-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HkAERHtg50BJJNy+NB/4bdHE0E0ZwQB7xHGfKBv2wULRH1Oh46a9w2YCIRO2+lvQ DLkdNwUuIeyZySxOY21OyA== 0000927016-99-002804.txt : 19990806 0000927016-99-002804.hdr.sgml : 19990806 ACCESSION NUMBER: 0000927016-99-002804 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNATECH CORP CENTRAL INDEX KEY: 0000030841 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 042258582 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12657 FILM NUMBER: 99678535 BUSINESS ADDRESS: STREET 1: 3 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803-5087 BUSINESS PHONE: 6172726100 MAIL ADDRESS: STREET 1: 3 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803-5087 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission file number 1-12657 ---------------- DYNATECH CORPORATION (Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2258582 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
3 New England Executive Park Burlington, Massachusetts 01803-5087 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (781) 272-6100 ---------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At July 15, 1999 there were 120,681,048 shares of common stock of the registrant outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I. Financial Information Item 1. Financial Statements DYNATECH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Three Months Ended June 30 -------------------- 1999 1998 --------- --------- Sales.................................................... $ 160,771 $ 109,143 Cost of sales............................................ 73,937 46,154 --------- --------- Gross profit............................................. 86,834 62,989 Selling, general & administrative expense................ 39,894 35,189 Product development expense.............................. 15,287 13,501 Recapitalization and other related costs................. 13,259 43,386 Amortization of intangibles.............................. 1,558 1,440 Amortization of unearned compensation.................... 441 -- --------- --------- Total operating expense.............................. 70,439 93,516 --------- --------- Operating income (loss).................................. 16,395 (30,527) Interest expense......................................... (12,851) (6,082) Interest income.......................................... 702 788 Gain on sale of subsidiary............................... -- 15,900 Other income............................................. 6 32 --------- --------- Income (loss) before income taxes........................ 4,252 (19,889) Income tax provision (benefit)........................... 1,701 (7,956) --------- --------- Net income (loss)........................................ $ 2,551 $ (11,933) ========= ========= Income (loss) per common share: Basic.................................................. $ 0.02 $ (0.19) Diluted................................................ $ 0.02 $ (0.19) ========= ========= Weighted average number of common shares: Basic.................................................. 120,673 63,464 Diluted................................................ 129,572 63,464 ========= =========
See notes to condensed consolidated financial statements. 2 DYNATECH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
June 30 March 31 1999 1999 ASSETS ----------- --------- (Unaudited) Current assets: Cash and cash equivalents.............................. $ 45,936 $ 70,362 Accounts receivable, net............................... 69,273 70,996 Inventories: Raw materials........................................ 17,229 16,680 Work in process...................................... 14,781 13,644 Finished goods....................................... 10,242 16,947 --------- --------- Total inventory.................................... 42,252 47,271 Other current assets................................... 23,662 22,150 --------- --------- Total current assets............................... 181,123 210,779 Property and equipment, net.............................. 26,460 25,619 Intangible assets, net................................... 55,241 56,768 Other assets............................................. 55,603 54,938 --------- --------- $ 318,427 $ 348,104 ========= ========= LIABILITIES & SHAREHOLDERS' DEFICIT Current liabilities: Notes payable/current portion of long-term debt........ $ 4,024 $ 23,191 Accounts payable....................................... 24,806 34,317 Income taxes payable................................... 4,015 10,772 Accrued expenses: Compensation and benefits............................ 28,218 24,420 Deferred revenue..................................... 32,205 27,141 Interest............................................. 3,602 10,129 Other................................................ 22,432 25,311 --------- --------- Total current liabilities.......................... 119,302 155,281 Long-term debt........................................... 513,085 504,151 Deferred compensation.................................... 6,248 5,112 Shareholders' deficit: Common stock........................................... -- -- Additional paid-in capital............................. 316,594 322,746 Retained deficit....................................... (627,390) (629,941) Unearned compensation.................................. (6,772) (7,563) Other comprehensive loss............................... (2,640) (1,682) --------- --------- Total shareholders' deficit........................ (320,208) (316,440) --------- --------- $ 318,427 $ 348,104 ========= =========
See notes to condensed consolidated financial statements. 3 DYNATECH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended June 30 ------------------- 1999 1998 -------- --------- Operating activities: Net income (loss)....................................... $ 2,551 $ (11,933) Adjustments for noncash items included in net income: Depreciation........................................... 2,771 3,173 Amortization........................................... 2,806 1,440 Gain on sale of subsidiary............................. -- (15,900) Transaction related costs.............................. -- 14,640 Change in deferred income tax asset..................... -- (5,500) Change in operating assets and liabilities.............. (15,882) 4,321 -------- --------- Net cash flows used in continuing operations............ (7,754) (9,759) Net cash flows provided by (used in) discontinued opera- tions.................................................. (342) 403 -------- --------- Net cash flows used in operating activities............... (8,096) (9,356) Investing activities: Purchases of property and equipment..................... (3,678) (2,416) Proceeds from disposals of property and equipment....... -- 127 Proceeds from sale of business.......................... -- 20,000 Business acquired in purchase transaction, net of cash acquired............................................... -- (19,615) Other................................................... (1,504) (4,149) -------- --------- Net cash flows used in continuing operations............ (5,182) (6,053) Net cash flows provided by discontinued operations...... -- -- -------- --------- Net cash flows used in investing activities............... (5,182) (6,053) Financing activities: Net borrowings (repayments) of debt..................... (10,170) 573,000 Repayment of notes payable.............................. -- (905) Repayment of capital lease obligations.................. (63) (32) Transaction related costs............................... -- (41,324) Proceeds from issuance of stock......................... 27 278,568 Purchases of treasury stock and stock outstanding....... -- (806,508) -------- --------- Net cash flows provided by financing activities........... (10,206) 2,799 Effect of exchange rate on cash........................... (942) (369) -------- --------- Decrease in cash and cash equivalents..................... (24,426) (12,979) Cash and cash equivalents at beginning of year............ 70,362 64,904 -------- --------- Cash and cash equivalents at end of period................ $ 45,936 $ 51,925 ======== =========
See notes to condensed consolidated financial statements. 4 DYNATECH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Basis of Presentation and Results of Operations Dynatech Corporation (the "Company") was organized in 1959 and its operations are conducted primarily by wholly owned subsidiaries located principally in the United States with distribution and sales offices in Germany, England, France, and the Pacific Rim. The Company operates in three business segments: communications test, industrial computing and communications, and visual communications. The communications test segment provides communications test instruments to communications service providers and long-distance companies, among others. The industrial computing and communications segment provides computer products to the ruggedized computer market. The visual communications segment manufactures (1) airplane passenger cabin video information display systems and information services, and (2) digital color enhancement systems used in the process of transferring film images into electronic signals. The Company operates on a fiscal year ended March 31 in the calendar year indicated (e.g., references to fiscal 2000 are references to the Company's fiscal year which began April 1, 1999 and will end March 31, 2000). B. Condensed Consolidated Financial Statements In the opinion of management, the unaudited condensed consolidated balance sheet at June 30, 1999, and the unaudited consolidated statements of operations and unaudited consolidated condensed statements of cash flows for the interim periods ended June 30, 1999 and 1998 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly these financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The year-end balance sheet data was derived from audited financial statements, but does not include disclosures required by generally accepted accounting principles. It is suggested that these condensed statements be read in conjunction with the Company's most recent Form 10-K as of March 31, 1999. 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, and tax valuation reserves. Actual results could differ from those estimates. C. Recapitalization and Other Related Costs In accordance with the terms of agreements relating to the Recapitalization (described below) and to other matters, the Company may elect to call vested stock options of certain employees upon termination of their services. During the first three months of fiscal 2000, the Company provided $13.3 million for such option calls and other expenses, most of which amount related to the retirement of John F. Reno, former Chairman, President and Chief Executive Officer of the Company. The total cash to be paid for the call of these options is approximately $14.9 million. At the time of the Merger (as defined below) the Company recorded a charge of $5.8 million, specifically related to these options, in connection with accelerating the vesting upon consummation of the Merger. Accordingly, an additional charge of $9.1 million has been recorded during the first quarter of fiscal 2000. 5 In connection with the Merger, the Company incurred a charge of $43.4 million principally for the cancellation payments of employee stock options and compensation expense due to the acceleration of unvested stock options. The Company incurred an additional $41.3 million in expenses, of which $27.3 million was capitalized and will be amortized over the life of the Senior Secured Credit Facilities and Senior Subordinated Notes, and $14.0 million was charged directly to shareholders' equity. D. Recapitalization and Merger On May 21, 1998, CDRD Merger Corporation ("MergerCo"), 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 "Merger") with the Company continuing as the surviving corporation. In the Merger, (i) each then outstanding share of common stock, par value $0.20 per share, of the Company 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 (ii) each then outstanding share of common stock of MergerCo was converted into one share of Common Stock. E. New Pronouncements On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." FAS 133 was amended by Statement of Financial Accounting Standards No. 137 which modified the effective date of FAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS 133, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is assessing the impact of the adoption of FAS 133 on its results of operations and its financial position. F. Legal Proceedings Litigation. The Company is involved from time to time in routine legal matters incidental to its business. The Company believes that the resolution of such matters will not have a material adverse effect on the Company's financial condition or results of operations. On June 27, 1996, Cincinnati Microwave, Inc. ("CMI") filed an action in the United States District Court for the Southern District of Ohio against the Company and Whistler Corporation of Massachusetts ("Whistler"), alleging willful infringement of CMI's patent for a mute function in radar detectors. In 1994, the Company sold its radar detector business to Whistler. The Company and Whistler have asserted in response that they have not infringed, and that the patent is invalid and unenforceable. The Company obtained an opinion of counsel from Bromberg & Sunstein LLP in connection with the manufacture and sale of the Company's Whistler series radar detectors and will be offering the opinion, among other things, as evidence that any alleged infringement was not willful. On March 24, 1998, CMI, together with its co-plaintiff and patent assignee Escort, Inc., moved for summary judgment. The Company and Whistler have opposed the motion for summary judgment. Discovery in this matter closed on June 20, 1998. The case is scheduled for trial in December 1999 and the Company intends to defend the lawsuit vigorously. On May 27, 1999 Whistler filed a Chapter 11 bankruptcy case in the United States Bankruptcy Court for the District of Massachusetts. The Company does not believe that the outcome of the litigation is likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. 6 G. Income (Loss) Per Share Income (loss) per share is calculated as follows:
Three Months Ended June 30, --------------------- 1999 1998 ---------- ---------- (In thousands except per share data) Net income (loss)...................................... $ 2,551 $ (11,933) ========== ========== BASIC: Common stock outstanding, beginning of period.......... 120,665 16,871 Weighted average common stock issued................... 8 54,416 Weighted average common stock repurchased.............. -- (7,823) ---------- ---------- Weighted average common stock outstanding, end of peri- od.................................................... 120,673 63,464 ========== ========== Income (loss) per common share......................... $ 0.02 $ (0.19) ========== ========== DILUTIVE: Common stock outstanding beginning of period........... 120,665 16,871 Weighted average common stock issued................... 8 54,416 Weighted average of dilutive potential common stock(a).... 8,899 -- Weighted average common stock repurchased.............. -- (7,823) ---------- ---------- Weighted average common stock outstanding, end of peri- od.................................................... 129,572 63,464 ========== ========== Income (loss) per common share......................... $ 0.02 $ (0.19) ========== ==========
- -------- (a) As of June 30, 1999, the Company had no options that were excluded from the diluted earnings per share calculation, since all options had a dilutive effect on earnings per share. As of June 30, 1998, the Company had options outstanding to purchase 15.3 million shares of common stock that were excluded from the diluted earnings per share computation as the effect of their inclusion would have been antidilutive. H. Debt Long-term debt is summarized below:
June 30, March 31, 1999 1999 -------- --------- Senior secured credit facilities.......................... $241,830 $252,000 Senior subordinated notes................................. 275,000 275,000 Capitalized leases........................................ 279 342 -------- -------- Total debt.............................................. 517,109 527,342 Less current portion.................................. 4,024 23,191 -------- -------- Long-term debt............................................ $513,085 $504,151 ======== ========
7 I. Shareholders' Deficit The following is a summary of the change in shareholders' deficit for the period ended June 30, 1999.
Number Of Shares Additional Other Total Common Paid-In Retained Unearned Comprehensive Shareholders' Stock Capital Deficit Compensation Loss Deficit --------- ---------- --------- ------------ ------------- ------------- Balance, March 31, 1999................... 120,665 $322,746 $(629,941) $(7,563) $(1,682) $(316,440) ------- -------- --------- ------- ------- --------- Net income current year................... 2,551 2,551 Translation adjustment.. (958) (958) --------- Total comprehensive income................. 1,593 ========= Adjust unearned compensation........... (350) 350 -- Stock option expense.... (5,829) (5,829) Amort of unearned compensation........... 441 441 Issuance of new stock... 8 27 27 ------- -------- --------- ------- ------- --------- Balance, June 30, 1999.. 120,673 316,594 $(627,390) $(6,772) $(2,640) $(320,208) ======= ======== ========= ======= ======= =========
J. Segment Information Sales and earnings before interest and taxes ("EBIT") for the three months ended June 30, 1999 and 1998 is shown below (in thousands):
Three Months Ended June 30, ------------------- 1999 1998 SEGMENT --------- --------- Communications test: Sales................................................. $ 67,281 $ 53,801 EBIT.................................................. 10,125 6,741 Industrial computing & communications: Sales................................................. 69,977 33,951 EBIT.................................................. 13,042 166 Visual communications: Sales................................................. 23,513 21,391 EBIT.................................................. 6,900 6,538 Corporate: EBIT.................................................. 33 (554) Total: Sales................................................. $ 160,771 $ 109,143 EBIT.................................................. 30,100 12,891
The Company had no material change in total assets by segment since March 31, 1999 and is, therefore, not separately disclosed. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Form 10-Q contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, product demand and market acceptance risks, the effect of economic conditions, the impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraints or difficulties, availability of capital resources, general business and economic conditions, the effect of the Company's accounting policies, and other risks detailed in the Company's most recent Form 10-K as of March 31, 1999. Overview During fiscal 1999 the Company's communications test and industrial computing and communications segments had been experiencing certain order delays due to the telecommunications equipment and service providers facing capital market volatility, reduced financing availability, as well as an overall economic slowdown in Asia. During the first quarter of fiscal 2000, the Company shipped products at record levels. However, the Company cannot predict whether this trend will continue due in part to the volatility of the global economy, the unpredictability of the purchasing patterns of the Regional Bell Operating Companies ("RBOCs"), and the timing and size of such customers' orders, among other things. In accordance with the terms of agreements relating to the Recapitalization and to other matters, the Company may elect to call vested stock options of certain employees upon termination of their services. During the first three months of fiscal 2000, the Company provided $13.3 million for such option calls and other expenses, most of which amount related to the retirement of John F. Reno, former Chairman, President and Chief Executive Officer of the Company. The total cash to be paid for the call of these options is approximately $14.9 million. At the time of the Merger the Company recorded a charge of $5.8 million, specifically related to these options, in connection with accelerating the vesting upon consummation of the Merger. Accordingly, an additional charge of $9.1 million has been recorded during the first quarter of fiscal 2000. During the first quarter of fiscal 1999, the Company acquired Pacific Systems, Inc. ("Pacific") for a total purchase price of $20 million. This acquisition resulted in approximately $18 million of goodwill which is being amortized over 30 years. Pacific is a subsidiary within the Company's visual communications segment. Also during the first quarter of fiscal 1999, the Company sold the assets of ComCoTec, Inc. ("ComCoTec") for $21 million. The Company recognized a gain of $15.9 million from the sale of ComCoTec and recorded the gain in other income. ComCoTec was a subsidiary within the Company's visual communications segment. Results of Operations Three Months Ended June 30, 1999 as Compared to Three Months Ended June 30, 1998 Sales. For the three months ended June 30, 1999 consolidated sales increased $51.6 million or 47.3% to $160.8 million as compared to $109.1 million for the three months ended June 30, 1998. The increase occurred within all three operating segments yet was primarily attributable to increased shipments of the Company's ruggedized laptop computers as a result of the large backlog of orders at March 31, 1999. International sales (defined as sales outside of North America) were $14.3 million or 8.9% of consolidated sales for the three months ended June 30, 1999, as compared to $15.9 million or 14.6% of consolidated sales for the three months ended June 30, 1998. The slight dollar decrease in international sales was a result of slower international sales throughout the Company. The large percentage decrease was a result of the increase in sales to a large domestic RBOC as a result of the large backlog at March 31, 1999. 9 Gross Profit. Consolidated gross profit increased $23.8 million to $86.8 million or 54.0% of consolidated sales for the three months ended June 30, 1999 as compared to $63.0 million or 57.7% of consolidated sales for the three months ended June 30, 1998. The percentage decrease was attributable to a change in the sales mix within the consolidated group along with lower gross margins within the Company's industrial computing and communications segment. Operating Expenses. Operating expenses consist of selling, general and administrative expense; product development expense; recapitalization and other related costs; amortization of intangibles; and amortization of unearned compensation. Total operating expenses were $70.4 million or 43.8% of consolidated sales for the three months ended June 30, 1999, as compared to $93.5 million or 85.7% of consolidated sales for the three months ended June 30, 1998. Excluding the impact of the recapitalization and other related costs, total operating expenses were $57.2 million or 35.6% of consolidated sales and $50.1 million or 45.9% of consolidated sales for the three months ended June 30, 1999 and 1998, respectively. The percentage decrease in total operating expenses excluding the recapitalization and other related expenses is due primarily to operating expenses having increased at a rate slower than sales growth, which is consistent with the Company's continued focus on cost containment. Selling, general and administrative expense was $39.9 million or 24.8% of consolidated sales for the three months ended June 30, 1999 as compared to $35.2 million or 32.2% of consolidated sales for the three months ended June 30, 1998. The percentage decrease is in part a result of the increase in sales. In addition, the Company's ICSADVENT Corporation subsidiary, formerly Industrial Computer Source, reduced its expense on its Industrial Computer Source-Book catalog as this subsidiary has implemented an on-line ordering system via the internet. Product development expense was $15.3 million or 9.5% of consolidated sales for the three months ended June 30, 1999 as compared to $13.5 million or 12.4% of consolidated sales for the same period a year ago. The Company continues to invest in product development and enhancement within all three segments. However, the percentage decrease is primarily due to the timing of expenses related to ongoing research and development programs as well as the increase in sales. Recapitalization and other related costs were $13.3 million and $43.4 million at June 30, 1999 and June 30, 1998, respectively. The fiscal 2000 expense relates to the cost incurred by the Company's call of certain terminating employees' vested stock options as well as other related termination expenses. Recapitalization costs totaling $43.4 million were incurred during the first quarter of fiscal 1999 in connection with the Merger, consisting of $39.9 million (including a $14.6 million non-cash charge) for the cancellation payments of employee stock options and compensation expense due to the acceleration of unvested stock options (of which $5.8 million relates to the terminating employees' unvested options as described above), and $3.5 million for certain other expenses resulting from the Merger, including employee termination expense. Amortization of intangibles was $1.6 million for the three months ended June 30, 1999 as compared to $1.4 million for the same period a year ago. The increase was primarily attributable to increased goodwill amortization related to the acquisition of Pacific in June, 1998. Amortization of unearned compensation of $0.4 million during the first quarter of fiscal 2000 related to the amortization of the $9.7 million recorded within shareholders' equity related to the 14.3 million options that originally were issued in July, 1998 at a grant price lower than fair market value. Operating income (loss). Operating income increased to $16.4 million or 10.2% of consolidated sales for the three months ended June 30, 1999 as compared to an operating loss of $30.5 million or (28.0%) of consolidated sales for the same period a year ago. The increase was primarily a result of the recapitalization and other related costs during fiscal 1999. Excluding these expenses, the Company generated operating income of $29.7 million or 18.4% of consolidated sales and $12.9 million or 11.8% of consolidated sales for the three months ended June 30, 1999 and 1998, respectively. This percentage increase was primarily the result of slower growth in operating expenses relative to the increase in sales described above. 10 Interest. Interest expense, net of interest income, was $12.1 million for the three months ended June 30, 1999 as compared to $5.3 million for the same period a year ago. The increase in net interest expense was attributable to a full quarter of interest expense in fiscal 2000 as compared to 41 days of interest expense in the first quarter of fiscal 1999, as the debt was incurred in connection with the Merger on May 21, 1998. Gain on sale. On June 30, 1998 the Company sold the assets of ComCoTec for $21 million which resulted in a gain of $15.9 million. ComCoTec was a subsidiary within the Company's visual communications segment. Taxes. The effective tax rate for the three months ended June 30, 1999 was 40.0%, which is essentially at the same level for the same period last year. Net income. Net income increased $14.5 million to $2.6 million or $0.02 per share on a diluted basis for the three months ended June 30, 1999 as compared to a net loss of $11.9 million or a $0.19 loss per share on a diluted basis for the same period a year ago. The increase was primarily attributable to the lower recapitalization and other related expenses and higher sales during fiscal 2000 as compared to the same period last year. Backlog. Backlog at June 30, 1999 was $169.2 million, an decrease of 0.5% as compared to $170.1 million at March 31, 1999. Adoption of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information"("FAS 131") During the fourth quarter of fiscal 1999 the Company adopted FAS 131 which establishes standards for the reporting of operating segments in the financial statements. The Company measures the performance of its subsidiaries by the their respective new orders received ("bookings"), sales and earnings before interest and taxes ("EBIT"). The discussion below includes bookings, sales and EBIT (excluding recapitalization and other related costs and the gain on sale of subsidiary) for the three segments in which the Company participates: communications test, industrial computing and communications, and visual communications (in thousands).
Three Months Ended June 30, ------------------- 1999 1998 SEGMENT --------- --------- Communications test: Bookings................................................. $ 76,358 $ 49,743 Sales.................................................... 67,281 53,801 EBIT..................................................... 10,125 6,741 Industrial computing & communications: Bookings................................................. $ 56,198 $ 39,510 Sales.................................................... 69,977 33,951 EBIT..................................................... 13,042 166 Visual communications: Bookings................................................. $ 24,821 $ 26,067 Sales.................................................... 23,513 21,391 EBIT..................................................... 6,900 6,538
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 - -- Communications Test Products Bookings for communications test products increased $26.6 million or 53.5% to $76.4 million for the three months ended June 30, 1999 as compared to $49.7 million for the same period a year ago. Orders for the Company's communications test instruments products continue to recover from last year's slowdown which was a result of the communications industry consolidation and the Asia economic crisis. 11 Sales of communications test products increased $13.5 million or 25.1% to $67.3 million for the three months ended June 30, 1999 as compared to $53.8 million for the three months ended June 30, 1998. During fiscal 1999 the Company experienced a decrease in demand for its core instruments in part due to the RBOC's consolidating their purchasing practices as well as the economic slowdown in Asia. The increase in sales is in part a result of the high backlog position for products within this segment at March 31, 1999. EBIT for the communications test products increased $3.4 million or 50.2% to $10.1 million for the three months ended June 30, 1999 as compared to $6.7 million for the same period a year ago. The increase in EBIT is directly related to the increase in sales. The backlog for the Company's communications test products was $69.7 million, an increase of 15.0% from the fiscal year ended March 31, 1999. Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 - -- Industrial Computing and Communications Products Bookings for the industrial computing and communications products increased 42.2% to $56.2 million for the three months ended June 30, 1999 as compared to $39.5 million for the same period a year ago. The increase is primarily attributable to a few significant orders received during the first quarter of fiscal 2000 from one of the large RBOCs for ruggedized laptops. Sales of industrial computing and communications products increased 106.1% to $70.0 million for the three months ended June 30, 1999 as compared to $34.0 million for the three months ended June 30, 1998. The increase was primarily due to increased shipments of the Company's ruggedized laptop computers to the RBOCs due to the high backlog position for products within this segment at March 31, 1999. EBIT for the industrial computing and communications products was $13.0 million for the three months ended June 30, 1999 as compared to $0.2 million for the same period a year ago. The increase was primarily attributable to the additional shipments of the ruggedized laptop computers. In addition the Company's ICSADVENT Corporation subsidiary, formerly Industrial Computer Source, reduced its expense on its Industrial Computer Source-Book catalog as this subsidiary has implemented an on-line ordering system via the internet. The backlog for the Company's industrial computing and communications products was $68.0 million, a decrease of 14.2% from the fiscal year ended March 31, 1999. Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 - -- Visual Communications Products Bookings for the visual communications products decreased $1.2 million or 4.8% to $24.8 million for the three months ended June 30, 1999 as compared to $26.1 million for the same period a year ago. The decrease was primarily a result of bookings for the Company's ComCoTec subsidiary, which was sold in June 1998, offset by bookings at Pacific, which was acquired in June 1998. In addition the Company booked approximately $2.4 million in fiscal 1999 related to Parallax which was closed in December 1998. Sales for the Company's visual communications products increased $2.1 million or 9.9% to $23.5 million for the three months ended June 30, 1999 as compared to $21.4 million for the same period a year ago. The increase in shipments is primarily a result of shipments at Pacific during the first three months of fiscal 2000 offset by shipments at Parallax and ComCoTec for the same period last year. EBIT for the visual communications products increased $0.4 million or 5.5% to $6.9 million for the three months ended June 30, 1999 as compared to $6.5 million for the same period a year ago. The backlog for the Company's visual communications products was $31.5 million, an increase of 4.3% from the fiscal year ended March 31, 1999. 12 Capital Resources and Liquidity The Company broadly defines liquidity as its ability to generate sufficient cash flow from operating activities to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments. The Company's liquidity needs arise primarily from debt service on the substantial indebtedness incurred in connection with the Merger and from the funding of working capital and capital expenditures. As of June 30, 1999, the Company had $517.1 million of indebtedness, primarily consisting of $275.0 million principal amount of the Senior Subordinated Notes, $236.8 million in borrowings under the Term Loan Facility and $5.0 million under the Revolving Credit Facility. Cash Flows. The Company's cash and cash equivalents decreased $24.4 million during the three months ended June 30, 1999. Working Capital. For the three months ended June 30, 1999, the Company's working capital decreased as its operating assets and liabilities used $15.9 million of cash. Accounts receivable decreased, creating a source of cash of $1.7 million. Inventory levels also decreased, creating a source of cash of $4.0 million, due primarily to improved inventory management throughout the organization. Other current assets increased, creating a use of cash of $1.5 million. Accounts payable decreased, creating a use of cash of $9.5 million. Other current liabilities decreased, creating a use of cash of $10.7 million. The decrease is due in part to management incentive payments made during the first quarter of fiscal year 2000. Investing activities. The Company's investing activities totaled $5.2 million for the three months ended June 30, 1999 in part for the purchase and replacement of property and equipment. The Company's capital expenditures during the first three months of fiscal 2000 were $3.7 million as compared to $2.4 million for the same period last year. The increase was primarily due to the timing of certain capital expenditure commitments at the Company's communications test and industrial computing and communications businesses. The Company anticipates that fiscal 2000 capital expenditures will increase from fiscal 1999 levels and return to or exceed fiscal 1998 levels as the Company anticipates replacing certain of its Enterprise Resource Planning (ERP) systems at the communications test and industrial computing and communications businesses. The Company is, in accordance with the terms of the Senior Secured Credit Agreement, subject to maximum capital expenditure levels. Debt and equity. The Company's financing activities used $10.2 million in cash during the first quarter of fiscal 2000, due mainly to the repayment of debt. Debt Principal and interest payments under the new Senior Secured Credit Agreement and interest payments on the Senior Subordinated Notes represent significant liquidity requirements for the Company. With respect to the $260 million initially borrowed under the Term Loan Facility (which is divided into four tranches, each of which has a different term and repayment schedule), the Company is required to make scheduled principal payments of the $50 million of tranche A term loan thereunder during its six-year term, with substantial amortization of the $70 million tranche B term loan, $70 million tranche C term loan and $70 million tranche D term loan thereunder occurring after six, seven and eight years, respectively. The balances of the revolving credit facility, and tranches A, B, C, and D at June 30, 1999 were $5.0 million, $34.7 million, $67.4 million, $67.4 million, and 13 $67.4 million, respectively. The $275 million of Senior Subordinated Notes will mature in 2008, and bear interest at 9 3/4% per annum. Total interest expense including $0.8 million of deferred debt issuance costs amortization was $12.9 million for the first quarter of fiscal 2000. The Company is required, under the terms of its Senior Secured Credit Facilities, to make a mandatory prepayment and principal reduction in an amount equal to 50% of the Company's excess cash flow (the "Recapture") calculated at the end of the Company's fiscal year. The Company was required to prepay $14.5 million on June 30, 1999 for its excess cash flow calculated as of March 31, 1999 in accordance with the terms of the Senior Secured Credit Facilities. The Company elected to use this recapture as a prepayment of the mandatory $8 million amortization due in fiscal 2000 which subsequently reduced the mandatory principal payments to approximately $2.6 million during fiscal 2000. The loans under the Senior Secured Credit Agreement bear interest at floating rates based upon the interest rate option elected by the Company. The Company's weighted-average interest rate on the loans under the Senior Credit Agreement was 8.24% per annum for the period April 1, 1999 through June 30, 1999. However, the Company has entered into interest rate swap contracts which will be effective for periods ranging from two to three years beginning September 30, 1998 to fix the interest charged on a portion of the total debt outstanding under the Term Loan Facility. After giving effect to these arrangements, approximately $220 million of the debt outstanding will be subject to an effective average annual fixed rate of 5.66%. This average annual interest rate does not include a margin payable to the lenders participating in the Senior Secured Credit Facilities. Future Financing Sources and Cash Flows. The amount under the Revolving Credit Facility that remained undrawn at June 30, 1999, was $105 million. The Company had $5 million outstanding under the Revolving Credit Facility at June 30, 1999. The Company believes that cash generated from operations, together with amounts available under the Revolving Credit Facility and any other available sources of liquidity, will be adequate to permit the Company to meet its debt service obligations, capital expenditure program requirements, ongoing operating costs and working capital needs, although no assurance can be given in this regard. The Company's future operating performance and ability to service or refinance the Senior Subordinated Notes and to repay, extend or refinance the Senior Secured Credit Facilities (including the Revolving Credit Facility) will be, among other things, subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. Covenant Restrictions. The Senior Secured Credit Agreement imposes restrictions on the ability of the Company to make capital expenditures, and both the Senior Secured Credit Facilities and the indenture governing the Senior Subordinated Notes limit the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company's ability to respond to market conditions, to meet its capital-spending program, to provide for unanticipated capital investments, or to take advantage of business opportunities. Year 2000 Broadly speaking, Year 2000 issues may arise when certain computer programs use only two digits to refer to a year or to recognize a year. As a result, computers that are not Year 2000 compliant may read the date 2000 as 1900. The Company is aware that Year 2000 issues could adversely impact its operations, and as detailed below, previously commenced and continues with a process intended to address Year 2000 issues that the Company has been able to identify. The Company's program for addressing Year 2000 issues at each of its businesses generally comprises the following phases: inventory, assessment, testing and remediation. The scope of this program includes the review of the Company's products, information technology ("IT") systems, non-IT and embedded systems, and vendors/supply chain. 14 State of Readiness. Management at each of the Company's businesses is in the final stages of a review of its computer systems and products to assess exposure to Year 2000 issues. The review process has been conducted by employees with expertise in information technology as well as engineers familiar with non-IT systems, and focuses on both the Company's internal systems and its existing and installed base of products. The Company previously formed a Year 2000 committee which is responsible for coordinating and facilitating activities across the Company. Progress of the Year 2000 committee is reported regularly to the Audit Committee of the Company's Board of Directors. Although the Company has used the services of consultants in connection with its assessment of some Year 2000 issues, it has not used independent verification and validation processes in the testing of its systems and products. As of June 30, 1999, the Company had conducted an inventory and test of its existing significant internal systems with regard to Year 2000 issues, and where necessary, has implemented solutions to non- conforming systems. The Company anticipates that additional testing and remediation of these systems will continue through September, 1999. As of June 30, 1999, the Company had conducted an inventory and an assessment of its existing and installed base of products. In determining state of readiness the Company has adopted the following definition: Year 2000 readiness means the intended functionality of a product, when used in accordance with its associated documentation, will correctly process, provide and/or receive date-data in and between the years 1999 and 2000, including leap year calculations, provided that all other products and systems (for example, hardware, software and firmware) used with the product properly exchange accurate date-data with it. Most of the Company's existing product lines, and the installed base of products, already meet this definition of Year 2000 readiness (i.e., they are "Year 2000 Ready"). These products do not have Year 2000 readiness issues because they do not contain date-sensitive functions. Certain existing products which are date-sensitive are being made Year 2000 Ready by making upgrades (i.e., hardware modifications and/or new software versions, as appropriate) available to customers. A few of the Company's older, installed base of products, primarily at the Company's communications test business, cannot reasonably be upgraded; customers using these products are being offered trade-in packages for newer, Year 2000 Ready products. As part of its assessment phase, the Company is in the process of communicating with its significant suppliers and customers to determine the extent to which the Company is vulnerable to any failure by those third parties to remediate their own Year 2000 issues. In addition, the Company is evaluating the extent to which Year 2000 issues may arise as a result of some combinations of certain of its products with other companies' products. If any such suppliers to customers or product combinations do not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be materially adversely affected. There can be no assurances that the Company's assessment of its suppliers and customers will be accurate. With minor exceptions, none of which is believed to be material, the communications test business, the Company's largest, met its June, 1999 targeted completion date for the review and remediation process. As of March 31, 1999, the communications test business had completed the inventory, assessment and testing of its existing products. Management does not consider data time fields to be critical to the functionality of most of the Company's communications test products. For the Company's other communications test product categories, which may employ data time fields in areas that are critical to product functionality, testing and remediation has been completed. In those limited product lines of the Company where Year 2000 readiness issues have been identified, the remediation process (generally, the distribution and implementation of software upgrades) continues, and will likely not be fully complete until after January 1, 2000. Costs. The Company's historical and estimated costs of remediation have not been and are not anticipated to be material to the Company's financial position or results of operations, and will be funded through operating cash flows. Total costs associated with remediation of Year 2000 issues (including systems, software, and non-IT systems replaced as a result of Year 2000 issues) are currently estimated at approximately $2 million to $3 million, of which approximately $1.5 million has already been incurred. Estimated remediation costs are based on management's best estimates. There can be no guarantee that these estimates will be achieved, and actual 15 results could differ materially from those anticipated, particularly if unanticipated Year 2000 issues arise. The costs do not include estimates for potential litigation. Many commentators believe that there will be a significant amount of litigation arising out of Year 2000 readiness issues. Because of the unprecedented nature of this litigation, it is not possible for the Company to predict the impact of such litigation. Year 2000 Risks and Related Plans. While the Company expects to make the necessary modifications or changes to both its internal IT and non-IT systems and existing product base in a timely fashion, there can be no assurance that the Company's internal systems and existing or installed base of products will not be materially adversely affected by the advent of Year 2000. Certain of the Company's products are used, in conjunction with products of other companies, in applications that may be critical to the operations of its customers. Any product non-readiness, whether standing alone or used in conjunction with the products of other companies, may expose the Company to claims from its customers or others, and could impair market acceptance of the Company's products and services, increase service and warranty costs, or result in payment of damages, which in turn could materially adversely affect the Company. In the event of a failure as a result of Year 2000 issues, the Company could lose or have trouble accessing accurate internal data, resulting in incomplete or inaccurate accounting of Company financial results, the Company's manufacturing operating systems could be impaired, and the Company could be required to expend significant resources to address such failures. In an effort intended to minimize potential disruption to its internal systems, the Company intends to perform additional hard-disk back-up of its rudimentary systems and critical information in advance of the Year 2000. Similarly, in the event of a failure as a result of Year 2000 issues in any systems of third parties with whom the Company interacts, the Company could lose or have trouble accessing or receive inaccurate third party data, experience internal and external communications difficulties or have difficulty obtaining components that are Year 2000 compliant from its vendors. The Company could also experience a slowdown or reduction of sales if customers such as telecommunications companies or commercial airlines are adversely affected by Year 2000 issues. New Pronouncements On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." FAS 133 was amended by Statement of Financial Accounting Standards No. 137 which modified the effective date of FAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS 133, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is assessing the impact of the adoption of FAS 133 on its results of operations and its financial position. 16 Item 3. Quantitative And Qualitative Disclosures About Market Risk The Company operates both manufacturing facilities and sales offices within the United States and primarily sales offices outside the United States. 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 sales offices are located, as well as the low percentage of overall sales outside the United States (approximately 14%, 16% and 20% in fiscal 1999, 1998, and 1997, respectively of consolidated sales relate to foreign sales including exports from the United States). The Company's principal currency exposures against the U.S. dollar are in the major European currencies and in Canadian currency. The Company does not 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 solely of interest rate swap contracts. 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. The Company currently has four interest rate swap contracts with notional amounts totaling $220 million which fixed its variable rate debt to a fixed interest rate for periods of two to three years in which the Company pays a fixed interest rate on a portion of its outstanding debt and receives three- month LIBOR. At June 30, 1999, three of the four interest rate swap contracts had an interest rate higher than the three-month LIBOR quoted by its financial institutions, as variable rate three-month LIBOR interest rates declined after the swap contracts became effective. Therefore, the additional interest expense (calculated as the difference between the interest rate in the swap contracts and the three-month LIBOR rate) recognized by the Company during the three months of fiscal 2000 was $375.8 thousand. The Company has 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 June 30, 1999, the analysis demonstrated that such movement would cause the Company to recognize additional interest expense of approximately $1.2 million on an annual basis, and accordingly, would cause a hypothetical loss in cash flows of approximately $1.2 million on an annual basis. 17 PART II. Other Information Item 1. Legal Proceedings Litigation. The Company is involved from time to time in routine legal matters incidental to its business. The Company believes that the resolution of such matters will not have a material adverse effect on the Company's financial condition or results of operations. On June 27, 1996, Cincinnati Microwave, Inc. ("CMI") filed an action in the United States District Court for the Southern District of Ohio against the Company and Whistler Corporation of Massachusetts ("Whistler"), alleging willful infringement of CMI's patent for a mute function in radar detectors. In 1994, the Company sold its radar detector business to Whistler. The Company and Whistler have asserted in response that they have not infringed, and that the patent is invalid and unenforceable. The Company obtained an opinion of counsel from Bromberg & Sunstein LLP in connection with the manufacture and sale of the Company's Whistler series radar detectors and will be offering the opinion, among other things, as evidence that any alleged infringement was not willful. On March 24, 1998, CMI, together with its co-plaintiff and patent assignee Escort, Inc., moved for summary judgment. The Company and Whistler have opposed the motion for summary judgment. Discovery in this matter closed on June 20, 1998. The case is scheduled for trial in December 1999 and the Company intends to defend the lawsuit vigorously. On May 27, 1999 Whistler filed a Chapter 11 bankruptcy case in the United States Bankruptcy Court for the District of Massachusetts. The Company does not believe that the outcome of the litigation is likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. Item 2. Changes in Securities and Use of Proceeds None Item 4. Submission of Matters to a Vote None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibit numbers in the following list correspond to the numbers assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
Exhibit Number Description ------- ----------- 10.1 Loanout Agreement 27 Financial Data Schedule
(b) Reports on Form 8-K None 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DYNATECH CORPORATION August 5, 1999 /s/ ALLAN M. KLINE _____________________________________ _____________________________________ Date Allan M. Kline Vice President, Chief Financial Officer and Treasurer August 5, 1999 /s/ ROBERT W. WOODBURY, JR. _____________________________________ _____________________________________ Date Robert W. Woodbury, Jr. Vice President, Corporate Controller and Principal Accounting Officer 19 EX-10.01 2 LOANOUT AGREEMENT EXHIBIT 10.1 LOANOUT AGREEMENT This LOANOUT AGREEMENT is dated as of May 19, 1999 (the "Agreement"), by and among Dynatech Corporation, a Massachusetts corporation (the "Company"), Dynatech LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (formerly known as Telecommunications Techniques Co., LLC) ("Holding"), and Clayton, Dubilier & Rice, Inc., a Delaware corporation ("CD&R"). WITNESSETH: WHEREAS, Holding, the Company and CD&R are parties to a Consulting Agreement, dated as of May 21, 1998 (the "Consulting Agreement"), among Holding, the Company and CD&R, and an Indemnification Agreement, dated as of May 21, 1998 (the "Indemnification Agreement"), among Holding, the Company, CD&R and Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited partnership; WHEREAS, the Company and Holding desire to obtain the services of Mr. Ned Lautenbach ("Lautenbach"), an employee of CD&R, to perform the functions of Chairman, President and Chief Executive Officer of the Company and Holding, and CD&R is willing to make such services available to the Company and Holding upon and subject to the terms and conditions hereof; and WHEREAS, this Agreement has been approved by the Boards of Directors of the Company and Holding, including a majority of the disinterested directors of each of the Company and Holding; NOW, THEREFORE, in consideration of the foregoing premises and the respective agreements hereinafter set forth and the mutual benefits to be derived here from, the parties hereto hereby agree as follows: 1. Services, etc. CD&R shall make the services of Lautenbach available to the Company and Holding, and the Company and Holding shall make use of the services of Lautenbach to serve as Chairman, President and Chief Executive Officer of each of the Company and Holding, commencing and effective as of May 19, 1999, until the expiration of the Term (as defined in Section 2 hereof). Lautenbach shall be available to render such services on a part-time basis mutually agreeable to the Company, Holding, CD&R and Lautenbach. Without limiting the foregoing, Lautenbach will continue to serve as an employee of CD&R and may serve as an officer or director of CD&R or other corporations or entities and devote such time to performing such services as Lautenbach, in his sole discretion, shall deem necessary or appropriate. The services of Lautenbach to be made available to the Company, Holding and its subsidiaries hereunder shall be deemed part of the services provided by CD&R pursuant to the Consulting Agreement. No separate or additional consideration shall be payable hereunder for the services of Lautenbach, beyond that payable under the Consulting Agreement. 2. Term. (a) This Agreement shall be effective as of May 19, 1999. The term of this Agreement (the "Term") shall commence on May 19, 1999 and shall terminate on the earliest to occur of (i) the termination of the Consulting Agreement, (ii) the date that is ten (10) business days following delivery of written notice of such termination by any party hereto to the other parties hereto, (iii) the election of a successor President and Chief Executive Officer of the Company or of Holding by the Board of Directors of the Company or of Holding, as applicable, in accordance with its by-laws, and (iv) Lautenbach's death, permanent disability or resignation from his employment with CD&R. (b) The expiration of the Term shall not affect the continuing effectiveness of the Consulting Agreement or the Indemnification Agreement, each of which shall continue to be in full force and effect and enforceable in accordance with their respective terms. Without limiting the foregoing, each of the Company and Holding shall continue to, and shall be obligated to, pay and reimburse all fees, expenses and other amounts as and when due under the Consulting Agreement and the Indemnification Agreement and perform all their other obligations thereunder. 3. Indemnification. All performance by, and all actions or omissions of, CD&R or Lautenbach under or in respect of this Agreement shall be deemed to be pursuant to the Consulting Agreement, and each of CD&R and Lautenbach shall be entitled to the benefits of the indemnification and other provisions of the Consulting Agreement and the Indemnification Agreement. 4. Independent Contractor Status. Each of CD&R, the Company and Holding agree that the furnishing of Lautenbach's services hereunder by CD&R is solely as an independent contractor, with CD&R retaining control over and responsibility for its own operations and personnel, including Lautenbach. Neither CD&R nor any of its directors, officers, employees or agents (including Lautenbach) shall, solely by virtue of this Agreement or the arrangements hereunder, be considered employees, principals, partners, co- venturers or agents of the Company or Holding. 5. Notices. Any notice or other communication required or permitted to be given or made under this Agreement by one party to the other parties shall be in writing and shall be deemed to have been duly given and to be effective (i) on the date of delivery if delivered personally or (ii) when sent if sent by prepaid telegram, or mailed first-class, postage prepaid, by registered or certified mail or confirmed facsimile transmission, as follows (or to such other address as shall be given in writing by one party to the other parties in accordance herewith): If to the Company to: Dynatech Corporation 3 New England Executive Park Burlington, Massachusetts 01803 Attn: Secretary Telephone: (781) 272-6100 Telecopy: (781) 272-2304 If to Holding, to it care of the Company at the address set forth above. If to CD&R to: Clayton, Dubilier & Rice, Inc. 375 Park Avenue, 18th Floor New York, New York 10152 Attn: Joseph L. Rice, III Telephone: (212) 407-5200 Telecopy: (212) 407-5252 With a copy to: Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attn: Franci J. Blassberg, Esq. Telephone: (212) 909-6000 Telecopy: (212) 909-6836 6. General. (a) Entire Agreement. This Agreement together with the Consulting Agreement and the Indemnification Agreement (i) contain the complete and entire understanding and agreement of CD&R, Holding and the Company with respect to the subject matter hereof, and (ii) supersede all prior and contemporaneous understandings, conditions and agreements, oral or written, express or implied, in respect of the subject matter hereof, including but not limited to in respect of the furnishing of the services of Lautenbach in connection with the subject matter hereof. There are no representations or warranties of Lautenbach or CD&R in connection with this Agreement or the services to be made available hereunder, except as expressly made and contained in this Agreement. (b) Headings. The headings contained in this Agreement are for purposes of convenience only and shall not affect the meaning or interpretation of this Agreement. (c) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. (d) Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns, provided that none of CD&R, the Company or Holding may assign any of its rights or obligations under this Agreement without the express written consent of the other parties hereto. (e) Governing Law. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER, AND IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS LAWS THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION. EACH OF THE COMPANY, HOLDING AND CD&R HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN THE STATE, CITY AND COUNTY OF NEW YORK SOLELY IN RESPECT OF THE INTERPRETATION AND ENFORCEMENT OF THE PROVISIONS OF THIS AGREEMENT, AND THE PARTIES HERETO HEREBY IRREVOCABLY AGREE THAT (i) THE SOLE AND EXCLUSIVE APPROPRIATE VENUE FOR ANY ACTION, SUIT OR PROCEEDING RELATING TO SUCH INTERPRETATION AND ENFORCEMENT SHALL BE IN SUCH A COURT, (ii) ALL CLAIMS WITH RESPECT TO SUCH PROVISIONS SHALL BE HEARD AND DETERMINED EXCLUSIVELY IN SUCH A COURT, (iii) ANY SUCH COURT SHALL HAVE EXCLUSIVE JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF ANY DISPUTE RELATING TO SUCH PROVISIONS AND (iv) EACH HEREBY WAIVES, AND AGREES NOT TO ASSERT, ANY AND ALL OBJECTIONS AND DEFENSES BASED ON FORUM, VENUE OR PERSONAL OR SUBJECT MATTER JURISDICTION AS THEY MAY RELATE TO SUCH AN ACTION, SUIT OR PROCEEDING BEFORE SUCH A COURT IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION 6(e), PROVIDED THAT ENFORCEMENT OF A JUDGMENT RENDERED BY SUCH A COURT MAY BE SOUGHT IN ANY COURT OF COMPETENT JURISDICTION FOR THE ENFORCEMENT THEREOF. EACH OF THE COMPANY, HOLDING AND CD&R HEREBY CONSENT TO AND GRANT ANY SUCH COURT JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF ANY SUCH DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION 5, OR IN SUCH OTHER MANNER AS MAY BE PERMITTED BY LAW, SHALL BE VALID AND SUFFICIENT SERVICE THEREOF. (f) Waiver of Jury Trial. Each party hereto acknowledges and agrees that any controversy that may arise under this Agreement is likely to involve complicated and difficult issues, and therefore it hereby irrevocably and unconditionally waives any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of or relating to this Agreement, or the breach, termination or validity of this Agreement, or the transactions contemplated by this Agreement. Each party certifies and acknowledges that (i) no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver, (ii) it understands and has considered the implications of this waiver, (iii) it makes this waiver voluntarily, and (iv) it has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications contained in this Section 6(f). (g) Amendment; Waivers. No amendment, modification, supplement or discharge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by the party against whom enforcement of the amendment, modification, supplement, discharge or waiver is sought (and in the case of Holding and the Company, approved by resolution of the Board of Directors of Holding or the Company, as the case may be). Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party granting such waiver in any other respect or at any other time. Neither the waiver by any party hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure by any party, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall be construed as a waiver of any other breach or default of a similar nature, or as a waiver of any of such provisions, rights or privileges hereunder. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity or otherwise. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. Dynatech Corporation /s/ Mark V. B. Tremallo By: ___________________________________ Name:Mark V. B. Tremallo Title: Corporate Vice President and General Counsel Dynatech LLC /s/ Mark V. B. Tremallo By: ___________________________________ Name:Mark V. B. Tremallo Title: Corporate Vice President and General Counsel Clayton, Dubilier & Rice, Inc. /s/ William A. Barbe By: ___________________________________ Name:William A. Barbe Title: Vice President, Secretary and Treasurer EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-2000 APR-01-1999 JUN-30-1999 45,936 0 71,078 1,805 42,252 181,123 76,143 49,638 318,427 119,302 275,000 0 0 0 (320,208) 318,427 160,771 160,771 60,888 73,937 70,439 0 12,851 4,252 1,701 2,551 0 0 0 2,551 .02 .02
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