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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1996 Commission File No. 33-74564
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 22-1867386
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1030 SWABIA COURT, RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-3585
(Address of principal executive offices and zip code)
(919) 941-5730
(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 [ X ] No [ ]
As of January 27, 1997, 5,231,722 shares of the Registrant's $0.01 par value
common stock were outstanding.
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WANDEL & GOLTERMANN TECHNOLOGIES, INC.
INDEX - FORM 10-Q
DECEMBER 31, 1996
PART I - FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets................................................................................3
Consolidated Statements of Income..........................................................................4
Consolidated Statements of Cash Flows......................................................................5
Notes to Consolidated Financial Statements.................................................................6
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................8
PART II - OTHER INFORMATION......................................................................................12
SIGNATURE........................................................................................................13
2
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 SEPTEMBER 30, 1996
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,227 $ 10,286
Accounts receivable-
Nonaffiliates 6,523 8,148
Affiliates 9,695 5,068
Income tax receivable 90 720
Inventories 4,298 4,695
Deferred tax assets 1,318 1,079
Other current assets 363 349
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Total current assets 32,514 30,345
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Property and equipment, at cost:
Machinery and equipment 4,351 4,401
Furniture and fixtures 5,489 5,186
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9,840 9,587
Accumulated depreciation (6,610) (6,323)
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3,230 3,264
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Other assets 644 689
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$36,388 $34,298
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-
Nonaffiliates $ 1,408 $ 1,327
Affiliates 1,265 950
Accrued compensation 1,552 1,855
Other accrued liabilities 1,440 1,344
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Total current liabilities 5,665 5,476
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Shareholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, $0.01 par value 20,000,000 shares authorized;
shares issued and outstanding 5,203,152 at December 31, 1996 and
5,169,052 at September 30, 1996 52 52
Additional paid-in capital 25,627 25,056
Retained earnings 5,044 3,714
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30,723 28,822
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$36,388 $34,298
==================== =====================
The accompanying notes are an integral part of
these consolidated financial statements.
3
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------------
1996 1995
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Revenues:
Nonaffiliates $6,482 $7,172
Affiliates 8,973 6,291
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Total revenues 15,455 13,463
Cost of revenues 6,112 5,412
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Gross profit 9,343 8,051
Selling, general and administrative expenses 5,134 4,631
Product development expenses 2,450 2,621
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Operating income 1,759 799
Interest income 148 53
Foreign currency gains (losses) (7) (21)
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Income before income taxes 1,900 831
Provision for income taxes 570 266
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Net income $1,330 $ 565
================= ====================
Earnings per share $ 0.25 $ 0.11
Weighted average number of common shares outstanding 5,361 5,218
================= ====================
The accompanying notes are an integral part of
these consolidated financial statements
4
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------- ------------------ --- -----------------
THREE MONTHS ENDED DECEMBER 31,
----------------------------------------
1996 1995
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Cash flows from operating activities:
Net income $1,330 $ 565
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 411 444
Deferred tax provision (239) --
Increase (decrease)in accounts receivable -
Nonaffiliates 1,625 1,155
Affiliates (4,627) (1,894)
Decrease in income tax receivable 630 266
Decrease in inventories 397 292
Increase (decrease) in accounts payable-
Nonaffiliates 81 (147)
Affiliates 315 482
Increase (decrease) in other current liabilities (207) 33
Other, net 8 (12)
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Net cash provided by (used in) operating activities (276) 1,184
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Cash flows from investing activities:
Purchases of marketable securities (11,450) (2,150)
Proceeds from the sale of marketable securities 11,450 2,150
Acquisitions of property and equipment (323) (340)
Acquisition of intangible assets (31) (184)
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Net cash used in investing activities (354) (524)
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Cash flows from financing activities:
Repurchase of Common Stock -- (1,287)
Proceeds from issuance of Common Stock, net 571 --
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Net cash provided by financing activities 571 <1,287>
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Decrease in cash and cash equivalents (59) (627)
Cash and cash equivalents, beginning of period 10,286 5,374
==================== ===================
Cash and cash equivalents, end of period $10,227 $4,747
==================== ===================
The accompanying notes are an integral part of
these consolidated financial statements.
5
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Wandel & Goltermann Technologies, Inc. and its wholly-owned subsidiaries,
collectively referred to herein as "the Company." All significant intercompany
accounts and transactions have been eliminated. Certain amounts presented in the
financial statements of prior periods have been reclassified to conform to the
method of presentation in the current period. These reclassifications are not
material.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. Certain information and footnote disclosures required for complete
financial statements have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (which consist of normal recurring
adjustments) necessary to present fairly the financial position as of December
31, 1996 and the results of operations and cash flows for the three months ended
December 31, 1996 and 1995. The results of operations for the quarter ended
December 31, 1996 are not necessarily indicative of the results to be expected
for the full fiscal year.
Note 2 - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. The
components of inventories, which include materials, labor and manufacturing
overhead, consist of the following (in thousands);
DECEMBER 31, 1996 SEPTEMBER 30, 1996
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Raw materials and supplies $1,778 1,473
Work in process 842 760
Finished goods 1,678 2,462
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$4,298 $4,695
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Note 3 - Foreign Currencies
Inventory purchases from affiliates, certain product sales to affiliates and
other transactions with affiliates are denominated in German Deutsche Marks
("DMs") and are translated into U.S. dollars at the exchange rate in effect at
the transaction date. Gains or losses resulting from changes in the exchange
rate subsequent to the transaction date are reflected in the consolidated
statements of income in the period in which they occur.
From time to time, the Company has sought to reduce its exposure to increases in
the U.S. dollar relative to the DM by purchasing forward foreign currency
exchange contracts and collars relating to cash and accounts receivable
denominated in DMs. In addition, the Company purchases foreign currency exchange
contracts and collars relating to some of its future anticipated sales in DMs.
As of December 31, 1996, the Company has no outstanding forward currency
exchange rate contracts or collars.
6
Cash and accounts receivable denominated in DMs are revalued at each balance
sheet date at the then current exchange rate, and any unrealized gain or loss is
recognized in the consolidated statement of income. Any foreign currency
exchange collars or any contracts are revalued at each balance sheet date at the
then current exchange rate, and any unrealized gain or loss is recognized in the
consolidated statement of income.
Note 5 - Major Customers and Consideration of Credit Risk
In the normal course of business, the Company extends credit to various
nonaffiliated companies, primarily developers and manufacturers of network
systems in the United States. The Company manages its exposure to credit risk
from nonaffiliated customers through credit approval and monitoring procedures.
The Company believes that its portfolio of receivables from nonaffiliated
customers is well diversified and the allowance for doubtful accounts ($140,000
at December 31, 1996 and $125,000 at September 30, 1996) is adequate. Accounts
receivable are not collateralized.
No nonaffiliated customer accounted for 10% or more of total revenues in the
quarter ended December 31, 1996 or 1995.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the
Consolidated Statements of Income expressed as a percentage of total revenues:
QUARTER ENDED DECEMBER 31,
---------------------------------
1996 1995
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Revenues:
Nonaffiliates 41.9 % 53.3 %
Affiliates 58.1 46.7
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Total revenues 100.0 100.0
Cost of revenues 39.5 40.2
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Gross profit 60.5 59.8
Selling, general and administrative expenses 33.2 34.4
Product development expenses 15.9 19.5
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Operating income 11.4 5.9
Interest income 0.9 0.4
Foreign currency gains (losses) -- (0.1)
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Income before income taxes 12.3 6.2
Provision for income taxes 3.7 2.0
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Net income 8.6 % 4.2 %
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The following table presents, for the periods indicated, the Company's revenues
from the sale of internetwork analysis products and complementary
telecommunication products and such revenues as a percentage of total revenues
(dollars in thousands):
QUARTER ENDED DECEMBER 31,
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1996 1995
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Internetwork analysis products:
DA-3x $ 7,012 45.4 % $7,877 58.5 %
Domino 5,148 33.3 2,817 20.9
Other 739 4.8 839 6.3
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Total internetwork
analysis products 12,899 83.5 11,533 85.7
Complementary telecom-
munication products 2,556 16.5 1,930 14.3
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Total revenues $15,455 100.0 % $13,463 100.0 %
=========== =========== =========== ===========
8
The following table presents, for the periods indicated, the Company's total
revenues from domestic and international sales and such revenues as a percentage
of total revenues (dollars in thousands):
QUARTER ENDED DECEMBER 31,
--------------------------------------------------
1996 1995
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United States $ 6,718 43.5 % $7,366 54.7 %
Europe 4,427 28.6 3,838 28.5
Central and South America 1,978 12.8 532 3.9
Pacific Rim 1,692 11.0 1,073 8.0
Canada 590 3.8 614 4.6
Other 50 0.3 40 0.3
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Total revenues $15,455 100.0 % $13,463 100.0 %
=========== ========== ========== ==========
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO QUARTER ENDED DECEMBER 31, 1995
TOTAL REVENUES. Total revenues increased $2.0 million, or 14.8%, to
$15.5 million in the quarter ended December 31, 1996 from $13.5 million in the
quarter ended December 31, 1995, due to increased sales volume of both the
Company's internetwork analysis products and complementary telecommunication
products. Domestic revenues decreased 8.8% to $6.7 million in the quarter ended
December 31, 1996 compared to $7.4 million in the quarter ended December 31,
1995 primarily due to decreased revenues in the DA-3x product family and due to
a lack of large individual orders during the quarter. International revenues
increased 43.3% to $8.7 million in the quarter ended December 31, 1996 compared
to $6.1 million in the quarter ended December 31, 1995 primarily due to sales
growth in Central and South America and the Pacific Rim, although European
revenue growth also contributed to the overall increase in international
revenues. Revenues in Central and South America increased 271.8%, primarily due
to sales related to a large order from the Brazilian national telecommunications
company.
Revenues from sales of the Company's internetwork analysis products
increased $1.4 million, or 11.8%, to $12.9 million in the quarter ended December
31, 1996 from $11.5 million in the quarter ended December 31, 1995. The
increasing complexity of computer networks, continued strength in the data
networking market as customers migrate to new technologies and continued
expansion of the Company's product lines have caused greater demand for these
products.
Revenues from sales of the Company's DA-3x product family decreased
$865,000, or 11.0%, to $7.0 million in the quarter ended December 31, 1996 from
$7.9 million in the quarter ended December 31, 1995 due to decreased unit
volumes. Revenues in the quarter ended December 31, 1995 included more
significant volumes related to the Company's ATM/OC-3 module which was
introduced in September 1995. DA-3x quarterly product revenues may fluctuate as
a result of a number of factors including the capital spending patterns of the
Company's customers, the timing of large individual orders and announcements of
new products.
Revenues from sales of the Company's Domino product family increased
$2.3 million, or 82.7%, to $5.1 million in the quarter ended December 31, 1996
compared to $2.8 million in the quarter ended December 31, 1995. The Domino
product family is a newer generation of analyzers designed for network service
providers and operators. The Company introduced DominoLAN, DominoWAN and
DominoFDDI in fiscal 1995 followed by DominoWIZARD and DominoREMOTE in fiscal
1996 and DominoFastEthernet in December 1996. Revenues have increased as the
Company has continued to expand product offerings and sales channels for this
product family.
Revenues of complementary telecommunication products increased by
$626,000, or 32.4%, to $2.6 million in the quarter ended December 31, 1996 from
$1.9 million in the quarter ended December 31, 1995, primarily due to an
increase in revenues from sales of new products purchased from international
affiliates for resale in the United States, including the ANT-20, a physical
layer test instrument for SDH, SONET and ATM.
GROSS PROFIT. Gross profit increased $1.3 million, or 16.0%, to $9.3
million in the quarter ended December 31, 1996 as a result of higher revenues.
Gross margin increased to 60.5% in the quarter ended December 31, 1996 from
59.8% in the quarter ended December 31, 1995.
9
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $503,000, or 10.9%, to $5.1 million in the
quarter ended December 31, 1996 from $4.6 million in the quarter ended December
31, 1995. Selling, general and administrative expenses, as a percentage of
revenues, decreased to 33.2% in the quarter ended December 31, 1996 from 34.4%
in the quarter ended December 31, 1995. The dollar amount of these expenses
increased as a result of personnel and equipment increases to support higher
revenues. Selling, general and administrative expenses in the quarter ended
December 31, 1996 also included approximately $300,000 in expenses related to a
trade show and sales training held for the Company's international sales
affiliates during the quarter.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses decreased
$171,000, or 6.5%, to $2.5 million in the quarter ended December 31, 1996 from
$2.6 million in the quarter ended December 31, 1995. Product development
expenses, as a percentage of revenues, decreased to 15.9% in the quarter ended
December 31, 1996 from 19.5% in the quarter ended December 31, 1995. The
Company's product development activities are an important element of its growth
strategy and it will continue to invest a significant portion of Company
revenues in this area.
INTEREST INCOME. Interest income increased $95,000 to $148,000 in the
quarter ended December 31, 1996 from $53,000 in the quarter ended December 31,
1995 primarily due to a higher average cash balance during the quarter ended
December 31, 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$570,000 in the quarter ended December 31, 1996 from $266,000 in the quarter
ended December 31, 1995. The Company's effective tax rate was 30% in the quarter
ended December 31, 1996 and 32% in the quarter ended December 31, 1995.
10
QUARTERLY OPERATING RESULTS
The results of operations for the three months ended December 31, 1996
are not necessarily indicative of the results to be expected for the full fiscal
year. Quarterly results have been affected by the timing of expenditures for
product development and marketing programs and by the hiring of product
development, marketing, sales and administrative personnel. Quarterly results
have also been affected by realized foreign currency gains or losses and by the
recording at the end of each period of unrealized foreign currency gains or
losses related to the revaluation of DM denominated receivables and payables and
any forward foreign currency exchange contracts related to such receivables and
some anticipated sales to affiliates. Further, the Company's expense levels have
been based, in part, on its expectations of future revenues. If expected revenue
levels are not achieved in the future in a particular quarter, quarterly results
may be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $59,000 in the quarter ended
December 31, 1996 primarily due to the acquisition of equipment and intangible
assets and by cash used in operations partially offset by cash provided by
financing activities.
Net cash used in operations was $276,000 in the quarter ended December
31,1996. Accounts receivable at December 31, 1996 increased by $3.0 million, or
22.7%, compared to September 30, 1996 primarily as a result of an increase in
the proportion of international sales in the quarter ended December 31, 1996
compared to the quarter ended September 30, 1996. International sales have terms
of 60 to 90 days while United States sales typically have terms of 30 days. The
increase in accounts receivable was partially offset by net income before
depreciation and amortization. In addition, inventories decreased to $4.3
million at December 31, 1996 from $4.7 million at September 30, 1996.
Net cash used in investing activities was $354,000 in the quarter ended
December 31, 1996. All of the cash used in investing activities was for
acquisitions of property and equipment and intangible assets. Acquisitions of
property and equipment consisted primarily of computer hardware and test
equipment. Acquisitions of intangible assets consisted primarily of financial,
manufacturing, product and product development software.
Net cash provided by financing activities was $571,000 in the quarter
ended December 31, 1996 and consisted of proceeds from the issuance of Common
Stock pursuant to the exercise of employee stock options.
In March 1995, the Company entered into a $5.0 million line of credit
facility with a U.S. bank which expires in January 1998. In September 1996,
availability under this line was reduced by $267,000 as a result of a standby
letter of credit issued by the bank to secure the Company's group medical
insurance plan. Through December 31, 1996, there have been no borrowings under
this facility.
The Company believes that cash generated from operations, together with
existing cash balances and borrowings available under the Company's U.S. bank
line of credit facility, will be sufficient to satisfy the Company's
requirements for working capital and capital expenditures in fiscal 1997.
11
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
DECEMBER 31, 1996
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(b) Reports on Form 8-K
No reports on Form 8-K were filed on behalf of the Company for
the three month period ended December 31, 1996.
12
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
SIGNATURE
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.
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
(Registrant)
Date: January 31, 1997 By: /s/ Adelbert Kuthe
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Adelbert Kuthe
Vice President, Finance and Secretary
(Principal Financial Officer)
13