PART 2
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.
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The EDGAR Online Glimpse is an extraction of the Management's
Discussion and Analysis section contained in the full 10-Q, available
from EDGAR Online
/bin/eol?date=1994&cik=0000030841&ftype=10-Q
All SEC Filings for DYNATECH CORP from EDGAR Online
/bin/eol?date=1994&cik=0000030841
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