduction actions in order to remain in compliance with its financial covenant requirements under its Senior Secured Credit Facility. (See Note B. Liquidity, to the Company's Consolidated Financial Statements.) These cost reduction programs include among other things: an additional reduction of 400 employees, a reduction of new hires, reductions to employee compensation, consolidation of identified facilities and an exit from certain product lines. A portion of these actions have been implemented in the first quarter of fiscal 2003 and are intended to reduce costs by an estimated $75 million in fiscal 2003. These new actions coupled with the fourth quarter restructuring programs will result in reducing headcount to approximately 4,100 employees by the third quarter of fiscal 2003. The Company believes that the cost reduction programs will be implemented and executed on a timely basis and will align costs with revenues. In the event the Company is unable to achieve this alignment, additional cost cutting programs would be required in the future. During the fiscal year ended March 31, 2002, the Company recorded $34.0 million of restructuring charges, related to three restructuring plans, as a result of the cost reduction programs mentioned above. Details of these restructuring plans and the associated charges are described below: On August 1, 2001 the Company announced a comprehensive cost reduction program that included a reduction of: (1) approximately 400 jobs worldwide; (2) expenditures on outside contractors and consultants; (3) operating expenses; and (4) manufacturing costs through procurement programs to lower materials costs. The Company expected 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 $8.0 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 B-4 subsidiary; (2) consolidating certain of its development and 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, primarily related to severance. During the fourth quarter of 2002, the Company announced additional cost reduction plans, which included (1) a reduction of approximately 400 jobs nationwide; and (2) consolidation of certain Itronix facilities located abroad. As a result the Company incurred a restructuring charge of $16.7 million during the fourth quarter of 2002. During the fiscal year ended March 31, 2002, the Company paid approximately $19.4 million in severance and other related costs. At March 31, 2002 approximately $14.6 million was left to be paid for the restructuring programs, which the Company anticipates will be paid primarily during the first half of fiscal 2003. (See Note G. Restructuring to the Consolidated Financial Statements.) A summary of restructuring actions taken during fiscal 2002 are outlined as follows: For The Twelve Months Ended March 31, 2002 Balance Balance March 31, March 31, 2001 Expense Paid 2002 ---------- ------- ---- ----------- Workforce-related $ --- $ 31,737 $(17,972) $ 13,765 Facilities --- 1,134 (763) 371 Other --- 1,118 (692) 426 ------------ -------- -------- ------------ Total $ --- $ 33,989 $(19,427) $ 14,562 ============ ======== ======== ============ Discontinued Operations In May 2000, the Board of Directors approved a plan to divest the industrial computing and communications business segment, which segment consisted of the Company's ICS Advent and Itronix Corporation subsidiaries. In October 2001, the Company divested its ICS Advent subsidiary (See Note F. Acquisitions and Divestitures to the Consolidated Financial Statements) and due to market conditions, decided to retain the Itronix business. 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 within continuing operations. 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. Critical Accounting Policies Acterna's significant accounting policies are presented within Note E. (Summary of Significant Accounting Policies) of the Consolidated Financial Statements. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. These policies are those that are both most important to the portrayal of the Company's financial condition and results of operations and require the Company's management's most difficult, subjective or complex judgments and estimates. Actual results B-5 could differ from those estimates. Management believes the policies that fall within this category are the policies on revenue recognition, receivables, inventory, long-lived asset valuation, accounting for income taxes, accounting for employee pension plans and warranty. Revenue The Company derives revenue, principally, from the sale of products. The Company recognizes revenue when it is earned, which is determined to be when it has persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, title and the risk of loss has been transferred to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. Revenue on long-term contracts is recognized using the completed contract basis or the percentage of completion basis, as appropriate. Profit estimates on long-term contracts are revised periodically based on changes in estimates of costs to be incurred and any losses on contracts are recognized in the period that such losses become known. Generally, the terms of long-term contracts provide for progress billing based upon completion of defined phases of work. Revenue from software sales is generally recognized upon delivery provided that a contract has been executed, there are no uncertainties regarding customer acceptance and that collection of the related receivable is probable. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. Revenue recognition involves judgments, and assessments of expected returns, the likelihood of nonpayment and estimates of expected costs and profits on long-term contracts. The Company analyzes various factors, including a review of specific transactions, historical experience, credit-worthiness of customers and current market and economic conditions in determining when to recognize revenue. Changes in judgments on these factors could impact the timing and amount of revenue recognized. Receivables Accounts receivable and notes receivable are evaluated based upon the credit-worthiness of customers and the age of historical balances and historical experience. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Inventory Inventory values are stated at the lower of cost or market. Cost is determined based on a currently-adjusted standard basis, which approximates actual cost on a first-in, first-out basis. The Company's inventory includes raw materials, work in process, finished goods and demonstration equipment. The Company periodically reviews its recorded inventory and estimates a reserve for obsolete or slow-moving items. The Company reserves the entire value of all obsolete items. The Company determines excess inventory based upon current and forecasted usage, and a reserve is provided for the excess inventory. Such estimates are difficult to make under current economic conditions. If actual demand and market conditions are less favorable than those projected by management, additional reserves may be required. If actual market conditions are more favorable than anticipated, our cost of sales will be lower than expected in that period. Long-Lived Assets B-6 Property, plant and equipment, goodwill and intangible, and other long-lived assets are evaluated based upon various factors, including the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. The Company assesses impairment of long-lived and intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers include among others the following: .. Significant under-performance relative to expected historical or projected future operating results; .. Significant changes in the manner of the Company's use of the acquired assets or the strategy for our overall business; .. Significant negative industry or economic trends; and .. The Company's market capitalization relative to book value. When the Company determines that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures impairment based on one of two methods. For assets related to ongoing operations the Company plans to continue, the Company uses a projected undiscounted cash flow method to determine if impairment exists and then measures impairment using discounted cash flows. For assets to be disposed of and goodwill, the Company assesses the fair value of the asset based on current market condition for similar assets. If the Company determines that any of the impairment indicators exist, and these assets were determined to be impaired, an adjustment to write down the long-lived assets would be charged to income in the period such determination was made. Income Tax The Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company's actual current tax obligations together with assessing differences resulting from the different treatment of items for tax and accounting purposes which result in deferred tax assets and liabilities. The Company has deferred tax assets and liabilities included within its balance sheet. The Company's deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation allowance for assets not expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations. In the event that actual results differ from these estimates, the Company's provision for income taxes could be materially impacted. Pension Plans Pension assets and liabilities are determined on an actuarial basis and are affected by the estimated market-related value of plan assets, estimates of the expected return on plan assets, discount rates and other assumptions relating to estimates of future salary costs and employee service lives, inherent in these valuations. The Company annually reviews the assumptions underlying the actuarial calculations and makes changes to these assumptions, based on the current market conditions, as necessary. Actual changes in the fair market B-7 value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension (income) expense ultimately recognized. Warranty The Company accrues for warranty costs at the time of shipment, based on estimates of expected rework rates and warranty costs to be incurred. While the Company engages in product quality programs and processes, the Company's warranty obligation is affected by product failure rates, material usage and service delivery costs. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, the amount of actual warranty costs could differ from the Company's estimates. The Company's warranty period ranges from 1 to 3 years. Seasonality As a result of purchasing patterns of the Company's telecommunications customers, which tend to place large orders periodically, typically during the third quarter and at the end of the Company's fourth fiscal quarters, the Company expects that its results of operations may vary on a quarterly basis, as they have in the past. Product Development For the year ended March 31, 2002 and 2001, the Company invested approximately $160.2 million and $168.1 million in product development activities, respectively. The market for the Company's products and services is characterized by rapidly changing technologies, new and evolving industry standards and protocols and product and service introductions and enhancements that render the Company's existing offerings obsolete or unmarketable. Automation in addressed markets for communications test equipment or a shift in customer emphasis from employee-operated communications test to automated test and monitoring systems could likewise render the Company's existing product offerings obsolete or unmarketable, or reduce the size of one or more of its addressed markets. In particular, incorporation of self-testing functions in the equipment currently addressed by the Company's communications test instruments could render product offerings redundant and unmarketable. The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends and the incurrence of substantial research and development costs. We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, which are often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS DURING FISCAL 2002 B-8 The Company in the normal course of business entered into acquisitions during fiscal 2002, which, in the aggregate, do not have a material impact on the financial results of the Company. Accordingly the Company has not presented proforma results of operations for these acquisitions. ACQUISITIONS DURING FISCAL 2001 Wavetek Wandel Goltermann, Inc. On May 23, 2000, the Company merged one of its wholly owned subsidiaries with WWG for consideration of $402.0 million, which includes $14.2 million of acquisition costs. In connection with the WWG Merger, the Company refinanced certain of its debt and entered into a new Senior Secured Credit Facility (See Note K. Note Payable and Debt to the Consolidated Financial Statements). The WWG Merger was accounted for using the purchase method of accounting. As part of a fair value exercise, the Company increased the carrying value of acquired inventory by $35 million in order to record this inventory at its fair value, increased the carrying value of acquired land and buildings by $27 million to record them at fair value, and determined the fair value of acquired incomplete technology to be $51 million. This purchased incomplete technology had not reached technological feasibility, had no alternative future use and was written off to the income statement during the year. The WWG Merger generated approximately $488.9 million of excess purchase price which was allocated to other intangibles on a basis as follows: $162.2 million to core technology (which was being amortized over six years), $45.2 million to workforce (which was being amortized over five years prior to adoption of FAS 142, as discussed below), and $6.8 million to backlog (which was amortized over 12 months). The unallocated excess purchase price or goodwill of $274.8 million was being amortized over six years. As of April 1, 2001, the Company adopted FAS 142 and all amounts previous allocated to workforce have been reclassified to goodwill; additionally, amortization of goodwill was ceased. Superior Electronics Group, Inc., doing business as Cheetah Technologies On August 23, 2000, the Company acquired Cheetah for a purchase price of $171.5 million. The acquisition was accounted for using the purchase method of accounting. As part of a fair value exercise, the Company increased the carrying value of the acquired inventory by $750 thousand to reflect its fair value, and determined the fair value of acquired incomplete technology to be $5.0 million. This purchased incomplete technology had not reached technological feasibility, had no alternative future use and was written off to the income statement during the year. The acquisition generated approximately $143.9 million of excess purchase price which was allocated to other intangibles as follows: $48.3 million to core technology (which was being amortized over six years), $3.9 million to workforce (which was being amortized over five years prior to adoption of FAS 142, as discussed below), $3.3 million to backlog (which was amortized over 12 months), and $0.7 million to trademarks (which is being amortized over 6 years). The unallocated excess purchase price or goodwill of $87.7 million was being amortized over six years. As of April 1, 2001, the Company adopted FAS 142 and all amounts previous allocated to workforce have been reclassified to goodwill; additionally, amortization of goodwill was ceased. The Company funded the purchase price with borrowings of $100 million under its Senior Secured Credit Facility (See Note K. Notes Payable and Debt to the Consolidated Financial Statements) and approximately $65.7 million from its existing cash balances. B-9 In connection with the Cheetah acquisition, options to purchase shares of Cheetah were converted into options to purchase shares of Acterna common stock. The fair value as of the announcement date of the acquisition of all options converted was $5.8 million using an option-pricing model. A total of $6.7 million relates to the unearned intrinsic value of unvested options as of the closing date of the acquisition, and has been recorded as deferred compensation to be amortized over the remaining vesting period of the options (the weighted average vesting period is approximately three years). DIVESTITURES DURING FISCAL 2002 AND 2001 On October 31, 2001, the Company sold its ICS Advent subsidiary for $23 million in cash proceeds. (See Note F. Acquisitions and Divestitures) 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 during 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. OTHER ACQUISITIONS AND DIVESTITURES The Company has, in the normal course of business, entered into acquisitions and divestitures of small companies or businesses that, in the aggregate, do not have a material impact on the financial results of the Company. RESULTS OF OPERATIONS Fiscal 2002 Compared to Fiscal 2001 on a Consolidated Basis Net Sales. For the fiscal year ended March 31, 2002 consolidated net sales decreased $233.6 million or 17.1% to $1.13 billion as compared to $1.37 billion for the fiscal year ended March 31, 2001. The decrease was primarily attributable to the current global economic slowdown and a severe downturn in the telecommunications industry, resulting in a significant decrease in network build-outs and capital spending. As a result, the Company experienced a significant decrease in revenues from its communication test segment during fiscal 2002. The Company also experienced reduced revenues at its AIRSHOW and da Vinci units during fiscal 2002, offset with increased revenues at its Itronix unit. International net sales (defined as sales originating outside of North America) were $477 million or 42.1% of consolidated net sales for the fiscal year ended March 31, 2002, as compared to $535 million or 39.2% of consolidated net sales for the fiscal year ended March 31, 2001. Gross Profit. Consolidated gross profit decreased $166.8 million to $592.6 million or 52.3% of consolidated net sales for the fiscal year ended March 31, 2002 as compared to $759.4 million or 55.6% of consolidated net sales for the fiscal year ended March 31, 2001. The decreased gross profit is primarily attributable to the decline in demand within the communications test business coupled with $21 million of adjustments in fiscal 2002 related to inventory and supplier commitments, partially offset by a $35.7 million fiscal 2001 charge B-10 related to inventory step-up amortization resulting from the acquisition of WWG and Cheetah. The majority of these adjustments relate to additional inventory charges resulting from reduced expectations of demand and usage. Operating Expenses. Operating expenses consist of selling, general and administrative expense; product development expense; recapitalization and other related costs; purchased incomplete technology; restructuring charges; impairment of other assets held for sale, goodwill and acquired intangible assets, and amortization of intangibles. Total operating expenses were $854.1 million or 75.4% of consolidated sales for the fiscal year ended March 31, 2002, as compared to $840.1 million or 61.5% of consolidated sales for the fiscal year ended March 31, 2001. The increase during fiscal 2002 as compared to the same period a year ago is principally due to the impairment of acquired intangibles and other assets of $173.2 million during fiscal 2002 and restructuring charges of $34.0 million, which were offset by non-recurring fiscal 2001 charges of $9.2 million for recapitalization and other charges as well as $56.0 million in write-offs of purchased of incomplete technology in fiscal 2001. In addition, intangible amortization expense decreased by $77.9 million (amortization of goodwill ceased on April 1, 2001) during fiscal 2002 as a result of the implementation of FAS 142. Amortization of unearned compensation relates to the issuance of non-qualified stock options to employees and non-employee directors at an exercise price lower than the closing price in the public market on the date of issuance. During October 2000, the Company ceased granting options with a strike price less than the fair market value of the underlying stock. The amortization of unearned compensation expense during fiscal 2002 was $19.4 million and has been allocated to cost of sales ($1.2 million), product development expense ($4.4 million), and selling, general and administrative expense ($13.8 million). The amortization expense during fiscal 2001 of $19.8 million was allocated to cost of sales ($1.2 million), product development expense ($3.8 million) and selling, general and administrative expense ($14.8 million). Selling, general and administrative expense was $444.4 million or 39.2% of consolidated sales for the fiscal year ended March 31, 2002, as compared to $486.6 million or 35.6% of consolidated sales for the fiscal year ended March 31, 2001. The $42.2 million decrease is primarily a result of the Company's restructuring efforts in the second half of the fiscal year to reduce operating costs of the business as well as a reduction of $9.7 million due to the sale of ICS Advent. Included in these expenses is approximately $23.0 million during fiscal 2002 related to charges for the implementation of enhanced systems and $25.2 million during fiscal 2001 related to the product rebranding and additional consultants hired for the integration of WWG. Product development expense was $160.2 million or 14.1% of consolidated net sales for the fiscal year ended March 31, 2002 as compared to $168.1 million or 12.3% of consolidated net sales for the same period a year ago. During 2001, recapitalization and other related costs of $9.2 million related to an executive who left the Company during fiscal 2000. No such costs were incurred during 2002. As a result of the declining financial performance and reduced expectations for future revenues and earnings within the communication test segment, management performed an assessment of the carrying values of long-lived assets within that segment. This assessment, based on estimated undiscounted future cash flows of the segment indicated that long-lived B-11 assets were impaired. The Company discounted cash flows to arrive at a value today, to quantify the impairment of long-lived assets (principally core technology). As a result, a pre-tax charge of $151.3 million was recorded during the fourth quarter of fiscal 2002. During fiscal 2002, the Company completed its transitional test of goodwill impairment, upon adoption of SFAS 142, which resulted in no impairment charge. (See Note H. Acquired Intangible Assets to the Company's Consolidated Financial Statements.) Amortization of intangibles was $42.3 million for the fiscal year ended March 31, 2002 as compared to $120.2 million for the same period a year ago. The decrease was primarily attributable to the Company's early adoption of FAS 142 in the first quarter of fiscal 2002, which eliminated the amortization of goodwill for the entire fiscal year. Interest. Interest expense, net of interest income, was $95.0 million for the fiscal year ended March 31, 2002 as compared to $98.8 million for the same period a year ago. The decrease in net interest expense during fiscal 2002 as compared to fiscal 2001, is primarily a result of decreased interest rates, offset partially by a decrease in interest income. Other expense. During fiscal 2002, the Company incurred other expense of $7.6 million principally related to losses in connection with changes in foreign currencies. Other expense of $4.5 million during fiscal 2001 was also related principally to changes in foreign currencies. Taxes. The Company recorded a provision for taxes of $0.8 million for fiscal 2002 compared to a benefit of $12.8 million for fiscal 2001. The amounts recorded for income taxes during both fiscal 2002 and 2001 differ significantly from the amounts that would have been expected by applying the U.S. federal statutory tax rate to income (loss) from operations before income taxes. During fiscal 2002 the principal reasons for such differences were: (1) the recording of valuation allowance against the Company's U.S. net deferred tax assets in the amount of approximately $74 million, (2) a provision for U.S. income taxes on unremitted foreign earnings of approximately $40 million, and (3) the carryback of fiscal 2002 losses for five years. During fiscal 2001 the principal reasons for the differences between the expected tax rate and the rate utilized were non-deductible goodwill amortization as a result of the WWG Merger and an increase in the amount of income earned in various countries with tax rates higher than the U.S. federal rate, primarily Germany. Fiscal 2001 Compared to Fiscal 2000 on a Consolidated Basis Sales. For the fiscal year ended March 31, 2001 consolidated net sales increased $709.7 million to $1.37 billion as compared to $656.6 million for the fiscal year ended March 31, 2000. The increase occurred primarily within the communications test segment primarily as a result of the WWG Merger and the acquisition of Cheetah Technologies. The Company's international sales (excluding WWG in fiscal 2000 and including exports from North America directly to foreign customers) were $535 million or 39.2% of consolidated sales for the fiscal year ended March 31, 2001, as compared to $82 million or 12.5% of consolidated sales for the fiscal year ended March 31, 2000. The increase in international sales was due primarily to the WWG Merger. WWG's operations are principally in Europe with significant sales offices in Asia and Latin America, as well as in the United States. B-12 Gross Profit. Consolidated gross profit increased $388.3 million to $759.4 million or 55.6% of consolidated net sales for the fiscal year ended March 31, 2001 as compared to $371.1 million or 56.5% of consolidated net sales for the fiscal year ended March 31, 2000. Included in the fiscal 2001 gross profit is a purchase accounting charge of $35.7 million related to the amortization of inventory step-up as a result of the acquisitions of WWG and Cheetah. Excluding this step-up, gross profit was $795.1 million or 58.2% of consolidated net sales. The increase in gross margin as a percent of sales was, in part, a result of increased capacity utilization due to the increase in sales. Operating Expenses. Operating expenses consist of selling, general and administrative expense; product development expense; recapitalization and other related costs; purchased incomplete technology; and amortization of intangibles. Total operating expenses were $840.1 million or 61.5% of consolidated net sales for the fiscal year ended March 31, 2001, as compared to $308.0 million or 46.9% of consolidated net sales for the fiscal year ended March 31, 2000. Excluding the impact of the write-off of the purchased incomplete technology of $56.0 million and the recapitalization and other related costs of $9.2 million, total operating expenses were $774.9 million or 56.7% of consolidated net sales during fiscal 2001. The increase was primarily a result of the WWG Merger, which has a higher cost structure than the Company has had historically, increased intangible amortization expense, increased amortization of unearned compensation, and expenses relating to product rebranding and additional consultants hired for the integration of WWG with the Company's communications test segment. Amortization of unearned compensation relates to the issuance of non-qualified stock options to employees and non-employee directors at an exercise price lower than the closing price in the public market on the date of issuance. The amortization of unearned compensation expense during fiscal 2001 was $19.8 million and has been allocated to cost of sales ($1.2 million), product development expense ($3.8 million), and selling, general and administrative expense ($14.8 million). The amortization expense during fiscal 2000 of $2.4 million was allocated to cost of sales ($0.4 million), product development expense ($0.1 million) and selling, general and administrative expense ($1.9 million). The increase in the amortization of unearned compensation expense is primarily a result of the non-qualified stock options that were granted to former WWG and Cheetah employees who became active employees of the Company at the time of the acquisitions. (See Note E. Summary of Significant Accounting Policies to the Company's Consolidated Financial Statements.) Selling, general and administrative expense was $486.6 million or 35.6% of consolidated net sales for the fiscal year ended March 31, 2001, as compared to $192.3 million or 29.3% of consolidated net sales for the fiscal year ended March 31, 2000. The percentage increase is in part a result of expenses totaling $25.2 million, which related to product rebranding and additional consultants hired for the integration of WWG with the Company's communications test segment (the "integration expenses"). In addition, the Company recorded a charge of $2.0 million during the third quarter of fiscal 2001 related to the write-off of all charges capitalized in connection with the Company's registration statement on Form S-1, which the Company filed in July 2000 for a potential common stock offering. The Company amended this registration statement by converting it to a universal shelf registration statement on Form S-3 under which the company may offer from time to time up to $1 billion of equity or debt securities. B-13 Excluding the amortization of unearned compensation of $14.8 million, the integration expenses of $25.2 million, and the write-off of the S-1 charges of $2.0 million, selling, general and administrative expense was $446.6 million in fiscal 2001, or 32.5% of consolidated net sales, which is comparable to the results for fiscal 2000. Product development expense was $168.1 million or 12.3% of consolidated sales for the fiscal year ended March 31, 2001 as compared to $75.4 million or 11.5% of consolidated sales for the fiscal year ended March 31, 2000. The dollar increase resulted principally from the WWG Merger and the acquisition of Cheetah. Recapitalization and other related costs during fiscal 2001 were $9.2 million as compared to $27.9 million in fiscal 2000. The expense incurred during the first three months of fiscal 2001 of $9.2 million related to an executive who left the Company during fiscal 2000. The expense incurred during fiscal 2000 related to termination expenses of certain executives including the retirement of John F. Reno, former Chairman, President and Chief Executive Officer of the Company, as well as other employees. During fiscal 2001, the Company recorded a total charge of $56.0 million for acquired incomplete technology, of which $51.0 million related to the WWG Merger and $5.0 million related to the acquisition of Cheetah. This purchased incomplete technology had not reached technological feasibility and had no alternative future use. Amortization of intangibles was $120.2 million for the fiscal year ended March 31, 2001 as compared to $12.3 million for the fiscal year ended March 31, 2000. The increase was primarily attributable to increased goodwill and other intangible amortization related to the acquisitions of Cheetah, WWG and ADA. Interest. Interest expense, net of interest income, was $98.8 million for the fiscal year ended March 31, 2001 as compared to $49.6 million for the same period during fiscal 2000. The increase in net interest expense during fiscal 2001 resulted from the additional debt incurred for the WWG Merger and the acquisition of Cheetah. Other income (expense). During fiscal 2001, the Company incurred approximately $4.5 million of losses in connection with changes in foreign currencies. Taxes. The effective tax rate changed for the fiscal year ended March 31, 2001 to a benefit of 7% as compared to a provision of 53.1% for the fiscal year ended March 31, 2000. The principal reasons for the decrease in the effective tax rate were: (1) additional non-deductible goodwill amortization in fiscal 2001 as a result of the WWG Merger and (2) an increase in the amount of income earned in various countries with tax rates higher than the U.S. federal rate, primarily Germany. Extraordinary item. During fiscal 2001, 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. Business Segments B-14 The Company measures the performance of its segments by their respective new orders received ("bookings"), net sales and earnings before interest, taxes, and amortization of intangibles and amortization of unearned compensation ("EBITA"), which excludes non-recurring and one-time charges (See Note S. Segment Information and Geographic Areas to the Company's Consolidated Financial Statements.) Included in the segment's EBITA is an allocation of corporate expenses. The information below includes bookings, net sales and EBITA for the Company's communications test, industrial computing and communications, AIRSHOW and da Vinci segments:
Years ending March 31, 2002 2001 2000 ---- ---- ---- SEGMENTS Communications test: (Amounts in thousands) Bookings ............................................ $ 657,147 $1,248,465 $ 430,254 Net sales ........................................... 854,437 1,052,747 349,886 EBITA ............................................... (3,662) 139,498 62,447 Industrial computing and communications: Bookings ............................................ $ 141,535 $ 226,566 $ 180,555 Net sales ........................................... 188,351 198,441 203,361 EBITA ............................................... 4,950 (1,914) 25,379 AIRSHOW: Bookings ............................................ $ 58,321 $ 79,142 $ 72,275 Net sales ........................................... 65,024 78,886 70,960 EBITA ............................................... 9,493 15,886 19,314 da Vinci: Bookings ............................................ $ 23,048 $ 33,720 $ 26,906 Net sales ........................................... 24,849 35,329 26,572 EBITA ............................................... 5,970 10,909 8,642
Fiscal 2002 Compared to Fiscal 2001 - Communications Test Bookings for the communications test products decreased 47.4% to $657.1 million for the fiscal year ended March 31, 2002, as compared to $1.25 billion for the same period a year ago. The decrease is primarily due to a global downturn within the telecommunications industry. Sales of communications test products decreased 18.8% to $854.4 million for the fiscal year ended March 31, 2002, as compared to $1.05 billion for the same period a year ago. The decrease in sales is primarily a result of the downturn in the telecommunications industry and has affected all of the segments' product lines. EBITA for the communications test products decreased to a loss of $3.7 million for fiscal 2002 as compared to an income of $139.5 million for the same period a year ago. The decrease is primarily related to reduced sales and pricing pressures, which were partially offset by reduced operating expenses in the second half of fiscal 2002 resulting from the restructuring actions taken during the year. B-15 As a result of the declining financial performance and reduced expectations for future earnings, management performed an assessment of the carrying value of the long-lived assets within the communications test segment resulting in an impairment of acquired intangible assets (principally core technology). As a result, a charge of $151.3 million was recorded during the fourth quarter of fiscal 2002. Fiscal 2002 Compared to Fiscal 2001 - Industrial Computing and Communications Bookings for the industrial computing and communications products decreased 37.5% to $141.5 million for the fiscal year ended March 31, 2002, as compared to $226.6 million for the same period a year ago. The decrease was primarily due to the disposition of ICS Advent, a division of industrial computing and communications, on October 31, 2001. Excluding the effect of ICS Advent for both fiscal 2002 and 2001, bookings decreased by 11.1% to $116.8 million for the fiscal year ended March 31, 2002, as compared to $131.4 million for the same period a year ago. The $14.6 million pro-forma decrease in bookings is primarily related to slower first half orders at the Company's Itronix subsidiary. Net sales of industrial computing and communications products decreased 5.1% to $188.4 million for the fiscal year ended March 31, 2002, as compared to $198.4 million for the same period a year ago. The decrease in net sales was primarily due to the disposition of ICS Advent and was offset in part by an increase in net sales from the Itronix business. Excluding the effect of ICS Advent for both fiscal 2002 and 2001, net sales increased by 34.9% to $152.7 million for the fiscal year ended March 31, 2002, as compared to $113.2 million for the same period a year ago. The $39.5 million pro-forma increase in net sales is from the Itronix business and is primarily due to shipments of Itronix's new rugged laptop PC (Go Book) product. EBITA for the industrial computing and communications segment increased $6.9 million to $5.0 million for fiscal 2002 as compared to a loss of $1.9 million for the same period a year ago. The increase in EBITA results primarily from an increase in net sales at Itronix, offset by increased losses at ICS Advent. Excluding the effect of ICS Advent for both fiscal 2002 and 2001, EBITA increased by $10.0 million to $10.7 million for the fiscal year ended March 31, 2002, as compared to $0.7 million for the same period a year ago. Fiscal 2002 Compared to Fiscal 2001 - AIRSHOW Bookings for AIRSHOW products decreased 26.3% to $58.3 million for the fiscal year ended March 31, 2002, as compared to $79.1 million for the same period a year ago. The decrease was primarily due to a reduction in spending in the aviation markets after September 11, 2001. Net sales of AIRSHOW products decreased 17.6% to $65.0 million for the fiscal year ended March 31, 2002, as compared to $78.9 million for the same period a year ago. The decrease in sales was primarily due to a reduction in orders during the second half of the fiscal year. EBITA for the AIRSHOW products decreased 40.2% to $9.5 million as compared to $15.9 million for the same period a year ago. The decrease in EBITA primarily resulted from higher product costs and lower volumes, which were partially offset by reduced operating expenses in the second half of fiscal 2002, which resulted from the restructuring actions taken during the year to more appropriately reflect current demand levels for its products. B-16 Fiscal 2002 Compared to Fiscal 2001 - da Vinci Bookings for da Vinci decreased 31.6% to $23.0 million for the fiscal year ended March 31, 2002, as compared to $33.7 million for the same period a year ago. The decrease related primarily to industry cutbacks of advertising budgets which indirectly drives the capital expenditure for post production video houses. This decrease became more pronounced in the second half of the fiscal year with the general downturn in the economy. Net sales of da Vinci decreased 29.7% to $24.8 million for the fiscal year ended March 31, 2002, as compared to $35.3 million for the same period a year ago. The decrease in sales was due to the factors described above causing a reduction in sales of the da Vinci products. EBITA for da Vinci decreased 45.3% to $6.0 million as compared to $10.9 million for the same period a year ago. The decrease in EBITA primarily resulted from the $10.5 million decrease in sales for fiscal 2002 as compared to fiscal 2001 and was offset by reduced operating expenses level in the third quarter of fiscal 2002. Fiscal 2001 Compared to Fiscal 2000 - Communications Test Bookings for communications test products increased 190.2% to $1.25 billion for the fiscal year ended March 31, 2001, as compared to $430.3 million for the same period of fiscal 2000. The increase was primarily due to the WWG Merger and the acquisition of Cheetah and ADA as well as an increase in bookings for instruments, principally for optical transport products, systems and services at the Company's existing communications test businesses. Net sales of communications test products increased 200.9% to $1.05 billion for the fiscal year ended March 31, 2001, as compared to $349.9 million for the same period of fiscal 2000. The increase in sales was primarily due to the additional net sales from the WWG Merger and the acquisitions of Cheetah and ADA. The increase is related to the following portions of the communications test segment: 15.0% was attributable to core growth, 3.8% was attributable to the additional sales from ADA; 77.2% was attributable to the WWG Merger; and 4.0% was attributable to the acquisition of Cheetah. For the fiscal years ended March 31, 2001 and March 31, 2000, respectively, sales of optical transport products were $420.3 million and $154.1 million; sales of cable products were $129.6 million and $0 million; and sales of telecommunications systems and software products were $90.3 million and $47.3 million. EBITA for the communications test products increased 123.4% to $139.5 million for fiscal 2001 as compared to $62.4 million for the same period of fiscal 2000. The increase in EBITA primarily resulted from the WWG Merger and the acquisition of Cheetah, which was offset by integration expenses principally related to the WWG Merger. Fiscal 2001 Compared to Fiscal 2000 - Industrial Computing and Communications Bookings for the industrial computing and communications product increased 25.5% to $226.6 million for the fiscal year ended March 31, 2001, as compared to $180.6 million for the same period of fiscal 2000. The increase in bookings is primarily related to the introduction of Itronix's new rugged laptop PC (Go Book) product during the fourth quarter of fiscal 2001. B-17 Net sales for the industrial computing and communications product decreased 2.4% to $198.4 million for the fiscal year ended March 31, 2001, as compared to $203.4 million for the same period of fiscal 2000. The decrease in sales primarily resulted from a decline in sales at ICS Advent. EBITA for the industrial computing and communications products decreased $27.3 million to a loss of $1.9 million for the fiscal year ended March 31 2001, as compared to $25.4 million in income in fiscal 2000. The decrease in EBITA primarily resulted from declining gross margins due to competitive pricing pressures, as well as costs incurred for product redesign. Fiscal 2001 Compared to Fiscal 2000 - AIRSHOW Bookings for AIRSHOW products increased 9.5% to $79.1 million for the fiscal year ended March 31, 2001 as compared to $72.3 million for the same period during fiscal 2000. The increase in bookings is primarily due to increase in the overall demand for general aviation products. Net sales for AIRSHOW products increased 11.2% to $78.9 million for the fiscal year ended March 31, 2001, as compared to $71.0 million for the same period during fiscal 2000. The increase in sales is primarily due to the increase in the general aviation market. EBITA for AIRSHOW products decreased 17.7% to $15.9 million for the fiscal year ended March 31, 2001, as compared to $19.3 million for the same during fiscal 2000. The decrease in EBITA is primarily due to an increase in shipments to the general aviation market, which have lower gross margins than commercial aviation products. Fiscal 2001 Compared to Fiscal 2000 - da Vinci Bookings for da Vinci products increased 25.3% to $33.7 million for the fiscal year ended March 31, 2001, as compared to $26.9 million for the same period during fiscal 2000. The increase in bookings is primarily related to the introduction of da Vinci's "2K" product, a digitally compatible color enhancement systems. Net sales for da Vinci products increased 33.0% to $35.3 million for the fiscal year ended March 31, 2002, as compared to $26.6 million for the same period during fiscal 2000. The increase in sales is primarily due to the emergence of the HDTV technology within the advertising film industry. EBITA for da Vinci products increased 26.2% to $10.9 million for the fiscal year ended March 31, 2001, as compared to $8.6 million during fiscal 2000. The increase was due primarily to the increase in sales. Debt, Capital Resources and Liquidity The Company's liquidity needs arise primarily from debt service on the substantial indebtedness incurred in connection with the WWG Merger, Cheetah acquisition, the recent and significant operating losses recorded as well as funding the Company's on-going operations. As of March 31, 2002, the Company had $1.088 billion of indebtedness, primarily consisting of $275 million principal amount of 9.75% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"), $711 million in borrowings under the Company's Senior Secured Credit Facility, $77 million principal amount of 12% of Senior Secured Convertible Note due 2007 (the "Convertible Notes") and $25 million of other debt obligations. The working capital B-18 balances of the Company at March 31, 2002 are expected to continue at similar levels for the foreseeable future. During the fourth quarter of the fiscal year ended March 31, 2002, new U.S. tax legislation was enacted which increased the period over which net operating losses may be carried back, from two years to five. Consistent with these new laws, the Company filed claims for a refund of approximately $61 million of taxes paid in prior years. The entire $61 million was collected during the first quarter of fiscal 2003. On June 13, 2002, the Company signed a definitive agreement to sell its AIRSHOW business to Rockwell Collins, Inc. for $160 million in cash, subject to adjustment. The Company expects to record a gain in relation to this transaction. Consummation of the sale is subject to customary closing conditions, including regulatory approvals and consent of the Company's lenders under its Senior Secured Credit Facility. The Company intends to use the net proceeds of the sale (after fees and expenses) to repay a portion of its debt or invest in its business. The following table lists the future payments for debt, operating leases and purchase obligations:(In thousands)
------------------------------------------------------------------------------------------------------------------- Debt, operating leases Fiscal Fiscal Fiscal Fiscal Fiscal and purchase obligations 2003 2004 2005 2006 2007 Thereafter Total ------------------------------------------------------------------------------------------------------------------- Senior secured credit facility $25,749 $40,700 $44,500 $74,700 $310,000 $ 215,034 $ 710,683 ------------------------------------------------------------------------------------------------------------------- Senior secured convertible note --- --- --- --- --- 76,875 76,875 ------------------------------------------------------------------------------------------------------------------- Senior subordinated notes --- --- --- --- --- 275,000 275,000 ------------------------------------------------------------------------------------------------------------------- Other notes payable 2,523 --- --- --- --- --- 2,523 ------------------------------------------------------------------------------------------------------------------- Capital leases and other debt 3,188 3,813 3,802 2,666 2,667 6,305 22,441 ------------------------------------------------------------------------------------------------------------------- Operating leases 18,386 16,489 12,257 9,630 8,208 43,195 108,165 ------------------------------------------------------------------------------------------------------------------- Purchase obligations 13,852 5,898 5,899 --- --- --- 25,649 ------------------------------------------------------------------------------------------------------------------- ------- ------- ------- ------- -------- --------- ---------- ------------------------------------------------------------------------------------------------------------------- Total $63,698 $66,900 $66,458 $86,996 $320,875 $ 616,409 $1,221,336 -------------------------------------------------------------------------------------------------------------------
The Company has recorded significant losses from operations and seen a substantial reduction in revenues and operations as a result of the economic downturn and in particular the downturn within the telecommunications sector and related industries. Consequently the Company has undertaken several restructurings during the year ended March 31, 2002 (See Note G. to the Consolidated Financial Statements) to align its cost structures and its revenues. Due to the severity of the continuing downturn, management have identified the need to make further cost reductions during the course of fiscal 2003. These cost reduction plans are designed to align the cost base of the Company with the reduced forecast revenues and to enable the Company to remain compliant with the liquidity and earnings covenants required under the Senior Secured Credit Facility (See Note K. to the Consolidated Financial Statements) during the course of fiscal 2003. Continuing compliance with these covenant requirements during fiscal 2003 is dependent upon the timely execution of the cost cutting plans identified and being implemented. The Company's cash requirements for debt service, including repayment of debt, and on-going operations are substantial. Debt repayment obligations are significant and increase through 2007 (See Note K. to the Consolidated Financial Statements). B-19 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 due 2007 (the "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. Under the Senior Secured Credit Facility, the Company is subject to certain covenants including but not limited to minimum liquidity and minimum EBITDA amounts. The Company must maintain minimum liquidity of $25 million, which is defined as the sum of cash and cash equivalents plus aggregate available revolving credit commitments. The Company must also comply with minimum cumulative EBITDA amounts of ($10 million), $17 million, and $40 million for the six, nine, and twelve month periods ended September 30, 2002, December 31, 2002, and March 31, 2003, respectively. The Company believes it has sufficient cash and borrowing availability to meet its liquidity covenants for fiscal 2003 and that at expected reduced revenue levels and on timely and successful execution of its restructuring programs, will be able to meet its EBITDA covenant requirements for the next twelve months ended March 31, 2003. Beyond March 31, 2003, the Company is dependent upon its ability to generate significant operating profitability and cash flows from operations to fund the repayment of the future debt obligations. There is no assurance that the Company will be able to achieve these levels of operating profitability and cash flows from operations or remain in compliance with its covenants requirements. In the event its operations are not profitable or do not generate sufficient cash to fund the business, the Company may fail to comply with its restrictions, obligations and covenants under its Senior Secured Credit Facility, which could result in a default. A default could result in the Company's Lenders requiring immediate repayment and limiting the availability of borrowings under the Company's Revolving Credit Facility. The Company may have to find other sources of capital and further substantially reduce its operations. In addition, the Company may need to raise additional capital to meet its needs after fiscal 2003, to develop new products and to enhance existing products in response to competitive pressures, and to acquire complementary products, businesses or technologies. However, the Company may not be able to obtain additional financing on terms favorable to it, if at all. If adequate funds are not available or are not available on terms favorable to the Company, its business, results of operations and financial condition could be materially and adversely affected. Beyond March 31, 2003, based on current forecasts of revenues and results of operations, assuming timely completion and execution of the cost reduction programs, and based on the increasing and significant debt repayment obligations beginning in 2003, the Company believes that its current capital structure will need to be renegotiated, extended or refinanced. There can be no guarantee that in the event the Company is required to extend, refinance or repay its debt, that new or additional sources of financing will be available or will be available on terms acceptable to the Company. Inability to repay the debt obligations or source alternative finance will likely have a material negative impact on the business, financial position and results of operations of the Company. 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 Convertible Notes and the Senior Subordinated Notes, will be subject to future economic, financial and business conditions and other factors, including demand for communications test equipment, many of which are beyond the Company's control. Convertible Notes B-20 On January 15, 2002, Acterna LLC, a wholly-owned subsidiary of the Company, issued and sold at par $75 million aggregate principal amount of the Convertible Notes to CDR Fund VI. The Company used the net proceeds of $69 million from the issuance and sale of the Convertible 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 re-borrowed by the Company, subject to compliance with the terms of the Senior Secured Credit Facility. As of March 31, 2002, the Company was in compliance with all covenants under the agreement governing the Convertible Notes. Interest on the Convertible Notes is payable semi-annually in arrears on each March 31/st/ and September 30/th/, 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 Convertible Notes. Due to limitations imposed by the Senior Secured Credit Facility, Acterna LLC expects to pay interest on the Convertible Notes in-kind by issuing additional Convertible Notes. The Convertible 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. A termination or acceleration of the Senior Secured Credit Facility because of a default under the Senior Secured Credit Facility, or a material payment default under the Senior secured Credit Facility, constitutes a default under the Convertible Notes. At the option of CDR Fund VI (or any subsequent holder of Convertible Notes), at any time prior to December 31, 2007, the maturity date of the Convertible Notes, the Convertible 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 anti-dilution adjustments. On the date of issuance, the conversion price of the Convertible Notes exceeded the public market price per share of common stock of the Company. If in the future any Convertible 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 Convertible 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 Convertible Notes upon a change of control and upon the disposition of certain assets. If any Convertible 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 Convertible 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 anti-dilution adjustments. Warrants will be exercisable upon issuance and will expire on the maturity date of the Convertible 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 change in fair value of the warrants will be recorded as a charge to operations. Senior Secured Credit Facility and Amendment to Senior Secured Credit Facility B-21 In connection with the WWG Merger, the Company refinanced a portion of its debt and entered into a senior secured credit facility with a syndicate of lenders (the "Senior Secured Credit Facility") that provided for term loans and a revolving credit facility (the "Revolving Credit Facility"). As of March 31, 2002, the Company had $647.7 million in the term loan borrowings, $63.0 million in revolving credit borrowings and $17 million of outstanding letters of credit under the Senior Secured Credit Facility. As of March 31, 2002 and 2001, the Company was in compliance with all covenants under the Senior Secured Credit Facility, as amended on December 27, 2001. Interest on the loans outstanding under the Senior Secured Credit Facility is payable quarterly in arrears on each June 30, September 30, December 31 and March 31 through maturity. The loans under the Senior Secured Credit Facility bear interest at floating rates based upon the interest rate option elected by the Company. To fix interest charged on a portion of its debt, the Company entered into interest rate hedge agreements. After giving effect to these hedge agreements, $130 million of the Company's debt is currently subject to an effective average annual fixed rate of 5.655% per annum until September 2002. Taking into account its interest rate swap agreement, the annual weighted-average interest rate on the loans under the Company's Senior Secured Credit Facility was 6.7% and 9.8% for the fiscal years ended March 31, 2002 and 2001, respectively. Due to the recent reduction in interest rates, the Company's 90-day LIBOR borrowing rate (plus the applicable margin) was 5.904% at March 31, 2002. The obligations of the Company under the Senior Secured Credit Facility are guaranteed by each direct and indirect U.S. subsidiary of the Company. The obligation under the Senior Secured Credit Facility are secured by a pledge of the equity interests in Acterna LLC, by substantially all of the assets of Acterna LLC and each direct or indirect U.S. subsidiary of the Acterna 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 the Company that acts as a holding company of the Company's foreign subsidiaries. The Company is also required to pay a commitment fee based on the unused amount of the Revolving Credit Facility. The rate is an annual rate, paid quarterly, and ranges from 0.30% to 0.50%, and is based on the Company's leverage ratio in effect at the beginning of the quarter. The Company paid $0.2 million and $0.3 million in fiscal 2002 and 2001, respectively, in commitment fees. The mandatory principal repayment schedule of the Senior Secured Credit Facility over the next five years and thereafter is: $25.7 million in fiscal 2003, $40.7 million in fiscal 2004, $44.5 million in fiscal 2005, $74.7 million in fiscal 2006, $310.0 million in fiscal 2007 and $215.0 million in fiscal years subsequent to fiscal 2007. On December 27, 2001, in order to remain in compliance with the terms of the Senior Secured Credit Facility, the Company entered into an amendment to the facility. Pursuant to the amendment, the lenders under the facility agreed, among other things, to waive the minimum interest coverage and maximum leverage covenants of the Company under the facility through June 30, 2003. The amendment imposed a new minimum liquidity on the Company, which requires that the sum of cash, cash equivalents plus aggregate available revolving credit commitments equal at least $25 million. The Company must also comply with a new minimum EBITDA covenant that requires EBITDA of negative $10 million, positive $17 million, and positive $40 million for the six, nine and twelve month periods ended September 30, 2002, December 31, 2002, and March 31, 2003, respectively. The amendment also imposed additional covenants and restrictions, including, without limitation, additional restrictions on the Company's ability to make capital expenditures, incur and guarantee debt, make investments, optionally prepay the Senior Subordinated Notes and dispose of assets. The amendment also, among other things, added additional prepayment requirements for certain transactions, establishes additional B-22 guarantees and pledges of collateral and increases the interest rates on loans under the Senior Secured Credit Facility by 0.75%. The Company believes it has sufficient cash and borrowing availability to meet its liquidity covenant for fiscal 2003. In addition, based upon expected revenue levels over the near term and on timely and successful execution of the Company's restructuring programs, the Company believes that it will be able to meet its EBITDA covenant requirements through March 31, 2003. However, there can be no assurance that this will be the case. On June 30, 2003, the Company will again become subject to the minimum interest coverage and maximum leverage covenants under the Senior Secured Credit Facility. Based on current estimates of its revenues and projected operating losses and profits in the near term, the Company does not believe that it will be in compliance with these covenants upon reversion. As a result, the Company has begun discussions with its lenders under the Senior Secured Credit Facility to amend the interest coverage and maximum leverage covenant requirements. If the Company is unable to amend the terms of its Senior Secured Credit Facility, a default could occur. If a default occurs, the lenders under the Senior Secured Credit Facility could require immediate repayment of the loans under the facility and refuse to extend funds under the Company's Revolving Credit Facility. The Company cannot give any assurance that it will be able to obtain an amendment to its Senior Secured Credit Facility, or if it is does, that the amendment will be sufficient to remain in compliance with the terms of the facility. Senior Subordinated Notes In connection with the 1998 recapitalization of the Company, the Company issued the Senior Subordinated Notes. Interest on the Senior Subordinated Notes accrues at the rate of 9 3/4% per annum and is payable semi-annually in arrears on each May 15 and November 15 through maturity in 2008. As of March 31, 2002 and 2001, the Company was in compliance with all covenants under the Senior Subordinated Notes. The Senior Subordinated Notes 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% Capital Resources B-23 Cash Flows. The Company's cash and cash equivalents decreased $20.3 million to $42.7 million during the fiscal year ended March 31, 2002. Working Capital. For the fiscal year ended March 31, 2002, the Company's net working capital decreased as its operating assets and liabilities provided $26.3 million of cash, excluding acquisitions. Accounts receivable decreased, creating a source of cash of $107.0 million, primarily due to the decrease in sales during the fourth quarter of 2002 as compared to the same period in 2001 as well as reduction in days sales outstanding due to more effective collections. Inventory levels decreased, creating a source of cash of $44.6 million, due in part to the efforts to control costs and maintain inventory levels in line with expected sales. Other current assets increased, creating a use of cash of $72.5 million, due primarily to a $77.5 million income tax receivable at March 31, 2002. Accounts payable decreased $44.2 million and accrued expenses and other current liabilities decreased $8.5 million as a result of a reduced level of purchases in the fourth quarter of 2002, as compared to the same period a year ago. Investing activities. The Company used $15.9 million in investing activities for the fiscal year ended March 31, 2002. The Company acquired property and equipment of $38.4 million, which was offset by the sale of businesses of $23.8 million and other of $1.3 million. The Company's capital expenditures in fiscal 2002 were $38.4 million as compared to $45.9 million in fiscal 2001. The decrease during fiscal 2002 was primarily due to the Company's cost reduction and alignment efforts resulting from the economic slowdown previously mentioned. Debt and equity. The Company's financing activities used $6.0 million in cash during fiscal 2002, partially due to the repayment of long-term debt in excess of new borrowings. New borrowings during fiscal 2002 included $75 million, Senior Secured Convertible Notes, of which approximately $69 million was used to repay long-term debt. The Company also paid $6.3 million in financing fees associated with obtaining notes payable during fiscal 2002. Future Financing Sources and Cash Flows As of March 31, 2002, the Company had $63.0 million of borrowings and $17.0 million of letters of credit outstanding under its Revolving Credit Facility and $95.0 million of additional availability under the facility. As of March 31, 2002 the Company also has a $61.0 million receivable due to new U.S. tax legislation changes as mentioned previously. The entire $61.0 millions was collected during the first fiscal quarter of 2003. New Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") 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 B-24 effective April 1, 2001. The effects of adoption of FAS 142 are detailed in Note H. Acquired Intangible to the Consolidated Financial Statements. In October 2001, 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. The company has determined that the adoption of this standard will require the Company to disclose AIRSHOW as a discontinued operation in the first quarter of fiscal 2003 and reclassify prior period presentation. In April 2002, the FASB issued Statement of Financial Accounting Standards FAS No. 145, "Rescission of FASB Statements No.4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections". In general, FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement 4. Gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB Opinion No.30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The extraordinary item in 2001 will be reclassified on adoption of this standard. 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 March 31, 2002, the Company had $710.7 million of variable rate debt outstanding which represents approximately 65.3% of total outstanding debt. The Company currently has one interest rate swap contract with notional amount totaling $130 million which fixed its variable rate debt to a fixed interest rate for periods of two years expiring in September 2002 in which the Company pays a fixed interest rate on a portion of its outstanding debt and receives interest at the three-month LIBOR rate. This swap contact has an expiration date of September 28, 2002. B-25 At March 31, 2002, the swap contract currently outstanding and the swap contract that had 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 fiscal year 2002 of $2.6 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 March 31, 2002, the analysis demonstrated that such movement would cause the Company to recognize additional interest expense of approximately $0.3 million, and accordingly, would cause a hypothetical loss in cash flows of approximately $0.3 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 fiscal year ended March 31, 2002 was 6.7%. 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 1% in interest rates would increase interest expense by approximately $7.1 million on an annual basis. SUBSEQUENT EVENT On June 13, 2002, the Company signed a definitive agreement to sell its AIRSHOW business to Rockwell Collins, Inc. for $160 million in cash, subject to adjustment. The Company expects to record a gain in relation to this transaction. Consummation of the sale is subject to customary closing conditions, including regulatory approvals and consent of the Company's lenders under its Senior Secured Credit Facility. The Company intends to use the net proceeds of the sale (after fees and expenses) to repay a portion of its debt or invest in its business. Factors That May Affect Future Results Set forth below and elsewhere in this annual report and in the other documents the Company files with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward- looking statements contained in this annual report. Factors Related to the Company's Business and Industry The Company's substantial debt could adversely affect its financial condition. The Company is required to comply with debt covenants; however, the Company cannot provide any assurance that it will have the ability to do so beyond March 31, 2003. Inability to comply with covenants or obtain modifications to covenant requirements could result in default and cause the lenders to require immediate repayment of debt and limit or cancel the availability of borrowings. The Company's debt agreements impose significant operating and financial restrictions which limit the discretion of management with respect to certain business matters and may prevent the Company from capitalizing on business opportunities. These agreements restrict, among other things, the Company's ability to: . incur additional indebtedness, guarantee obligations and create liens; B-26 . 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. The Company's substantial level of debt and the terms of its debt instruments may also have important consequences for the Company, including, but not limited to, the following: the Company's vulnerability to adverse general economic conditions is heightened; the Company will be required to dedicate a substantial portion of its cash flow from operations to repayment of debt, limiting the availability of cash for other purposes; the Company is and will continue to be limited by financial and other restrictive covenants in its ability to borrow additional funds, guarantee obligations, pay dividends, consummate asset sales, enter into transactions with affiliates or conduct mergers and acquisitions; the Company's flexibility in planning for, or reacting to, changes in its business and industry will be limited; the Company is sensitive to fluctuations in interest rates because a substantial portion of its debt obligations are subject to variable interest rates; and the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or to capitalize on business opportunities may be impaired. The Company's leverage and restrictions in the Company's debt instruments may materially and adversely affect the Company's ability to finance its future operations or capital needs or to capitalize on business opportunities. Because the Company's quarterly operating results have fluctuated in the past and are likely to fluctuate in the future, the price of the Company's securities may be volatile and may decline. The Company has experienced in the past and expects to experience in the future fluctuations in its quarterly results due to a number of factors beyond the Company's control. Many factors could cause the Company's operating results to fluctuate from quarter to quarter, including the following: .. the size and timing of orders from the Company's customers; .. the degree to which the Company's customers have allocated and spent their yearly budgets, which has, in some cases, resulted in higher net sales in the Company's fourth quarter; .. the uneven buying patterns of the Company's customers; .. the uneven pace of technology innovation; .. economic downturns or other factors reducing demand for telecommunication equipment and services; and B-27 .. a significant portion of the Company's operating expenses is fixed and if the Company's net sales are below its expectations in any quarter, the Company may not be able to reduce its spending in a timely manner. The Company's operating results could be harmed if the markets into which the Company sells its products experience a downturn as a result of a reduction in previously planned capital expenditures for infrastructure expansion. Several significant markets into which the Company sells its products are cyclical. For example, the telecommunications industry in general, and the competitive local exchange carrier segment in particular, are now experiencing a downturn that has resulted in a reduction in previously planned capital expenditures for infrastructure expansion. These industry downturns have been characterized by diminished product demand, excess manufacturing capacity and the subsequent accelerated erosion of average selling prices. Any further downturn in the Company's customers' markets or in general economic conditions would likely result in a further reduction in demand for the Company's products and services, which would harm its business results and operating and financial condition. The Company's customers, which have also been effected by the downturn in the telecommunication industry and may be unable to meet current and ongoing obligations. The Company operates in highly competitive markets. The markets for the Company's products are highly competitive. Some of the Company's current and potential competitors have greater name recognition and greater financial, selling and marketing, technical, manufacturing and other resources than the Company does. In addition, due to the rapid evolution of the markets in which the Company competes, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers, may enter the Company's markets and further intensify competition. The Company may not be able to compete effectively with its existing competitors or with new competitors, and the Company's competitors may succeed in adapting more rapidly and effectively to changes in technology, in the market or in developing or marketing products that will be more widely accepted. The markets the Company serves are characterized by rapid change and innovation. The Company may not be able to develop and successfully market products that account for such changes and innovations. The market for the Company's products and services is characterized by rapidly changing technologies, new and evolving industry standards and protocols and product and service introductions and enhancements that may render the Company's existing offerings obsolete or unmarketable. A shift in customer emphasis from employee-operated communications test to automated, remote test and monitoring systems could likewise render some of the Company's existing product offerings obsolete or unmarketable, or reduce the size of one or more of the Company's addressed markets. In particular, incorporation of self-testing functions in the equipment currently addressed by the Company's communications test instruments could render some of its offerings redundant and unmarketable. Failure to anticipate or to respond rapidly to advances in technology and to adapt its products appropriately could have a material adverse effect on the Company's business, financial condition and results of operations. B-28 The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends and the incurrence of substantial research and development costs. The Company may not successfully anticipate such trends or have sufficient free cash flow to continue to incur such costs. The Company cannot assure you that it will successfully identify new product opportunities, develop and bring new products to market in a timely manner and achieve market acceptance of its products or that products and technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive. The Company's manufacturing efforts could be interrupted due to component shortages, which could reduce the Company's ability to build and sell its products. The Company uses a number of components to build its products and systems that are only available from a limited number of, or single-source, vendors. In addition, to obtain the components the Company requires to build its products and systems, the Company may be required to identify alternate sources of supply, which can be time consuming and result in higher procurement costs. The Company also cannot assure that it will be able to obtain suitable substitutes for components that become unavailable, which could potentially require the Company to perform costly and time consuming redesigns of its products. If the Company is unable to obtain sufficient quantities of required components, or if suppliers choose to reduce the amount of parts they make available to the Company, the Company may be unable to meet customer demand for its products, which would negatively affect its business and results of operations and could materially damage customer relationships. Acquisitions by the Company of additional businesses, products or technologies could negatively affect its business and the price of its securities. The Company has acquired businesses and technologies in the past and may pursue acquisitions of other companies, technologies and new and complementary product lines in the future. Any acquisition would involve risks to the Company's business, including: an inability to integrate the operations, products and personnel of the Company's acquired businesses and diversion of management's time and attention; an inability to expand the Company's financial and management controls and reporting systems and procedures to incorporate the acquired businesses; potential difficulties in completing projects associated with purchased in-process research and development; assumption of unknown liabilities, or other unanticipated events or circumstances; the possibility that the Company may pay too much cash or issue too much of its stock as the purchase price for an acquired business relative to the economic benefits that the Company ultimately derives from operating the acquired business; and the need to record significant one-time charges or amortize intangible assets, which could lower the Company's reported earnings. Mergers and acquisitions of high-technology companies are inherently risky. The Company cannot assure that any business that it may acquire will achieve anticipated net sales and operating results, which could decrease the value of the acquisition to the Company. Any of these risks could materially harm the Company's business, financial condition and results of B-29 operations. Payment paid for future acquisitions, if any, could be in the form of cash, stock, and rights to purchase stock or a combination of these. Dilution to existing stockholders and to earnings per share may result in connection with any future acquisitions. Economic, political and other risks associated with international sales and operations could adversely affect the Company's net sales. Because the Company sells its products worldwide, the Company's business is subject to risks associated with doing business internationally. The Company expects its net sales originating outside the United States to be approximately half of the Company's Communication Test total net sales for its 2003 fiscal year. In addition, many of the Company's manufacturing facilities and suppliers are located outside the United States. Accordingly, the Company's future results could be harmed by a variety of factors, including: changes in foreign currency exchange rates; changes in a specific country's or region's political or economic conditions, particularly in emerging markets; trade protection measures and import or export licensing requirements; and potentially negative consequences from changes in tax laws and other regulatory requirements. Compliance with applicable regulations, standards and protocols may be time consuming and costly for the Company. Several of the Company's products must comply with significant governmental and industry-based regulations, certifications, standards and protocols, some of which evolve as new technologies are deployed. Compliance with such regulations, certifications, standards and protocols may prove costly and time-consuming for the Company, and the Company cannot assure that its products will continue to meet these standards in the future. In addition, regulatory compliance may present barriers to entry in particular markets or reduce the profitability of the Company's product offerings. Such regulations, certifications, standards and protocols may also adversely affect the communications industry, limit the number of potential customers for the Company's products and services or otherwise have a material adverse effect on its business, financial condition and results of operations. Failure to comply, or delays in compliance, with such regulations, standards and protocols or delays in receipt of such certifications could delay the introduction of new products or cause the Company's existing products to become obsolete. Industry consolidation or changes in regulation could adversely affect the Company's business. A substantial portion of the Company's customers are regional telephone service operating companies, competitive access providers, wireless service providers, competitive local exchange carriers and other communications service providers and industrial engineers and other users of communications test equipment. Their industries are characterized by intense competition and consolidation. Consolidation could reduce the number of the Company's customers, increase their buying power and create pressure on the Company to lower its prices. In addition, governmental regulation of the communications industry could materially adversely affect the Company's customers and, as a result, materially limit or restrict its business. B-30 If service providers reduce their use of field technicians and successfully implement a self-service installation model, demand for the Company's products could decrease. To ensure quality service, the Company's major service provider customers typically send into the field a technician who uses its products to verify service for installations. However, some providers have recently announced plans to encourage their customers to install their own service and, by doing so, hope to reduce their expenses and expedite installation for their customers. To encourage self-installation, these companies offer financial incentives. If service providers successfully implement these plans or choose to send technicians into the field only after a problem has been reported, or if alternative methods of verification become available, such as remote verification service, the need for field technicians and the need for some of the Company's communications test instruments could decrease, which would negatively affect the Company's business and results of operations. The Company's success depends upon the quality of its key personnel. If the Company is unable to retain some of its personnel, or if it is unable to continue to attract and retain highly-skilled personnel, its business may suffer. The Company's success depends in large part upon its senior management, as well as its ability to attract and retain highly-skilled technical, managerial, sales and marketing personnel, particularly engineers with communications equipment experience. Competition for such personnel is intense, and the Company may not be successful in retaining its existing key personnel or attracting additional employees. Any failure of the Company to retain its personnel, including senior management, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, continued labor market shortages of technically-skilled personnel may lead to significant wage increases, which could adversely affect the Company's business, results of operations or financial condition. In order to reduce operating costs, the Company implemented restructuring plans. These restructuring plans included a reduction of personnel, many of which were highly skilled employees. The Company's operations could be negatively impacted by the loss of such employees. Third parties may claim the Company is infringing their intellectual property and, as a result of such claims, the Company may face significant litigation or incur licensing expenses or be prevented from selling its products. Third parties may claim that the Company is infringing their intellectual property rights, and the Company may be found to infringe those intellectual property rights. Any litigation regarding patents or other intellectual property rights could be costly and time consuming, and divert the attentions of the Company's management and key personnel from its business operations. Claims of intellectual property infringement might also require the Company to enter into costly royalty or license agreements. However, the Company may not be able to obtain royalty or license agreements on terms acceptable to it, or at all. The Company also may be subject to significant damages or injunctions against development and sale of certain of its products. Third parties may infringe on the Company's intellectual property and, as a result, the Company may be required to expend significant resources enforcing its rights or suffer competitively. The Company's success depends in large part on its intellectual property. The Company relies on a combination of patents, copyrights, trademarks and trade secrets, confidentiality B-31 provisions and licensing arrangements to establish and protect its proprietary intellectual property. If the Company fails to protect or to enforce successfully its intellectual property rights, the Company's competitive position could suffer, which could have a material adverse effect on its business, financial condition and results of operations. The Company's products are complex, and its failure to detect errors and defects may subject it to costly repairs, product returns under warranty and product liability litigation. The Company's products are complex and may contain undetected defects or errors when first introduced or as enhancements are released. The existence of these errors or defects could result in costly repairs and/or returns of products under warranty, diversion of development resources and, more generally, in delayed market acceptance of the product or damage to the Company's reputation and business, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Factors Related to the Company's Common Stock. The Company's current principal stockholders have effective control over the Company's business. As of March 31, 2002, the CDR Funds, the Company's controlling stockholders, together held approximately 80.1% of the outstanding shares of the Company's common stock. In addition, three of the eleven directors who serve on the Company's board are currently affiliated with the CDR Funds. By virtue of such stock ownership and board representation, the CDR funds have effective control over all matters submitted to the Company's stockholders, including the election of the Company's directors, and exercise significant control over the Company's policies and affairs. Such concentration of voting power could have the effect of delaying, deterring or preventing a change in control or other business combination that might otherwise be beneficial to the Company's stockholders. In addition, CDR Fund V has agreed, with Mr. John R. Peeler, the President and Chief Executive Officer of the Company's Communications Test Business, to vote its shares to elect him as a director so long as he is employed by the Company. Only approximately 19% of the Company's common stock trades publicly and the market for technology stocks is extremely volatile. The public market for the Company's common stock is limited as only approximately 19% of the outstanding stock trades publicly. The small size of the Company's float tends to increase the volatility of the Company's stock price. In addition, the stock market in general, and the market for technology stocks in particular, have experienced extreme volatility and this volatility has often been unrelated to the operating performance of particular companies. The market price of the Company's common stock could fluctuate significantly at any time in response to such factors as: changes in financial estimates or investment recommendations relating to the Company by securities analysts; the Company's quarterly operating results falling below securities analysts' or investors' expectations in any given period; announcements by the Company or its competitors of new products, acquisitions or strategic relationships; and B-32 general market conditions and domestic and international economic factors unrelated to the Company's performance. In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If the Company were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from the Company's business. Since November 9, 2000, the Company's common stock has been trading on the NASDAQ National Market. The Company has filed to transfer from the NASDAQ National market to the NASDAQ Small Cap Market. The Company expects such transfer to occur in June 2002. However, there is no assurance that such transfer will occur by such date, or at all. Furthermore, the Company's transfer from the NASDAQ National Market increases the risk that the market for the Company's common stock will become less liquid. Forward-Looking Statements This report (other than the Company's consolidated financial statements and other statements of historical fact) contains forward-looking statements. The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that its assumptions made in connection with the forward-looking statements are reasonable, there can be no assurance that the Company's assumptions and expectations will prove to have been correct. These forward-looking statements are subject to various risks, uncertainties and assumptions, including the risk factors described elsewhere in this report and the Company's other Securities and Exchange Commission filings. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur, actual results may differ materially from the estimates or expectations reflected in the Company's forward-looking statements, and undue reliance should not be placed upon the forward-looking events discussed in this report. B-33 APPENDIX C ACTERNA CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS C-2 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND 2001 C-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000 C-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000 C-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000 C-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS C-9
C-1 Report of Independent Accountants To the Board of Directors and Stockholders of Acterna Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) present fairly, in all material respects, the financial position of Acterna Corporation and its subsidiaries (the "Company") at March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion the financial statement schedule listed in the index appearing under Item 14 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note E to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, on April 1, 2001. As discussed in Note B to the consolidated financial statements, the Company has significant liquidity needs. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts May 28, 2002, except for Note R, as to which the date is June 14, 2002 C-2 Acterna Corporation Consolidated Balance Sheets
March 31, 2002 2001 -------- -------- Assets (Amounts in thousands except share and per share data) Current assets: Cash and cash equivalents $ 42,739 $ 63,054 Accounts receivable, net of allowance of $7,872 and $10,741 respectively 126,381 233,371 Inventories, net: Raw materials 39,511 61,009 Work in process 36,759 48,266 Finished goods 36,331 48,206 ---------- ---------- Total inventory 112,601 157,481 Deferred income taxes 18,878 37,961 Income tax receivable 77,479 --- Notes receivable 1,422 2,033 Other current assets 33,265 37,577 ---------- ---------- Total current assets 412,765 531,477 Property, plant and equipment: Land and buildings 55,075 55,123 Leasehold improvements 9,719 12,443 Machinery and equipment 88,567 87,716 Furniture and fixtures 75,679 55,240 ---------- ---------- 229,040 210,522 Less accumulated depreciation and amortization (106,954) (85,956) ---------- ---------- Property, plant and equipment, net 122,086 124,566 Other assets: Net assets held for sale --- 37,908 Goodwill, net 427,086 435,478 Other intangible assets, net 2,453 195,093 Deferred debt issuance costs, net 26,582 25,908 Other 23,584 32,549 ---------- ---------- Total assets $1,014,556 $1,382,979 ========== ==========
C-3 Acterna Corporation Consolidated Balance Sheets, continued
March 31, 2002 2001 -------- -------- Liabilities and Stockholders' Deficit (Amounts in thousands except share and per share data) Current liabilities: Notes payable $ 2,523 $ 10,919 Current portion of long-term debt 28,937 22,248 Accounts payable 73,374 112,155 Accrued expenses: Compensation and benefits 37,931 71,836 Deferred revenue 52,540 47,743 Warranty 17,332 11,914 Interest 10,700 11,476 Restructuring 14,562 --- Other 31,747 36,801 Taxes other than income taxes 8,230 14,112 Accrued income taxes 31,263 7,616 --------- --------- Total current liabilities 309,139 346,820 Long-term debt 979,187 1,056,383 Long-term notes payable 76,875 --- Deferred income taxes 17,581 2,915 Other long-term liabilities 68,549 57,838 Commitments and contingencies (Note P.) Stockholders' deficit: Serial preference stock, par value $1 per share; authorized 100,000 shares; none issued --- --- Common stock, par value $0.01, authorized 350,000,000 shares; issued and outstanding 192,247,785 and 190,953,052 shares, 2002 and 2001, respectively 1,922 1,910 Additional paid-in capital 786,537 801,080 Accumulated deficit (1,170,639) (795,746) Unearned compensation (53,925) (90,986) Other comprehensive income (loss) (670) 2,765 ---------- --------- Total stockholders' deficit (436,775) ( 80,977) ---------- --------- Total liabilities and stockholders' deficit $1,014,556 $1,382,979 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. C-4 Acterna Corporation Consolidated Statements of Operations
Years Ended March 31, 2002 2001 2000 ------ ----- ------ (Amounts in thousands except per share data) Net sales $1,132,661 $1,366,257 $ 656,601 Cost of sales 540,048 606,860 285,531 ---------- ---------- --------- Gross profit 592,613 759,397 371,070 Selling, general and administrative expense 444,387 486,598 192,286 Product development expense 160,219 168,117 75,398 Amortization of intangibles 42,271 120,151 12,326 Restructuring expense 33,989 --- --- Impairment of net assets held for sale 17,918 --- --- Goodwill impairment 3,947 --- --- Impairment of acquired intangible assets 151,322 --- --- Recapitalization and other related costs --- 9,194 27,942 Purchased incomplete technology --- 56,000 --- ---------- ---------- --------- Operating income (loss) (261,440) (80,663) 63,118 Interest expense (96,625) (102,158) (51,949) Interest income 1,625 3,322 2,373 Other expense, net (7,615) (4,491) (720) ---------- ---------- --------- Income (loss) from continuing operations before income taxes and extraordinary item (364,055) (183,990) 12,822 Provision for (benefit from) income taxes 799 (12,793) 6,810 ---------- ---------- --------- Income (loss) from continuing operations before extraordinary item (364,854) (171,197) 6,012 Income (loss) from discontinued operations (10,039) 10,039 --- ---------- ---------- --------- Income (loss) before extraordinary item (374,893) (161,158) 6,012 Extraordinary item, net of income tax benefit of $6,603 --- (10,659) --- ---------- ---------- --------- Net income (loss) $ (374,893) $ (171,817) $ 6,012 ========== ========== ========= Net income(loss) per common share-basic and diluted: Continuing operations $ (1.90) $ (0.93) $ 0.04 Discontinued operations (0.05) 0.06 --- Extraordinary item --- (0.06) --- ---------- ---------- --------- $ (1.95) $ (0.93) $ 0.04 ========== ========== ========= Weighted average number of common shares: Basic 191,868 183,881 148,312 Diluted 191,868 183,881 162,273
The accompanying notes are an integral part of the consolidated financial statements. C-5 Acterna Corporation Consolidated Statements of Stockholders' Deficit (amounts in thousands, except per share data)
Additional Other Total Common Common Paid - In Accumulated Unearned Comprehensive Shareholders' Stock Stock Capital Deficit Compensation Income (loss) Deficit ------------------------------------------------------------------------------------------ Balance, April 1, 1999 120,665 $ -- $ 322,746 $ (629,941) $ (7,563) $ (1,682) $ (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 1,225 344,873 (623,929) (16,965) (1,879) (296,675) -------- ------ ---------- ----------- -------- -------- ---------- Net loss 2001 (171,817) (171,817) Translation adjustment 4,644 4,644 ---------- Total comprehensive loss (167,173) Issuance of common stock to CDR Funds 43,125 431 172,069 172,500 Issuance of common stock rights offering, net of fees 4,983 50 16,882 16,932 Issuance of common stock to WWG stockholders 14,987 150 129,850 130,000 Stock option expense 12,255 12,255 Conversion of Cheetah stock options 5,754 (6,721) (967) Amortization of unearned compensation- continued operations 19,840 19,840 Exercise of stock option and other issuances 5,331 54 10,919 10,973 Unearned compensation from stock option grants 98,726 (98,726) --- Adjustment to unearned compensation (11,567) 11,586 19 Tax benefit from exercise of stock options 21,319 21,319 -------- ------ ---------- ----------- -------- -------- ---------- Balance, March 31, 2001 190,953 $1,910 $ 801,080 $ (795,746) $(90,986) $ 2,765 $ (80,977) -------- ------ ---------- ----------- -------- -------- ---------- Net loss 2002 (374,893) (374,893) Translation adjustment and minimum pension liability (3,435) (3,435) ---------- Total comprehensive loss (378,328) Amortization of unearned compensation 19,368 19,368 Exercise of stock option and other issuances, net 1,295 12 2,156 2,168 Adjustment to unearned compensation (17,693) 17,693 --- Tax benefit from exercise of stock options 994 994 -------- ------ ---------- ----------- -------- -------- ---------- Balance, March 31, 2002 192,248 $1,922 $ 786,537 $(1,170,639) $(53,925) $ (670) $ (436,775) ======== ====== ========== =========== ======== ======== ==========
The accompanying notes are an integral part of the consolidated financial statements. C-6 Acterna Corporation Consolidated Statements of Cash Flows
Years Ended March 31, 2002 2001 2000 ---------- ---------- -------- (Amounts in thousands) Operating activities: Net income (loss) from operations $ (374,893) $(171,817) $ 6,012 Adjustment for noncash items included in net income (loss): Depreciation 36,391 28,427 13,082 Bad debt (582) 7,147 1,024 Amortization of intangibles and goodwill 42,271 120,151 12,327 Amortization of inventory step-up --- 35,750 --- Amortization of unearned compensation 19,368 19,840 2,419 Amortization of deferred debt issuance costs 5,582 3,974 3,232 Impairment of acquired intangible assets 151,322 --- --- Write-off of deferred debt issuance costs --- 10,019 --- Loss on discontinued operations 10,039 --- --- Loss on sale of fixed assets 4,173 --- --- Impairment of assets held for sale and goodwill impairment 21,865 --- --- Purchased incomplete technology --- 56,000 --- Recapitalization and other related costs --- 9,194 12,327 Tax benefit from stock option exercises 994 21,319 1,461 Other --- 2,047 56 Change in deferred income taxes 59,291 (31,309) (2,840) Changes in operating assets and liabilities, net of effects of purchase acquisitions and divestitures 26,300 (91,372) 8,310 ----------- --------- --------- Net cash flows provided by operating activities 2,121 19,370 57,410 ----------- --------- --------- Investing activities: Purchases of property and equipment (38,403) (45,905) (21,859) Proceeds from sale of property and equipment 1,178 2,433 --- Proceeds from sales of businesses 23,800 6,381 --- Businesses acquired in purchase transactions, net of cash and noncash items (1,495) (422,137) (113,227) Other (1,029) (4,863) (7,165) ----------- --------- --------- Net cash flows used in investing activities (15,949) (464,091) (142,251) ----------- --------- --------- Financing activities: Borrowings (repayments) under revolving credit facility, net (45,000) 108,000 70,000 Borrowings of term loan debt 3,350 683,566 --- Repayment of term loan debt (35,010) (12,944) (17,139) Borrowings of notes payable 75,000 --- --- Borrowings (repayments) of notes payable and other debt (260) 31,735 (212) Repayment of debt under old Senior Secured Credit Facility --- (304,861) --- Repayment of WWG term debt --- (118,594) --- Redemption of WWG bonds --- (94,148) --- Financing fees (6,256) (18,519) --- Proceeds from issuance of common stock, net 2,168 200,405 4,736 Purchases of treasury stock, common stock and stock options --- --- (6,980) ----------- --------- --------- Net cash flows provided by (used in) financing activities (6,008) 474,640 50,405 ----------- --------- --------- Effect of exchange rates on cash (479) (2,634) (157) ----------- --------- --------- Increase (decrease) in cash and cash equivalents (20,315) 27,285 (34,593) Cash and cash equivalents at beginning of year 63,054 35,769 70,362 ----------- --------- --------- Cash and cash equivalents at end of year $ 42,739 $ 63,054 $ 35,769 =========== ========= ========= Change in operating asset and liability components: Decrease (increase) in trade accounts receivable $ 106,979 $ (47,191) $ (19,200)
C-7 Decrease (increase) in inventories 44,552 (32,950) 7,185 Decrease (increase) in other current assets (72,519) (1,403) (7,324) Increase (decrease) in accounts payable (44,238) 22,200 12,397 Increase (decrease) in accrued expenses, taxes and other (8,474) (32,028) 15,252 ----------- ---------- -------- Change in operating assets and liabilities $ 26,300 $ (91,372) $ 8,310 =========== ========== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 87,258 $ 105,115 $ 48,791 Income taxes 15,555 13,036 14,737
The accompanying notes are an integral part of the consolidated financial statements C-8 ACTERNA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. FORMATION AND BACKGROUND Acterna Corporation (the "Company" or "Acterna", formerly Dynatech Corporation), was formed in 1959 and is a global communications equipment company focused on network technology solutions. The Company's operations are conducted 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 four business segments: communications test, industrial computing and communications, AIRSHOW and da Vinci. 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 F. Acquisitions and Divestitures), 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 as continuing operations. The Balance Sheets as of March 31, 2002 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, manufacturers and markets instruments, systems, software and services used to test, deploy, manage and optimize communications networks, equipment and services. The industrial computing and communications segment provides computer products to the ruggedized computer market. ICS Advent 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. AIRSHOW is a provider of systems that deliver real-time news, information and flight data to aircraft passengers. AIRSHOW systems are marketed to commercial airlines and private aircraft owners. The da Vinci segment 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 ended March 31, 2002). B. LIQUIDITY The Company has recorded significant losses from operations and seen a substantial reduction in revenues and operations as a result of the economic downturn and in particular the downturn within the telecommunications sector and related industries. Consequently the Company has undertaken several restructurings during the year ended March 31, 2002 (See Note G. Restructuring) to align its cost structures and its revenues. Due to the severity and continuing downturn, management have C-9 identified the need to make further cost reductions during the course of fiscal 2003. These cost reduction plans are designed to align the cost base of the Company with the reduced forecast revenues and to enable the Company to remain compliant with the liquidity and earnings covenants required under the Senior Secured Credit Facility (See Note K. Notes Payable and Debt) during the course of fiscal 2003. Continuing compliance with these covenant requirements during fiscal 2003 is dependent upon the timely execution of the cost cutting plans identified and being implemented. The Company's cash requirements for debt service, including repayment of debt, and on-going operations are substantial. Debt repayment obligations are significant and increase through 2007 (See Note K. Notes Payable and Debt) As a result of the amendment of the Senior Secured Credit Facility and the issuance at par of $75 million of 12% Senior Secured Convertible Notes due 2007 (the "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 December 2001, in order to remain compliant with the terms of the Senior Secured Credit Facility, the Company amended its near-term covenants under the Senior Secured Credit Facility. Based on the terms of the amendment, the Company must maintain minimum liquidity of $25 million, which is defined as the sum of cash and cash equivalents plus aggregate available revolving credit commitments. The Company must also comply with minimum EBITDA amounts of ($10 million), $17 million, and $40 million for the six, nine, and twelve month periods ended September 30, 2002, December 31, 2002, and March 31, 2003, respectively. The Company believes it has sufficient cash and borrowing availability to meet its liquidity covenants for the year ending March 31, 2003 and that based on expected reduced revenue levels and timely and successful execution of its restructuring programs, it will be able to meet its EBITDA covenant requirements for the next twelve months. Beyond March 31, 2003, based on current forecasts of revenues and results of operations, assuming timely completion and execution of the cost reduction programs, and based on the increasing and significant debt repayment obligations beginning in 2003, the Company believes that its current financing base, consisting of equity and debt instruments, will need to be renegotiated, extended or refinanced. There can be no guarantee that in the event the Company is required to extend, refinance or repay its debt, that new or additional sources of finance will be available or will be available on terms acceptable to the Company. Inability to repay the debt obligations or source alternative financing will likely have a material impact on the financial position of the Company. After March 31, 2003, the Company will again be subject to covenants outlined in the original Senior Secured Credit Facility which include minimum interest and maximum debt to EBITDA coverage ratios. Based on the current economic outlook, the Company does not believe it has the ability to comply with these covenants. The Company plans to work with its senior lenders to amend its covenants requirements, however, it cannot provide any assurance that it will be able to reach agreement with it lenders on reasonable terms. Inability to modify the current covenant agreement could result in default and cause the lenders to require immediate repayment of all debt under the Credit Facility and limit or cancel the availability of borrowings under the Company's Revolving Credit Facility. The Company may have to immediately find other sources of capital and further substantially reduce its cost of operations. In addition, the Company may need to raise additional capital to meet its needs after 2003, to develop new products and to enhance existing products in response to competitive pressures, and to acquire complementary products, businesses or technologies. After March 31, 2003, 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 Convertible Notes and the Senior C-10 Subordinated Notes, will be subject to future economic, financial and business conditions and other factors, including demand for communications test equipment, many of which are beyond the Company's control. C. RECAPITALIZATION On May 21, 1998, CDRD Merger Corporation, a nonsubstantive transitory merger vehicle, which was organized at the direction of Clayton, Dubilier & Rice, Inc. ("CDR"), a private investment firm, was merged with and into the Company (the "Recapitalization" or the "Transaction") with the Company continuing as the surviving corporation. In the Recapitalization, (1) each then outstanding share of common stock, par value $0.20 per share, of the Company (the "Old Common Stock") was converted into the right to receive $47.75 in cash and 0.5 shares of common stock, no par value, of the Company (the "Common Stock") and (2) each then outstanding share of common stock of CDRD Merger Corporation was converted into one share of Common Stock. Upon consummation of the Recapitalization, Clayton, Dubilier & Rice Fund V Limited Partnership, an investment partnership managed by CDR ("CDR Fund V"), held approximately 91.8% of the Company's Common Stock and other stockholders held approximately 8.2% of the Common Stock. The Transaction was treated as a recapitalization for financial reporting purposes. Accordingly, the historical basis of the Company's assets and liabilities were not affected by these transactions. As of March 31, 2002, CDR Fund V and Clayton, Dubilier & Rice Fund VI Limited Partnership ("CDR Fund VI") held approximately 80.1% of the Common Stock outstanding. Recapitalization and other related costs during fiscal 2002, 2001 and 2000 totaled $0 million, $9.2 million and $27.9 million, respectively, most of which related to termination expenses of certain executives including the retirement of John F. Reno, former Chairman, President and Chief Executive Officer of the Company, as well as other employees. D. RELATED PARTY The Company paid an annual management fee to CDR totaling $ 1.6 million, $0.5 million and $0.5 million in the three fiscal years ending March 31, 2002, 2001 and 2000, respectively. In return for the annual management fee, CDR provides management and financial consulting services to the Company and its subsidiaries. In fiscal 2002, the Company also paid CDR a $2.3 million financing fee in connection with the issuance of the Senior Secured Convertible Notes and the amendment of the Senior Secured Credit Facility. In connection with the merger (the "WWG Merger") between a subsidiary of the Company and Wavetek Wandel Goltermann, Inc. ("WWG") in May 2000 and the concurrent establishment of the new Senior Secured Credit Facility, the Company paid CDR $6.0 million for services provided in connection with the WWG Merger and the related financing, of which $3.0 million has been allocated to deferred debt issuance costs and $3.0 million allocated to additional paid-in capital in connection with the rights offering to the Company's other stockholders undertaken by the Company in June 2000. On May 19, 1999, Ned C. Lautenbach, a principal of CDR, became the Company's Chairman and Chief Executive Officer. Mr. Lautenbach has not received direct compensation from the Company for these services. However, his compensation for any services is covered in the above mentioned management fees paid to CDR. C-11 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 "Convertible Notes") to CDR Fund VI. Interest on the Convertible 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 Convertible Notes. Due to limitations imposed by the Company's Senior Secured Credit Facility, Acterna LLC expects to pay interest on the Convertible Notes in-kind by issuing additional Convertible Notes. The Convertible 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. The Company used the net proceeds of $69 million from the issuance and sale of the Convertible 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 re-borrowed by the Company. As a result of the repayment, the Company had $95 million of availability under its Revolving Credit Facility as of March 31, 2002. (For additional information concerning the Convertible Notes see Note K. Notes Payable and Debt.) E. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its wholly owned domestic and international subsidiaries. The results of companies acquired or disposed of during the fiscal year are included in the Consolidated Financial Statements from the effective date of acquisition or up to the date of disposal. Intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentations. 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, carrying values of long-lived assets, pension assets and liabilities, tax valuation reserves and nonrecurring charges. 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, 2002 and 2001. Other financial instruments include debt and interest rate swaps. (See Note K. Notes Payable and Debt and Note L. Interest Rate Swap Contracts) Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, accounts receivable and interest rate swap contracts. The Company maintains its cash accounts in various institutions worldwide and places its cash investments in prime quality certificates of deposit, commercial paper, or mutual funds. Credit risk related to its accounts receivable are limited due to the large number of customers and their dispersion across many business and geographic areas. However, a significant amount of trade receivables are with customers within the telecommunications industry, which is currently experiencing a significant downturn. The Company extends credit to its customers based upon an C-12 evaluation of the customer's financial condition and credit history and generally does not require collateral. The Company has historically incurred insignificant credit losses. The Company's counterparties to the investment agreements and interest rate swap contracts consist of various major corporations and financial institutions of high credit standing. The Company does not believe there is significant risk of non-performance by these counterparties. Cash Equivalents. Cash equivalents represent highly liquid investment instruments with an original maturity of three months or less at the time of purchase. Inventories. Inventory values are stated at the lower of cost or market. Cost is determined based on a currently-adjusted standard basis, which approximates actual cost on a first-in, first-out basis. The company's inventory includes raw materials, work in process, finished goods and demonstration equipment. The Company periodically reviews its recorded inventory and estimates a reserve for obsolete or slow-moving items. The Company reserves the entire value of all obsolete items. The Company determines excess inventory based upon current and forecasted usage, and a reserve is provided for the excess inventory. Such estimates are difficult to make under current economic conditions. 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 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. Maintenance and repairs' expenditures are expensed when incurred. Goodwill. Goodwill represents the excess of cost over the fair market value of the net assets acquired and, prior to March 31, 2001, goodwill was charged to earnings on a straight-line basis over the period estimated to be benefited, averaging 6 years. Effective April 1, 2001, the Company adopted FAS 141 and FAS 142. Under the provisions of FAS 142, the Company ceased amortization of goodwill and will complete an impairment test using a discounted cash flow method of the remaining goodwill, at least annually on March 31, and therefore, will only be charged to operations to the extent it has been determined to be impaired. Acquired Intangible Assets. Acquired intangible assets consist primarily of product technology acquired in business combinations. Product technology and other acquired intangible assets are amortized on a straight-line basis primarily over six years. Amortization expense related to product technology was $38.9 million in 2002, $32.7 million in fiscal 2001, and $2.6 million in fiscal 2000. Amortization expense related to other intangibles was $3.3 million in 2002, $18.6 million in fiscal 2001, and $0.5 million in fiscal 2000. Long-Lived Assets. The Company periodically evaluates the recoverability of long-lived assets, including intangibles, whenever events and changes in circumstances indicate that the carrying C-13 amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. Impairment is measured by the amount discounted cash flows are 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. If the Company determines that any of the impairment indicators exist, and these assets were determined to be impaired, an adjustment to write down the long-lived assets would be charged to income in the period such determination was made. Deferred Debt Issuance Costs. In connection with the Recapitalization and the new Senior Secured Credit Facility, the Company incurred financing fees that are being amortized over the life of the Senior Secured Credit Facilities and Senior Subordinated Notes. (See Note K. Notes Payable and Debt.) Other Comprehensive Income (Loss). The functional currency for the majority of the Company's foreign operations is the applicable local currency. The translation from the local foreign currencies to U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The unrealized gains or losses resulting from such translation are included in stockholders' equity (deficit). The realized gains or losses resulting from foreign currency transactions are included in other income. During fiscal 2002, 2001 and 2000 the Company recorded transaction losses of $5.2 million, $5.5 million and a gain of $54.5 thousand, respectively. Other comprehensive income (loss) that is shown in the Statement of Stockholders' Deficit consists of foreign currency translation adjustments and unrealized gains (losses) on interest rate swap contracts offset by changes in minimum pension funding obligations. Stock-Based Compensation. The Company accounts for stock-based awards to its employees using the intrinsic value-based method as prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has adopted the pro forma footnote disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which prescribes the recognition of compensation expense based on the fair value of options on the grant date with compensation costs recognized ratably over the vesting period. Unearned Compensation. From the time of the Recapitalization through October 2000, the Company issued non-qualified stock options to employees and non-employee directors at an exercise price equal to the fair market value as determined by the Company's board of directors. The exercise price may or may not have been equal to the trading price in the public market on the dates of the grants. The Company recorded a charge equal to the difference between the closing price in the public market and the exercise price of the options within unearned compensation within stockholders' deficit. This unearned compensation charge is being amortized to expense over the options' vesting periods of up to five years. The Board of Directors voted on October 23, 2000 to issue non-qualified stock options based on the average of the highest and lowest trading prices in the public market as of the day of the grant for all stock options issued after that date. The Company adjusts unearned compensation for employees and non-employee directors who have terminated employment with the Company whose options, which were granted at an exercise price C-14 lower than the trading price on the open market, were not fully vested at the time of departure. The adjustment reverses any amortization charge recognized for unvested options and eliminates any related remaining unearned compensation. Revenue Recognition. The Company's revenues are primarily derived from product sales. The Company recognizes revenue when it is earned. The Company considers revenue earned when it has persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, title and risk of loss have passed to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. Revenue from product sales are generally recognized at the time the products are shipped to the customer. In certain cases where the Company has not transferred the risks and rewards of ownership, revenue recognition is deferred. Upon shipment, the Company also provides for estimated costs that may be incurred for product warranties and sales returns. Service revenue is deferred and recognized over the contract period or as services are rendered. Revenue on multi-element arrangements is recognized among each of the deliverables based on the relative fair value. Revenue on long-term contracts is recognized using the completed contract basis or the percentage of completion basis, as appropriate. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. Generally, the terms of long-term contracts provide for progress billing based on completion of certain phases of work. Revenue from software sales is generally recognized upon delivery provided that a contract has been executed, there are no uncertainties regarding customer acceptance and that collection of the related receivable is probable. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. 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, based on expected return rates and costs to repair, 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 assets and liabilities that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits are generally recognized as reductions of income tax provisions in the year in which the credits arise. The Company's deferred tax assets are evaluated as to whether it is more likely than not they will be recovered from future income. To the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance against such assets. (See Note M. Income Taxes.) C-15 The Company does not provide for U.S. income tax liabilities on undistributed earnings of its foreign subsidiaries which are considered indefinitely reinvested. 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. The effects of FAS 142 are detailed in Note H. Goodwill and Other Intangible Assets. 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 was adopted by the Company, as required, on April 1, 2002. The Company has determined that the adoption of this standard will require the Company to disclose AIRSHOW as a discontinued operation in the first quarter of fiscal 2003 and reclassify prior period presentation. In April 2002, the FASB issued Statement of Financial Accounting Standards FAS No. 145, "Rescission of FASB Statements No.4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections". In general, FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement 4. Gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB Opinion No.30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The extraordinary item in 2001 will be reclassified on adoption of this standard. F. ACQUISITIONS AND DIVESTITURES ACQUISITIONS DURING FISCAL 2002 The Company in the normal course of business entered into acquisitions during fiscal 2002, which, in the aggregate, do not have a material impact on the results of operations and financial position of the Company. Accordingly the Company has not presented proforma results of operations for these acquisitions. C-16 ACQUISITIONS DURING FISCAL 2001 Wavetek Wandel Goltermann,Inc. On May 23, 2000, the Company merged one of its wholly owned subsidiaries with Wavetak Wandel Goltermann, Inc. ("WWG") for consideration of $402.0 million. The WWG Merger was accounted for using the purchase method of accounting. Purchased incomplete technology of $51 million had not reached technological feasibility, had no alternative future use and was written off to the income statement in the fiscal year 2001. The excess purchase price was allocated to other intangibles and goodwill. The purchase accounting is summarized as follows: Aggregate purchase price: Cash in exchange for WWG stock $ 249,562 Cash in exchange for WWG options 8,248 Acterna common stock, 14,987 shares 130,000 Acquisition costs 14,228 --------- Total purchase price 402,038 Plus net tangible liabilities acquired 150,504 --------- Total purchase price in excess of net assets acquired $ 552,542 ========= Allocations of purchase price: Inventory step-up to fair value $ 35,000 In-process research and development acquired 51,000 Allocation to land and buildings 27,000 Deferred tax liabilities (49,447) Core technology 162,180 Backlog 6,841 Goodwill 319,968 --------- $ 552,542 ========= As of April 1, 2001, the Company adopted FAS 142 and all amounts previous allocated to workforce have been reclassified to goodwill. Superior Electronics Group, Inc., doing business as Cheetah Technologies On August 23, 2000, the Company acquired Superior Electronics Group, Inc., a Florida corporation doing business as Cheetah Technologies ("Cheetah") for a purchase price of $171.5 million. The acquisition was accounted for using the purchase method of accounting. The Company funded the purchase price with borrowings of $100 million under its Senior Secured Credit Facility (See Note K. Notes Payable and Debt) and approximately $65.7 million from its existing cash balance. Purchased incomplete technology of $5 million had not reached technological feasibility, had no alternative future use and was written off to the income statement in the fiscal year 2001. The excess purchase price was allocated to other intangibles and goodwill. C-17 In connection with the Cheetah acquisition, options to purchase shares of Cheetah common stock were converted into options to purchase shares of Acterna common stock. The fair value as of the announcement date of the acquisition of all options converted was $5.8 million using an option-pricing model. An additional charge of $6.7 million relates to the unearned intrinsic value of unvested options as of the closing date of the acquisition, and has been recorded as deferred compensation to be amortized over the remaining vesting period of the options (the weighted average vesting period is approximately three years). The purchase accounting is summarized as follows: Aggregate purchase price: Cash paid $ 164,723 Fair value of Cheetah stock options converted to Acterna stock options 5,754 Acquisition costs 997 --------- Total purchase price 171,474 Less net assets acquired (15,073) --------- Total purchase price in excess of net assets acquired $ 156,401 ========= Allocations of purchase price: Inventory step-up to fair value $ 750 In-process research and development acquired 5,000 Deferred compensation related to unvested stock options assumed by the Company 6,720 Core technology 48,300 Backlog 3,300 Other intangibles 700 Goodwill 91,631 --------- $ 156,401 ========= As of April 1, 2001, the Company adopted FAS 142 and all amounts previous allocated to workforce have been reclassified to goodwill. ACQUISITIONS DURING FISCAL 2000 WPI Husky Technology, Inc., WPI Oyster Termiflex Limited, WPI Husky Technology Limited and WPI Husky Technology GmbH On February 24, 2000 the Company, through one of its wholly owned subsidiaries, purchased certain assets and liabilities of WPI Husky Technology, Inc., and WPI Oyster Termiflex Limited, and the stock of WPI Husky Technology Limited and WPI Husky Technology GmbH (collectively "Itronix UK"), all of which were subsidiaries of WPI, Inc. The total purchase price for Itronix UK totaled approximately $34.8 million in cash (of which approximately $30 million was borrowed to finance the acquisition). The acquisition was accounted for using the purchase method of accounting and resulted in approximately $30 million of goodwill. Itronix UK distributes rugged field computer systems including the provision of related services for incorporation into customers' specific applications. C-18 ICS Advent (Europe) Ltd. On January 4, 2000, the Company purchased the remaining outstanding stock of ICS Advent (Europe) Ltd. ("ICS UK") for (pound)3.0 million (approximately $4.9 million) in cash. The acquisition was accounted for using the purchase method of accounting and generated approximately $4.0 million of goodwill. On October 31, 2001, the ICS business was sold. (See Divestiture during Fiscal 2002) Applied Digital Access, Inc. On November 1, 1999, the Company acquired all the outstanding stock of Applied Digital Access, Inc. ("ADA") for a total purchase price of approximately $81.0 million in cash. The operating results of ADA have been included in the Consolidated Financial Statements since November 1, 1999 and is included within the Company's communications test segment. Sierra Design Labs On September 10, 1999, the Company purchased the outstanding stock of Sierra Design Labs ("Sierra") for a total purchase price of $6.3 million in cash. The acquisition was accounted for using the purchase method of accounting and resulted in $4.9 million of goodwill. The operating results of Sierra have been included in the consolidated financial statements since September 10, 1999 and is included within the Company's Other Subsidiaries. DIVESTITURE DURING FISCAL 2002 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. DIVESTITURE DURING FISCAL 2001 Data Views Corporation In June 2000, the Company sold the assets and liabilities of DataViews Corporation ("DataViews"), a subsidiary that manufactures software for graphical-user-interface applications, to GE Fanuc for $3.5 million. The sale generated a loss of approximately $0.1 million. Prior to the sale, the results of DataViews were included in the Company's financial statements within "Corporate and Other Subsidiaries". C-19 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 results of operations and financial position of the Company for the periods presented. G. RESTRUCTURING The Company continues to implement cost reduction programs aimed at aligning its ongoing operating costs with its expected revenues. At the end of the fourth quarter of fiscal 2002, the Company's headcount was 4,973 (down from 6,380 at the beginning of fiscal 2002), and the corporate headquarters was relocated from Burlington, Massachusetts to Germantown, Maryland. Based on current estimates of its revenues and operating profitability and losses, the Company plans to take additional and significant cost reduction actions in order to remain in compliance with its financial covenant requirements under its Senior Secured Credit Facility. (See Note B. Liquidity, to the Company's Consolidated Financial Statements.) These cost reduction programs include among other things: an additional reduction of 400 employees, a reduction of new hires, reductions to employee compensation, consolidation of identified facilities and an exit from certain product lines. A portion of these actions have been implemented in the first quarter of fiscal 2003 and are intended to reduce costs by an estimated $75 million in fiscal 2003. These new actions coupled with the fourth quarter restructuring programs will result in reducing headcount to approximately 4,100 employees by the third quarter of fiscal 2003. The Company believes that the cost reduction programs will be implemented and executed on a timely basis and will align costs with revenues. In the event the Company is unable to achieve this alignment, additional cost cutting programs would be required in the future. During the fiscal year ended March 31, 2002, the Company recorded $34.0 million of restructuring charges, related to three restructuring plans, as a result of the cost reduction programs mentioned above. Details of these restructuring plans and the associated charges are described below: On August 1, 2001 the Company announced a comprehensive cost reduction program that included 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 $8.0 million relating primarily to severance in the second quarter of fiscal 2002. 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; (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 fourth quarter of 2002, the Company announced additional cost reduction plans that included (1) a reduction of approximately 400 jobs nationwide; and (2) consolidation of certain Itronix facilities located abroad. As a result, the Company incurred a restructuring charge of $16.7 million during the fourth quarter of 2002. During the fiscal year ended March 31, 2002, the Company paid approximately $19.4 million in severance and other related costs. At March 31, 2002 approximately $14.6 million was left to be C-20 paid for this restructuring; the Company anticipates that this amount will be paid primarily during the first half of fiscal 2003. The following table summarizes the restructuring expenses and payments incurred during the fiscal year ended March 31, 2002: For The Twelve Months Ended March 31, 2002 Balance Balance March 31, March 31, 2001 Expense Paid 2002 ---------- ------- ---- ---------- Workforce-related $ --- $ 31,737 $(17,972) $ 13,765 Facilities --- 1,134 (763) 371 Other --- 1,118 (692) 426 --------- -------- -------- ---------- Total $ --- $ 33,989 $(19,427) $ 14,562 ========= ======== ======== ========== H. ACQUIRED INTANGIBLE ASSETS During the fourth quarter of fiscal 2002, as a result of the substantial declining financial performance within the communication test segment and resulting reduced expectations for future revenues and earnings, management performed an assessment of the carrying values of long-lived assets within the communications test segment. This assessment, based on estimated future cash flows of the assets, discounted to arrive at a value today, quantified the impairment of acquired intangible assets (principally core technology). As a result, a charge of $151.3 million was recorded during the fourth quarter of fiscal 2002. The remaining acquired intangible assets are as follows: As of March 31, 2002 Gross Carrying Accumulated Amount Amortization ----------- ------------ (In thousands) Amortized intangible assets: Core technology $ 8,758 $ 6,930 Other intangible assets 1,050 425 --------- --------- Total $ 9,808 $ 7,355 ========= ========= Aggregate amortization expense: For the year ended March 31, 2002 $ 42,271 Estimated amortization expense: For the year ended March 31, 2003 $ 1,297 For the year ended March 31, 2004 $ 1,031 For the year ended March 31, 2005 $ 125 Core technology is amortized over a weighted average life of 8 years and all other intangible assets are amortized over a weighted average life of 5 years. I. GOODWILL AND OTHER INTANGIBLE ASSETS C-21 The changes in the carrying amount of goodwill during the year ended March 31, 2002, are as follows:
-------------------------------------------------------- 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 (1,016) (2,391) (875) (4,110) (8,392) -------- --------- -------- ------- -------- Balance as of March 31, 2002 $376,171 $ 31,645 $ 18,164 $ 1,106 $427,086 ======== ========= ======== ======= ========
The goodwill adjustments in the communications test reporting unit resulted primarily from final adjustments to the purchase price allocation for the WWG Merger (See Note F. Acquisitions and Divestitures) and due to the deferred tax adjustment relating 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 AIRSHOW relates to the reclassification of an identified intangible asset from goodwill. The goodwill adjustment for da Vinci relates to the goodwill impairment as a result of the closure of Sierra Design Labs, a subsidiary of da Vinci Systems, Inc. during the third quarter of fiscal 2002. The effects of adopting FAS 142 are set out below:
Year Ended Year Ended March 31, March 31, 2001 2000 ---- ---- Income (loss) from continuing operations before extraordinary item $ (171,197) $ 6,012 Add back goodwill amortization 68,896 9,192 Add back other intangible amortization 9,258 164 ---------- ---------- Adjusted income (loss) from continuing operations before extraordinary item $ (93,043) $ 15,368 ========== ========== Basic and diluted loss per share: Reported net income (loss) from continuing operations before extraordinary item $ (0.93) $ 0.04 Goodwill amortization 0.37 0.06 Other intangible amortization 0.05 0.00 ---------- ---------- Adjusted basic and diluted income (loss) per share from continuing operations before extraordinary item $ (0.51) $ 0.10 ========== ==========
The Company completed its transitional impairment test of goodwill during the year ended March 31, 2002 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 was performed as of C-22 March 31, 2002 and determined that goodwill was not impaired for all reporting units required under FAS 142. J. NET INCOME (LOSS) PER SHARE The computation for net income (loss) per share is as follows:
2002 2001 2000 --------- --------- --------- (Amounts in thousands except per share data) Net income (loss): Continuing operations $(364,854) $(171,197) $ 6,012 Discontinued operations (10,039) 10,039 -- Extraordinary loss -- (10,659) -- --------- --------- --------- Net income (loss) $(374,893) $(171,817) $ 6,012 ========= ========= ========= BASIC AND DILUTED: Common stock outstanding, net of treasury stock, beginning of period 190,953 122,527 120,665 Weighted average common stock and treasury stock issued during the period 915 57,188 886 --------- --------- --------- 191,868 179,715 121,551 Bonus element adjustment related to rights offering -- 4,166 26,761 --------- --------- --------- Weighted average common stock outstanding, net of treasury stock, end of period 191,868 183,881 148,312 ========= ========= ========= Net income (loss) per common share basic and diluted: Continuing operations $ (1.90) $ (0.93) $ 0.04 Discontinued operations (0.05) 0.06 -- Extraordinary loss -- (0.06) -- --------- --------- --------- Net income (loss) per common share $ (1.95) $ (0.93) $ 0.04 ========= ========= =========
On May 23, 2000 in connection with the WWG Merger, the Company issued 43,125,000 shares of common stock to CDR Fund V and CDR Fund VI at a price of $4.00 per share. In order to reverse the diminution of all other common stockholders as a result of shares issued in connection with the WWG Merger, the Company made a rights offering to all its common stock stockholders (including CDR) of record on April 20, 2000 (the "Rights Offering"). CDR Fund V elected to waive its right to participate in this Rights Offering. As a result, 4,983,000 shares of common stock were covered by the Rights Offering to stockholders other than CDR Fund V. As a result of these transactions, the Company granted a right to all stockholders other than CDR Fund V to purchase 4,983,000 shares of common stock at a price of $4.00 per share. The closing trading price of the common stock on May 22, 2000, immediately prior to the sale of the common stock to CDR Fund V, was $11.25. C-23 For purposes of calculating weighted average shares and earnings per share, the Company has treated the sale of common stock to the CDR Funds and the sale of common stock to all other stockholders as a rights offer. Since the common stock was offered to all stockholders at a price that was less than that of the market trading price (the "bonus element"), a retroactive adjustment of 1.22 per share was made to weighted average shares to reflect this bonus element. In fiscal 2002, 2001 and 2000 the Company excluded from its diluted weighted average shares outstanding the effect of the weighted average common stock equivalents (7.6 million in fiscal 2002, 13.5 million in fiscal 2001 and 11.4 million in fiscal 2000) and the Secured Convertible Notes as the Company incurred a net loss from continuing operations. Common stock equivalents have been excluded from the calculation of diluted weighted average shares outstanding because inclusion would have the effect of reducing net loss per common share from continuing operations. K. NOTES PAYABLE AND DEBT Notes payable and Long-term debt is summarized below: 2002 2001 ---------- ---------- (Amounts in thousands) Senior secured credit facility $ 710,683 $ 776,354 Senior subordinated notes 275,000 275,000 Senior secured convertible note 76,875 --- Capitalized leases and other debt 22,441 27,277 Other notes payable 2,523 10,919 ---------- ---------- Total debt 1,087,522 1,089,550 ---------- ---------- Less current portion 31,460 33,167 ---------- ---------- Long-term debt $1,056,062 $1,056,383 ========== ========== The book value of the debt under the Senior Secured Credit Facility and the Senior Secured Convertible Notes represents fair market value at March 31, 2002 and 2001. The fair market value of the Senior Subordinated Notes was $77.7 million and $226.9 million, at March 31, 2002 and 2001, respectively. The following table lists the future payments for debt obligations: (In thousands)
-------------------------------------------------------------------------------------------------------------------- Debt obligations Fiscal Fiscal Fiscal Fiscal Fiscal Thereafter Total 2003 2004 2005 2006 2007 -------------------------------------------------------------------------------------------------------------------- Senior secured credit facility $ 25,749 $ 40,700 $ 44,500 $ 74,700 $ 310,000 $ 215,034 $ 710,683 -------------------------------------------------------------------------------------------------------------------- Senior secured convertible note -- -- -- -- -- 76,875 76,875 -------------------------------------------------------------------------------------------------------------------- Senior subordinated notes -- -- -- -- -- 275,000 275,000 -------------------------------------------------------------------------------------------------------------------- Other notes payable 2,523 -- -- -- -- -- 2,523 -------------------------------------------------------------------------------------------------------------------- Capital leases and other debt 3,188 3,813 3,802 2,666 2,667 6,305 22,441 -------------------------------------------------------------------------------------------------------------------- Total $ 31,460 $ 44,513 $ 48,302 $ 77,366 $ 312,667 $ 573,214 $1,087,522 --------------------------------------------------------------------------------------------------------------------
Senior Secured Convertible Notes C-24 On January 15, 2002, Acterna LLC, a wholly-owned subsidiary of the Company, issued and sold at par $75 million aggregate principal amount of the Convertible Notes to CDR Fund VI. The Company used the net proceeds of $69 million from the issuance and sale of the Convertible 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 re-borrowed by the Company. As a result of the repayment, the Company currently had $95 million of availability under its Revolving Credit Facility as of March 31, 2002. As of March 31, 2002, the Company was in compliance with all covenants under the agreement governing the Convertible Notes. Interest on the Convertible 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 Convertible Notes. Due to limitations imposed by the Senior Secured Credit Facility, Acterna LLC expects to pay interest on the Convertible Notes in-kind by issuing additional Convertible Notes. The Convertible 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. A termination or acceleration of the Senior Secured Credit Facility because of a default under the Senior Secured Credit Facility, or a material payment default under the Senior secured Credit Facility, constitutes a default under the Convertible Notes. At the option of CDR Fund VI (or any subsequent holder of Convertible Notes), at any time prior to December 31, 2007, the maturity date of the Convertible Notes, the Convertible 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 Convertible 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 Convertible 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 Convertible 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 Convertible 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. Warrants will be exercisable upon issuance and will expire on the maturity date of the Convertible 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 change in fair value of the warrants will be recorded as a charge to operations. Senior Secured Credit Facility In connection with the WWG Merger, the Company refinanced certain of its debt and entered into a new senior secured credit facility (the "Senior Secured Credit Facility") which provided for up to $175.0 million in revolving credit borrowings (the "Revolving Credit Facility") and $685.0 million C-25 of term loan borrowings. As of March 31, 2002, the Company had $710.7 million of indebtedness outstanding under the Senior Secured Credit Facility consisting of $647.7 million in term loans and $63.0 million in revolving credit borrowings. The amount under the Revolving Credit Facility that remained available at March 31, 2002 was approximately $95 million, including outstanding letters of credit which reduce the borrowing capacity of the Company under the terms of the Revolving Credit Facility. As of March 31, 2002 and 2001, the Company was in compliance with all covenants under the Senior Secured Credit Facility, as amended on December 27, 2001. On December 27, 2001, in order to meet the requirements under its existing credit facility, 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, subject to the successful issuance and sale of the Convertible Notes. Under the Amendment, the Company is subject to certain additional covenants and restrictions, including, without limitation, 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 Company must maintain minimum liquidity of $25 million, which is defined as the sum of cash and cash equivalents plus aggregate available revolving credit commitments. The Company must also comply with minimum cumulative EBITDA amounts of ($10 million), $17 million, and $40 million for the six, nine and twelve month periods ended September 30, 2002, December 31, 2002, and March 31, 2003, respectively. 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 the minimum interest coverage and maximum leverage covenants under the Senior Secured Credit Facility. Based on current estimates of its revenues and projected operating losses and profits in the near term, the Company does not believe that it will be in compliance with these covenants upon reversion. As a result, the Company has begun discussions with its lenders under the Senior Secured Credit Facility to amend the interest coverage and maximum leverage covenants requirements. If the Company is unable to amend the terms of its Senior Secured Credit Facility, a default could occur. If a default occurs, the lenders under the Senior Secured Credit Facility could require immediate repayment of the loans under the facility and refuse to extend funds under the Company's Revolving Credit Facility. The Company cannot give any assurance that it will be able to obtain an amendment to its Senior Secured Credit Facility, or if it does, that the amendment will be sufficient to remain in compliance with the terms of the Facility. The obligation under the Senior Secured Credit Facility are secured by a pledge of the equity interests in Acterna LLC, by substantially all of the assets of Acterna LLC and each direct or indirect U.S. subsidiary of the Acterna 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 the Company that acts as a holding company of the Company's foreign subsidiaries. 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 December 2001 amendment which has been capitalized as deferred debt issuance costs to be amortized over the remaining life of the Senior Secured Credit Facility. At the time of the WWG Merger, the Company acquired and subsequently repaid approximately $118.6 million of WWG revolving credit debt and $94.1 million of outstanding WWG bonds. The loans under the Senior Secured Credit Facility bear interest at floating rates based upon the interest rate option elected by the Company. These rates are based on LIBOR plus an applicable C-26 margin ranging from 2.75% to 3.25% per annum. To fix interest charged on a portion of its debt, the Company entered into interest rate hedge agreements. After giving effect to these agreements, $130 million of the Company's debt is currently subject to an effective average annual fixed rate of 5.718% per annum until September 2002. The annual weighted-average interest rate on the loans under the Company's Senior Secured Credit Facility was 6.7% and 9.8% for the fiscal years ended March 31, 2002 and 2001, respectively. Due to the recent reduction in interest rates, the Company's 90-day LIBOR borrowing rate plus margin at March 31, 2002 was 5.655%. 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 $0.2 million and $0.3 million in fiscal 2002 and 2001, respectively, in commitment fees. Covenant Restrictions. The Senior Secured Credit Facility imposes restrictions on the ability of the Company to make capital expenditures, and the Senior Secured Credit Facility, the Convertible Notes and the indenture governing the Senior Subordinated Notes limit the Company's ability to incur additional indebtedness. On December 27, 2001, the Company entered into an amendment of the Senior Secured Credit Facility, modifying the covenants until June 30, 2003. Beginning June 30, 2003, the Company will again be subject to these covenants. The covenants contained in the Senior Secured Credit Facility also, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur guarantee obligations, prepay other indebtedness, make restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of the indenture governing the Senior Subordinated Notes, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries taken as a whole or engage in certain transactions with affiliates. These restrictions, among other things, preclude Acterna LLC from distributing assets to Acterna Corporation (which has no independent operations and no significant assets other than its membership interest in Acterna LLC), except in limited circumstances. The term loans under the Senior Secured Credit Facility is governed by negative covenants that are substantially similar to the negative covenants contained in the indenture governing the Senior Subordinated Notes, which also impose restrictions on the operation of the Company's business. The Senior Secured Credit Facility is 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 Facility) 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. Based on the Recapture calculations at March 31, 2002 and March 31, 2001, the Company was not required to make any additional mandatory principal reduction payments during these years. Senior Subordinated Notes In connection with the 1998 recapitalization of the Company, the Company issued the Senior Subordinated Notes. Interest on the Senior Subordinated Notes accrues at the rate of 9 3/4% per C-27 annum and is payable semi-annually in arrears on each May 15 and November 15 through maturity in 2008. As of March 31, 2002 and 2001, the Company was in compliance with all covenants under the Senior Subordinated Notes. The Senior Subordinated Notes due 2008 will not be redeemable at the option of the Company prior to May 15, 2003 unless a change of control occurs. Should that happen, the Company may redeem the Notes in whole, but not in part, at a price equal to 100% of the principal amount plus the greater of (1) 1.0% of the principal amount of such Note and (2) the excess of (a) the present value of (i) redemption price of such Note plus (ii) all required remaining scheduled interest payments due on such Note through May 15, 2003, over (b) principal amount of such Note on the redemption date. Except as noted above, the Notes are redeemable at the Company's option, in whole or in part, anytime on and after May 15, 2003, and prior to maturity at the following redemption prices: Redemption Period Price ------ ---------- 2003 104.875% 2004 103.250% 2005 101.625% 2006 and thereafter 100.000% Principal and interest payments under the Senior Secured Credit Facility and interest payments on the Senior Subordinated Notes have represented and will continue to represent significant liquidity requirements for the Company. Short-term Credit Facility On June 29, 2001, the Company entered into an unsecured, short-term revolving credit facility (the "Short-Term Credit Facility") with Credit Suisse First Boston and The Chase Manhattan Bank, which provided for revolving credit loans in an aggregate principal amount not to exceed $40 million. The Company arranged the facility to provide additional funds for general corporate purposes including short-term working capital needs. The Company never borrowed any funds under the Short-Term Credit Facility. The Short-Term Facility was terminated on December 31, 2001. Other Credit Arrangements Certain of the Company's foreign subsidiaries have agreements with banks that provide for short-term revolving advances and overdraft facilities (the "Overdraft Facilities") in an aggregate total amount of approximately $30.7 million. At March 31, 2002 and 2001, aggregate amounts of $1.4 and $8.5 million, respectively, had been borrowed under these facilities. Certain of these bank agreements also provide for long-term borrowings and are generally secured by the assets of the local subsidiary and guaranteed by the Company. Most of these agreements do not have stated maturity dates, but are cancelable by the banks at any time and, accordingly, are classified as short-term liabilities. Revolving borrowings under these Overdraft Facilities vary significantly by country. The average interest rate on the Overdraft Facilities ranges from approximately 15% to 20%. L. INTEREST RATE SWAP CONTRACTS C-28 The Company uses interest rate swap contracts to effectively fix a portion of its variable rate term loans under the Senior Secured Credit Facility to a fixed rate in order to reduce the impact of interest rate changes on future income. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense related to the debt. At March 31, 2002 the Company had one interest rate swap contract under which the Company pays a fixed interest rate and the Company receives a three-month LIBOR interest rate.
Notional Fixed Interest Market Valuation Swap No. Amount Term Rate at March 31, 2002 -------- -------- ---- -------------- ----------------- (Amounts in thousands) September 30, 1998 - 1 $130,000 September 28, 2002 5.655% $ (2,113)
During fiscal 2002, the Company recognized an increase in interest expense from the swap contracts of $2.6 million and a reduction in interest expense in fiscal 2001 of $1.8 million. During 2000, the Company recognized an increase in interest expense from swap contracts of $0.4 million. The valuations of derivative 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. The provided valuations of derivative transactions are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. The valuation set forth above indicates a net payment from the Company to the financial institution since the fixed interest rate in the contract was higher than the three-month LIBOR interest rate at March 31, 2002. M. INCOME TAXES The components of income (loss) from continuing operations before taxes are as follows: 2002 2001 2000 --------- --------- -------- (Amounts in thousands) Domestic $(332,846) $(204,129) $ 12,881 Foreign (31,209) 20,139 (59) --------- --------- -------- Total $(364,055) $(183,990) $ 12,822 ========= ========= ======== C-29 The components of the provision (benefit) for income taxes from continuing operations are as follows: 2002 2001 2000 -------- -------- -------- (Amounts in thousands) Provision (benefit) for income taxes: US Federal & State $ 15,675 $(28,982) $ 6,597 Foreign (14,876) 16,189 213 -------- -------- -------- Total $ 799 $(12,793) $ 6,810 ======== ======== ======== The components of the income tax provision (benefit) are as follows: 2002 2001 2000 -------- -------- -------- (Amounts in thousands) Current: Federal $(45,453) $(11,499) $ 8,285 Foreign 13,293 25,223 213 State 220 7 741 -------- -------- -------- Total Current (31,940) 13,731 9,239 -------- -------- -------- Deferred: Federal 60,908 (15,568) (2,252) Foreign (28,169) (9,034) --- State --- (1,922) (177) -------- -------- -------- Total deferred 32,739 (26,524) (2,429) -------- -------- -------- Total $ 799 $(12,793) $ 6,810 ======== ======== ======== Reconciliation between U.S. federal statutory rate and the effective tax rate of continuing operations before extraordinary items follow: 2002 2001 2000 ------ ------ ------ U.S. federal statutory income tax (benefit) 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 0.1 7.0 .5 State income taxes, net of federal income tax benefit (1.1) (0.7) 1.3 Nondeductible purchased incomplete technology -- 9.7 -- Nondeductible amortization -- 9.2 19.5 Adjustment to foreign deferred tax assets C-30 and liabilities for enacted changes in tax rates -- (5.6) -- Unremitted earnings of foreign subsidiaries 11.0 5.6 -- Nondeductible compensation -- 0.8 0.9 Foreign sales corporation tax benefit -- -- (7.4) Non-deductible meals and entertainment expenses 0.2 0.4 3.0 Net increase to valuation allowance 24.5 -- -- Foreign deductible investment writedown (3.7) -- -- Tax effect of losses for which carryback was -- -- restricted 3.5 -- -- Other, net .5 1.6 0.3 ----- ----- ----- Effective income tax (benefit) rate before extraordinary items 0.0% (7.0)% 53.1% ===== ===== =====
The principal components of the deferred tax assets and liabilities follow:
2002 2001 ------ ------ (Amounts in thousands) Deferred tax assets: Net operating loss and credit carryforwards $ 83,668 $ 53,444 Depreciation and amortization 24,305 26,739 Other accruals 19,816 12,867 Deferred revenue 5,787 8,908 Deferred compensation 4,708 4,705 Compensation related to stock options 19,993 16,255 Other deferred assets 14,754 15,756 -------- -------- 173,031 138,674 Valuation allowance (106,522) (16,189) -------- -------- 66,509 122,485 -------- -------- Deferred tax liabilities: Depreciation and amortization 11,721 76,241 Unremitted earnings of foreign subsidiaries 50,419 10,356 Other deferred liabilities 3,072 842 -------- -------- 65,212 87,439 -------- -------- Net deferred tax assets $ 1,297 $ 35,046 ======== ========
During the year ended March 31, 2002 the Company recorded a valuation allowance of approximately $78 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. The Company incurred significant and previously unanticipated financial accounting and taxable losses in the U.S. for the year ended March 31, 2002 and the current outlook indicates that significant C-31 uncertainty will continue 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 valuation allowance also applies to state and foreign net operating loss carryforwards that may not be fully utilized by the Company. The increase in the valuation allowance relates primarily to the above described charge against the Company's U.S. net deferred tax assets. At March 31, 2002 the Company has tax net operating losses (NOL) and credit carryforwards expiring as follows:
Federal & U.S. Federal Foreign State NOLs State NOLs NOLs Credits ------------ ---------- ----- ---------- (Amounts in thousands) Year of expiration: 2003 - 2008 $ --- $ --- $ 700 $ 14,274 2009 - 2014 1,200 --- 29,400 900 2015 - 2020 13,500 28,800 --- 2,700 2021 - 2026 43,200 295,600 --- 5,000 Thereafter --- --- 30,800 1,300 -------- -------- -------- -------- Totals $ 57,900 $324,400 $ 60,900 $ 24,174 ======== ======== ======== ========
The Company previously had not provided U.S. income taxes on unremitted foreign earnings of approximately $13.8 million at March 31, 2001 because such earnings had been considered to be permanently reinvested in non-U.S. operations. During the year ended March 31, 2002 the Company determined that such earnings are no longer permanently reinvested and accordingly provided U.S. income taxes for such earnings. During the fourth quarter of the fiscal year ended March 31, 2002, new U.S. tax legislation was enacted which increased the period over which net operating losses may be carried back, from two years to five. Consistent with these new laws, the Company filed claims for a refund of approximately $61 million of taxes paid in prior years. The entire $61 million was collected during the first quarter of fiscal 2003. 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. The Company has a nonqualified deferred compensation plan that permits certain key employees to annually elect to defer a portion of their compensation for their retirement. The amount of compensation deferred and related investment earnings have been placed in an irrevocable rabbi trust and recorded within other assets in the Company's balance sheet, as this trust will be C-32 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, 2002 and 2001 of $11.4 million and $10.6 million, respectively, reflect amounts due the 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 $9.1 in fiscal 2002, $8.8 million in fiscal 2001 and $6.2 million in fiscal 2000. Defined Benefit Plans The Company sponsors several qualified and non-qualified pension plans for its employees. For those employees participating in defined benefit plans, benefits are generally based upon years of service and compensation or stated amounts for each year of service. Assets of the various pension plans consist primarily of managed funds that have underlying investments in stocks and bonds. 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: (Amounts in thousands) 2002 2001 ---- ---- Obligation at April 1, 2001 $ 59,298 $ 50,712 Service cost 2,464 4,373 Interest cost 3,793 2,939 Actuarial gain/loss (2,366) 4,254 Plan participants' contributions 524 --- Foreign currency exchange rate changes (947) (1,116) Benefits paid (2,242) (1,864) -------- -------- Obligation at March 31, 2002 $ 60,524 $ 59,298 ======= ======== The following table provides a reconciliation of the changes in the fair value of assets under the benefits plans: (Amounts in thousands) 2002 2001 ---- ---- Fair value of plan assets $ 13,961 $ 14,084 Actual return on plan assets (1,240) 139 Foreign currency exchange rate changes (101) (786) Employer contributions 997 816 Employee contributions 524 --- Benefits paid (380) (292) -------- -------- Fair value of plan assets at March 31, 2002 $ 13,761 $ 13,961 ======== ======== C-33 The following table represents a statement of the funded status:
(Amounts in thousands) 2002 2001 ---- ---- Accrued pension cost $ 46,996 $ 42,637 Unrecognized net (gain)/loss 1,564 2,700 Minimum liability (1,797) --- -------- -------- Funded status $ 46,763 $ 45,337 ======== ========
The following table provides the amounts recognized in the consolidated balance sheets:
(Amounts in thousands) 2002 2001 ---- ---- Prepaid benefit cost $ --- $ (370) Accrued benefit liability 46,996 43,007 Minimum liability (1,797) --- -------- -------- Net amount recognized $ 45,199 $ 42,637 ======== ========
The following table provides the components of the net periodic benefit cost for the plans:
(Amounts in thousands) 2002 2001 ---- ---- Service cost $ 2,464 $ 4,374 Interest cost 3,793 2,939 Expected return of plan assets (966) (822) ---------- ---------- Net periodic pension cost $ 5,291 $ 6,491 ========== ==========
O. STOCK COMPENSATION PLANS The Company maintains two Stock Option plans in which common stock is available for grant to key employees at prices not less than fair market value (110% of fair market value for employees holding more than 10% of the outstanding common stock) at the date of grant determined by the Board of Directors. Incentive or nonqualified options may be issued under the plans and are exercisable from one to ten years after grant. There are 55,000,000 shares of stock reserved for issuance under the plans. 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. There are 750,000 shares of stock reserved for under the plan. 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. C-34 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:
2002 2001 2000 Weighted Weighted Weighted Average Average Average 2002 Exercise 2001 Exercise 2000 Exercise Shares Price Shares Price Shares Price ---------- --------- ------ ----- ------ ----- Shares under option, beginning of year 37,553,498 $ 4.02 33,384,111 $ 2.40 33,903,244 $ 1.85 Options granted (at an exercise price of $2.28 to $12.45 in 2002, $3.25 to $27.94 in 2001, $3.25 to $4.00 in 2000) 8,015,633 6.94 12,675,790 7.62 9,537,781 3.29 Options exercised (1,427,207) 2.09 (5,223,498) 1.84 (1,194,318) 1.24 Options canceled (6,409,906) 5.37 (3,282,905) 4.94 (8,862,596) 1.36 ---------- ----------- ---------- Shares under option, end of year 37,732,018 $ 4.45 37,553,498 $ 4.02 33,384,111 $ 2.40 ========== =========== ========== Shares exercisable 15,934,557 $ 2.90 12,402,897 $ 2.00 13,178,441 $ 1.66
As of March 31, 2001, the Company had issued approximately 10.3 million stock options at a weighted-average exercise price of $5.28 per share which was below the quoted market price on the day of grant. During fiscal 2002 no stock options were granted with an exercise price below the quoted market price on the day of the grant. Options available for future grants under the plans were 18.0 million, 18.2 million and 3.9 million at March 31, 2002, 2001, and 2000, respectively. The following table summarizes information about currently outstanding and exercisable stock options at March 31, 2002:
Weighted Number of Average Weighted Options Remaining Average Number Outstanding Contractual Exercise of Options Range of Exercise Price At March 31,2002 (Years) Life Price Exercisable $ 0.00 - $ 4.00 30,013,846 5.1 2.76 15,053,451 $ 4.01 - $ 8.00 2,360,286 8.5 7.40 304,507 $ 8.01 - $ 15.00 3,986,115 8.7 10.31 168,115 $ 15.01 - $ 28.00 1,371,771 8.3 19.21 408,484 ---------- ----------- --------- ----------- Total 37,732,018 7.1 2.90 15,934,557 ========== =========== ========= ===========
The fair market value of each option granted during 2002, 2001, and 2000 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000 --------- --------- --------- Expected volatility 100.00% 100.00% 70.00% Risk-free rate of return 4.72% 6.30% 6.13%
C-35 Expected life (in years) 5 yrs. 5 yrs. 5 yrs. Weighted average fair value $ 5.16 $ 14.007 $ 3.274 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 (FAS 123), "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would approximate the pro forma amounts indicated below:
2002 2001 2000 ------------------------ ------------------------ ----------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ----- -------- ----- -------- ----- (Amounts in thousands except per share) Net income (loss) $(374,893) $(394,543) $(171,817) $(185,166) $ 6,012 $ 2,579 Net income (loss) per share: Basic $ (1.95) $ (2.06) $ (0.93) $ (1.01) $ 0.04 $ 0.02 Diluted $ (1.95) $ (2.06) $ (0.93) $ (1.01) $ 0.04 $ 0.02
The effect of applying FAS 123 in this pro forma disclosure is not indicative of future amounts. Additional awards in future years are anticipated. P. COMMITMENTS AND CONTINGENCIES The Company has operating leases 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 2003 through 2007 under noncancelable operating leases having an original term of more than one year are $18.4 million, $16.5 million, $12.3 million, $9.6 million, and $8.2 million, respectively. The aggregate obligation subsequent to fiscal 2007 is $43.2 million. Rent expense was approximately $20.1 million, $18.5 million and $9.6 million in fiscal 2002, 2001 and 2000, respectively. The Company has inventory purchase obligations with certain vendors that total $25.6 million over the next three years. The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company's management is of the opinion that the final outcome should not have a material adverse effect on the Company's operations or financial position. Q. EXTRAORDINARY CHARGE In connection with the WWG Merger, during fiscal 2001, 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, during fiscal 2001, 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. C-36 R. SUBSEQUENT EVENT On June 14, 2002, the Company announced that it signed a definitive agreement to sell its AIRSHOW business to Rockwell Collins for $160 million in cash, subject to adjustment. The Company expects to record a gain in relation to this transaction. This agreement is subject to customary regulatory approvals and consent of the Company's Lenders under the Senior Secured Credit Facility. The Company intends to use the net proceeds of the sale (after fees and expenses) to repay a portion of its debt or invest in its business. The pre-tax losses from this segment prior to interest and corporate overhead allocations for 2002, 2001 and 2000 were $7.6 million, $15.3 million and $19.2 million, respectively. S. SEGMENT INFORMATION AND GEOGRAPHIC AREAS Segment Information. The Company is currently managed in four business segments: communications test segment, industrial computing and communications segment, AIRSHOW and da Vinci. Communications test develops, manufactures and markets instruments, systems, software and services to test, deploy, manage and optimize communications networks and equipment. The Company offers products that test and manage the performance of equipment found in modern, converged networks, including optical transmission systems for data communications, voice services, wireless voice and data services, cable services, and video delivery. Industrial computing and communications provides portable computer products to the ruggedized personal computer market. AIRSHOW provides systems that deliver real-time news, information and flight data to aircraft passengers. AIRSHOW systems are marketed to commercial airlines and private aircraft owners. da Vinci Systems, Inc. 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. The Company measures the performance of its segments by their respective earnings before interest, taxes and amortization of intangibles and amortization of unearned compensation ("EBITA"), which excludes non-recurring and one-time charges. Included in the segment's EBITA is an allocation of corporate expenses. The information below includes net sales and EBITA for the Company's communications test segment, industrial computing and communications segment, AIRSHOW segment and da Vinci. Corporate EBITA is comprised of a portion of the total corporate general and administrative expense that has not been allocated to the segments. Corporate assets are comprised primarily of cash, deferred financing fees, and deferred taxes. As of March 31, 2002, corporate assets include an income tax receivable of $77.5 million. The Company is a multi-national corporation with continuing operations in the United States and Europe as well as distribution and sales offices in the Far East and Latin America. The accounting policies for the Company's segments are the same as those described in the summary of significant accounting policies. (See Note E. Summary of Significant Accounting Policies.) No single customer accounted for more than 10.0% of net sales from continuing operations during fiscal 2002, 2001, and 2000. C-37
Years ending March 31, 2002 2001 2000 ------ ------- ------- (Amounts in thousands) Communications test: Net sales $ 854,437 $1,052,747 $ 349,886 Depreciation and amortization $ 69,181 $ 129,272 $ 15,441 EBITA $ (3,662) $ 139,498 $ 62,447 Total assets $ 749,338 $1,109,270 $ 179,338 Capital expenditures $ 33,080 $ 35,339 $ 13,629 Industrial Computing and Communications: Net sales $ 188,351 $ 198,441 $ 203,361 Depreciation and amortization $ 6,267 $ 14,938 $ 6,553 EBITA $ 4,950 $ (1,914) $ 25,379 Total assets $ 91,118 $ 139,084 $ 121,412 Capital expenditures $ 3,078 $ 6,889 $ 5,695 AIRSHOW: Net sales $ 65,024 $ 78,886 $ 70,960 Depreciation and amortization $ 2,253 $ 2,621 $ 2,105 EBITA $ 9,493 $ 15,886 $ 19,314 Total Assets $ 41,548 $ 46,846 $ 39,728 Capital Expenditures $ 976 $ 2,730 $ 1,743 da Vinci: Net sales $ 24,849 $ 35,329 $ 26,572 Depreciation and amortization $ 829 $ 1,616 $ 972 EBITA $ 5,970 $ 10,909 $ 8,642 Total assets $ 3,810 $ 11,268 $ 11,532 Capital expenditures $ 1,251 $ 718 $ 604 Corporate and other: Net sales $ - $ 854 $ 5,822 Depreciation and amortization $ 132 $ 131 $ 338 EBITA $ (10,971) $ (5,551) $ (4,757) Total assets $ 128,742 $ 76,511 $ 111,639 Capital expenditures $ 18 $ 229 $ 188 Total Company: Net sales $1,132,661 $1,366,257 $ 656,601 Depreciation and amortization $ 78,662 $ 148,578 $ 25,409 EBITA $ 5,780 $ 158,828 $ 111,025 Total assets $1,014,556 $1,382,979 $ 463,649 Capital expenditures $ 38,403 $ 45,905 $ 21,859
C-38 The following are excluded from the calculation of EBITA: Amortization of inventory step up $ --- $ 35,750 $ 4,899 Purchased incomplete technology $ --- $ 56,000 $ --- Amortization of unearned compensation $ 19,368 $ 19,840 $ 2,419 Recapitalization and other related costs $ --- $ 9,194 $ 27,942 Impairment of assets $ 173,187 $ --- $ --- Restructuring $ 33,989 $ --- $ --- Loss from discontinued operations $ 10,039 $ (10,039) $ --- Non-recurring cost reduction $ 4,715 $ --- $ --- Other $ 1,305 $ 3,047 $ 1,040 --------- --------- --------- Total excluded items $ 242,603 $ 113,792 $ 36,300 ========= ========= =========
Geographic Information. Information by geographic areas for the years ended March 31, 2002, 2001, and 2000 is summarized below:
United States Outside U.S. (a) (b) Combined ------------- ------------ ----------- (Amounts in thousands) Sales to unaffiliated customers ................... 2002 ........................................... $ 655,868 $ 476,793 $ 1,132,661 2001 ........................................... $ 831,342 $ 534,915 $ 1,366,257 2000 ........................................... $ 574,610 $ 81,991 $ 656,601 Income (loss) before taxes from continuing operations 2002 ........................................... $ (203,201) $ (160,854) $ (364,055) 2001 ........................................... $ (214,636) $ 30,646 $ (183,990) 2000 ........................................... $ 12,576 $ 246 $ 12,822 Long-lived assets at March 31, 2002 ................................. $ 475,020 $ 76,605 $ 551,625 March 31, 2001 ................................. $ 709,280 $ 45,857 $ 755,137 March 31, 2000 ................................. $ 138,553 $ 3,502 $ 142,055
(a) Sales within the United States include export sales of $61,122 $158,351, and $57,251, in 2002, 2001, and 2000, respectively. (b) Sales outside the United States includes sales from foreign subsidiaries to the United States of $12,318, 28,817 and 1,150 in fiscal 2002, 2001 and 2000, respectively. Currency gains (losses). Net income in fiscal 2002, 2001, and 2000 included currency gains (losses) of approximately $(5.2) million, ($5.5) million, and $54.5 thousand, respectively. T. SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF ACTERNA CORPORATION AND ACTERNA LLC C-39 In connection with the Recapitalization and related transactions, Acterna LLC (formerly known as Telecommunications Techniques Co., LLC), Acterna Corporation's wholly owned subsidiary ("Acterna LLC"), became the primary obligor (and Acterna Corporation, a guarantor) with respect to indebtedness of Acterna Corporation, including the 9 3/4% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"). Acterna Corporation has fully and unconditionally guaranteed the Senior Subordinated Notes. Acterna Corporation, however, is a holding company with no independent operations and no significant assets other than its membership interest in Acterna LLC. Certain other subsidiaries of the Company are not guarantors of the Senior Subordinated Notes. The condensed consolidating financial statements presented herein include the statement of operations, balance sheets, and statements of cash flows without additional disclosure as the Company has determined that the additional disclosure is not material to investors. C-40 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS March 31, 2002
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated ----------- ----------- ------------ ----------- ------------ (In thousands) Net sales $ --- $ 315,107 $ 817,554 $ --- $ 1,132,661 Cost of sales --- 159,021 381,027 --- 540,048 ----------- ----------- ----------- ----------- ----------- Gross profit --- 156,086 436,527 --- 592,613 Selling, general and administrative expense --- 213,924 230,463 --- 444,387 Product development expense --- 55,803 104,416 --- 160,219 Impairment of assets held for sale --- --- 17,918 --- 17,918 Impairment of acquired intangible assets --- 3,724 147,598 --- 151,322 Goodwill impairment --- --- 3,947 --- 3,947 Restructuring --- 16,429 17,560 --- 33,989 Amortization of intangibles --- 3,037 39,234 --- 42,271 ----------- ----------- ----------- ----------- ----------- Total operating expense --- 292,917 561,136 --- 854,053 Operating loss --- (136,831) (124,609) --- (261,440) Interest expense --- (85,164) (11,461) --- (96,625) Interest income --- 562 1,063 --- 1,625 Intercompany interest income (expense) --- 3,902 (3,902) --- --- Intercompany royalty income (expense) --- 19,657 (19,657) --- --- Other income (expense), net --- 420 (8,035) --- (7,615) ----------- ----------- ----------- ----------- ----------- Loss from continuing operations before income taxes --- (197,454) (166,601) --- (364,055) Provision (benefit) for income taxes --- (3,909) 4,708 --- 799 ----------- ----------- ----------- ----------- ----------- Loss from continuing operations before extraordinary item --- (193,545) (171,309) --- (364,854) Equity income (loss) (374,893) (171,309) --- 546,202 --- Loss from discontinued operations --- (10,039) --- --- (10,039) ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (374,893) $ (374,893) $ (171,309) $ 546,202 $ (374,893) =========== =========== =========== =========== ===========
C-41 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2002
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated ----------- ------------ ------------ ----------- ------------ ASSETS (in thousands) Current assets: Cash and cash equivalents $ --- $ 14,969 $ 27,770 $ --- $ 42,739 Accounts receivable, net --- 38,875 87,506 --- 126,381 Inventory --- 23,623 88,978 --- 112,601 Other current assets --- 91,233 39,811 --- 131,044 ----------- ----------- ----------- ----------- ----------- Total current assets --- 168,700 244,065 --- 412,765 Property and equipment, net --- 31,255 90,831 --- 122,086 Investments in and advances to consolidated subsidiaries (376,167) (234,866) (593,530) 1,204,563 --- Goodwill --- 16,908 410,178 --- 427,086 Intangible assets, net --- --- 2,453 --- 2,453 Deferred income taxes --- (9,284) 9,284 --- -- Other --- 40,574 9,592 --- 50,166 ----------- ----------- ----------- ----------- ----------- Total assets $ (376,167) $ 13,287 $ 172,873 $ 1,204,563 $ 1,014,556 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current portion of long-term debt $ --- $ 23,000 $ 8,460 $ --- $ 31,460 Accounts payable --- 27,547 45,827 --- 73,374 Accrued expenses --- 87,349 116,956 --- 204,305 ----------- ----------- ----------- ----------- ----------- Total current liabilities --- 137,896 171,243 --- 309,139 Long-term debt --- 953,200 102,862 --- 1,056,062 Deferred income taxes --- 15,739 1,842 --- 17,581 Other long-term liabilities --- 11,386 57,163 --- 68,549 Stockholders' equity (deficit): Common stock 1,922 (16,200) 17,214 (1,014) 1,922 Additional paid-in capital 786,537 (13,784) 203,097 (189,313) 786,537 Accumulated deficit (1,164,626) (1,020,520) (380,383) 1,394,890 (1,170,639) Unearned compensation --- (53,925) --- --- (53,925) Other comprehensive loss --- (505) (165) --- (670) ----------- ----------- ----------- ----------- ----------- Total stockholders' equity (deficit) (376,167) (1,104,934) (160,237) 1,204,563 (436,775) ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity (deficit) $ (376,167) $ 13,287 $ 172,873 $ 1,204,563 $ 1,014,556 =========== =========== =========== =========== ===========
C-42 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For The Twelve Months Ended March 31, 2002
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated ------- ------- ------------- ----------- ------------ (In thousands) Operating activities: Net income (loss) from operations $(374,893) $(374,893) $(171,309) $ 546,202 $(374,893) Adjustment for noncash items included in net income (loss): Depreciation --- 13,392 22,999 --- 36,391 Bad debt --- (863) 281 --- (582) Amortization of intangibles --- 3,037 39,234 --- 42,271 Amortization of unearned compensation --- 8,751 10,617 --- 19,368 Amortization of deferred debt issuance costs --- 5,582 --- 5,582 Impairment of intangibles --- 3,724 147,598 --- 151,322 Write-off of previously deferred loss on discontinued operations --- --- 10,039 --- 10,039 Loss on sale of fixed assets --- 3,738 435 --- 4,173 Impairment of assets held for sale and goodwill impairment --- --- 21,865 --- 21,865 Tax benefit from stock option exercise --- 994 --- 994 Change in deferred income taxes --- 59,291 --- 59,291 Changes in operating assets and liabilities, net of effects of purchase acquisitions and divestitures --- (12,445) 38,745 --- 26,300 Changes in intercompany 374,893 291,299 (119,990) (546,202) - --------- --------- --------- --------- --------- Net cash flows provided by operating activities --- 1,607 514 --- 2,121 Investing activities: Purchases of property and equipment --- (17,122) (21,281) --- (38,403) Proceeds from sale of property and equipment --- --- 1,178 --- 1,178 Proceeds from sales of businesses --- --- 23,800 --- 23,800 Businesses acquired in purchase transactions, net of cash and noncash items --- (1,495) (1,495) Other --- (1,607) 578 --- (1,029) --------- --------- --------- --------- --------- Net cash flows provided by (used in) investing activities --- (18,729) 2,780 --- (15,949) Financing activities: Repayments under revolving credit facility, net --- (45,000) --- --- (45,000) Borrowings of term loan debt --- --- 3,350 --- 3,350 Borrowings of notes payable and other debt --- --- (260) --- (260) Repayment of term loan debt --- (16,000) (19,010) --- (35,010) Borrowings of notes payable --- 75,000 --- --- 75,000 Financing fees --- (6,256) --- --- (6,256)
C-43 Proceeds from issuance of common stock, net of expenses --- 2,168 --- --- 2,168 -------- -------- -------- -------- -------- Net cash flows provided by or (used) in financing --- 9,912 (15,920) --- (6,008) activities Effect of exchange rate on cash --- --- (479) --- (479) -------- -------- -------- -------- -------- Decrease in cash and cash equivalents --- (7,210) (13,105) --- (20,315) Cash and cash equivalents at beginning of year --- 22,179 40,875 --- 63,054 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year $ --- $ 14,969 $ 27,770 $ --- $ 42,739 ======== ======== ======== ======== ========
C-44 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Twelve Months Ended March 31, 2001
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated --------- --------- ------------- ----------- ------------ (In thousands) Net sales $ --- $ 418,232 $ 948,025 $ --- $ 1,366,257 Cost of sales --- 138,675 468,185 --- 606,860 --------- --------- ---------- ---------- ----------- Gross profit --- 279,557 479,840 --- 759,397 Selling, general and administrative expense --- 221,812 264,786 --- 486,598 Product development expense --- 51,838 116,279 --- 168,117 Purchased incomplete technology --- --- 56,000 --- 56,000 Recapitalization and other related costs --- 9,194 --- --- 9,194 Amortization of intangibles --- --- 120,151 --- 120,151 --------- --------- ---------- ---------- ----------- Operating loss --- (3,287) (77,376) --- (80,663) Interest expense --- (90,003) (12,155) --- (102,158) Interest income --- 1,742 1,580 --- 3,322 Intercompany interest income (expense) --- 19,481 (19,481) --- --- Other income (expense), net --- 284 (4,775) --- (4,491) --------- --------- ---------- ---------- ----------- Loss from continuing operations before income taxes --- (71,783) (112,207) --- (183,990) Benefit for income taxes --- (3,549) (9,244) --- (12,793) --------- --------- ---------- ---------- ----------- Loss from continuing operations --- (68,234) (102,963) --- (171,197) Equity income (loss) (171,817) (92,924) 10,039 264,741 10,039 Extraordinary item --- (10,659) --- --- (10,659) --------- --------- ---------- ---------- ----------- Net income (loss) $(171,817) $(171,817) $ (92,924) $ 264,741 $ (171,817) ========= ========= ========== ========== ===========
C-46 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2001
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, net --- 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 of discontinued operations --- --- 37,908 --- 37,908 Other --- 28,166 30,291 --- 58,457 --------- -------- ---------- --------- ---------- Total assets $ 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 Other long-term liabilities --- 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 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) --------- -------- ---------- --------- ---------- Total liabilities and stockholders' equity $ 13,255 $471,112 $ 624,203 $ 274,409 $1,382,979 ========= ======== ========== ========= ==========
C-47 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For The Twelve Months Ended March 31, 2001
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated -------- -------- ------------- ----------- ------------ (In thousands) Operating activities: Net income (loss) from operations $(171,817) $(171,817) $ (92,924) $ 264,741 $(171,817) Adjustment for noncash items included in net income (loss): Depreciation --- 9,872 18,555 --- 28,427 Bad debt --- 3,509 3,638 --- 7,147 Amortization of intangibles --- --- 120,151 --- 120,151 Amortization of inventory step-up --- 35,750 --- --- 35,750 Amortization of unearned compensation --- 17,012 2,828 --- 19,840 Amortization of deferred debt issuance costs --- 3,974 --- --- 3,974 Write-off of deferred debt issuance costs --- 10,019 --- --- 10,019 Purchased incomplete technology --- 56,000 --- --- 56,000 Recapitalization and other related costs --- 9,194 --- --- 9,194 Tax benefit from stock option exercise --- 21,319 --- --- 21,319 Other --- 45 2,002 --- 2,047 Change in deferred income taxes --- (40,452) 9,143 --- (31,309) Changes in operating assets and liabilities, net of effects of purchase acquisitions and divestitures --- (23,181) (68,191) --- (91,372) Changes in intercompany 171,817 39,639 53,285 (264,741) --- --------- --------- --------- --------- --------- Net cash flows provided by (used in) operating activities --- (29,117) 48,487 --- 19,370 Investing activities: Purchases of property and equipment --- (17,300) (28,605) --- (45,905) Proceeds from sale of property and equipment --- --- 2,433 --- 2,433 Proceeds from sale of businesses --- 6,381 --- --- 6,381 Businesses acquired in purchase transactions, net of cash and non-cash items --- (422,137) --- --- (422,137) Other --- (389) (4,474) --- (4,863) --------- --------- --------- --------- --------- Net cash flows used in investing activities --- (433,445) (30,646) --- (464,091) Financing activities: Borrowings under revolving credit facility, net --- 108,000 --- --- 108,000 Borrowings of term loan debt, net --- 683,566 --- --- 683,566 Repayment of term loan debt --- (12,944) --- --- (12,944) Borrowings of notes payable and other debt --- 31,858 (123) --- 31,735 Repayment of debt under old Senior Secured
C-48 Credit Facility --- (304,861) --- --- (304,861) Repayment of WWG term debt --- (118,594) --- --- (118,594) Redemption of WWG bonds --- (94,148) --- --- (94,148) Financing fees --- (18,519) --- --- (18,519) Proceeds from issuance of common stock, net of expenses --- 200,404 1 --- 200,405 --------- --------- --------- --------- --------- Net cash flows provided by (used in) financing activities --- 474,762 (122) --- 474,640 Effect of exchange rate on cash --- (9,380) 6,746 --- (2,634) --------- --------- --------- --------- --------- Increase in cash and cash equivalents --- 2,820 24,465 --- 27,285 Cash and cash equivalents at beginning of year --- 19,359 16,410 --- 35,769 --------- --------- --------- --------- --------- Cash and cash equivalents at end of year $ --- $ 22,179 $ 40,875 $ --- $ 63,054 ========= ========= ========= ========= =========
C-49 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Twelve Months Ended March 31, 2000
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated --------- --------- ------------- ----------- ------------ (In thousands) Net sales $ --- $ 306,504 $ 350,097 $ --- $ 656,601 Cost of sales --- 104,805 180,726 --- 285,531 --------- --------- --------- --------- --------- Gross profit --- 201,699 169,371 --- 371,070 Selling, general and administrative expense --- 106,982 85,304 --- 192,286 Product development expense --- 43,497 31,901 --- 75,398 Recapitalization and other related costs --- 27,543 399 --- 27,942 Amortization of intangibles --- 1,847 10,479 --- 12,326 --------- --------- --------- --------- --------- Operating income --- 21,830 41,288 --- 63,118 Interest expense --- (51,899) (50) --- (51,949) Interest income --- 1,537 836 --- 2,373 Intercompany interest income (expense) --- 477 (477) --- --- Other income (expense), net --- (972) 252 --- (720) Income (loss) from continuing operations --------- --------- --------- --------- --------- before income taxes --- (29,027) 41,849 --- 12,822 Provision (benefit) for income taxes --- (4,304) 11,114 --- 6,810 --------- --------- --------- --------- --------- Income (loss) from continuing operations --- (24,723) 30,735 --- 6,012 Equity income 6,012 30,735 --- (36,747) --- --------- --------- --------- --------- --------- Net income (loss) $ 6,012 $ 6,012 $ 30,735 $ (36,747) $ 6,012 ========= ========= ========= ========= =========
C-50 ACTERNA CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For The Twelve Months Ended March 31, 2000
Acterna Acterna Non-Guarantor Total Corp LLC Subsidiaries Elimination Consolidated -------- --------- ------------- ----------- ------------ (In thousands) Operating activities: Net income (loss) from operations $ 6,012 $ 6,012 $ 30,735 $(36,747) $ 6,012 Adjustment for noncash items included in net income (loss): Depreciation --- 6,543 6,539 --- 13,082 Bad debt --- 461 563 --- 1,024 Amortization of intangibles --- 7,645 4,682 --- 12,327 Recapitalization and other related costs --- 12,327 --- --- 12,327 Amortization of unearned compensation --- 2,419 --- --- 2,419 Amortization of deferred debt issuance --- 3,232 --- --- 3,232 costs --- (2,840) --- --- (2,840) Tax benefit from stock option exercise --- 1,461 --- --- 1,461 Other --- --- 56 --- 56 Changes in operating assets and liabilities, net of effects of purchase acquisitions and divestitures --- (9,935) 18,245 --- 8,310 Changes in intercompany (6,012) 19,676 (50,411) 36,747 --- -------- -------- ---------- -------- -------- Net cash flows provided by operating activities --- 47,001 10,409 --- 57,410 Investing activities: Purchases of property and equipment --- (11,962) (9,897) --- (21,859) Businesses acquired in purchase transactions, net of cash acquired --- (113,227) --- --- (113,227) Other --- (5,643) (1,522) --- (7,165) -------- -------- ---------- -------- -------- Net cash flows used in investing activities --- (130,832) (11,419) --- (142,251) Financing activities: Borrowings under revolving credit facility, net --- 70,000 --- --- 70,000 Repayment of term loan debt --- (17,139) --- --- (17,139) Repayment of capital lease obligations --- --- (212) --- (212) Proceeds from issuance of common stock and stock options --- 4,736 --- --- 4,736 Redemption of stock options --- (6,980) --- --- (6,980) -------- -------- ---------- -------- -------- Net cash flows provided by (used in) financing activities --- 50,617 (212) --- 50,405
C-51 Effect of exchange rate on cash --- 92 (249) --- (157) -------- -------- ---------- -------- -------- Increase (decrease) in cash and cash equivalents --- (33,122) (1,471) --- (34,593) Cash and cash equivalents at beginning of year --- 52,481 17,881 --- 70,362 -------- -------- ---------- -------- -------- Cash and cash equivalents at end of year $ --- $ 19,359 $ 16,410 $ --- $ 35,769 ======== ======== ========== ========= =========
C-52 SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
FY 2002 ------- (Amounts in thousands except per share data) First Second (1) Third (2) Fourth (3) Year ----- ------- ----- ------ ---- Net sales $356,600 $ 314,812 $ 248,785 $ 212,464 $1,132,661 Gross profit $201,389 $ 171,799 $ 116,521 $ 102,904 $ 592,613 Net income (loss) from continuing operations $ (7,201) $(136,431) $ (74,006) $(147,216) $ (364,854) Net income (loss) $ (6,150) $(147,521) $ (74,006) $(147,216) $ (374,893) Income (loss) per common share - basic and diluted: Continuing operations $ (0.04) $ (0.71) $ (0.39) $ (0.77) $ (1.90) Discontinued operations $ (0.01) $ (0.06) $ --- $ --- $ (0.05) FY 2001 ------- First Second Third Fourth Year ----- ------ ----- ------ ---- Net sales $ 254,686 $348,287 $369,982 $393,302 $1,366,257 Gross profit 132,848 177,767 219,107 229,675 759,397 Net loss from continuing operations $ (75,578) $(52,248) $(22,467) $(20,904) $ (171,197) Net (loss) (82,394) (50,389) (18,306) (20,728) (171,817) Income (loss) per common share - basic and diluted: Continuing operations $ (0.40) $ (0.28) $ (0.12) $ (0.10) $ (0.93) Extraordinary (loss) (0.06) --- --- --- (0.06) Discontinued operations --- 0.01 0.02 --- 0.06
(1) The Company recorded a charge of $71 million to provide for valuation allowance against its U.S. deferred tax assets. (2) The Company recorded charges of $21.8 million for impairments of assets held for sale and goodwill. (3) The Company recorded a charge of $151 million with respect to intangible assets and a tax benefit of $61 million relating to the carryback of U.S. net operating losses. C-50 Appendix D EXHIBIT INDEX Exhibit No. 2.1 Agreement and Plan of Merger, dated as of December 20, 1997, by and between Acterna Corporation and CDRD Merger Corporation. (1) 2.2 Agreement and Plan of Merger, dated as of September 7, 1999, by and among Acterna Corporation, Acterna Acquisition Corporation and Applied Digital Access, Inc. (2) 2.3 Agreement and Plan of Merger, dated as of February 14, 2000, by and among Acterna Corporation, DWW Acquisition Corporation and Wavetek Wandel Goltermann, Inc. (3) 2.4 Agreement for the Sale and Purchase of Shares in WPI Husky Technology Ltd., dated February 23, 2000, by and among Acterna Nominees Limited, WPI Group (UK), and WPI Group, Inc.(5) 3.1 Amended and Restated Certificate of Incorporation of Acterna Corporation.(5) 3.2 Amended and Restated By-Laws of Acterna Corporation. (4) 4.1 Indenture, dated as of May 21, 1998, among Acterna Corporation, TTC Merger Co. LLC (now known as Acterna LLC) and State Street Bank and Trust Company, as trustee. (6) 4.2 Form of 9 3/4% Senior Subordinated Note due 2008 (6). 4.3 First Supplemental Indenture, dated as of May 21, 1998, among Acterna Corporation, Telecommunications Techniques Co., LLC (now known as Acterna LLC) and State Street Bank and Trust Company, as trustee. (6) 4.4 Registration Rights Agreement, dated May 21, 1998, by and among Acterna Corporation, Telecommunications Techniques Co., LLC (now known as Acterna LLC), Credit Suisse First Boston Corporation and J.P. Morgan Securities Inc. (6) 4.5 Registration Rights Agreement, dated as of May 21, 1998, among Acterna Corporation, Clayton, Dubilier & Rice Fund V Limited Partnership, Mr. John F. Reno, The John F. Reno 1997 Qualified Annuity Trust, under Trust Agreement, dated as of the 28th day of November, 1997, between John F. Reno as Grantor and John F. Reno and John D. Hamilton, Jr. as Trustees, and The Suzanne D. Reno 1997 Qualified Annuity Trust, under Trust Agreement, dated as of the 28th day of November, 1997, between Suzanne D. Reno as Grantor and John F. Reno and John D. Hamilton, Jr. as Trustees. (6) 4.6 Amendment No. 1, dated as of May 23, 2000, among Acterna Corporation ("Acterna"), Clayton, Dubilier & Rice Fund V Limited Partnership ("Fund V") and Clayton, Dubilier & Rice Fund VI Limited Partnership, to the Registration Rights Agreement, dated as of May 21, 1998, among Acterna, Fund V and the other parties thereto. (5) 4.7 Form of Piggyback Registration Rights Agreement, dated as of February 29, 2000, by and among Wavetek Wandel Goltermann, Inc. ("WWG"), Acterna Corporation and each stockholder of WWG party thereto.(5) 4.8 Form of Subscription Warrant to Subscribe for Shares of Acterna Corporation Common Stock. (7) 4.9 Investment Agreement, dated as of December 27, 2001, among Acterna Corporation, Acterna LLC and Clayton, Dubilier & Rice Fund VI Limited Partnership. (14) 4.10 Form of Note Issuable under Investment Agreement, dated as of December 27, 2001, among Acterna Corporation, Acterna LLC and Clayton, Dubilier & Rice Fund VI Limited Partnership. (14) 4.11 Form of Warrant Issuable under Investment Agreement, dated as of December 27, 2001, among Acterna Corporation, Acterna LLC and Clayton, Dubilier & Rice Fund VI Limited Partnership. (14) D-1 4.12 Amendment No. 2, dated as of January 15, 2002, among Acterna Corporation ("Acterna"), Clayton, Dubilier & Rice Fund V Limited Partnership ("Fund V"), and Clayton, Dubilier & Rice Fund VI Limited Partnership ("Fund VI"), to the Registration Rights Agreement, dated as of May 21, 1998, among Acterna, Fund V, Fund VI, and certain other parties thereto. (14) 10.1 Credit Agreement, dated May 23, 2000, among Acterna LLC, Wavetek Wandel Goltermann GmbH and Acterna Subworld Holdings GmbH, the lenders named therein, Morgan Guaranty and Trust Company of New York ("Morgan Guaranty") as administrative agent, Morgan Guaranty as German Term Loan Servicing Bank, Credit Suisse First Boston as syndication agent and The Chase Manhattan Bank and Bankers Trust Company as co-documentation agents. (5) 10.2 Guarantee and Collateral Agreement, dated as of May 23, 2000, among Acterna LLC, certain of its subsidiaries and Morgan Guaranty and Trust Company of New York as administrative agent.(5) 10.3 Indemnification Agreement, dated as of May 21, 1998, by and among Acterna Corporation, Telecommunications Techniques Co., LLC (now known as Acterna LLC), Clayton, Dubilier & Rice, Inc. and Clayton, Dubilier & Rice Fund V Limited Partnership. (6) 10.4 Indemnification Agreement, dated as of May 23, 2000, by and among Acterna Corporation, Clayton, Dubilier & Rice Fund VI Limited Partnership and Clayton, Dubilier & Rice, Inc.(5) 10.5 Amended and Restated Consulting Agreement, dated as of January 1, 2001, by and among Acterna Corporation, Acterna LLC and Clayton, Dubilier & Rice, Inc. (13) 10.6 Agreement, dated as of May 23, 2000, by and between Clayton, Dubilier & Rice, Inc. and Acterna Corporation.(5) 10.7 Tax Sharing Agreement, dated as of May 21, 1998, by and between Acterna Corporation and Telecommunications Techniques Co., LLC (now known as Acterna LLC). (6) 10.8 Form of Letter Agreement by and between Acterna Corporation ("Acterna") and certain officers of Acterna. (8) 10.9 Form of Management Equity Agreement among Acterna Corporation, Clayton, Dubilier & Rice Fund V Limited Partnership and Messrs. Kline and Peeler. (8) 10.10 Form of Management Equity Agreement among Acterna Corporation ("Acterna"), Clayton, Dubilier & Rice Fund V Limited Partnership and certain officers of Acterna. (8) 10.11 Amended and Restated Employment Agreement, entered into on November 1, 1998, by and between Acterna Corporation and Allan M. Kline. (9) 10.12 Amended and Restated Employment Agreement, entered into on November 1, 1998, by and between Acterna Corporation and John R. Peeler. (9) 10.13 Form of Nondisclosure, Noncompetition and Nonsolicitation Agreement by and between Acterna Corporation ("Acterna") and certain executives of Acterna. (8) 10.14 Acterna Corporation 1992 Stock Option Plan. (6) 10.15 Acterna Corporation Amended and Restated 1994 Stock Option and Incentive Plan. (10) 10.16 Acterna Corporation Non-Employee Directors Stock Incentive Plan. (10) 10.17 Acterna Corporation Directors Stock Purchase Plan. (4) 10.18 Form of Non-Employee Director Stock Subscription Agreement between Acterna Corporation and non-employee directors of Acterna. (11) 10.19 Loanout Agreement, dated as of May 19, 1999, by and among Acterna Corporation, Acterna LLC and Clayton, Dubilier & Rice, Inc. (12) 10.20 Second Credit Agreement Amendment, dated as of December 27, 2001, among Acterna Corporation ("Acterna"), Acterna LLC, certain subsidiaries of Acterna LLC, JPMorgan Chase Bank (as successor by merger to the Morgan Guaranty Trust Company of New York), as administrative agent, and certain of the lenders under the Credit Agreement, dated May 23, 2000, among Acterna LLC, Wavetek Wandel Goltermann GmbH and Acterna Subworld Holdings GmbH, the lenders named therein, Morgan Guaranty and Trust Company of New York ("Morgan Guaranty") as administrative agent, Morgan Guaranty as German Term Loan Servicing Bank, Credit D-2 Suisse First Boston as syndication agent and The Chase Manhattan Bank and Bankers Trust Company as co-documentation agents. (14) 10.21 Guarantee and Collateral Agreement, dated as of December 27, 2001, made by Acterna Corporation, Acterna LLC and certain subsidiaries of Acterna LLC for the benefit of Clayton, Dubilier & Rice Fund VI Limited Partnership. (14) 10.22 Intercreditor Agreement, dated as of December 27, 2001, between JPMorgan Chase Bank and Clayton, Dubilier & Rice Fund VI Limited Partnership, and consented to by Acterna Corporation and Acterna LLC. (14) 10.23 Separation Agreement for Allan M. Kline, dated as of February 28, 2002. 10.24 Form of Separation Agreement for each of Mark V.B. Tremallo and Robert W. Woodbury, Jr. 21 Subsidiaries of Acterna Corporation. 23 Consent of Independent Accountants. (1) Incorporated by reference to Acterna Corporation's Report on Form 8-K (File No. 0-7438). (2) Incorporated by reference to Acterna Corporation's Schedule 14D-1 (File No. 5-44783). (3) Incorporated by reference to Acterna Corporation's Report on Form 8-K (File No. 1-12657). (4) Incorporated by reference to Acterna Corporation's Form 10-Q for the quarter ended September 30, 1999 (File No. 1-12657). (5) Incorporated by reference to Acterna Corporation's Report on Form 10-K for the year ended March 31, 2000 (File No. 0-7438). (6) Incorporated by reference to Acterna Corporation's Registration Statement on Form S-4 (Registration No. 333-60893). (7) Incorporated by reference to Acterna Corporation's Registration Statement on Form S-3 (Registration No. 333-35476). (8) Incorporated by reference to Acterna Corporation's Registration Statement on Form S-4 (File No. 333-44933). (9) Incorporated by reference to Acterna Corporation's Form 10-Q for the quarter ended December 31, 1998 (File No. 1-12657). (10) Incorporated by reference to Acterna Corporation's Registration Statement on Form S-8 (File No. 333-75797). (11) Incorporated by reference to Acterna Corporation's Form 10-Q for the quarter ended December 31, 1999 (File No. 1-12657). (12) Incorporated by reference to Acterna Corporation's Form 10-Q for the quarter ended June 30, 1999 (File No. 1-12657). (13) Incorporated by reference to Acterna Corporation's Report on Form 10-K for the year ended March 31, 2001 (File No. 0-7438). (14) Incorporated by reference to Acterna Corporation's Report on Form 8-K (File No. 0-7438). D-3 Item 14(a) (2) SCHEDULE II ACTERNA CORPORATION VALUATION AND QUALIFYING ACCOUNTS For the years ended March 31, 2002, 2001, and 2000 Reserve for Doubtful Accounts (In thousands) Balance, March 31, 1999 $ 1,634 Additions charged to income 1,024 Write-off of uncollectible accounts, net (22) Balance acquired by acquisition 247 -------- Balance, March 31, 2000 2,883 Additions charged to income 7,147 Write-off of uncollectible accounts, net (3,222) Balance acquired by acquisition 3,933 -------- Balance, March 31, 2001 10,741 Additions charged to income (582) Write-off of uncollectible accounts, net (2,287) -------- Balance, March 31, 2002 $ 7,872 ========