February 3, 1999 (Part 3)
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, has commenced 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.
State of Readiness. Management at each of the Company's businesses has commenced a review of its computer systems and
products to assess exposure to Year 2000 issues. The review process is being 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. Although the Company has used the services of consultants to a limited extent 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 December 31, 1998, the Company had conducted an inventory and test of its
existing significant internal systems with regard to Year 2000 issues. The Company anticipates that additional testing and
remediation of these systems will continue through June, 1999.
As of December 31, 1998, the Company had conducted an inventory of its existing products. The Company anticipates that it
will complete its inventory of its installed base of products by March 31, 1999. In particular, it is anticipated that significant
focus and resources will be required for the assessment, testing and remediation process for the Industrial Computer Source
existing product line 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.
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.
The targeted completion date for the review and remediation process for the communications test business, the Company's
largest, is June, 1999. As of December 31, 1998, 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 the
Company's communications test products. For the Company's other product categories, which may employ data time fields in
areas that are critical to product functionality, completion dates are targeted on or prior to June, 1999 for testing and
remediation.
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 (including systems, software, and non-IT systems replaced as a result of Year 2000 issues) are
currently estimated at approximately $3 million to $4 million, of which at least $2 million to $3 million remains to be spent. The
largest cost factor to date has consisted of expenditure of management and employee time in attention to Year 2000 and related
issues. Estimated remediation costs are based on management's best estimates. There can be no guarantee that these estimates
will be achieved, and actual results could differ materially from those anticipated, particularly if unanticipated Year 2000 issues
arise.
Year 2000 Risks and Related Plans. While the Company expects to make the necessary modifications of 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.
The Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union (the "participating countries") established
fixed conversion rates between their existing sovereign currencies (the "legacy currencies") and the euro. The participating
countries agreed to adopt the euro as their common legal currency on that date. The euro now trades on currency exchanges for
non- cash transactions.
As of January 1, 1999, the participating countries no longer controlled their own monetary policies by directing independent
interest rates for the legacy currencies. Instead, the authority to direct monetary policy, including money supply and official
interest rates for the euro, is exercised by the new European Central Bank.
Following introduction of the euro, the legacy currencies remain legal tender in the participating countries as denominations of
the euro between January 1, 1999 and January 1, 2002 (the "transition period"). During the transition period, public and private
parties may pay for goods and services using either the euro or the participating country's legacy currency.
The impact of the euro is not expected to materially affect the results of operations of Dynatech. The Company operates
primarily in U.S. dollar- denominated purchase orders and contracts, and the Company neither has a large customer nor vendor
base within the countries participating in the euro conversion.
New Pronouncements
In the quarter ended June 30, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130") "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components. SFAS 130 requires, among other things, foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity to be included in other comprehensive income.
In the quarter ended June 30, 1998, the Company adopted Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on
software transactions.
In June, 1997, the Financial Accounting Standards Board issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards for the reporting of operating segments in the
financial statements. The Company is required to adopt SFAS 131 in the fourth quarter of fiscal 1999 and its adoption may
result in the provision of additional details in the Company's disclosures.
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. SFAS 133 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. Due to its limited use of derivative instruments, the Company is assessing the impact of the adoption of SFAS
133 on its results of operations and its financial position.
Exchange Offer of Senior Subordinated Notes
On October 8, 1998, Dynatech LLC commenced an offer to exchange, for the Senior Subordinated Notes, notes that are
registered under the Securities Act of 1933 and that have materially identical terms (with minor exceptions relating to payment
of additional interest and registration rights). All of the existing notes originally issued were tendered and exchanged for new
notes. |
