UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1997.
/ / 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
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 X No ____.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of February 10, 1998,
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 DECEMBER 31, 1997
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997
and September 30, 1997.......................................... 3
Consolidated Statements of Income for the Three Months
Ended December 31, 1997 and December 31, 1996................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1997 and December 31, 1996.................. 5
Notes to Consolidated Financial Statements....................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................ 19
ITEM 2. CHANGES IN SECURITIES............................................ 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 19
ITEM 5. OTHER INFORMATION................................................ 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVETEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,407 $ 5,695
Short-term investments, available for sale.......... 996 996
Accounts receivable (less allowance for doubtful
accounts of $970 at December 31, 1997 (unaudited)
and $851 at September 30, 1997).................... 26,035 25,860
Inventories......................................... 15,815 15,937
Refundable income taxes............................. 437 616
Deferred income taxes............................... 3,611 3,611
Other current assets................................ 1,398 1,730
--------- ---------
Total current assets................................. 51,699 54,445
Property and equipment, net.......................... 15,106 15,110
Deferred debt issuance costs, net.................... 4,155 4,233
Intangible assets, net............................... 3,207 3,281
Deferred income taxes................................ 101 101
Other assets......................................... 2,307 183
--------- ---------
Total assets......................................... $ 76,575 $ 77,353
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks.............................. $ 4,336 $ 3,859
Trade accounts payable.............................. 13,118 13,356
Accrued compensation................................ 5,532 6,034
Income taxes payable................................ 583 522
Other current liabilities........................... 6,543 9,847
Current maturities of long-term obligations......... 2,968 1,972
--------- ---------
Total current liabilities............................ 33,080 35,590
Long-term obligations, less current maturities....... 111,945 112,972
Deferred income and other liabilities................ 2,400 431
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.......................... 43,741 43,741
Accumulated deficit................................. (114,470) (115,048)
Foreign currency translation adjustments............ (170) (382)
--------- ---------
Total stockholders' equity (deficit)................. (70,850) (71,640)
--------- ---------
Total liabilities and stockholders' equity (deficit). $ 76,575 $ 77,353
--------- ---------
--------- ---------
Note: The balance sheet at September 30, 1997 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, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
-------- --------
Sales ......................................... $ 35,775 $ 42,495
Cost of goods sold ............................ 15,749 21,002
-------- --------
Gross margin .................................. 20,026 21,493
Operating expenses:
Marketing and selling......................... 9,062 9,095
Research and development...................... 4,278 3,646
General and administrative.................... 2,652 2,741
-------- --------
15,992 15,482
-------- --------
Operating income .............................. 4,034 6,011
Non-operating income (expense):
Interest income .............................. 70 48
Interest expense ............................. (2,971) (113)
Other, net ................................... (169) (395)
-------- --------
(3,070) (460)
-------- --------
Income before provision for income taxes....... 964 5,551
Provision for income taxes .................... 386 2,006
-------- --------
Net income .................................... $ 578 $ 3,545
-------- --------
-------- --------
Net income per share - basic .................. $ .12 $ .32
-------- --------
-------- --------
Net income per share - diluted ................ $ .11 $ .31
-------- --------
-------- --------
Average common shares outstanding - basic ..... 4,885 10,974
-------- --------
-------- --------
Average common shares outstanding - diluted ... 5,125 11,604
-------- --------
-------- --------
See accompanying notes.
4
WAVETEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income ............................................................ $ 578 $3,545
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense ................................................. 825 667
Amortization expense ................................................. 73 149
Amortization of debt issuance costs................................... 175 -
Provision for losses on accounts receivable........................... 121 112
Deferred income taxes................................................. - 385
Other, net............................................................ (12) (24)
Changes in operating assets and liabilities:
Accounts receivable................................................. (262) (4,206)
Inventories and other assets........................................ (1,463) 347
Accounts payable and accrued expenses............................... (2,020) 525
Income taxes payable, net........................................... 39 1,447
------- -------
Net cash provided by (used in) operating activities.................... (1,946) 2,947
INVESTING ACTIVITIES
Purchase of property and equipment..................................... (751) (1,470)
Proceeds from sale of property and equipment........................... 20 192
Payments received on notes receivable ................................. 11 75
------- -------
Net cash used in investing activities.................................. (720) (1,203)
FINANCING ACTIVITIES
Repurchase of common shares and stock options for cash................. - (73)
Proceeds from revolving lines of credit and long-term obligations...... 586 509
Principal payments on revolving lines of credit and long-term
obligations ........................................................ (102) (659)
Debt issuance costs ................................................... (97) -
------- -------
Net cash provided by (used in) financing activities.................... 387 (223)
Effect of exchange rate changes on cash and cash equivalents........... (9) (7)
------- -------
Increase (decrease) in cash and cash equivalents....................... (2,288) 1,514
Cash and cash equivalents at beginning of period ...................... 5,695 6,126
------- -------
Cash and cash equivalents at end of period............................. $ 3,407 $ 7,640
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 5,116 $ 132
------- -------
------- -------
Cash paid for income taxes ............................................ $ 6 $ 192
------- -------
------- -------
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 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. It is suggested that these consolidated
financial statements be read in conjunction with the Company's audited
consolidated financial statements and notes thereto, included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997.
2. NET INCOME PER SHARE
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS 128
replaced the calculation of primary and fully diluted net income per share
with basic and diluted net income per share. Unlike primary net income per
share previously reported by the Company, basic net income per share is based
only on average common shares outstanding and excludes the dilutive effects
of the Company's outstanding stock options. Diluted net income per share is
very similar to the previous concept of fully diluted net income per share
and includes the dilutive effect of the Company's outstanding stock options.
The Company has a simple capital structure and, accordingly, the only
difference in the Company's computations of basic and diluted net income per
share is the dilutive effect of outstanding stock options. All net income
per share amounts for all periods have been presented, and where necessary,
restated to conform to the requirements of SFAS 128.
3. FINANCIAL STATEMENT DETAILS
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(DOLLARS IN THOUSANDS)
Finished Goods $ 5,575 $ 6,451
Work-in-progress 3,358 3,612
Materials 6,882 5,874
-------- --------
$ 15,815 $ 15,937
-------- --------
-------- --------
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under its Senior Subordinated Notes issued
in connection with certain Recapitalization Transactions in June 1997 are
guaranteed by all of the Company's current and future domestic subsidiaries
6
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
(collectively, the "Subsidiary Guarantors"). Wavetek U.S. Inc. is the only
current Subsidiary Guarantor. Such guarantee is full and unconditional and
future guarantees will be joint and several. Separate financial statements of
the Subsidiary Guarantor 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 Guarantor and (iii) the Company's current foreign subsidiaries
(the "Foreign Subsidiaries"). The supplemental financial data reflects the
investments of Wavetek Corporation in the Subsidiary Guarantor and the
Foreign Subsidiaries using the equity method of accounting.
7
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 1997
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ - $ 2,375 $ 1,032 $ - $ 3,407
Short-term investments, available for sale........ - 996 - - 996
Accounts receivable (less allowance for
doubtful accounts of $970)...................... (128) 27,250 19,114 (20,201) 26,035
Inventories....................................... - 6,072 10,744 (1,001) 15,815
Refundable income taxes........................... 5,543 (5,108) 2 - 437
Deferred income taxes............................. 2,301 1,310 - - 3,611
Other current assets............................ 56 207 1,135 - 1,398
--------- ------- ------- -------- ---------
Total current assets............................... 7,772 33,102 32,027 (21,202) 51,699
Property and equipment, net........................ 5,661 4,313 5,132 - 15,106
Deferred debt issuance costs, net.................. 4,155 $ - - - 4,155
Intangible assets, net............................. 3,157 - 50 - 3,207
Deferred income taxes.............................. (4) 105 - - 101
Other assets....................................... 223 2,179 90 (185) 2,307
Investment in subsidiaries......................... 36,132 - 25 (36,157) -
--------- ------- ------- -------- ---------
Total assets....................................... $ 57,096 $39,699 $37,324 $(57,544) $ 76,575
--------- ------- ------- -------- ---------
--------- ------- ------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks............................ $ - $ - $ 4,336 $ - $ 4,336
Trade accounts payable............................ 12,599 7,817 12,889 - 13,118
Accrued compensation.............................. 228 1,534 3,770 - 5,532
Income taxes payable.............................. - - 583 - 583
Other current liabilities......................... 1,043 2,145 3,370 (15) 6,543
Current maturities of long-term obligations....... 2,099 - 869 - 2,968
--------- ------- ------- -------- ---------
Total current liabilities.......................... 15,969 11,496 25,817 (20,202) 33,080
Long-term obligations, less current maturities..... 111,945 - 185 (185) 111,945
Deferred income and other liabilities.............. 32 2,360 8 - 2,400
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........................ 43,741 2,137 15,064 (17,201) 43,741
Retained earnings (accumulated deficit)........... (114,470) 23,706 (3,580) (20,126) (114,470)
Foreign currency translation adjustments.......... (170) - (170) 170 (170)
--------- ------- ------- -------- ---------
Total stockholders' equity (deficit)............... (70,850) 25,843 11,314 (37,157) (70,850)
--------- ------- ------- -------- ---------
Total liabilities and stockholders' equity
(deficit)......................................... $ 57,096 $ 39,699 $37,324 $(57,544) $ 76,575
--------- ------- ------- -------- ---------
--------- ------- ------- -------- ---------
8
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 1997
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ - $ 4,575 $ 1,120 $ - $ 5,695
Short-term investments, available for sale........ - 996 - - 996
Accounts receivable (less allowance for
doubtful accounts of $851)....................... (103) 20,202 16,230 (10,469) 25,860
Inventories....................................... - 5,758 11,084 (905) 15,937
Refundable income taxes........................... 4,134 (3,521) 3 - 616
Deferred income taxes............................. 2,301 1,310 - - 3,611
Other current assets.............................. 63 246 1,421 - 1,730
--------- ------- ------- -------- ---------
Total current assets............................... 6,395 29,566 29,858 (11,374) 54,445
Property and equipment, net........................ 5,690 4,428 5,015 (23) 15,110
Debt issuance costs, net........................... 4,233 - - - 4,233
Intangible assets, net............................. 3,224 - 57 - 3,281
Deferred income taxes.............................. (4) 105 - - 101
Other assets....................................... 226 46 96 (185) 183
Investment in subsidiaries......................... 33,0 - 25 (33,084) -
--------- ------- ------- -------- ---------
Total assets....................................... $ 52,823 $34,145 $35,051 $(44,666) $ 77,353
--------- ------- ------- -------- ---------
--------- ------- ------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks............................ $ - $ - $ 3,859 $ - $ 3,859
Trade accounts payable............................ 5,215 5,795 12,817 (10,471) 13,356
Accrued compensation.............................. 418 1,486 4,130 - 6,034
Income taxes payable.............................. - - 522 - 522
Other current liabilities......................... 4,727 3,042 2,077 1 9,847
Current maturities of long-term obligations....... 1,097 - 875 - 1,972
--------- ------- ------- -------- ---------
Total current liabilities.......................... 11,457 10,323 24,280 (10,470) 35,590
Long-term obligations, less current maturities..... 112,971 - 186 (185) 112,972
Deferred income and other liabilities.............. 35 369 27 - 431
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........................ 43,741 2,137 15,064 (17,201) 43,741
Retained earnings (accumulated deficit)........... (115,048) 21,316 (4,124) (17,192) (115,048)
Foreign currency translation adjustments.......... (382) - (382) 382 (382)
--------- ------- ------- -------- ---------
Total stockholders' equity (deficit)............... (71,640) 23,453 10,558 (34,011) (71,640)
--------- ------- ------- -------- ---------
Total liabilities and stockholders' equity
(deficit)......................................... $ 52,823 $34,145 $35,051 $(44,666) $ 77,353
--------- ------- ------- -------- ---------
--------- ------- ------- -------- ---------
9
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Sales.............................................. $ - $20,605 $22,490 $(7,320) $35,775
Cost of goods sold................................. (50) 9,028 14,017 (7,246) 15,749
------- ------- ------- ------- -------
Gross margin....................................... 50 11,577 8,473 (74) 20,026
Operating expenses:
Marketing and selling............................. 431 4,191 4,440 - 9,062
Research and development.......................... (12) 2,586 1,704 - 4,278
General and administrative........................ 413 1,001 1,238 - 2,652
------- ------- ------- ------- -------
832 7,778 7,382 - 15,992
------- ------- ------- ------- -------
Operating income (loss)............................ (782) 3,799 1,091 (74) 4,034
Non-operating income (expense):
Interest income................................... - 70 - - 70
Interest expense.................................. (2,909) - (62) - (2,971)
Equity in net income (loss) of subsidiaries....... 2,860 - - (2,860) -
Other, net........................................ - 115 (284) - (169)
------- ------- ------- ------- -------
(49) 185 (346) (2,860) (3,070)
------- ------- ------- ------- -------
Income (loss) before provision (credit) for
income taxes...................................... (831) 3,984 745 (2,934) 964
Provision (credit) for income taxes................ (1,409) 1,594 201 - 386
------- ------- ------- ------- -------
Net income......................................... $ 578 $ 2,390 $ 544 $(2,934) $ 578
------- ------- ------- ------- -------
------- ------- ------- ------- -------
10
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Sales................................................. $ - $21,855 $30,536 $ (9,896) $42,495
Cost of goods sold.................................... 642 10,092 20,381 (10,113) 21,002
------- ------- ------- ------- -------
Gross margin.......................................... (642) 11,763 10,155 217 21,493
Operating expenses:
Marketing and selling................................ 287 3,968 4,840 - 9,095
Research and development............................. (12) 1,511 2,147 - 3,646
General and administrative........................... 715 856 1,170 - 2,741
------- ------- ------- ------- -------
990 6,335 8,157 - 15,482
------- ------- ------- ------- -------
Operating income (loss)............................... (1,632) 5,428 1,998 217 6,011
Non-operating income (expense):
Interest income...................................... 67 44 3 (66) 48
Interest expense..................................... (96) - (83) 66 (113)
Equity in net income of subsidiaries................. 4,872 - - (4,872) -
Other, net........................................... (45) (107) (243) - (395)
------- ------- ------- ------- -------
4,798 (63) (323) (4,872) (460)
------- ------- ------- ------- -------
Income before provision (credit) for income taxes..... 3,166 5,365 1,675 (4,655) 5,551
Provision (credit) for income taxes................... (379) 2,146 239 - 2,006
------- ------- ------- ------- -------
Net income............................................ $ 3,545 $ 3,219 $ 1,436 $ (4,655) $ 3,545
------- ------- ------- ------- -------
------- ------- ------- ------- -------
11
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net cash provided by (used in) operating
activities........................................... $ 213 $(2,006) $ (153) $ - $(1,946)
INVESTING ACTIVITIES -
Purchase of property and equipment.................... (103) (182) (466) - (751)
Other investing activities............................ 11 (12) 32 - 31
----- ------- ------ --- -------
Net cash used in investing activities................. (92) (194) (434) - (720)
FINANCING ACTIVITIES -
Proceeds from revolving lines of credit and
long-term obligations................................ - - 586 - 586
Principal payments on revolving lines of credit
and long-term obligations............................ (24) - (78) - (102)
Debt issuance costs................................... (97) - - - (97)
----- ------- ------ --- -------
Net cash provided by (used in) financing
activities........................................... (121) - 508 - 387
Effect of exchange rate changes on cash and
cash equivalents..................................... - - (9) - (9)
----- ------- ------ --- -------
Decrease in cash and cash equivalents................. - (2,200) (88) - (2,288)
Cash and cash equivalents at beginning of period...... - 4,575 1,120 - 5,695
----- ------- ------ --- -------
Cash and cash equivalents at end of period............ $ - $ 2,375 $1,032 $ - $ 3,407
----- ------- ------ --- -------
----- ------- ------ --- -------
12
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net cash provided by operating activities............. $ 1,148 $ 11 $1,788 $ - $ 2,947
INVESTING ACTIVITIES
Purchase of property and equipment.................... (323) (535) (612) - (1,470)
Other investing activities............................ 25 174 68 - 267
------- ------ ------ --- -------
Net cash used in investing activities................. (298) (361) (544) - (1,203)
FINANCING ACTIVITIES
Repurchase of common shares and stock
options for cash..................................... (73) - - - (73)
Proceeds from revolving lines of credit and
long-term obligations................................ - - 509 - 509
Principal payments on revolving lines of credit
and long-term obligations............................ (22) - (637) - (659)
Loans from Wavetek Corporation to subsidiaries........ (1,330) - 1,330 - -
Repayment of loans from Wavetek Corporation
to subsidiaries...................................... 575 - (575) - -
------- ------ ------ --- -------
Net cash provided by (used in) financing activities... (850) - 627 - (223)
Effect of exchange rate changes on cash and
cash equivalents..................................... - - (7) - (7)
------- ------ ------ --- -------
Increase (decrease) in cash and cash equivalents...... - (350) 1,864 - 1,514
Cash and cash equivalents at beginning of period...... - 4,845 1,281 - 6,126
------- ------ ------ --- -------
Cash and cash equivalents at end of period............ $ - $4,495 $3,145 $ - $ 7,640
------- ------ ------ --- -------
------- ------ ------ --- -------
13
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, 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 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 1997,
approximately 61% of the Company's sales were generated outside of the United
States and approximately 50% 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 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 introduced in the period.
Research and
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development expenses are primarily driven by the number and complexity of new
products under development. 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.
RESULTS OF OPERATIONS
The following table sets forth selected financial information as a
percentage of sales for the periods indicated:
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
------ ------
Sales................................................. 100.0% 100.0%
Cost of goods sold.................................... 44.0 49.4
------ ------
Gross margin.......................................... 56.0 50.6
Operating expenses.................................... 44.7 36.4
------ ------
Operating income...................................... 11.3 14.2
Interest expense, net................................. (8.1) (0.2)
Other non-operating income (expense), net............. (0.5) (0.9)
------ ------
Income before provision for income taxes.............. 2.7 13.1
Provision for income taxes............................ 1.1 4.7
------ ------
Net income............................................ 1.6% 8.4%
------ ------
------ ------
EBITDA (1)............................................ 13.8% 16.1%
The Company's ratio of earnings to fixed charges was as follows for the
periods indicated:
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
------ ------
Ratio of earnings to fixed charges (2)................ 1.3x 18.6x
- ------------
(1) EBITDA is operating income plus depreciation and amortization expense. The
Company's definition of EBITDA is consistent with the definition of
Consolidated Cash Flow in the Indenture related to the Company's Senior
Subordinated Notes ("the Indenture"). 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 may be viewed as an indicator of compliance with certain covenants in
the Indenture and the New Credit Agreement and 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. EBITDA as presented by the Company herein may not
be comparable to similarly titled measures reported by other companies. In
addition, the amount reported by the Company as EBITDA may not be fully
available for management's discretionary use due to the Company's needs to
conserve funds for debt service, capital expenditures and other
commitments.
15
(2) For purposes of computing this ratio, earnings consist of income before
provision for income taxes plus fixed charges. Fixed charges consist of
interest expense, amortization of deferred debt issuance costs and one-
third of the rent expense from operating leases, which management believes
is a reasonable approximation of the interest factor of the rent.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Net sales in the three months ended December 31, 1997
decreased $6.7 million, or 15.8%, to $35.8 million from $42.5 million in the
comparable fiscal 1997 period. This decrease was due to a decrease in sales
to international customers of $7.0 million, or 24.9%, partially offset by an
increase of $0.3 million, or 1.8%, in sales to customers in the United
States. The Company's sales to customers outside the United States decreased
to 58.9% of total sales in the three months ended December 31, 1997 from
66.0% in the comparable fiscal 1997 period and the portion of the Company's
sales which were made in currencies other than the United States dollar
decreased to approximately 47% in the three months ended December 31, 1997
from approximately 57% in the comparable fiscal 1997 period. The decrease in
sales to international customers was primarily due to two large shipments to
international customers, aggregating $5.6 million, which were made during the
three months ended December 31, 1996, and did not recur during the three
months ended December 31, 1997. Changes in certain foreign exchange rates
also had the effect of reducing the United States dollar equivalent of the
Company's foreign currency sales by $1.4 million from the United States
dollar equivalent amount that would have been reported if the average
exchange rates in effect during the three months ended December 31, 1996 had
remained in effect during the three months ended December 31, 1997. Sales of
the Company's Communications Test products in the three months ended December
31, 1997 decreased $5.6 million, or 17.0%, from the comparable fiscal 1997
period primarily as a result of the two large shipments mentioned above that
occurred during the comparable fiscal 1997 period. Sales of Calibration
Instruments products in the three months ended December 31, 1997 decreased
$1.5 million, or 21.9%, from the comparable fiscal 1997 period, due partially
to a delay in a large order which was expected during the three months ended
December 31, 1997 and partially to the fact that the comparable fiscal 1997
period included higher shipments in connection with a planned reduction in
the backlog of this product line during that period. Sales in the three
months ended December 31, 1997 from repair, upgrade and calibration services
increased $0.3 million, or 9.2%, from the comparable fiscal 1997 period.
GROSS MARGIN. The Company's gross margin in the three months ended
December 31, 1997 decreased $1.5 million or 6.8%, to $20.0 million from $21.5
million in the comparable fiscal 1997 period. Gross margin as a percentage of
sales increased to 56.0% in the three months ended December 31, 1997 from
50.6% in the comparable fiscal 1997 period. The increase in the gross margin
percentage during the three months ended December 31, 1997 results primarily
from increases in gross margin percentages realized from the Company's sales
of Communications Test products due substantially to improvements made by the
Company in recent periods to the cost structure of its manufacturing
operations, including the replacement of a major manufacturing subcontractor
in Europe. In addition, the Company's improved gross margin percentages were
positively impacted by a favorable geographical and product mix of its sales.
As a partial offset to these improved gross margin percentages, the Company
experienced a reduction in gross margin percentages realized from sales of
its Calibration Instruments products during the three months ended December
31, 1997 due primarily to lower sales volume and an unfavorable geographic
mix of its sales. Changes in foreign exchange rates had an unfavorable impact
on the United States dollar equivalent of gross margins related to
international sales denominated in foreign currencies in the three months
ended December 31, 1997.
OPERATING EXPENSES. Operating expenses in the three months ended
December 31, 1997 increased $0.5 million, or 3.3%, to $16.0 million from
$15.5 million in the comparable fiscal 1997 period. Operating expenses as a
percentage of sales increased to 44.7% in the three months ended December 31,
1997 from 36.4% in the comparable fiscal 1997 period. The
16
increase in operating expenses in the three months ended December 31, 1997
was due to an increase in spending for research and development activities of
$0.6 million, to $4.3 million, or 12.0% of sales, in the three months ended
December 31, 1997 from $3.6 million, or 8.6% of sales, in the comparable
fiscal 1997 period, in order to accelerate the timing and number of new
product introductions. Spending for marketing and selling and general and
administrative activities remained at approximately the same level in the
three months ended December 31, 1997 as in the comparable fiscal 1997 period,
however these expenses increased as a percentage of sales during the current
period. Changes in foreign exchange rates had a favorable impact on the
United States dollar equivalent of operating expenses denominated in foreign
currencies in the three months ended December 31, 1997.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the
three months ended December 31, 1997 increased by $2.6 million over the
comparable fiscal 1997 period to $3.1 million. The increase was primarily due
to an increase in the Company's net interest expense to $2.9 million during
the three months ended December 31, 1997 from $0.1 million in the comparable
fiscal 1997 period, reflecting additional interest expense due to the Notes
and the New Credit Agreement. The increase in net interest expense was
partially offset by a reduction of $0.2 million in other non-operating
expenses.
PROVISION FOR INCOME TAXES. The Company's effective tax rate has
increased to approximately 40% in the three months ended December 31, 1997
from approximately 36% in the comparable fiscal 1997 period.
NET INCOME (LOSS). As a result of the above factors, net income was
$0.6 million in the three months ended December 31, 1997 as compared to $3.5
million in the comparable fiscal 1997 period.
EBITDA. EBITDA was $4.9 million in the three months ended December 31,
1997 as compared to $6.8 million in the comparable fiscal 1997 period. EBITDA
as a percentage of sales decreased to 13.8% in the three months ended
December 31, 1997 from 16.1% in the comparable fiscal 1997 period.
RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors,
the ratio of earnings to fixed charges was 1.3x in the three months ended
December 31, 1997 as compared to 18.6x in the comparable fiscal 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by (used in) operating activities was $(1.9
million) and $2.9 million in the three months ended December 31, 1997 and
1996, respectively. The Company had cash, cash equivalents and short-term
investments at December 31, 1997 of $4.4 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 $4.3 million at December 31, 1997 for
funding short-term working capital requirements, and the Company had
additional obligations outstanding totaling approximately $1.6 million in the
form of letters of credit and bank guarantees. As of December 31, 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 accounts receivable) and
capital expenditures. The Company's net cash used in investing activities was
$0.7 million and $1.2 million in the three months ended December 31, 1997 and
1996, respectively. The Company's recurring cash
17
requirements for investing activities are primarily for capital expenditures.
The Company made capital expenditures in the three months ended December 31,
1997 and 1996 of approximately $0.8 million and $1.5 million, respectively.
The Company's net cash provided by (used in) financing activities was
$0.4 million and $(0.2 million) in the three months ended December 31, 1997
and 1996, respectively. The net cash provided by (used in) financing
activities substantially reflects the proceeds from and repayments for
borrowings used to finance the Company's operating and investing activities,
or as an application of the cash generated from these activities.
As part of certain Recapitalization Transactions occurring in June 1997,
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 United
States availability under its Existing Credit Agreements, leaving borrowing
availability of approximately $9.6 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 included in 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 the Company to the Foreign Subsidiaries are pledged to the lenders under
the New Credit Agreement.
PERIODIC FLUCTUATIONS
The Company's fiscal 1997 sales occurred in the following percentages in
each of the four fiscal quarters: 27% for the quarter ended December 31,
1996; 26% for the quarter ended March 31, 1997; 23% for the quarter ended
June 30, 1997 and 24% for the quarter ended September 30, 1997. 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
18
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.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of the 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1998 WAVETEK CORPORATION
(Registrant)
/s/VICKIE L. CAPPS
-------------------
Vickie L. Capps
Chief Financial Officer
20