SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------------------- to ----------------
Commission file number: 333-32195
WAVETEK CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
DELAWARE 33-0457664
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11995 EL CAMINO REAL, SUITE 301
SAN DIEGO, CALIFORNIA 92130
- ---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(619) 793-2300
--------------
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
--------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
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 No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of August
11, 1997, Registrant had only one class of common stock, of which there were
4,884,860 shares outstanding.
WAVETEK CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 1997 and June 30, 1996 . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1997 and June 30, 1996. . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 24
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVETEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1997 1996
---------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 4,059 $ 6,126
Short-term investments, available for sale . . . . . . 3,000 -
Accounts receivable (less allowance for doubtful
accounts of $2,023 in 1996 and $2,054 in 1997
(unaudited)). . . . . . . . . . . . . . . . . . . . . 25,280 20,866
Inventories . . . . . . . . . . . . . . . . . . . . . . 18,202 19,308
Deferred income taxes. . . . . . . . . . . . . . . . . . 4,474 4,505
Other current assets . . . . . . . . . . . . . . . . . . 2,226 1,188
--------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 57,241 51,993
Property and equipment, net. . . . . . . . . . . . . . . . 14,773 12,194
Deferred debt issuance costs, net. . . . . . . . . . . . . 4,293 -
Intangible assets, net . . . . . . . . . . . . . . . . . . 3,424 3,867
Deferred income taxes. . . . . . . . . . . . . . . . . . . 37 441
Other assets . . . . . . . . . . . . . . . . . . . . . . . 195 357
--------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 79,963 $ 68,852
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . . $ 3,377 $ 786
Trade accounts payable . . . . . . . . . . . . . . . . . 15,834 12,007
Accrued compensation . . . . . . . . . . . . . . . . . . 7,162 7,468
Income taxes payable . . . . . . . . . . . . . . . . . . 2,021 1,427
Other current liabilities. . . . . . . . . . . . . . . . 9,095 8,747
Current maturities of long-term obligations. . . . . . . 988 95
--------- --------
Total current liabilities. . . . . . . . . . . . . . . . . 38,477 30,530
Long-term obligations, less current maturities . . . . . . 113,995 5,073
Deferred income and other liabilities. . . . . . . . . . . 460 561
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.01; authorized, 15,000 shares;
issued and outstanding, 10,974 shares in 1996 and 4,885
shares in 1997 (unaudited). . . . . . . . . . . . . . . 49 110
Additional paid-in capital . . . . . . . . . . . . . . . 43,748 5,538
Retained earnings (accumulated deficit). . . . . . . . . (116,660) 26,746
Foreign currency translation adjustments . . . . . . . . (106) 294
--------- --------
Total stockholders' equity (deficit) . . . . . . . . . . . (72,969) 32,688
--------- --------
Total liabilities and stockholders' equity (deficit) . . . $ 79,963 $ 68,852
--------- --------
--------- --------
Note: The balance sheet at September 30, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
WAVETEK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- --------- ---------
Sales . . . . . . . . . . . . . . $36,484 $38,191 $118,700 $115,181
Cost of goods sold. . . . . . . . 16,378 18,038 55,479 55,779
-------- -------- --------- ---------
Gross margin. . . . . . . . . . . 20,106 20,153 63,221 59,402
Operating expenses:
Marketing and selling . . . . . . 9,340 9,223 27,913 26,809
Research and development. . . . . 3,922 3,249 11,635 9,416
General and administrative. . . . 2,473 2,716 7,878 8,655
Stock option compensation
related to recapitalization . . 7,061 - 7,061 -
Provision for restructuring
operations. . . . . . . . . . . . - 45 - 188
-------- -------- --------- ---------
22,796 15,233 54,487 45,068
-------- -------- --------- ---------
Operating income (loss) . . . . . . (2,690) 4,920 8,734 14,334
Non-operating income (expense):
Interest income . . . . . . . . . 118 42 254 99
Interest expense. . . . . . . . . (709) (137) (948) (616)
Other, net. . . . . . . . . . . . (245) (207) (861) (488)
-------- -------- --------- ---------
(836) (302) (1,555) (1,005)
Income (loss) before provision
(credit) for income taxes . . . . (3,526) 4,618 7,179 13,329
Provision (credit) for
income taxes. . . . . . . . . . (1,137) 311 2,728 893
-------- -------- --------- ---------
Net income (loss) . . . . . . . . $(2,389) $ 4,307 $ 4,451 $ 12,436
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per share . . . $ (.23) $ .37 $ .40 $ 1.08
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in computation. . . . 10,173 11,550 11,123 11,485
-------- -------- --------- ---------
-------- -------- --------- ---------
See accompanying notes.
4
WAVETEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . $ 4,451 $ 12,436
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation expense . . . . . . . . . . . . . . . . 2,102 2,031
Amortization expense . . . . . . . . . . . . . . . . 430 435
Amortization of deferred debt
issuance costs. . . . . . . . . . . . . . . . . . . 33 -
Provision for losses on accounts
receivable. . . . . . . . . . . . . . . . . . . . . 252 407
Loss on disposal of property
and equipment . . . . . . . . . . . . . . . . . . . 8 95
Deferred income. . . . . . . . . . . . . . . . . . . (73) (74)
Deferred income taxes. . . . . . . . . . . . . . . . 435 (2,910)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . (6,948) (3,049)
Inventories and other assets . . . . . . . . . . . . (335) (1,989)
Accounts payable and accrued expenses . . . . . . . 6,136 2,687
Income taxes payable, net. . . . . . . . . . . . . . 540 362
-------- --------
Net cash provided by operating
activities. . . . . . . . . . . . . . . . . . . . . . 7,031 10,431
INVESTING ACTIVITIES
Proceeds from sale of business . . . . . . . . . . . . - 338
Purchase of property and
equipment . . . . . . . . . . . . . . . . . . . . . . (4,784) (3,207)
Proceeds from sale of property and equipment . . . . . 53 197
Purchase of short-term investments . . . . . . . . . . (3,000) -
Payments received on notes receivable. . . . . . . . . 169 165
Issuance of notes receivable . . . . . . . . . . . . . - (90)
-------- --------
Net cash used in investing activities. . . . . . . . . (7,562) (2,597)
FINANCING ACTIVITIES
Issuance of common shares for cash . . . . . . . . . . 42,856 -
Repurchase of common shares and stock options
for cash. . . . . . . . . . . . . . . . . . . . . . . (152,564) -
Proceeds from revolving lines of credit and
long-term obligations . . . . . . . . . . . . . . . . 114,144 14,324
Principal payments on revolving lines of credit and
long-term obligations . . . . . . . . . . . . . . . . (1,489) (21,802)
Debt issuance costs. . . . . . . . . . . . . . . . . . (4,326) -
-------- --------
Net cash used in financing activities. . . . . . . . . (1,379) (7,478)
Effect of exchange rate changes on cash and
cash equivalents. . . . . . . . . . . . . . . . . . . (157) (124)
-------- --------
Increase (decrease) in cash and cash equivalents . . . (2,067) 232
Cash and cash equivalents at beginning of period . . . 6,126 3,689
-------- --------
Cash and cash equivalents at end of period . . . . . . $ 4,059 $ 3,921
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . $ 440 $ 628
-------- --------
-------- --------
Cash paid for income taxes . . . . . . . . . . . . . . $ 1,963 $ 3,507
-------- --------
-------- --------
See accompanying notes.
5
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Wavetek Corporation ("the Company") is a leading global designer,
manufacturer and distributor of a broad range of electronic test instruments,
with a primary focus on application-specific instruments for testing voice,
video and data communications equipment and networks. The Company also
designs, manufactures and distributes precision instruments to calibrate and
test electronic equipment and provides repair, upgrade and calibration
services for its products on a worldwide basis. The accompanying consolidated
financial statements include the operations of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements and the financial
information included herein are unaudited. However, such information includes
all adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary to fairly state the results of
the interim periods. Interim results are not necessarily indicative of
results to be expected for the full year. For further information, refer to
the Company's annual audited consolidated financial statements and notes
thereto, for the year ended September 30, 1996, contained in the Company's
Registration Statement on Form S-4 dated July 28, 1997.
2. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
("SFAS 128"). SFAS 128 replaces Accounting Principles Board Opinion No. 15,
EARNINGS PER SHARE ("APB 15"). SFAS 128 requires dual presentation of basic
and diluted earnings per share ("EPS") by entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution of securities that
could share in the earnings of the entity. The Company plans to adopt SFAS
128 beginning with its financial statements for the three months ended
December 31, 1997. The impact of SFAS 128 is expected to result in the
calculation of basic net income (loss) per share of $(.25) and $.39 for the
three months ended June 30, 1997 and 1996, respectively, and $.42 and $1.13
for the nine months ended June 30, 1997 and 1996, respectively. The impact of
SFAS 128 is expected to result in the calculation of diluted net income
(loss) per share of $(.23) and $.37 for the three months ended June 30, 1997
and 1996, respectively, and $.40 and $1.08 for the nine months ended June 30,
1997 and 1996, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), which is effective for the year ending September
30, 1997. SFAS 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS 123 or under the provisions of
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"), but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS 123 had
been adopted. The Company has continued accounting for its stock-based
compensation in accordance with the provisions of APB 25 and will disclose
the required pro forma information in its fiscal 1997 audited financial
statements.
3. FINANCIAL STATEMENT DETAILS
Inventories consist of the following:
JUNE 30, SEPTEMBER 30,
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Finished Goods . . . . . . . . . . . . . $ 7,124 $ 7,852
Work-in-progress . . . . . . . . . . . . 3,990 5,639
Materials. . . . . . . . . . . . . . . . 7,088 5,817
------- -------
$18,202 $19,308
------- -------
------- -------
6
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. RECAPITALIZATION TRANSACTIONS
On June 11, 1997, the Company completed the following transactions (the
Recapitalization Transactions): (i) the Company sold an aggregate of
2,428,470 shares of its Common Stock, representing 49.7% of the Common Stock
outstanding following the Recapitalization Transactions, to DLJ Merchant
Banking Partners II, L.P. and its affiliates and Green Equity Investors II,
L.P. and its affiliates for an aggregate purchase price of $43.5 million,
less related costs of $644,000 (the New Equity Investment); (ii) the Company
issued $85 million aggregate principal amount of 10-1/8% Senior Subordinated
Notes maturing June 15, 2007 (the Notes) (Note 5); (iii) the Company incurred
indebtedness of $25 million under a five year and six month term loan
facility and entered into a five year and six month revolving credit facility
providing for borrowings of up to $20 million (the New Credit Agreement)
(Note 5); (iv) the Company incurred aggregate debt issuance costs of $4.3
million in connection with the issuance of the Notes and with entering the
New Credit Agreement; (v) the Company used the net proceeds from the New
Equity Investment, the issuance of the Notes and the New Credit Agreement to
repurchase an aggregate of 8,513,610 shares of Common Stock from existing
stockholders for an aggregate of $152.5 million and to make cash payments
upon surrender of stock options by employees in an aggregate amount of $7.1
million. Such existing stockholders retained 50.3% of the shares of Common
Stock outstanding following the Recapitalization Transactions.
5. CREDIT AGREEMENTS AND LONG-TERM OBLIGATIONS
In connection with the Recapitalization Transactions (Note 4), the Company
issued $85 million aggregate principal amount of Senior Subordinated Notes
(Notes) pursuant to an Indenture (the Indenture) between the Company and the
Bank of New York, as trustee. The Notes bear interest at 10.125%, payable
semi-annually on each June 15 and December 15 commencing December 15, 1997.
The total principal balance of the Notes is due June 15, 2007. On or after
June 15, 2002, the Notes will be redeemable at the option of the Company, in
whole or in part, at the following redemption prices (expressed as
percentages of principal amount) plus accrued and unpaid interest and
liquidated damages, if any: 105.063% if redeemed during the twelve-month
period beginning on June 15, 2002; 103.375% if redeemed during the
twelve-month period beginning on June 15, 2003; 101.688% if redeemed during
the twelve-month period beginning on June 15, 2004; and 100% thereafter.
Notwithstanding the foregoing, during the first three years following the
issue date of the Notes, the Company may redeem up to 33-1/3% of the
aggregate principal amount of the Notes with the proceeds of one or more
Public Equity Offerings (as defined in the Indenture) at a redemption price
of 110.125% of the principal amount thereof, in each case plus accrued and
unpaid interest and liquidated damages, if any. The Notes are guaranteed on a
senior subordinated basis by the Company's current and future subsidiaries in
the United States. The Indenture requires the Company to comply with various
affirmative, negative, and financial covenants. The Company was in compliance
with all such covenants at June 30, 1997.
Also in connection with the Recapitalization Transactions, the Company
entered into a New Credit Agreement (New Credit Agreement) with a group of
five lending banks (the Lenders) including DLJ Capital Funding, Inc. as
Syndication Agent and Fleet National Bank as Administrative Agent. The New
Credit Agreement provided for a $25 million five year and six month term loan
(Term Loan) borrowed by the Company on June 11, 1997. The Term Loan is
repayable in quarterly installments on the 15th day of each September,
December, March and June commencing September 15, 1998. Total principal
payments due in each future fiscal year are as follows: 1998 - $1,000,000;
1999 - $4,250,000; 2000 - $5,250,000; 2001 -$6,250,000; 2002 - $6,750,000
and; 2003 - $1,500,000. The Term Loan may be prepaid at any time and is
subject to mandatory prepayments if the Company generates Excess Cash Flow
(as defined in the New Credit Agreement). The New Credit Agreement also
provides for a five year and six month revolving credit facility in the
amount of $20 million, of which up to $7.5 million may be borrowed in British
pounds, French francs or Deutsche marks. The Company has no borrowings
7
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. CREDIT AGREEMENTS AND LONG-TERM OBLIGATIONS (CONTINUED)
outstanding under the revolving credit facility. All borrowings under the New
Credit Agreement bear interest, at the option of the Company, at either (i)
the Base Rate (as defined in the New Credit Agreement) plus 1.50%, or (ii) at
the reserve adjusted Euro-Dollar Rate (as defined in the New Credit
Agreement) plus 2.50%, subject to reduction upon the achievement of certain
performance levels and/or credit ratios. The Term Loan currently bears
interest at 8.1875% through August 14, 1997, with interest payable at the end
of each one-month period. The New Credit Agreement is secured by all of the
Company's assets in the United States (approximately $52.5 million at June
30, 1997) and the pledge of 100% of the stock of its subsidiaries in the
United States and 65% of the stock of its foreign subsidiaries. The New
Credit Agreement requires the Company to comply with various affirmative,
negative, and financial covenants. The Company was in compliance with all
such covenants at June 30, 1997.
The Company incurred aggregate debt issuance costs of $4.3 million in
connection with the issuance of the Notes and with entering into the New
Credit Agreement. Such costs have been deferred and will be amortized over
the term of the related debt using the interest method.
6. STOCKHOLDERS' EQUITY
Prior to June 11, 1997, the Company had two classes of Common Stock
outstanding, Common Stock and Class B Common Stock. The rights and
preferences of both classes of common stock were identical, except that
holders of Common Stock were entitled to one vote per share and holders of
Class B Common Stock were entitled to ten votes per share. The Class B Common
Stock was convertible, at the holder's option, into shares of Common Stock on
a share for share basis. In connection with the Recapitalization Transactions
(Note 4), all shares of Class B Common Stock were repurchased by the Company
and the Company's Certificate of Incorporation was amended to eliminate the
Class B Common Stock. The Company's Certificate of Incorporation was also
amended effective June 11, 1997 to effect a ten-for-one stock split of its
common stock, which was authorized by the Company's Board of Directors on May
30, 1997. All share and per share amounts in the accompanying consolidated
financial statements have been restated to retroactively reflect the stock
split.
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under the Notes to be issued in the
Recapitalization Transactions are guaranteed by all of the Company's current
and future domestic subsidiaries (collectively, the "Subsidiary Guarantors").
Such guarantees are full, unconditional and joint and several. Separate
financial statements of each of the Subsidiary Guarantors are not presented
because the Company's management has deemed that they would not be material
to investors. The following supplemental condensed consolidating financial
data sets forth, on an unconsolidated basis, balance sheets, statements of
income and statements of cash flows data for (i) the Company ("Wavetek
Corporation"), (ii) the current Subsidiary Guarantors and (iii) the Company's
current foreign subsidiaries (the "Foreign Subsidiaries"). The supplemental
financial data reflects the investments of Wavetek Corporation in the
Subsidiary Guarantors and the Foreign Subsidiaries using the equity method of
accounting. Certain reclassifications have been made to provide for uniform
disclosure of all periods presented. The reclassifications are not material.
8
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (Continued)
CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 1997
(DOLLARS AND SHARES IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ----------- ------------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ - $ 3,542 $ 517 $ - $ 4,059
Short-term investments, available for sale . . . - 3,000 - - 3,000
Accounts receivable (less allowance for
doubtful accounts of $2,054) . . . . . . . . . (91) 17,181 21,968 (13,778) 25,280
Inventories . . . . . . . . . . . . . . . . . . (479) 6,516 13,532 (1,367) 18,202
Deferred income taxes . . . . . . . . . . . . . 2,879 1,595 - - 4,474
Other current assets. . . . . . . . . . . . . . 312 189 1,725 - 2,226
------------ ----------- ------------- ----------- ------------
Total current assets . . . . . . . . . . . . . . . 2,621 32,023 37,742 (15,145) 57,241
Property and equipment, net. . . . . . . . . . . . 5,445 4,426 4,946 (44) 14,773
Deferred debt issuance costs, net. . . . . . . . . 4,293 - - - 4,293
Intangible assets, net . . . . . . . . . . . . . . 3,290 72 65 (3) 3,424
Deferred income taxes. . . . . . . . . . . . . . . (6) 43 - - 37
Other assets . . . . . . . . . . . . . . . . . . . 230 46 104 (185) 195
Investment in subsidiaries . . . . . . . . . . . . 30,646 - 25 (30,671) -
------------ ----------- ------------- ----------- ------------
Total assets . . . . . . . . . . . . . . . . . . . $ 46,519 $ 36,610 $ 42,882 $(46,048) $ 79,963
------------ ----------- ------------- ----------- ------------
------------ ----------- ------------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . $ - $ - $ 3,377 $ - $ 3,377
Trade accounts payable . . . . . . . . . . . . . 2,872 10,031 16,711 (13,780) 15,834
Accrued compensation . . . . . . . . . . . . . . 470 1,677 5,015 - 7,162
Income taxes payable . . . . . . . . . . . . . . (1,559) 2,008 1,572 - 2,021
Other current liabilities . . . . . . . . . . . 3,574 1,764 3,757 - 9,095
Current maturities of long-term
obligations . . . . . . . . . . . . . . . . . 100 - 888 - 988
------------ ----------- ------------- ----------- ------------
Total current liabilities. . . . . . . . . . . . . 5,457 15,480 31,320 (13,780) 38,477
Long-term obligations, less current
maturities. . . . . . . . . . . . . . . . . . . 113,995 - - - 113,995
Deferred income and other liabilities. . . . . . . 36 393 216 (185) 460
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.01; authorized,
15,000 shares; issued and outstanding,
4,885 shares . . . . . . . . . . . . . . . . 49 - - - 49
Additional paid-in capital . . . . . . . . . . 43,748 2,137 15,064 (17,201) 43,748
Retained earnings (accumulated deficit) . . . . (116,660) 18,600 (3,612) (14,988) (116,660)
Foreign currency translation
adjustments. . . . . . . . . . . . . . . . . (106) - (106) 106 (106)
------------ ----------- ------------- ----------- ------------
Total stockholders' equity (deficit) . . . . . . (72,969) 20,737 11,346 (32,083) (72,969)
------------ ----------- ------------- ----------- ------------
Total liabilities and stockholders'
equity (deficit). . . . . . . . . . . . . . . $ 46,519 $ 36,610 $ 42,882 $(46,048) $ 79,963
------------ ----------- ------------- ----------- ------------
------------ ----------- ------------- ----------- ------------
9
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (Continued)
CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 1996
(DOLLARS AND SHARES IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ - $ 4,845 $ 1,281 $ - $ 6,126
Accounts receivable (less allowance
for doubtful accounts of $2,023). . . . . . . 3,042 18,657 15,123 (15,956) 20,866
Inventories . . . . . . . . . . . . . . . . . . (479) 6,277 14,496 (986) 19,308
Deferred income taxes . . . . . . . . . . . . . 2,660 1,845 - - 4,505
Other current assets. . . . . . . . . . . . . . 6 148 1,034 - 1,188
----------- ---------- ------------ ------------ ------------
Total current assets . . . . . . . . . . . . . . 5,229 31,772 31,934 (16,942) 51,993
Property and equipment, net . . . . . . . . . . . 4,495 3,731 4,075 (107) 12,194
Intangible assets, net . . . . . . . . . . . . . 3,490 288 99 (10) 3,867
Deferred income taxes . . . . . . . . . . . . . . 430 182 - (171) 441
Other assets . . . . . . . . . . . . . . . . . . 281 196 83 (203) 357
Investment in subsidiaries . . . . . . . . . . . 32,492 - 25 (32,517) -
----------- ---------- ------------ ------------ ------------
Total assets . . . . . . . . . . . . . . . . . . $ 46,417 $ 36,169 $ 36,216 $ (49,950) $68,852
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . $ - $ - $ 786 $ - $ 786
Trade accounts payable. . . . . . . . . . . . . 6,168 7,027 14,701 (15,889) 12,007
Accrued compensation. . . . . . . . . . . . . . 1,454 1,827 4,187 - 7,468
Income taxes payable. . . . . . . . . . . . . . - 460 967 - 1,427
Other current liabilities . . . . . . . . . . . 1,883 1,884 5,047 (67) 8,747
Current maturities of long-term obligations . . 93 - 2 - 95
----------- ---------- ------------ ------------ ------------
Total current liabilities . . . . . . . . . . . . 9,598 11,198 25,690 (15,956) 30,530
Long-term obligations, less current maturities . 4,069 - 1,207 (203) 5,073
Deferred income and other liabilities . . . . . . 62 625 45 (171) 561
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; authorized,
15,000 shares; issued and outstanding,
10,974 shares . . . . . . . . . . . . . . . . 11 - - - 11
Additional paid-in capital. . . . . . . . . . . 5,637 2,137 12,468 (14,605) 5,637
Retained earnings . . . . . . . . . . . . . . . 26,746 22,209 (3,488) (18,721) 26,746
Foreign currency translation adjustments. . . . 294 - 294 (294) 294
----------- ---------- ------------ ------------ ------------
Total stockholders' equity . . . . . . . . . . . 32,688 24,346 9,274 (33,620) 32,688
----------- ---------- ------------ ------------ ------------
Total liabilities and stockholders' equity. . . . $ 46,417 $ 36,169 $ 36,216 $ (49,950) $ 68,852
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
10
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (Continued)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Sales . . . . . . . . . . . . . . . . . . . . . . $ - $ 21,325 $ 24,231 $ (9,072) $ 36,484
Cost of goods sold. . . . . . . . . . . . . . . . (92) 9,525 15,590 (8,645) 16,378
----------- ---------- ------------ ------------ ------------
Gross margin. . . . . . . . . . . . . . . . . . . 92 11,800 8,641 (427) 20,106
Operating expenses:
Marketing and selling . . . . . . . . . . . . . 220 4,883 4,237 - 9,340
Research and development. . . . . . . . . . . . (12) 2,378 1,556 - 3,922
General and administrative. . . . . . . . . . . 418 1,012 1,050 (7) 2,473
Stock option compensation related to
recapitalization . . . . . . . . . . . . . . 1,926 2,318 2,817 - 7,061
----------- ---------- ------------ ------------ ------------
2,552 10,591 9,660 (7) 22,796
----------- ---------- ------------ ------------ ------------
Operating income (loss) . . . . . . . . . . . . . (2,460) 1,209 (1,019) (420) (2,690)
Non-operating income (expense):
Interest income . . . . . . . . . . . . . . . . - 100 18 - 118
Interest expense. . . . . . . . . . . . . . . . (669) - (40) - (709)
Equity in net income (loss) of subsidiaries . . (1,165) - - 1,165 -
Other, net. . . . . . . . . . . . . . . . . . . 181 32 (458) - (245)
----------- ---------- ------------ ------------ ------------
(1,653) 132 (480) 1,165 (836)
----------- ---------- ------------ ------------ ------------
Income before provision (credit) for
income taxes . . . . . . . . . . . . . . . . . (4,113) 1,341 (1,499) 745 (3,526)
Provision (credit)for income taxes. . . . . . . . (1,724) 545 42 - (1,137)
----------- ---------- ------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . $ (2,389) $ 796 $ (1,541) $ 745 $ (2,389)
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
11
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Sales. . . . . . . . . . . . . . . . . . . . . . . $ - $ 22,655 $ 22,645 $ (7,109) $ 38,191
Cost of goods sold . . . . . . . . . . . . . . . . (82) 10,763 14,589 (7,232) 18,038
----------- ---------- ------------ ------------ ------------
Gross margin . . . . . . . . . . . . . . . . . . . 82 11,892 8,056 123 20,153
Operating expenses:
Marketing and selling. . . . . . . . . . . . . . . 246 4,228 4,749 - 9,223
Research and development . . . . . . . . . . . . . (14) 1,522 1,741 - 3,249
General and administrative . . . . . . . . . . . . 969 871 879 (3) 2,716
Provision for restructuring operations . . . . . . 45 - - - 45
----------- ---------- ------------ ------------ ------------
1,246 6,621 7,369 (3) 15,233
----------- ---------- ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . (1,164) 5,271 687 126 4,920
Non-operating income (expense):
Interest income. . . . . . . . . . . . . . . . . . 17 26 14 (15) 42
Interest expense . . . . . . . . . . . . . . . . . (97) (1) (54) 15 (137)
Equity in net income of subsidiaries . . . . . . . 4,056 - - (4,056) -
Other, net . . . . . . . . . . . . . . . . . . . . 376 (89) (302) (192) (207)
----------- ---------- ------------ ------------ ------------
4,352 (64) (342) (4,248) (302)
----------- ---------- ------------ ------------ ------------
Income before provision for income taxes . . . . . 3,188 5,207 345 (4,122) 4,618
Provision for income taxes . . . . . . . . . . . . (1,119) 1,071 359 - 311
----------- ---------- ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . $ 4,307 $ 4,136 $ (14) $ (4,122) $ 4,307
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
12
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Sales. . . . . . . . . . . . . . . . . . . . . . . $ - $ 64,759 $ 81,844 $(27,903) $118,700
Cost of goods sold . . . . . . . . . . . . . . . . (244) 29,351 53,956 (27,584) 55,479
----------- ---------- ------------ ------------ ------------
Gross margin . . . . . . . . . . . . . . . . . . . 244 35,408 27,888 (319) 63,221
Operating expenses:
Marketing and selling. . . . . . . . . . . . . 700 13,159 14,054 - 27,913
Research and development . . . . . . . . . . . (36) 7,323 4,348 - 11,635
General and administrative . . . . . . . . . . 1,661 2,813 3,411 (7) 7,878
Stock option compensation related to
recapitalization. . . . . . . . . . . . . . . 1,926 2,318 2,817 - 7,061
----------- ---------- ------------ ------------ ------------
4,251 25,613 24,630 (7) 54,487
----------- ---------- ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . (4,007) 9,795 3,258 (312) 8,734
Non-operating income (expense):
Interest income. . . . . . . . . . . . . . . . 76 221 32 (75) 254
Interest expense . . . . . . . . . . . . . . . (861) - (162) 75 (948)
Equity in net income of subsidiaries . . . . . 7,259 - - (7,259) -
Other, net . . . . . . . . . . . . . . . . . . 345 128 (1,334) - (861)
----------- ---------- ------------ ------------ ------------
6,819 349 (1,464) (7,259) (1,555)
----------- ---------- ------------ ------------ ------------
Income before provision for income taxes . . . . . 2,812 10,144 1,794 (7,571) 7,179
Provision for income taxes . . . . . . . . . . . . (1,639) 3,753 614 - 2,728
----------- ---------- ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . $ 4,451 $ 6,391 $ 1,180 $ (7,571) $ 4,451
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
13
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Sales. . . . . . . . . . . . . . . . . . . . . . . $ - $64,337 $74,174 $(23,330) $115,181
Cost of goods sold . . . . . . . . . . . . . . . . 232 32,104 46,651 (23,208) 55,779
----------- ---------- ------------ ------------ ------------
Gross margin . . . . . . . . . . . . . . . . . . . (232) 32,233 27,523 (122) 59,402
Operating expenses:
Marketing and selling. . . . . . . . . . . . . 722 11,948 14,139 - 26,809
Research and development . . . . . . . . . . . (42) 3,856 5,602 - 9,416
General and administrative . . . . . . . . . . 3,067 2,653 2,944 (9) 8,655
Provision for restructuring operations . . . . 188 - - - 188
----------- ---------- ------------ ------------ ------------
3,935 18,457 22,685 (9) 45,068
----------- ---------- ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . (4,167) 13,776 4,838 (113) 14,334
Non-operating income (expense):
Interest income. . . . . . . . . . . . . . . . 71 38 54 (64) 99
Interest expense . . . . . . . . . . . . . . . (291) (77) (312) 64 (616)
Equity in net income of subsidiaries . . . . . 13,236 - - (13,236) -
Other, net . . . . . . . . . . . . . . . . . . 558 213 (897) (362) (488)
----------- ---------- ------------ ------------ ------------
13,574 174 (1,155) (13,598) (1,005)
----------- ---------- ------------ ------------ ------------
Income before provision for income taxes . . . . . 9,407 13,950 3,683 (13,711) 13,329
Provision for income taxes . . . . . . . . . . . . (3,029) 3,088 834 - 893
----------- ---------- ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . $12,436 $10,862 $ 2,849 $(13,711) $ 12,436
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
14
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in) operating
activities.................................... $ (7,307) $ 13,102 $ 1,236 $ - $ 7,031
INVESTING ACTIVITIES
Purchase of short-term investments................. - (3,000) - - (3,000)
Purchase of property and equipment................. (1,179) (1,565) (2,040) - (4,784)
Other investing activities......................... 25 160 37 - 222
----------- ---------- ------------ ------------ ------------
Net cash used in investing activities (1,154) (4,405) (2,003) - (7,562)
FINANCING ACTIVITIES
Issuance of common shares for cash................. 42,856 - - - 42,856
Repurchase of common shares and stock options
for cash.......................................... (152,564) - - - (152,564)
Proceeds from revolving lines of credit and long-
term obligations.................................. 110,000 - 4,144 - 114,144
Principal payments on revolving lines of credit and
long-term obligations............................. (68) - (1,421) - (1,489)
Debt issuance costs................................ (4,326) - - - (4,326)
Dividends from subsidiaries to Wavetek Corporation. 11,304 (10,000) (1,304) - -
Capital contributions from Wavetek Corporation
to subsidiaries................................... (2,578) - 2,578 - -
Repayment of loans from Wavetek Corporation to
subsidiaries...................................... 3,837 - (3,837) - -
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in) financing activities 8,461 (10,000) 160 - (1,379)
Effect of exchange rate changes on cash and cash
equivalents....................................... - - (157) - (157)
----------- ---------- ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents... - (1,303) (764) - (2,067)
Cash and cash equivalents at beginning of period... - 4,845 1,281 - 6,126
----------- ---------- ------------ ------------ ------------
Cash and cash equivalents at end of period......... $ - $ 3,542 $ 517 $ - $ 4,059
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
15
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in) operating activities.. $ 612 $ 4,843 $4,976 $ - $ 10,431
INVESTING ACTIVITIES
Proceeds from sale of business....................... - 310 28 - 338
Purchase of property and equipment................... (713) (1,522) (972) - (3,207)
Other investing activities........................... 14 216 42 - 272
----------- ---------- ------------ ------------ ------------
Net cash used in investing activities................ (699) (996) (902) - (2,597)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term
obligations......................................... - 11,713 2,611 - 14,324
Principal payments on revolving lines of credit and
long-term obligations............................... (63) (16,246) (5,493) - (21,802)
Loans from Wavetek Corporation to subsidiaries....... (2,505) - 2,505 - -
Repayment of loans from Wavetek Corporation
to subsidiaries..................................... 2,102 - (2,102) - -
Dividends from subsidiary to Wavetek Corporation..... 553 - (553) - -
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in) financing activities.. 87 (4,533) (3,032) - (7,478)
Effect of exchange rate changes on cash and cash
equivalents......................................... - - (124) - (124)
----------- ---------- ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents..... - (686) 918 - 232
Cash and cash equivalents at beginning of period..... - 2,256 1,433 - 3,689
----------- ---------- ------------ ------------ ------------
Cash and cash equivalents at end of period........... $ - $ 1,570 $ 2,351 $ - $ 3,921
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in this
Quarterly Report on Form 10-Q which are not historical facts may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
those projected, including, but not limited to, those risks and special
considerations set forth in the Company's other SEC filings. Readers are
cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
Wavetek is a leading global designer, manufacturer and distributor of a
broad range of electronic test instruments, with a primary focus on
application-specific instruments for testing voice, video and data
communications equipment and networks. The Company also designs,
manufacturers and distributes precision instruments to calibrate and test
electronic equipment and provides repair, upgrade and calibration services
for its products on a worldwide basis.
The Company derives its revenues primarily from the sale of its products
to a broad international base of over 5,000 customers operating in a wide
range of industries. A majority of the Company's sales come from its
Communications Test product lines which serve the CATV, Wireless, Telecom,
LAN and Test Tools market segments of the test instrument industry. The
Company also sells Calibration Instruments and provides repair, upgrade and
calibration services for its products on a worldwide basis. The Company sells
products that are manufactured at its four facilities located in: (i)
Indianapolis, Indiana; (ii) Norwich, England; (iii) St. Etienne, France; and
(iv) Munich, Germany. In major markets such as the United States, England,
France and Germany, the Company sells its products to customers in their
local currencies. In the rest of the world, the Company generally sells its
products to customers or local distributors in the functional currency of the
location where the products are manufactured. During fiscal 1996,
approximately 59% of the Company's sales were generated outside of the United
States and approximately 47% of the Company's sales were made in currencies
other than the United States dollar. As a result of such foreign currency
sales, the equivalent United States dollar amount of the Company's sales is
impacted by changes in foreign currency exchange rates. The Company's ability
to maintain and grow its sales depends on a variety of factors including its
ability to maintain its competitive position in areas such as technology,
performance, price, brand identity, quality, reliability, distribution and
customer service and support, and its ability to continue to introduce new
products that respond to technological change and market demand in a timely
manner.
Wavetek's cost of goods sold, and its resulting gross margin, are driven
primarily by the cost of the material in its products, the cost of the labor
to manufacture such products and the overhead expenses in its facilities. In
recent years, the Company has focused on improving its gross margin by: (i)
consolidating manufacturing operations; (ii) focusing its new product
development efforts on lower-cost, easier to manufacture designs; (iii)
controlling headcount and expenses in its manufacturing facilities; and (iv)
gaining efficiencies and economies of scale in its material and component
procurement activities.
The Company's operating expenses are substantially impacted by marketing
and selling activities and by research and development activities. Marketing
and selling expenses are primarily driven by: (i) sales volume, with respect
to sales force expenses and sales and commission expenses; (ii) the extent of
market research activities for new product design efforts; (iii) advertising
and trade show activities; and (iv) the number of new products launched in
the period. In recent periods, the Company has increased its spending on
research and development activities. This increase has resulted from the
Company's October 1994 acquisition of its Wireless and Telecom businesses,
17
which had a higher spending level than the Company's historical activities,
and from a planned increase in spending to accelerate the timing of new
product introductions. General and administrative expenses primarily include
costs associated with the Company's administrative employees, facilities and
functions. The Company incurs expenses in foreign countries primarily in the
functional currencies of such locations. As a result of the Company's
substantial international operations, the United States dollar amount of its
expenses is impacted by changes in foreign currency exchange rates.
In recent periods, the Company's results of operations have been
significantly impacted by its October 1994 acquisition of its Wireless and
Telecom businesses, the Company's efforts to improve the operating results of
these businesses and by the rapid growth in sales and profitability of the
Company's CATV product lines.
RESULTS OF OPERATIONS
The following table sets forth selected financial information as a
percentage of sales for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1997 1996 1997 1996
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 44.9 47.2 46.7 48.4
----- ----- ----- -----
Gross margin 55.1 52.8 53.3 51.6
Operating expenses 62.5 39.9 45.9 39.1
----- ----- ----- -----
Operating income (loss) (7.4) 12.9 7.4 12.5
Interest expense, net (1.6) (0.3) (0.7) (0.5)
Other non-operating income
(expense), net (0.7) (0.5) (0.7) (0.4)
----- ----- ----- -----
Income (loss) before provision (credit)
for income taxes (9.7) 12.1 6.0 11.6
Provision (credit) for income taxes 3.1 (0.8) (2.3) (0.8)
----- ----- ----- -----
Net income (loss) (6.6)% 11.3% 3.7% 10.8%
----- ----- ----- -----
----- ----- ----- -----
EBITDA (1) 14.3% 15.0% 15.4% 14.7%
----- ----- ----- -----
----- ----- ----- -----
- ------------
(1) EBITDA is operating income plus depreciation and amortization expense,
stock option compensation related to recapitalization and provision for
restructuring operations. While EBITDA should not be construed as a
substitute for income from operations, net income or cash flows from
operating activities in analyzing the Company's operating performance,
financial position or cash flows, the Company has included EBITDA because
it is commonly used by certain investors and analysts to analyze and
compare companies on the basis of operating performance, leverage and
liquidity and to determine a Company's ability to service debt.
18
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
SALES. Sales in the three months ended June 30, 1997 decreased $1.7
million, or 4.5%, to $36.5 million from $38.2 million in the comparable
fiscal 1996 period. This decrease was comprised of a decrease in sales to
customers in the United States of $1.4 million, or 7.9%, and a decrease of
$0.3 million, or 1.6%, in sales to international customers. The Company's
sales to customers in the United States decreased primarily due to a decrease
in sales to one large customer in the United States and due to pending
transitions to certain new products which are being introduced late in fiscal
1997. Sales to international customers decreased primarily because changes in
foreign exchange rates had an unfavorable impact on the United States dollar
equivalent of such sales. The Company's sales to customers outside the United
States increased to 55.8% in the three months ended June 30, 1997 from 54.2%
in the comparable fiscal 1996 period. Sales of the Company's Communications
Test products decreased $2.9 million, or 10.0%, from the comparable fiscal
1996 period as a result of decreases in domestic and international sales.
Sales of Calibration Instruments products increased $1.1 million, or 17.7%,
from the comparable fiscal 1996 period, due partially to changes in foreign
exchange rates and partially to higher shipments in connection with a planned
reduction in the backlog of this product line. Sales from repair, upgrade and
calibration services during the three months ended June 30, 1997, increased
$0.2 million, or 8.2%, from the comparable fiscal 1996 period.
Within its Communications Test product lines, sales of the Company's
Wireless products increased in the three months ended June 30, 1997 from the
comparable fiscal 1996 period, while sales of the Company's CATV, Telecom,
LAN and Test Tools products declined. The increase in Wireless product sales
in the three months ended June 30, 1997 was due primarily to stronger sales of
the Company's core Wireless products as compared to the comparable prior year
period, partially offset by the impact of the devaluation of the Deutsche
mark against the United States dollar. The Company's CATV product sales
decreased during the three months ended June 30, 1997 compared to the
comparable fiscal 1996 period primarily due to reduced sales to one large
customer in the United States, which were substantially offset by increased
sales to international customers. The Company's Telecom sales decreased
during the three months ended June 30, 1997 as a result of reduced sales in
France, including sales to one of the Company's largest Telecom customers.
Telecom sales in the three months ended June 30, 1997 were also adversely
affected by the devaluation in the French franc against the United States
dollar. Decreases in sales of LAN and Test Tools products during the three
months ended June 30, 1997 were primarily attributable to pending transitions
to new or updated LAN and Test Tools products which are being introduced late
in fiscal 1997. The Company's sales were also adversely impacted in the three
months ended June 30, 1997 by the discontinuance of selected non-core
Communications Test products.
GROSS MARGIN. The Company's gross margin in the three months ended June
30, 1997 remained consistent with the comparable Fiscal 1996 period at $20.1
million. Gross margin as a percentage of sales increased to 55.1% in the
three months ended June 30, 1997 from 52.8% in the three months ended June
30, 1996. The increase in the gross margin percentage during the three months
ended June 30, 1997 resulted from increases in the gross margin percentages
achieved in the Company's CATV, Wireless and Calibration Instruments product
lines offset by reductions in the gross margin percentage achieved in its
Telecom and LAN product lines. The Company has also experienced higher gross
margin percentages in the three months ended June 30, 1997 as a result of a
more favorable geographic mix and higher gross percentages achieved from its
repair, upgrade and calibration services.
OPERATING EXPENSES. Operating expenses in the three months ended June 30,
1997 increased $7.6 million, or 49.6%, to $22.8 million from $15.2 million in
the comparable fiscal 1996 period. Operating expenses as a percentage of
sales increased to 62.5% in three months ended June 30, 1997 from 39.9% in
the three months ended June 30, 1996. The increase in operating expenses in
the three months ended June 30, 1997 was due to a one-time charge of $7.1
million, or 19.4% of sales, for stock option compensation related to the
Recapitalization Transactions and an increase in spending for research and
development activities of $0.7 million, to 10.7% of sales in the three months
ended June 30, 1997 from 8.5% of sales in three months ended June 30, 1996,
in order to accelerate the timing of new product introductions. The increase
in three months ended June 30, 1997 was also partially due to increased
spending, as a percentage of sales, in marketing and selling activities to
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25.6% from 24.1% in the three months ended June 30, 1996. These increases in
the three months ended June 30, 1997 were partially offset by reduced
spending in general and administrative activities of $0.2 million to 6.8% in
the three months ended June 30, 1997 from 7.1% in the three months ended June
30, 1996.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the three
months ended June 30, 1997 increased by $0.5 million over the comparable
fiscal 1996 period to $0.8 million. The Company's net interest expense
increased to $0.6 million during the three months ended June 30, 1997 from
$0.1 million in the comparable fiscal 1996 period, reflecting additional
interest expense due to the Notes and the New Credit Agreement.
PROVISION FOR INCOME TAXES. The Company's effective tax rate in the three
months ended June 30, 1997 was 38.0%. In the three months ended June 30,
1996, the Company's effective tax rate was only 6.7% due to the reduction of
certain deferred tax asset valuation allowances in fiscal 1996 due to the
realization of such deferred tax assets becoming more likely than not. At
June 30, 1997, the deferred tax assets were $4.5 million.
NET INCOME (LOSS). As a result of the above factors, net income (loss)
was $(2.4) million in the three months ended June 30, 1997 as compared to
$4.3 million in the three months ended June 30, 1996.
EBITDA. EBITDA was $5.2 million in the three months ended June 30, 1997
as compared to $5.8 million in the three months ended June 30, 1996. EBITDA
as a percentage of sales decreased to 14.3% in the three months ended June
30, 1997 from 15.0% in the three months ended June 30, 1996.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
SALES. Sales in the nine months ended June 30, 1997 increased $3.5
million, or 3.1%, to $118.7 million from $115.2 million in the comparable
fiscal 1996 period. This increase was due to an increase in sales to
international customers of $5.3 million, or 7.7%, offset by a decrease of
$1.7 million, or 3.7%, in sales to customers in the United States. The
Company's sales to customers outside the United States increased to 62.2% in
the nine months ended June 30, 1997 from 59.5% in the comparable fiscal 1996
period. Changes in foreign exchange rates had an unfavorable impact on the
United States dollar equivalent of international sales in the nine months
ended June 30, 1997. Sales of the Company's Communications Test products
increased $1.0 million, or 1.1%, from the comparable fiscal 1996 period
primarily as a result of an increase in international sales partially offset
by reduced domestic sales. Sales of Calibration Instruments products
increased $2.5 million, or 14.2%, from the comparable fiscal 1996 period, due
partially to changes in foreign exchange rates and partially to higher
shipments in connection with a planned reduction in the backlog of this
product line. Sales from repair, upgrade and calibration services remained
relatively constant during the nine months ended June 30, 1997, increasing
$0.1 million, or 0.8%, from the comparable fiscal 1996 period.
Within its Communications Test product lines, sales of the Company's CATV
and Wireless products increased in the nine months ended June 30, 1997 from
the comparable fiscal 1996 period, while sales of the Company's Telecom, LAN
and Test Tools products declined. The growth in CATV sales in the first nine
months of fiscal 1997 can be substantially attributed to the Company's
continued penetration of international markets as it continues to benefit
from the increasing international investment in CATV infrastructure. The
increase in Wireless product sales in the first nine months of fiscal 1997 is
due primarily to the shipment of a large order to a customer in Korea, offset
by the impact of the devaluation of the Deutsche mark against the United
States dollar. The Company's Telecom sales decreased during the first nine
months of fiscal 1997 as a result of reduced sales in France, including sales
to one of the Company's largest Telecom customers. Telecom sales in the first
nine months of fiscal 1997 were also adversely affected by the devaluation in
the French franc against the United States dollar. Decreases in sales of LAN
20
and Test Tools products during the first nine months of fiscal 1997 were
primarily attributable to pending transitions to new or updated LAN and Test
Tools products which are being introduced in fiscal 1997. The Company's sales
were also adversely impacted in the first nine months of fiscal 1997 by the
discontinuance of selected non-core Communications Test products.
GROSS MARGIN. The Company's gross margin in the nine months ended June
30, 1997 increased $3.8 million, or 6.4%, to $63.2 million from $59.4 million
in the first nine months of fiscal 1996. Gross margin as a percentage of
sales increased to 53.3% in the first nine months of fiscal 1997 from 51.6%
in the first nine months of fiscal 1996. The increase in the gross margin
percentage during the first nine months of fiscal 1997 results from a higher
proportion of the Company's sales coming from its higher margin CATV
products, offset by reductions in the gross margin percentage achieved in its
Wireless, Telecom and Calibration Instruments product lines. The Company has
also experienced higher gross margin percentages in the first nine months of
fiscal 1997 as a result of a more favorable geographic mix. The decline in
Wireless gross margin percentages in the first nine months of fiscal 1997 is
due primarily to a large sale of a non-core product to a customer in Korea on
which a lower than average gross margin percentage was achieved.
OPERATING EXPENSES. Operating expenses in the nine months ended June 30,
1997 increased $9.4 million, or 20.9%, to $54.5 million from $45.1 million in
the comparable fiscal 1996 period. Operating expenses as a percentage of
sales increased to 45.9% in the first nine months of fiscal 1997 from 39.1%
in the first nine months of fiscal 1996. The increase in operating expenses
in the first nine months of fiscal 1997 was due to a one-time charge of $7.1
million, or 5.9% of sales, for stock option compensation related to the
Recapitalization Transactions and an increase in spending for research and
development activities of $2.2 million, to 9.8% of sales in the first nine
months of fiscal 1997 from 8.2% of sales in the first nine months of fiscal
1996, in order to accelerate the timing of new product introductions. The
increase in the first nine months of fiscal 1997 was also partially due to
increased spending, as a percentage of sales, in marketing and selling
activities to 23.5% in the first nine months of fiscal 1997 from 23.3% in the
first nine months of fiscal 1996. These increases in the first nine months of
fiscal 1997 were partially offset by reduced spending in general and
administrative activities of $0.8 million to 6.6% in the first nine months of
fiscal 1997 from 7.5% in the first nine months of fiscal 1996, reflecting the
Company's ability to spread certain fixed expenses over a higher sales volume.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the nine
months ended June 30, 1997 increased by $0.6 million over the comparable
fiscal 1996 period to $1.6 million. The Company's net interest expense
increased to $0.7 million during the nine months ended June 30, 1997 from
$0.5 million in the comparable fiscal 1996 period, reflecting additional
interest expense due to the Notes and the New Credit Agreement. In addition,
in the nine months ended June 30, 1997, the Company's exchange losses from
foreign currency transactions, included in the "Other, net" caption in the
Company's consolidated statements of income, increased by $0.5 million over
the comparable fiscal 1996 period.
PROVISION FOR INCOME TAXES. The Company's effective tax rate in the nine
months ended June 30, 1997 was 38.0%. In the nine months ended June 30, 1996,
the Company's effective tax rate was only 6.7% due to the reduction of
certain deferred tax asset valuation allowances due to the realization of
such deferred tax assets becoming more likely than not. At June 30, 1997, the
deferred tax assets were $4.5 million.
NET INCOME. As a result of the above factors, net income was $4.5 million
in the nine months ended June 30, 1997 as compared to $12.4 million in the
nine months ended June 30, 1996.
EBITDA. EBITDA was $18.3 million in the nine months ended June 30, 1997 as
compared to $17.0 million in the nine months ended June 30, 1996. EBITDA as a
percentage of sales increased to 15.4% in the first nine months of fiscal
1997 from 14.7% in the first nine months of fiscal 1996.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities was $14.1 million
(excluding a one-time charge of $7.1 million for stock option compensation
related to the Recapitalization Transactions) for the nine months ended June
30, 1997. The Company had cash, cash equivalents and short-term investments
at June 30, 1997 of $7.1 million. The Company invests its excess cash in
money market funds and U.S. Treasury obligations. Historically the Company
has funded its business through operating cash flow, has not relied on sales
of equity to provide cash and has used short-term debt primarily for cash
management purposes. The Company's European subsidiaries had borrowings
outstanding under their existing credit agreements (the "Existing Credit
Agreements") of $3.4 million at June 30, 1997 for funding short-term working
capital requirements, and the Company had additional obligations outstanding
totalling approximately $2.1 million in the form of letters of credit and
bank guarantees. As of June 30, 1997, the Company had outstanding an
unsecured note of approximately $0.9 million issued in the October 1994
acquisition of the Company's Telecom business and a financing obligation of
$4.1 million recorded in connection with the sale and leaseback of the
Company's facilities in Indianapolis, Indiana.
The Company's primary cash needs have been for the funding of working
capital requirements (primarily inventory) and capital expenditures. The
Company made capital expenditures of $4.8 million for the nine months ended
June 30, 1997 and expects its capital expenditures to increase to
approximately $6.0 million in fiscal 1997, which would represent a higher
than average percentage of sales as compared to historical levels. These
higher than average expenditures primarily reflect the Company's continued
investment in new management information systems and manufacturing equipment.
As part of the Recapitalization Transactions, the Company entered into the
New Credit Agreement with Fleet National Bank, DLJ Capital Funding, Inc. and
various other lenders providing for a term loan facility of $25.0 million and
a revolving credit facility providing for borrowings up to $20.0 million, of
which the Company borrowed all $25.0 million of the term loan facility and
none of the revolving credit facility to complete the Recapitalization
Transactions. In connection with entering into the New Credit Agreement, the
Company terminated $4.0 million of availability under its Existing Credit
Agreements, leaving borrowing availability of approximately $10.5 million at
its Foreign Subsidiaries. The Company believes that its cash flow from
operations, combined with the remaining available borrowings under the
Existing and New Credit Agreements will be sufficient to fund its debt
service obligations, including its obligations under the Notes, and working
capital requirements, as well as implement its growth strategy.
FOREIGN OPERATIONS
As discussed above, a significant portion of the Company's sales and
expenses are denominated in currencies other than the United States dollar.
In order to maintain access to such foreign currencies, the Company's
subsidiaries in the United Kingdom, France and Germany have credit facilities
providing for borrowings in British pounds, French francs and Deutsche marks,
respectively. The revolving credit facility under the New Credit Agreement
provides for up to an aggregate of $7.5 million of borrowings in British
pounds, French francs and Deutsche marks. Adjustments made in translating the
balance sheet accounts of the Foreign Subsidiaries from their respective
functional currencies at appropriate exchange rates are included as a
separate component of stockholders' equity. In addition, the Company
periodically uses forward exchange contracts to hedge certain known foreign
exchange exposures. Gains or losses from such contracts are includedin the
Company's statements of income to offset gains and losses from the underlying
foreign currency transactions.
The Indenture and the New Credit Agreement permit the Company and its
subsidiaries to make investments in, and intercompany loans to, the Foreign
Subsidiaries. Payments to the Company or its other subsidiaries by such
Foreign Subsidiaries, including the payment of dividends, redemption of
capital stock or repayment of such intercompany loans, may be restricted by
the credit agreements of the Foreign Subsidiaries. All intercompany loans from
22
the Company to the Foreign Subsidiaries are pledged to the lenders under the
New Credit Agreement.
PERIODIC FLUCTUATIONS
A variety of factors may cause period-to-period fluctuations in the
operating results of the Company. Such factors include, but are not limited
to, product mix, European summer holidays and other seasonal influences,
competitive pricing pressures, materials costs, currency fluctuations,
revenues and expenses related to new products and enhancements of existing
products, as well as delays in customer purchases in anticipation of the
introduction of new products or product enhancements by the Company or its
competitors. The majority of the Company's revenues in each quarter results
from orders received in that quarter. As a result, the Company establishes
its production, inventory and operating expenditure levels based on
anticipated revenue levels. Thus, if sales do not occur when expected,
expenditures levels could be disproportionately high and operating results
for that quarter, and potentially future quarters, would be adversely
affected.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company from time to time is
subject to legal claims. The Company does not believe that the likely outcome
of any such claims or related lawsuits would have a material adverse effect
on the Company or its ability to develop new products.
ITEM 2. CHANGES IN SECURITIES
On June 11, 1997, the Company completed the following transactions (the
Recapitalization Transactions): (i) the Company sold an aggregate of
2,428,470 shares of its Common Stock, representing 49.7% of the Common Stock
outstanding following the Recapitalization Transactions, to DLJ Merchant
Banking Partners II, L.P. and its affiliates and Green Equity Investors II,
L.P. and its affiliates for an aggregate purchase price of $43.5 million;
(ii) the Company issued $85 million aggregate principal amount of 10 1/8%
Senior Subordinated Notes maturing June 15, 2007; (iii) the Company incurred
indebtedness of $25 million under a five year and six month term loan
facility and entered into a five year and six month revolving credit facility
providing for borrowings of up to $20 million; and (iv) the Company
repurchased an aggregate of 8,513,610 shares of Common Stock from existing
stockholders for an aggregate of $152.5 million. Such existing stockholders
retained 50.3% of the shares of Common Stock outstanding following the
Recapitalization Transactions.
Prior to June 11, 1997, the Company had two classes of common stock
outstanding - Common Stock and Class B Common Stock. In connection with the
Recapitalization Transactions, all shares of Class B Common Stock were
repurchased by the Company and the Company's Certificate of Incorporation was
amended to eliminate the Class B Common Stock. The Company's Certificate of
Incorporation was also amended effective June 11, 1997 to effect a
ten-for-one stock split of its common stock, which was authorized by the
Company's Board of Directors on May 30, 1997. All preceding share and per
share amounts have been restated to retroactively reflect the stock split.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent dated May 30, 1997, shareholders of the Company holding
a majority of the voting power of the common stock of the Company, approved
the Recapitalization Transactions, which are briefly described in Item 2
herein.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
12.1 Schedule Re: Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
Date: AUGUST 14, 1997 WAVETEK CORPORATION
(Registrant)
/s/VICKIE L. CAPPS
------------------
Vickie L. Capps
Chief Financial Officer
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