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, 1998.
[ ] 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 WANDEL & GOLTERMANN, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0457664
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1030 SWABIA COURT
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-3585
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(Address of Principal Executive Offices) (Zip Code)
(919) 941-5730
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Registrant's Telephone Number, Including Area Code
NOT APPLICABLE
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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 16, 1999,
Registrant had only one class of common stock, of which there were 13,202,323
shares outstanding.
WAVETEK WANDEL & GOLTERMANN, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and September 30, 1998 . . . 3
Consolidated Statements of Operations for the Three Months Ended
December 31, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . 23
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVETEK WANDEL & GOLTERMANN, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $16,570 $35,544
Accounts receivable (less allowance for doubtful accounts of $4,368 at
December 31, 1998 (unaudited) and $4,432 at September 30, 1998). . . . . . . 91,067 92,281
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,760 74,886
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,136 17,095
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,100 12,736
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,633 232,542
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 65,761 66,597
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,651 178,675
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,694 6,710
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $457,739 $484,524
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,262 $113,085
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,855 37,612
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,934 25,907
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,093 5,956
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,866 41,848
Notes payable to related parties . . . . . . . . . . . . . . . . . . . . . . . 11,766 11,746
Current maturities of long-term obligations. . . . . . . . . . . . . . . . . . 6,475 30,222
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,251 266,376
Long-term obligations, less current maturities . . . . . . . . . . . . . . . . . 199,003 121,595
Pension liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,270 39,991
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,260 25,582
Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 4,004 5,566
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; authorized, 50,000 shares;
issued and outstanding, 13,202 shares . . . . . . . . . . . . . . . . . . . . 132 132
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 72,948 72,948
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58,782) (57,645)
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . 9,653 9,979
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,951 25,414
-------- --------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . $457,739 $484,524
-------- --------
-------- --------
Note: The balance sheet at September 30, 1998 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 WANDEL & GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1998 1997
-------- --------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $126,465 $90,260
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . 54,635 37,895
-------- -------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . 71,830 52,365
Operating expenses:
Marketing and selling . . . . . . . . . . . . . . . . . . 35,522 23,682
Research and development. . . . . . . . . . . . . . . . . 17,844 10,603
General and administrative. . . . . . . . . . . . . . . . 12,088 6,609
Amortization of intangible assets . . . . . . . . . . . . 4,816 266
Acquired in-process research and development. . . . . . . - 1,361
-------- -------
70,270 42,521
-------- -------
Operating income. . . . . . . . . . . . . . . . . . . . . . 1,560 9,844
Non-operating income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . 233 387
Interest expense. . . . . . . . . . . . . . . . . . . . . (5,191) (2,565)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 239 (681)
-------- -------
(4,719) (2,859)
-------- -------
Income (loss) before provision (credit) for income taxes
and minority interest in income (loss) . . . . . . . . . . (3,159) 6,985
Provision (credit) for income taxes . . . . . . . . . . . . (2,022) 7,202
Minority interest in income (loss). . . . . . . . . . . . . - (163)
-------- -------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(1,137) $ (54)
-------- -------
-------- -------
Net loss per share. . . . . . . . . . . . . . . . . . . . . $ (0.09) $(0.01)
-------- -------
-------- -------
Weighted average number of shares outstanding . . . . . . . 13,202 8,317
-------- -------
-------- -------
See accompanying notes.
4
WAVETEK WANDEL & GOLTERMANN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities . . . . . . . . . . . . $ (8,904) $ 6,324
INVESTING ACTIVITIES
Purchase of business, net of cash acquired. . . . . . . . . . . . . . . . . - (5,185)
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . . (2,709) (1,876)
Purchase of short-term investments, available for sale. . . . . . . . . . . - (18,150)
Proceeds from sale of short-term investments, available for sale. . . . . . - 18,150
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (396)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (2,709) (7,457)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term obligations . . . . . 96,570 22,881
Principal payments on revolving lines of credit and long-term obligations . (103,949) (8,270)
-------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . . . (7,379) 14,611
Effect of exchange rate changes on cash and cash equivalents. . . . . . . . 18 (7)
Increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . (18,974) 13,471
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . 35,544 9,400
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . $ 16,570 $ 22,871
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,318 $ 2,059
-------- --------
-------- --------
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . $ 460 $ 706
-------- --------
-------- --------
See accompanying notes.
5
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
On September 30, 1998, Wavetek Corporation, a Delaware corporation
("Wavetek"), and Wandel & Goltermann Management Holding GmbH, a German
limited liability company ("WG"), consummated an exchange transaction whereby
the stockholders of WG became stockholders of Wavetek, and WG became a
subsidiary of Wavetek (the "Exchange Transaction"). In connection with the
Exchange Transaction, Wavetek was renamed Wavetek Wandel & Goltermann, Inc.
(the "Company"). The Exchange Transaction was accounted for as a purchase of
Wavetek by WG. Accordingly, the financial statements of the Company included
herein as of any date or for any period prior to September 30, 1998, are the
historical financial statements of WG.
The Company is a leading global designer, manufacturer and marketer of a
broad range of communications test instruments used to develop, manufacture,
install and maintain communications networks and equipment. The Company
conducts its communications test business, which addresses most sectors of
the communications test market, in four principal business areas: (1)
Telecom Networks (traditional voice/data transmissions and new multi-service
networks), (2) Enterprise Networks (local and wide-area network
infrastructures), (3) Multimedia (cable television and digital video
broadcast) and (4) Wireless (mobile telephony and data). The Company also
designs, manufactures and sells precision measurement instruments,
electromagnetic measurement instruments and general-purpose handheld test
tools. In addition, the Company provides repair, upgrade and calibration
services, as well as value-added professional services such as consulting and
training 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 fiscal year ended September 30,
1998. Certain amounts reported in the accompanying balance sheet as of
September 30, 1998 have been reclassified to conform to the current
presentation.
2. NET INCOME (LOSS) PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE ("SFAS
128"). Basic net income (loss) 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 (loss) per share 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 (loss) per share is
the dilutive effect of outstanding stock options. For the three months ended
December 31, 1998, the effect of outstanding stock options would have been
anti-dilutive and, therefore, was not considered in the computation of
diluted loss per share for such periods. There were no outstanding stock
options in the three months ended December 31, 1997. All net income (loss)
per share amounts for all periods have been presented, in accordance with the
requirements of SFAS 128.
6
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. FINANCIAL STATEMENT DETAILS
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(DOLLARS IN THOUSANDS)
Materials . . . . . . . . . . . . . . . . . $17,586 $19,217
Work-in-progress. . . . . . . . . . . . . . 19,045 21,469
Finished goods. . . . . . . . . . . . . . . 31,129 34,200
------- -------
$67,760 $74,886
------- -------
------- -------
4. COMPREHENSIVE INCOME (LOSS)
On October 1, 1998, the Company adopted SFAS No. 30, "Reporting
Comprehensive Income," ("SFAS 130") which established standards for reporting
and displaying comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income (loss) and other
comprehensive income. The Company's current and accumulated other
comprehensive income as of and for the periods ended December 31, 1998 and
September 30, 1998 is comprised solely of foreign currency translation
adjustments.
Components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
------------- ------------
(DOLLARS IN THOUSANDS)
Net loss. . . . . . . . . . . . . . . . . . $(1,137) $ (54)
Foreign currency translation adjustments. . (326) (235)
------- -----
Comprehensive loss. . . . . . . . . . . . . $(1,463) $(289)
------- -----
------- -----
5. MULTI-CURRENCY REVOLVING CREDIT FACILITY
In December 1998, the Company entered into a Facilities Agreement in
relation to a Multi-Currency Revolving Credit Facility and Bilateral
Ancillary Facilities (the "Credit Facility") with a syndicate of four German
banks, providing for revolving borrowings, letters of credit and bank
guarantees aggregating up to a maximum amount of 280 million Deutsche marks
($167.4 million at December 31, 1998). The Credit Facility has a two-year
term and all borrowings bear interest at LIBOR plus 0.9% through September
30, 1999 and at LIBOR plus 1.5% thereafter. Borrowings under the Credit
Facility are secured by the pledge of 65% of the shares of Wandel &
Goltermann Management Holding GmbH, a subsidiary of the Company. In addition,
a $45 million tranche of the Credit Facility, which refinanced and replaced
the previously existing bank credit facility of Wavetek, is guaranteed by a
U.S. subsidiary of the Company. The Credit Facility requires the Company to
comply with certain covenants and maintain certain minimum financial ratios.
The Company was in compliance with all such requirements at December 31,
1998. As of December 31, 1998, the Company had borrowed $77.9 million under
the Credit Facility and $89.5 million was available to borrow. In January
1999, additional amounts were borrowed under the Credit Facility to refinance
certain bank debt at the Company's subsidiaries, and certain bank guarantees
were provided under the Credit Facility to secure other subsidiary bank
borrowings, reducing availability under the Credit Agreement to approximately
$30 million.
7
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under its 10-1/8% Senior Subordinated
Notes due 2007 (the "Notes") are guaranteed by all of the Company's current
and future domestic subsidiaries (collectively, the "Subsidiary Guarantors").
WGTI and Wandel & Goltermann ATE Systems, Inc., which became legal Subsidiary
Guarantors upon completion of the Exchange Transaction, are shown as
Subsidiary Guarantors for all periods presented prior to September 30, 1998.
Wavetek U.S. Inc. and its subsidiary, Digital Transport Systems, Inc., are
also included in the financial statements as of September 30, 1998 as a
result of the Exchange Transaction. Such guarantees are full and
unconditional and joint and several. Separate financial statements 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 operations and statements
of cash flows data for (i) the Company (Wavetek Wandel & Goltermann, Inc.,
formerly Wavetek Corporation, the issuer of the Notes), (ii) the current
Subsidiary Guarantors and (iii) the Company's foreign subsidiaries (the
"Foreign Subsidiaries"). The supplemental financial data reflects the
investments of the Company in the Subsidiary Guarantors and the Foreign
Subsidiaries using the equity method of accounting.
8
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 1998
(DOLLARS AND SHARES IN THOUSANDS)
WAVETEK
WANDEL &
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 361 $5,814 $10,395 $ - $16,570
Accounts receivable (less allowance for
doubtful accounts of $4,368) . . . . . . . . . (191) 50,259 81,690 (40,691) 91,067
Inventories. . . . . . . . . . . . . . . . . . . - 15,709 56,909 (4,858) 67,760
Deferred income taxes. . . . . . . . . . . . . . 3,592 5,068 5,374 6,102 20,136
Other current assets . . . . . . . . . . . . . . 1,264 2,500 11,701 (365) 15,100
-------- -------- --------- --------- --------
Total current assets . . . . . . . . . . . . . . . 5,026 79,350 166,069 (39,812) 210,633
Property and equipment, net. . . . . . . . . . . . 1,478 7,914 56,369 - 65,761
Intangible assets, net . . . . . . . . . . . . . . 6,992 118,183 48,476 - 173,651
Other assets . . . . . . . . . . . . . . . . . . . 7,714 1,698 5,968 (7,686) 7,694
Investment in subsidiaries . . . . . . . . . . . . 178,146 - - (178,146) -
-------- -------- --------- --------- --------
Total assets . . . . . . . . . . . . . . . . . . . $199,356 $207,145 $276,882 $(225,644) $457,739
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . $ - - $ 52,262 $ - $ 52,262
Trade accounts payable . . . . . . . . . . . . . 20,845 16,391 37,740 (47,121) 27,855
Accrued compensation . . . . . . . . . . . . . . 1,121 4,965 12,848 - 18,934
Income taxes payable . . . . . . . . . . . . . . (12,540) 12,256 8,377 - 8,093
Other current liabilities. . . . . . . . . . . . 2,606 7,522 28,738 - 38,866
Notes payable to related parties . . . . . . . . - 11,766 - 11,766
Current maturities of long-term obligations. . . - 741 5,734 6,475
-------- -------- --------- --------- --------
Total current liabilities. . . . . . . . . . . . . 12,032 41,875 157,465 (47,121) 164,251
Long-term obligations, less current maturities . . 162,889 4,232 33,230 (1,348) 199,003
Pension liabilities. . . . . . . . . . . . . . . . - 353 41,917 - 42,270
Deferred taxes . . . . . . . . . . . . . . . . . . 452 24,716 (908) - 24,260
Other non-current liabilities. . . . . . . . . . . 32 1,582 2,390 - 4,004
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . 132 - - - 132
Additional paid-in capital . . . . . . . . . . . 72,948 168,071 87,187 (255,258) 72,948
Accumulated deficit. . . . . . . . . . . . . . . (58,782) (33,652) (54,807) 88,459 (58,782)
Foreign currency translation adjustments . . . . 9,653 (32) 10,408 (10,376) 9,653
-------- -------- --------- --------- --------
Total stockholders' equity . . . . . . . . . . . . 23,951 134,387 42,788 (177,175) 23,951
-------- -------- --------- --------- --------
Total liabilities and stockholders' equity . . . . $199,356 $207,145 $276,882 $(225,644) $457,739
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
9
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
WAVETEK
WANDEL &
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 19 $ 31,143 $ 4,382 $ - $ 35,544
Accounts receivable (less allowance for
doubtful accounts of $4,432) . . . . . . . . . 8,710 27,364 81,907 (25,700) 92,281
Inventories. . . . . . . . . . . . . . . . . . . - 18,033 59,942 (3,089) 74,886
Deferred income taxes. . . . . . . . . . . . . . 3,592 4,408 9,095 - 17,095
Other current assets . . . . . . . . . . . . . . 1,244 1,884 9,608 - 12,736
-------- -------- -------- --------- --------
Total current assets . . . . . . . . . . . . . . . 13,565 82,832 164,934 (28,789) 232,542
Property and equipment, net. . . . . . . . . . . . 1,611 8,015 56,971 - 66,597
Intangible assets, net . . . . . . . . . . . . . . 7,953 120,428 50,294 - 178,675
Investment in subsidiaries . . . . . . . . . . . . 143,579 - 29,932 (173,511) -
Other assets . . . . . . . . . . . . . . . . . . . 213 2,763 3,794 (60) 6,710
-------- -------- -------- --------- --------
Total assets . . . . . . . . . . . . . . . . . . . $166,921 $214,038 $305,925 $(202,360) $484,524
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . $ 34,463 $ 373 $ 78,249 $ - $113,085
Trade accounts payable . . . . . . . . . . . . . 4,003 20,322 35,845 (22,558) 37,612
Accrued compensation . . . . . . . . . . . . . . 714 5,478 19,715 - 25,907
Income taxes payable . . . . . . . . . . . . . . (10,839) 9,978 6,817 5,956
Other current liabilities. . . . . . . . . . . . 3,683 8,967 30,986 (1,788) 41,848
Notes payable to related parties . . . . . . . . - - 11,746 - 11,746
Current maturities of long-term obligations. . . 24,000 741 5,481 - 30,222
-------- -------- -------- --------- --------
Total current liabilities. . . . . . . . . . . . . 56,024 45,859 188,839 (24,346) 266,376
Long-term obligations, less current maturities . . 85,000 4,299 33,711 (1,415) 121,595
Pension liabilities. . . . . . . . . . . . . . . . - - 39,991 - 39,991
Deferred taxes . . . . . . . . . . . . . . . . . . 238 25,156 188 - 25,582
Other non-current liabilities. . . . . . . . . . . 245 2,142 3,179 - 5,566
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . 132 - - - 132
Additional paid-in capital . . . . . . . . . . . 72,948 168,071 85,153 (253,224) 72,948
Accumulated deficit. . . . . . . . . . . . . . . (57,645) (31,463) (55,115) 86,578 (57,645)
Foreign currency translation adjustments . . . . 9,979 (26) 9,979 (9,953) 9,979
-------- -------- -------- --------- --------
Total stockholders' equity . . . . . . . . . . . . 25,414 136,582 40,017 (176,599) 25,414
-------- -------- -------- --------- --------
Total liabilities and stockholders' equity . . . . $166,921 $214,038 $305,925 $(202,360) $484,524
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
10
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
WAVETEK
WANDEL &
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Net sales. . . . . . . . . . . . . . . . . . . . $ - $ 38,834 $ 104,481 $ (16,850) $ 126,465
Cost of goods sold . . . . . . . . . . . . . . . . 28 20,758 48,707 (14,858) 54,635
------- -------- --------- --------- ---------
Gross margin . . . . . . . . . . . . . . . . . . . (28) 18,076 55,774 (1,992) 71,830
Operating expenses:
Marketing and selling. . . . . . . . . . . . . . 1,025 9,060 25,437 - 35,522
Research and development . . . . . . . . . . . . - 5,343 12,501 - 17,844
General and administrative . . . . . . . . . . . 1,061 2,989 8,038 - 12,088
Amortization of intangible assets. . . . . . . . 36 3,008 1,772 - 4,816
------- -------- --------- --------- ---------
2,122 20,400 47,748 - 70,270
------- -------- --------- --------- ---------
Operating income (loss). . . . . . . . . . . . . . (2,150) (2,324) 8,026 (1,992) 1,560
Non-operating income (expense):
Interest income. . . . . . . . . . . . . . . . . 34 50 149 - 233
Interest expense . . . . . . . . . . . . . . . . (2,869) (140) (2,182) - (5,191)
Equity in net income (loss) of subsidiaries. . . 2,012 - (1,452) (560) -
Other, net . . . . . . . . . . . . . . . . . . . 135 253 (149) - 239
------- -------- --------- --------- ---------
(688) 163 (3,634) (560) (4,719)
------- -------- --------- --------- ---------
Income (loss) before provision (credit) for
income taxes . . . . . . . . . . . . . . . . . . (2,838) (2,161) 4,392 (2,552) (3,159)
Provision (credit) for income taxes. . . . . . . . (1,701) 231 3,955 (4,507) (2,022)
------- -------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . . . $(1,137) $ (2,392) $ 437 $ 1,955 $ (1,137)
------- -------- --------- --------- ---------
------- -------- --------- --------- ---------
11
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
WAVETEK
WANDEL &
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
Net sales. . . . . . . . . . . . . . . . . . . . . $ - $16,725 $84,368 $(10,833) $90,260
Cost of goods sold . . . . . . . . . . . . . . . . - 8,499 40,229 (10,833) 37,895
------ ------- ------- -------- -------
Gross margin . . . . . . . . . . . . . . . . . . . - 8,226 44,139 - 52,365
Operating expenses:
Marketing and selling. . . . . . . . . . . . . . - 4,105 19,577 - 23,682
Research and development . . . . . . . . . . . . - 3,044 7,559 - 10,603
General and administrative . . . . . . . . . . . - 1,402 5,207 - 6,609
Amortization of intangible assets. . . . . . . . - 70 196 - 266
Acquired in-process research and development . . - - 1,361 - 1,361
------ ------- ------- -------- -------
- 8,621 33,900 - 42,521
------ ------- ------- -------- -------
Operating income (loss). . . . . . . . . . . . . . - (395) 10,239 - 9,844
Non-operating income (expense):
Interest income. . . . . . . . . . . . . . . . . - 188 244 (45) 387
Interest expense . . . . . . . . . . . . . . . . - (45) (2,565) 45 (2,565)
Equity in net income (loss) of subsidiaries. . . - - 40 (40) -
Other, net . . . . . . . . . . . . . . . . . . . - 26 (707) - (681)
------ ------- ------- -------- -------
- 169 (2,988) (40) (2,859)
------ ------- ------- -------- -------
Income (loss) before provision (credit) for income
taxes and minority interest in income (loss) . . - (226) 7,251 (40) 6,985
Provision (credit) for income taxes. . . . . . . . - (103) 7,305 - 7,202
Minority interest in income (loss) . . . . . . . . - - - (163) (163)
------ ------- ------- -------- -------
Net income (loss). . . . . . . . . . . . . . . . . $ - $ (123) $ (54) $ 123 $ (54)
------ ------- ------- -------- -------
------ ------- ------- -------- -------
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
WAVETEK
WANDEL &
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . $(11,223) $4,743 $(2,424) $ - $(8,904)
INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . (455) (637) (1,617) - (2,709)
Transfer of subsidiaries . . . . . . . . . . . . . (28,536) - 28,536 - -
-------- ------ ------- ------- -------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . (28,991) (637) 26,919 - (2,709)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and
long-term obligations. . . . . . . . . . . . . . 77,889 1,402 17,279 - 96,570
Principal payments on revolving lines of credit
and long-term obligations. . . . . . . . . . . . (58,463) (1,775) (43,711) (103,949)
Capital contribution from Wavetek Wandel &
Goltermann, Inc. to subsidiary . . . . . . . . . (2,034) - 2,034 - -
Loans to subsidiaries. . . . . . . . . . . . . . . (5,832) (66) 5,898 - -
Repayment of loans to subsidiaries . . . . . . . . 28,996 (28,996) - - -
-------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . 40,556 (29,435) (18,500) - (7,379)
Effect of exchange rate changes on cash and
cash equivalents . . . . . . . . . . . . . . . . - - 18 - 18
-------- ------- ------- ------- -------
Increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . 342 (25,329) 6,013 - (18,974)
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . . 19 31,143 4,382 - 35,544
-------- ------- ------- ------- -------
Cash and cash equivalents at end of period . . . . $ 361 $ 5,814 $10,395 $ - $16,570
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
13
WAVETEK WANDEL & GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
WAVETEK
WANDEL &
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . $ - $ 383 $ (2,559) $8,500 $ 6,324
INVESTING ACTIVITIES
Purchase of business, net of cash acquired . . . . - - (5,185) - (5,185)
Purchase of property and equipment . . . . . . . . - (335) (1,541) - (1,876)
Purchase of short-term investments . . . . . . . . - (18,150) - - (18,150)
Proceeds from sale of short-term investments . . . - 18,150 - - 18,150
Other investing activities . . . . . . . . . . . . - 2 (398) - (396)
-------- -------- -------- ------ --------
Net cash used in investing activities. . . . . . . - (333) (7,124) - (7,457)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and
long-term obligations. . . . . . . . . . . . . . - - 22,881 - 22,881
Principal payments on revolving lines of credit
and long-term obligations. . . . . . . . . . . . - - (8,270) - (8,270)
-------- -------- -------- ------ --------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . - - 14,611 - 14,611
Effect of exchange rate changes on cash and
cash equivalents . . . . . . . . . . . . . . . . - - (7) - (7)
-------- -------- -------- ------ --------
Increase in cash and cash equivalents. . . . . . . - 50 4,921 8,500 13,471
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . . - 13,401 4,499 (8,500) 9,400
-------- -------- -------- ------ --------
Cash and cash equivalents at end of period . . . . $ - $ 13,451 $ 9,420 $ - $22,871
-------- -------- -------- ------ --------
-------- -------- -------- ------ --------
14
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
On September 30, 1998, Wavetek Corporation, a Delaware corporation
("Wavetek"), and Wandel & Goltermann Management Holding GmbH, a German
limited liability company ("WG"), consummated an exchange transaction whereby
the stockholders of WG became stockholders of Wavetek, and WG became a
subsidiary of Wavetek (the "Exchange Transaction"). In connection with the
Exchange Transaction, Wavetek was renamed Wavetek Wandel & Goltermann, Inc.
(the "Company"). Although WG became a subsidiary of Wavetek, the Exchange
Transaction was treated, for accounting and reporting purposes, as a purchase
of Wavetek by WG. Accordingly, the consolidated financial statements of the
Company included herein as of any date or for any period prior to September
30, 1998 are the historical consolidated financial statements of WG. The
consolidated balance sheets of the Company as of September 30, 1998 and
December 31, 1998 and the consolidated statement of operations for the three
months ended December 31, 1998, included herein, reflect the Exchange
Transaction and the related purchase accounting adjustments. The Company
expects net sales, cost of goods sold, gross margin, operating expenses and
interest expense to increase significantly in fiscal 1999 as a result of the
Exchange Transaction. The Company also expects its operating expenses to
increase as a result of its acquisition of Tinwald Networking Technologies
Inc. in January 1998 and Wavetek's acquisition of Digital Transport Systems,
Inc. effective September 30, 1998.
GENERAL
The Company is a leading global designer, manufacturer and marketer of a
broad range of communications test instruments used to develop, manufacture,
install and maintain communications networks and equipment. The Company
conducts its communications test business, which addresses most sectors of
the communications test market, in four principal business areas: (1)
Telecom Networks (traditional voice/data transmissions and new multi-service
networks), (2) Enterprise Networks (local and wide-area network
infrastructures), (3) Multimedia (cable television and digital video
broadcast) and (4) Wireless (mobile telephony and data). The Company also
designs, manufactures and sells precision measurement instruments,
electromagnetic measurement instruments and general-purpose handheld test
tools. In addition, the Company provides repair, upgrade and calibration
services, as well as value-added professional services such as consulting and
training on a worldwide basis.
The Company sells its products to a broad base of over 5,000 customers
worldwide, including (1) global communications equipment manufacturers such
as Alcatel, Cisco Systems, Inc., L.M. Ericsson Telephon AB ("Ericsson"),
International Business Machines Corp. ("IBM"), Lucent Technologies, Inc.,
Motorola, Inc., Northern Telecom, Ltd. ("Nortel"), NCR Corporation and
Siemens AG, (2) communications service providers such as AT&T Corporation,
15
TeleCommunications, Inc. ("TCI"), Deutsche Telekom AG, France Telecom,
Embratel, China Telecom and Time Warner Cable and (3) the information service
departments of corporations and governmental entities such as DaimlerChrysler
and the U.S. Navy. For fiscal 1998, no customer represented more than 5% of
the Company's pro forma sales. The Company's sales are also diversified
geographically.
The Company sells and services its products through (1) its global sales
and service organization of over 800 employees in over 25 countries and (2) a
global network of over 250 distributors, resellers and independent
representatives, which together provide the Company with a sales and service
presence in over 85 countries. The Company has design and manufacturing
capabilities through 11 facilities located in the United States, Germany,
France, the United Kingdom, Switzerland and Brazil.
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: (1) sales volume, with respect
to sales force expenses and commission expenses; (2) the extent of market
research activities for new product design efforts; (3) advertising and trade
show activities and (4) the number of new products launched in the period. In
recent periods, the Company has increased its spending on research and
development activities primarily 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. 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. The Company's sales growth
also depends on its ability to continue to introduce new products that
respond to technological change and market demand in a timely manner.
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,
---------------------
1998 1997
----- -----
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 43.2 42.0
----- -----
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 56.8 58.0
Operating expenses . . . . . . . . . . . . . . . . . . . . . 55.6 47.1
----- -----
Operating income (loss). . . . . . . . . . . . . . . . . . . 1.2 10.9
Interest expense, net. . . . . . . . . . . . . . . . . . . . (3.9) (2.4)
Other non-operating income (expense), net. . . . . . . . . . 0.2 (0.8)
----- -----
Income (loss) before provision (credit) for income taxes
and minority interest in income (loss) . . . . . . . . . . (2.5) 7.7
Provision (credit) for income taxes. . . . . . . . . . . . . (1.6) 8.0
Minority interest in income (loss) . . . . . . . . . . . . . - (0.2)
----- -----
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (0.9)% (0.1)%
----- -----
----- -----
EBITDA (1) . . . . . . . . . . . . . . . . . . . . . . . . . 10.0% 15.4%
----- -----
----- -----
16
The Company's ratio of earnings to fixed charges was as follows for the
periods indicated:
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1997
---- ----
Ratio of earnings to fixed charges (2) . . . . . . . . . 0.5x 3.3x
- ---------------
(1) EBITDA is operating income plus depreciation and amortization expense,
acquired in-process research and development, provisions for restructuring
and other non-recurring charges and, for the three months ended December
31, 1998, the one-time non-cash increase in cost of goods sold resulting
from the adjustment of inventories to fair value in connection with the
Exchange Transaction. The Company's definition of EBITDA is consistent with
the definition of Consolidated Cash Flow in the Indenture related to the
Company's 10-1/8% Senior Subordinated Notes due June 15, 2007 (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 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.
(2) For purposes of computing this ratio, earnings consist of income (loss)
before provision (credit) for income taxes plus fixed charges. Fixed
charges consist of interest expense 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, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
NET SALES. Net sales in the three months ended December 31, 1998
increased $36.2 million, or 40.1%, to $126.5 million from $90.3 million in
the comparable fiscal 1998 period. This increase was substantially due to the
addition of sales from Wavetek following the Exchange Transaction. Sales to
international customers increased $18.0 million, or 22.4%, to $98.6 million
and sales to customers in the United States increased $18.2 million, or
187.4%, to $27.9 million. The Company's sales to customers outside the United
States decreased to 78.0% of total sales in the three months ended December
31, 1998 from 89.3% in the comparable fiscal 1998 period. Changes in certain
foreign exchange rates had a small favorable impact on the United States
dollar equivalent of the Company's sales denominated in foreign currencies in
the three months ended December 31, 1998. Sales of the Company's
Communications Test products in the three months ended December 31, 1998
increased $29.1 million, or 34.7%, from the comparable fiscal 1998 period to
$113.1 million also primarily due to the addition of sales from Wavetek
following the Exchange Transaction. Sales in the three months ended December
31, 1998 from repair, upgrade and calibration services increased $2.6
million, or 71.6%, from the comparable fiscal 1998 period to $6.2 million.
GROSS MARGIN. The Company's gross margin in the three months ended
December 31, 1998 increased $19.4 million, or 37.2%, to $71.8 million from
$52.4 million in the comparable fiscal 1998 period due to the added gross
margin on the Wavetek sales following the Exchange Transaction. Gross margin
as a percentage of sales decreased to 56.8% in the three months ended
December 31, 1998 from 58.0% in the comparable fiscal 1998 period. The
decrease in the gross margin percentage during the three months ended
December 31, 1998 resulted primarily from the impact of the change in the mix
17
of products sold following the Exchange Transaction. Changes in foreign
exchange rates had a small favorable 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, 1998.
OPERATING EXPENSES. Operating expenses in the three months ended
December 31, 1998 increased $27.8 million, or 65.3%, to $70.3 million from
$42.5 million in the comparable fiscal 1998 period due primarily to the
addition of expenses from Wavetek following the Exchange Transaction.
Operating expenses as a percentage of sales increased to 55.6% in the three
months ended December 31, 1998 from 47.1% in the comparable fiscal 1998
period. Marketing and selling expenses increased $11.8 million, or 50.0%, to
$35.5 million (28.1% of sales) in the three months ended December 31, 1998
from $23.7 million (26.2% of sales) in the comparable fiscal 1998 period due
primarily to the addition of marketing and selling expenses from Wavetek
following the Exchange Transaction. In addition, the Company incurred certain
costs during the three months ended December 31, 1998 related to a biannual
international sales and marketing meeting and increased its spending related
to certain market development resources and fixed selling expenses. Spending
for research and development activities increased $7.2 million, or 68.3%, to
$17.8 million (14.1% of sales) in the three months ended December 31, 1998
from $10.6 million (11.7% of sales) in the comparable fiscal 1998 period due
primarily to the addition of research and development expenses from Wavetek
following the Exchange Transaction and from other businesses acquired by the
Company during fiscal 1998. The Company also increased research and
development spending in order to accelerate the timing and number of new
product introductions. General and administrative expenses increased $5.5
million, or 82.9%, to $12.1 million (9.6% of sales) in the three months ended
December 31, 1998 from $6.6 million (7.3% of sales) in the comparable fiscal
1998 period due to the addition of general and administrative expenses from
Wavetek following the Exchange Transaction and from other businesses acquired
by the Company during fiscal 1998. In addition, the Company has increased its
general and administrative spending relate to its management information
systems and certain other fixed administrative costs in relation to the
comparable fiscal 1998 period. Operating expenses for the three months ended
December 31, 1998 also reflect an increase in amortization of intangible
assets of $4.6 million, due primarily to the Exchange Transaction, partially
offset by expenses for acquired in-process research and development of $1.4
million which occurred in the three months ended December 31, 1997 and did
not recur in the current period. Changes in foreign exchange rates had a
small unfavorable impact on the United States dollar equivalent of operating
expenses denominated in foreign currencies in the three months ended December
31, 1998.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the three
months ended December 31, 1998 increased by $1.9 million over the comparable
fiscal 1998 period to $4.7 million. The increase was primarily due to an
increase in the Company's net interest expense to $5.0 million during the
three months ended December 31, 1998 from $2.2 million in the comparable
fiscal 1998 period, reflecting additional interest expense due to an increase
in the Company's outstanding debt following the Exchange Transaction. The
increase in net interest expense was partially offset by a reduction of $0.9
million in other non-operating expenses.
PROVISION (CREDIT) FOR INCOME TAXES. The Company's effective tax rate
decreased to approximately 64% in the three months ended December 31, 1998,
from approximately 103% in the comparable fiscal 1998 period. The Company's
effective tax rate takes into account the expected annual mix of income and
related tax rates by geographical location. Such effective rate also reflects
the non-deductibility of the amortization expense related to certain
intangible assets and other expenses related to the Exchange Transaction and
other acquisitions which occurred during fiscal 1998.
NET INCOME (LOSS). As a result of the above factors, net loss was $1.1
million in the three months ended December 31, 1998 as compared to $0.1
million in the comparable fiscal 1998 period.
18
EBITDA. As a result of the above factors, EBITDA was $12.6 million in
the three months ended December 31, 1998 as compared to $13.9 million in the
comparable fiscal 1998 period. EBITDA as a percentage of sales decreased to
10.0% in the three months ended December 31, 1998 from 15.4% in the
comparable fiscal 1998 period.
RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors,
the ratio of earnings to fixed charges was 0.5x in the three months ended
December 31, 1998 as compared to 3.3x in the comparable fiscal 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by (used in) operating activities was $(8.9)
million and $6.3 million in the three months ended December 31, 1998 and
1997, respectively. The Company had cash, cash equivalents and short-term
investments at December 31, 1998 of $16.6 million. The Company invests its
excess cash in highly liquid money market funds, U.S. Treasury obligations
and investment grade commercial paper. In recent years, 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 had short-term borrowings outstanding of
$52.3 million at December 31, 1998, including amounts borrowed for working
capital requirements. The Company had additional obligations outstanding
totaling approximately $5.0 million in the form of letters of credit and bank
guarantees.
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
$2.7 million and $7.5 million in the three months ended December 31, 1998 and
1997, respectively. The Company's recurring cash requirements for investing
activities are primarily for the purchase of businesses and capital
expenditures. The Company made capital expenditures in the three months ended
December 31, 1998 and 1997 of approximately $2.7 million and $1.9 million,
respectively.
The Company's net cash provided by (used in) financing activities was
$(7.4) million and $14.6 million in the three months ended December 31, 1998
and 1997, 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.
The Company believes that its cash flow from operations, combined with
the remaining available borrowings under its existing bank credit agreements,
including the Credit Facility discussed in Note 5 to the Company's
consolidated financial Statements included in Item 1 herein, will be
sufficient to fund its debt service obligations, including its obligations
under the Notes, and working capital requirements.
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 and
certain of its foreign subsidiaries have credit facilities providing for
borrowings in local currency. 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 and collars to hedge certain known foreign exchange
exposures. Gains or losses from such contracts are included in the Company's
consolidated statements of operations to offset gains and losses from the
underlying foreign currency transactions.
19
The Indenture under which the Company's 10-1/8% Senior Subordinated Notes
due 2007 were issued permits the Company and its subsidiaries to make
investments in, and intercompany loans to, its 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.
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies and a new common currency (the "euro"). The participating
countries adopted the euro as their common legal currency on that date. The
Company is assessing the potential impact from the euro conversion in a
number of areas, including the competitive impact of cross-border price
transparency, which may make it more difficult for businesses to charge
different prices for the same products on a country-by-country basis, and the
impact on currency exchange costs and currency exchange rate risk. At this
stage of its assessment, the Company cannot yet predict the full impact of
the euro conversion on the Company.
PERIODIC FLUCTUATIONS
The Company's net sales occurred in the following percentages in each of the
last four quarters: 20% for the quarter ended March 31, 1998, 21% for the
quarter ended June 30, 1998, 24% for the quarter ended September 30, 1998 and
35% for the quarter ended December 31, 1998. 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, the purchase of businesses, 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, expenditure levels
could be disproportionately high and operating results for that quarter, and
potentially future quarters, would be adversely affected.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than
the Year 2000. This could result in a system failure or a miscalculation
causing disruption of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
WG and Wavetek, prior to the Exchange Transaction, independently
addressed the issues involved in the Year 2000 Issue. The Company has
determined that it will be required to modify or replace significant portions
of its hardware and software so that those systems will properly utilize
dates beyond December 31, 1999. The Company presently believes that with
modifications or replacements of existing hardware and software, the Year
2000 Issue can be mitigated. However, if such modifications and replacements
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. Starting in
1995, both WG and Wavetek began to evaluate their internal business and
information systems for Year 2000 compliance. The Company has completed an
assessment of the impact of the Year 2000
20
Issue on its internal and external operations, and is in the process of
upgrading or replacing certain hardware, embedded chips and software programs
it employs in the normal course of business, including its manufacturing,
accounting applications and certain other administrative hardware and
software systems. As a result, the Company has already addressed many of its
Year 2000 Issues and continues on schedule to complete this project before it
will have any material impact on the Company's ability to deliver products
and services.
The total cost of the year 2000 Issue project is estimated to be
approximately $2.2 million and is estimated to be completed no later than
June 30, 1999 including testing and implementation. The Company has already
incurred a substantial portion of the costs of this project, including costs
associated with the implementation of certain new core information systems.
Much of this expenditure, both incurred and expected, would have been
necessary in any case as part of the regular process of maintaining and
updating systems. In some instances, the expenditures have been accelerated
in order to comply with Year 2000 requirements. As of December 31, 1998, the
Company has incurred approximately $1.5 million related to the Year 2000
Issue.
The costs of the Year 2000 Issue project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no assurance that these
results will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all
relevant computer codes and similar uncertainties.
The Company expects to mitigate the Year 2000 Issue so that the Company's
operations or business are not materially adversely affected. In some cases,
the Company is relying upon suppliers to provide Year 2000 compliant upgrades
in a timely manner. The Company has a program in place to assess the extent
to which the Company's systems or business processes may be vulnerable to
third party non-compliance and the ability of its suppliers and business
partners to continue normal operations beyond Year 2000. Where responses from
suppliers or partners to the questions asked as part of this formal
assessment program are unsatisfactory, the Company will take steps to seek
alternative suppliers or partnerships. However, there can be no assurance
that the systems of other companies on which the Company's systems rely will
be timely converted and will not have an adverse effect on the Company's
systems.
As of December 31, 1998, all Company products are delivered Year 2000
compliant. Information has also been provided to address customer inquiries
concerning previously delivered products, including those no longer
manufactured. All expenditures for product correction have been incurred.
The Company has taken steps to minimize the risks for its business
processes and systems. Contingency plans for certain critical applications
are in place. The Company is, however, vulnerable to failures of major
utilities or service providers to become Year 2000 compliant. The Company's
major facilities include 11 discrete locations in six countries, thus
mitigating any potential impact upon the Company as a whole of any such
material failures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses financial instruments, including fixed and variable rate
debt, to finance its operations. The information below summarizes the
Company's market risks associated with debt obligations outstanding as of
December 31, 1998. The following table presents principal cash flows and
related weighted average interest rates by fiscal year of maturity. Variable
interest rate obligations under the Credit Facility and other revolving bank
credit agreements, capital lease obligations and notes payable to related
parties are not included in the table. The information is presented in U.S.
21
dollar equivalents, which is the Company's reporting currency. The actual
cash flows of the instruments are denominated in U.S. dollars ("US$"), German
Deutsche marks ("DM") and other currencies ("other") as indicated.
EXPECTED MATURITY DATE
----------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(US$ EQUIVALENT IN THOUSANDS)
Long-term Obligations:
Fixed Rate (US$) . . . . . . . . $ 741 $ 685 $ 633 $ 585 $ 541 $85,500 $88,685
Average interest . . . . . . . 8.2% 8.2% 8.2% 8.2% 8.2% 10.1% 10.0%
Fixed Rate (DM). . . . . . . . . $3,826 $4,784 $4,048 $3,676 $3,679 $13,413 $33,426
Average interest rate. . . . . 4.6% 4.4% 3.8% 3.6% 3.6% 5.9% 4.8%
Fixed Rate (other) . . . . . . . $ 152 $ 451 $ 195 $2,008 $ 180 $ 1,660 $ 4,646
Average interest . . . . . . . 5.5% 8.5% 5.6% 5.3% 5.7% 5.6% 5.8%
The carrying amounts of the Company's debt instruments approximate their
fair values. At December 31, 1998, the Company had interest rate cap and swap
agreements in an aggregate notional amount of $12.0 million to limit its
exposure on interest rate changes related to certain variable interest rate
debt instruments. The carrying values of these interest rate agreements
approximate fair value at December 31, 1998.
The Company uses forward exchange contracts and collars in the ordinary
course of business to mitigate its exposure to changes in foreign currency
exchange rates relating to cash, accounts receivable, accounts payable,
significant transactions and anticipated future sales denominated in foreign
currencies. The terms of these contracts are generally less than one year.
The Company's risk management policies do not provide for the utilization of
financial instruments for trading purposes. Gains and losses on financial
instruments that qualify as hedges of existing assets or liabilities or firm
commitments are recognized in income or as adjustments of carrying amounts
when the hedged transaction occurs. Financial instruments which are not
designated as hedges of specific assets, liabilities, firm commitments or
anticipated transactions are marked to market and any resulting unrealized
gains or losses are recorded in "Other, net" in the accompanying consolidated
statements of operations. At December 31, 1998 and September 30, 1998, the
Company had foreign exchange contracts outstanding in an aggregate notional
amount of $22.2 million and $25.8 million, respectively. While it is not the
Company's intention to terminate any of these contracts, the estimated fair
value of these contracts indicated that termination of the forward currency
exchange contracts at December 31, 1998 would have resulted in a gain of $0.3
million and termination at September 30, 1998 would have resulted in a loss
of $0.6 million. Due to the volatility of currency exchange rates, these
estimated results may or may not be realized.
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.
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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
10.1 Facilities Agreement in relation to a Multi-Currency Revolving
Credit Facility and Bilateral Ancillary Facilities between
Wavetek Wandel & Goltermann, Inc. as Borrower, Wandel &
Goltermann Technologies, Inc. as Guarantor, Commerzbank
Aktiengesellschaft and Deutsche Bank AG as Joint-Arrangers,
Commerzbank International S.A. as Agent and Others, dated
December 23, 1998.
12.1 Schedule Re: Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule for the three months ended December 31,
1998
(b) Reports on Form 8-K
On December 14, 1998, the Company filed an amendment to a Current
Report on Form 8-K originally filed on October 6, 1998 relating to the
consummation of the Exchange Transaction. Such amendment included
certain financial statements and pro forma financial information
related to the Exchange Transaction.
23
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 16, 1999 WAVETEK WANDEL & GOLTERMANN, INC.
(Registrant)
/s/VICKIE L. CAPPS
---------------------------------
Vickie L. Capps
Senior Vice President-Finance, Treasurer,
Secretary and Acting Chief Financial Officer
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