<PAGE>
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 March 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 CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0457664
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
11995 EL CAMINO REAL, SUITE 301
SAN DIEGO, CALIFORNIA 92130
(Address of Principal Executive Offices) (Zip Code)
(619) 793-2300
Registrant's Telephone Number, Including Area Code
NOT APPLICABLE
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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 May 14, 1998, Registrant
had only one class of common stock, of which there were 4,884,860 shares
outstanding.
<PAGE>
WAVETEK CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998 and
September 30, 1997. . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three and
Six Months Ended March 31, 1998 and March 31, 1997. . . . . 4
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 1998 and March 31, 1997. . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 24
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 24
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVETEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
------------ --------------
(Unaudited) (Note)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 3,918 $ 5,695
Short-term investments, available for sale . . . . . . . . . . . . - 996
Accounts receivable (less allowance for doubtful accounts of $946
at March 31, 1998 (unaudited) and $851 at September 30, 1997) . . 25,858 25,860
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,466 15,937
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . 2 616
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 3,611 3,611
Other current assets . . . . . . . . . . . . . . . . . . . . . . 1,427 1,730
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 51,282 54,445
Property and equipment, net . . . . . . . . . . . . . . . . . . . . 10,931 15,110
Deferred debt issuance costs, net . . . . . . . . . . . . . . . . . 4,001 4,233
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . 3,131 3,281
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 101 101
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,307 183
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $71,753 $77,353
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . . . . . . . $ 3,632 $ 3,859
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . 11,261 13,356
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . 5,441 6,034
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . 928 522
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 8,694 9,847
Current maturities of long-term obligations . . . . . . . . . . . . 3,000 1,972
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 32,956 35,590
Long-term obligations, less current maturities . . . . . . . . . . . 107,000 112,972
Deferred income and other liabilities . . . . . . . . . . . . . . . 1,718 431
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 . . . . . . . . . . . . . . . . . . . . . . . . (113,393) (115,048)
Foreign currency translation adjustments. . . . . . . . . . . . . . (318) (382)
--------- ---------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . (69,921) (71,640)
--------- ---------
Total liabilities and stockholders' equity (deficit) . . . . . . . . $71,753 $77,353
--------- ---------
--------- ---------
</TABLE>
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
<PAGE>
WAVETEK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $35,504 $39,721 $71,279 $82,216
Cost of goods sold . . . . . . . . . . . . . . 14,797 18,099 30,546 39,101
---------- ---------- ---------- ----------
Gross margin . . . . . . . . . . . . . . . . . 20,707 21,622 40,733 43,115
Operating expenses:
Marketing and selling . . . . . . . . . . . . 8,798 9,478 17,860 18,573
Research and development. . . . . . . . . . . 4,449 4,067 8,727 7,713
General and administrative. . . . . . . . . . 2,741 2,664 5,393 5,405
---------- ---------- ---------- ----------
15,988 16,209 31,980 31,691
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . 4,719 5,413 8,753 11,424
Non-operating income (expense):
Interest income . . . . . . . . . . . . . . . 39 88 109 136
Interest expense. . . . . . . . . . . . . . . (2,978) (126) (5,947) (239)
Other, net . . . . . . . . . . . . . . . . . 15 (220) (156) (616)
---------- ---------- ---------- ----------
(2,924) (258) (5,994) (719)
---------- ---------- ---------- ----------
Income before provision for income taxes . . . 1,795 5,155 2,759 10,705
Provision for income taxes . . . . . . . . . . 718 1,861 1,104 3,865
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . $ 1,077 $ 3,294 $ 1,655 $ 6,840
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share - basic . . . . . . . . . $ .22 $ .30 $ .34 $ .62
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share - diluted . . . . . . . . $ .21 $ .28 $ .32 $ .59
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common shares outstanding - basic. . . 4,885 10,971 4,885 10,973
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common shares outstanding - diluted. . 5,121 11,593 5,123 11,599
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
4
<PAGE>
WAVETEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,655 $6,840
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . 1,639 1,385
Amortization expense . . . . . . . . . . . . . . . . . . . . 147 292
Amortization of debt issuance costs. . . . . . . . . . . . . 329 -
Provision for losses on accounts receivable. . . . . . . . . 144 165
Deferred income taxes. . . . . . . . . . . . . . . . . . . . - 435
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (5) (20)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (473) (6,107)
Inventories and other assets. . . . . . . . . . . . . . . (1,946) 1,950
Accounts payable and accrued expenses . . . . . . . . . . (2,022) (417)
Income taxes payable, net . . . . . . . . . . . . . . . . 381 1,793
-------- --------
Net cash provided by (used in) operating activities . . . . . . (151) 6,316
INVESTING ACTIVITIES
Purchase of property and equipment. . . . . . . . . . . . . . . (1,596) (3,253)
Proceeds from sale of property and equipment. . . . . . . . . . 106 -
Purchase of short-term investments. . . . . . . . . . . . . . . - (3,000)
Proceeds from sale of short-term investments. . . . . . . . . . 996 -
Payments received on notes receivable . . . . . . . . . . . . . 11 75
Issuance of notes receivable. . . . . . . . . . . . . . . . . . (15) -
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . (498) (6,178)
FINANCING ACTIVITIES
Repurchase of common shares and stock options for cash. . . . . - (64)
Proceeds from revolving lines of credit and long-term
obligations. . . . . . . . . . . . . . . . . . . . . . . . . 639 2,186
Principal payments on revolving lines of credit and long-term
obligations. . . . . . . . . . . . . . . . . . . . . . . . . (1,617) (1,109)
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . (97) -
-------- --------
Net cash provided by (used in) financing activities . . . . . . (1,075) 1,013
Effect of exchange rate changes on cash and cash equivalents. . (53) (149)
-------- --------
Increase (decrease) in cash and cash equivalents. . . . . . . . (1,777) 1,002
Cash and cash equivalents at beginning of period. . . . . . . . 5,695 6,126
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . . $3,918 $7,128
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . $5,754 $ 292
-------- --------
-------- --------
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . $ 32 $1,830
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
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:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods. . . . . . . . . . . $6,656 $6,451
Work-in-progress. . . . . . . . . . 3,780 3,612
Materials. . . . . . . . . . . . . 6,030 5,874
--------- -------------
$16,466 $15,937
--------- -------------
--------- -------------
</TABLE>
6
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SALE AND LEASEBACK FINANCING
In October 1994, the Company entered into a sale and leaseback financing
whereby it sold its facility in Indianapolis to a third party investor for
$4.5 million, resulting in a charge to income of $1.8 million, representing
the excess of the net book value of the property over the net proceeds
received. The Company simultaneously entered a Master Lease Agreement with
the buyer, under which the Company leased back the facility for a period of
20 years for an annual rental of $473,000, subject to annual adjustments
based on the change in the consumer price index, not to exceed 3.0% per
annum. In December 1994, the Company subleased a portion of this facility to
a third party for five years for an annual base rental and common area
expense reimbursement of $387,000. Because of the significance of the
sublease in relation to the Company's master lease of the facility, generally
accepted accounting principles required that the transaction be recorded as a
financing transaction, whereby the building remained on the Company's balance
sheet in an amount equal to the net proceeds from the sale and an offsetting
long-term financing obligation was recorded. In February 1998 the sublease
was no longer significant in relation to the Company's master lease of the
facility. Accordingly, both the building asset and the long-term financing
obligation, each in the amount of approximately $4.0 million, have been
removed from the Company's balance sheet, with no impact on the Company's
results of operations or its cash flows. Effective February 1, 1998, the
master lease will be accounted for as an operating lease, with monthly rental
payments recorded as operating expenses.
5. AGREEMENT IN PRINCIPLE TO MERGE
On March 18, 1998, Wavetek Corporation and Wandel & Goltermann Management
Holding GmbH jointly announced that they have reached an agreement in
principle to merge the companies. The structure of the transaction and the
conditions of closing are currently being negotiated.
6. 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 (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
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 1998
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 1,441 $ 2,477 $ - $ 3,918
Short-term investments, available for sale - - - - -
Accounts receivable (less allowance for
doubtful accounts of $946) (114) 31,517 15,605 (21,150) 25,858
Inventories - 7,181 10,022 (737) 16,466
Refundable income taxes - - 2 - 2
Deferred income taxes 2,301 1,310 - - 3,611
Other current assets 29 225 1,173 - 1,427
----------- ---------- ------------ ------------ ------------
Total current assets 2,216 41,674 29,279 (21,887) 51,282
Property and equipment, net 1,615 4,326 4,990 - 10,931
Deferred debt issuance costs, net 4,001 - - - 4,001
Intangible assets, net 3,090 - 41 - 3,131
Deferred income taxes (4) 105 - - 101
Other assets 317 2,088 87 (185) 2,307
Investment in subsidiaries 39,600 - 25 (39,625) -
----------- ---------- ------------ ------------ ------------
Total assets $ 50,835 $ 48,193 $ 34,422 $ (61,697) $ 71,753
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks $ - $ - $ 3,632 $ - $ 3,632
Trade accounts payable 14,493 7,209 10,706 (21,147) 11,261
Accrued compensation 183 1,347 3,911 - 5,441
Income taxes payable (6,928) 7,071 785 - 928
Other current liabilities 2,976 2,081 3,640 (3) 8,694
Current maturities of long-term obligations 3,000 - - - 3,000
----------- ---------- ------------ ------------ ------------
Total current liabilities 13,724 17,708 22,674 (21,150) 32,956
Long-term obligations, less current maturities 107,000 - 185 (185) 107,000
Deferred income and other liabilities 32 1,668 18 - 1,718
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) (113,393) 26,680 (3,201) (23,479) (113,393)
Foreign currency translation adjustments (318) - (318) 318 (318)
----------- ---------- ------------ ----------- ------------
Total stockholders' equity (deficit) (69,921) 28,817 11,545 (40,362) (69,921)
----------- ---------- ------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 50,835 $ 48,193 $34,422 $(61,697) $ 71,753
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
8
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 1997
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
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 33,059 - 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
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
9
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $- $22,196 $20,231 $(6,923) $35,504
Cost of goods sold (20) 9,127 12,876 (7,186) 14,797
----------- ---------- ------------ ------------ ------------
Gross margin 20 13,069 7,355 263 20,707
Operating expenses:
Marketing and selling 409 4,625 3,764 - 8,798
Research and development (8) 2,828 1,629 - 4,449
General and administrative 625 974 1,142 - 2,741
----------- ---------- ------------ ------------ ------------
1,026 8,427 6,535 - 15,988
----------- ---------- ------------ ------------ ------------
Operating income (loss) (1,006) 4,642 820 263 4,719
Non-operating income (expense):
Interest income - 36 3 - 39
Interest expense (2,921) - (57) - (2,978)
Equity in net income (loss) of subsidiaries 3,619 - - (3,619) -
Other, net - 278 (266) 3 15
----------- ---------- ------------ ------------ ------------
698 314 (320) (3,616) (2,924)
----------- ---------- ------------ ------------ ------------
Income (loss) before provision (credit) for
income taxes (308) 4,956 500 (3,353) 1,795
Provision (credit) for income taxes (1,385) 1,982 121 - 718
----------- ---------- ------------ ------------ ------------
Net income $1,077 $2,974 $379 $(3,353) $1,077
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
10
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $- $21,579 $27,077 $(8,935) $39,721
Cost of goods sold (794) 9,734 17,985 (8,826) 18,099
----------- ---------- ------------ ------------ ------------
Gross margin 794 11,845 9,092 (109) 21,622
Operating expenses:
Marketing and selling 193 4,308 4,977 - 9,478
Research and development (12) 3,434 645 - 4,067
General and administrative 528 945 1,191 - 2,664
----------- ---------- ------------ ------------ ------------
709 8,687 6,813 - 16,209
----------- ---------- ------------ ------------ ------------
Operating income (loss) 85 3,158 2,279 (109) 5,413
Non-operating income (expense):
Interest income 9 77 11 (9) 88
Interest expense (96) - (39) 9 (126)
Equity in net income of subsidiaries 3,552 - - (3,552) -
Other, net 209 203 (632) - (220)
----------- ---------- ------------ ------------ ------------
3,674 280 (660) (3,552) (258)
----------- ---------- ------------ ------------ ------------
Income before provision for income taxes 3,759 3,438 1,619 (3,661) 5,155
Provision for income taxes 465 1,062 334 - 1,861
----------- ---------- ------------ ------------ ------------
Net income $3,294 $2,376 $1,285 $(3,661) $3,294
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
11
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $42,801 $42,721 $(14,243) $71,279
Cost of goods sold (70) 18,155 26,893 (14,432) 30,546
----------- ---------- ------------ ------------ ------------
Gross margin 70 24,646 15,828 189 40,733
Operating expenses:
Marketing and selling 840 8,816 8,204 - 17,860
Research and development (20) 5,414 3,333 - 8,727
General and administrative 1,038 1,975 2,380 - 5,393
----------- ---------- ------------ ------------ ------------
1,858 6,205 13,917 - 31,980
----------- ---------- ------------ ------------ ------------
Operating income (loss) (1,788) 8,441 1,911 189 8,753
Non-operating income (expense):
Interest income - 106 3 - 109
Interest expense (5,830) - (117) - (5,947)
Equity in net income (loss) of subsidiaries 6,479 - - (6,479) -
Other, net - 393 (552) 3 (156)
----------- ---------- ------------ ------------ ------------
649 499 (666) (6,476) (5,994)
----------- ---------- ------------ ------------ ------------
Income (loss) before provision (credit) for
income taxes (1,139) 8,940 1,245 (6,287) 2,759
Provision (credit) for income taxes (2,794) 3,576 322 - 1,104
----------- ---------- ------------ ------------ ------------
Net income $ 1,655 $ 5,364 $ 923 $(6,287) $ 1,655
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
12
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $- $43,434 $57,613 $(18,831) $82,216
Cost of goods sold (152) 19,826 38,366 (18,939) 39,101
----------- ---------- ------------ ------------ ------------
Gross margin 152 23,608 19,247 108 43,115
Operating expenses:
Marketing and selling 480 8,276 9,817 - 18,573
Research and development (24) 4,945 2,792 - 7,713
General and administrative 1,243 1,801 2,361 - 5,405
----------- ---------- ------------ ------------ ------------
1,699 15,022 14,970 - 31,691
----------- ---------- ------------ ------------ ------------
Operating income (loss) (1,547) 8,586 4,277 108 11,424
Non-operating income (expense):
Interest income 76 121 14 (75) 136
Interest expense (192) - (122) 75 (239)
Equity in net income of subsidiaries 8,424 - - (8,424) -
Other, net 164 96 (876) - (616)
----------- ---------- ------------ ------------ ------------
8,472 217 (984) (8,424) (719)
----------- ---------- ------------ ------------ ------------
Income before provision for income taxes 6,925 8,803 3,293 (8,316) 10,705
Provision for income taxes 85 3,208 572 - 3,865
----------- ---------- ------------ ------------ ------------
Net income $6,840 $5,595 $2,721 $(8,316) $6,840
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
13
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating
activities........................................ $322 $(3,537) $3,064 $- $(151)
INVESTING ACTIVITIES
Purchase of property and equipment................. (203) (568) (825) - (1,596)
Proceeds from sale of short-term investments....... - 996 - - 996
Other investing activities......................... 11 (25) 116 - 102
----------- ---------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities........................................ (192) 403 (709) - (498)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and
long-term obligations............................. - - 639 - 639
Principal payments on revolving lines of credit
and long-term obligations......................... (33) - (1,584) - (1,617)
Debt issuance costs................................ (97) - - - (97)
----------- ---------- ----------- ----------- -----------
Net cash used in financing activities.............. (130) - (945) - (1,075)
Effect of exchange rate changes on cash and
cash equivalents.................................. - - (53) - (53)
----------- ---------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents....................................... - (3,134) 1,357 - (1,777)
Cash and cash equivalents at beginning of
period............................................ - 4,575 1,120 - 5,695
----------- ---------- ----------- ----------- -----------
Cash and cash equivalents at end of period......... $- $ 1,441 $2,477 $- $3,918
----------- ---------- ----------- ----------- -----------
----------- ---------- ----------- ----------- -----------
</TABLE>
14
<PAGE>
WAVETEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating
activities.................................. $(10,232) $13,467 $3,081 $ - $6,316
INVESTING ACTIVITIES
Purchase of property and equipment........... (943) (981) (1,329) - (3,253)
Purchase of short-term investments........... - (3,000) - - (3,000)
Other investing activities................... 25 50 - - 75
----------- ---------- ------------ ------------ ------------
Net cash used in investing activities........ (918) (3,931) (1,329) - (6,178)
FINANCING ACTIVITIES -
Proceeds from revolving lines of credit and
long-term obligations....................... - - 2,186 - 2,186
Principal payments on revolving lines of credit
and long-term obligations................... (45) - (1,064) - (1,109)
Divdends from subsidiary to Wavetek
Corporation................................. 10,000 (10,000) - - -
Capital contributions from Wavetek Corporation
to subsidiaries............................. (2,578) - 2,578 - -
Repayment of loans from Wavetek Corporation
to subsidiaries............................. 3,837 - (3,837) - -
Other financing activities................... (64) - - - (64)
----------- ---------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities.................................. 11,150 (10,000) (137) - 1,013
Effect of exchange rate changes on cash and
cash equivalents............................ - - (149) - (149)
----------- ---------- ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents................................. - (464) 1,466 - 1,002
Cash and cash equivalents at beginning of
period...................................... - 4,845 1,281 - 6,126
----------- ---------- ------------ ------------ ------------
Cash and cash equivalents at end of period... $ - $4,381 $2,747 $ - $7,128
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
15
<PAGE>
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. During the six months ended March 31,
1998, approximately 56% of the Company's sales were generated outside the
United States and approximately 44% 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.
16
<PAGE>
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 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:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 41.7 45.6 42.9 47.6
------ ------ ------ ------
Gross margin 58.3 54.4 57.1 52.4
Operating expenses 45.0 40.8 44.9 38.5
------ ------ ------ ------
Operating income 13.3 13.6 12.2 13.9
Interest expense, net (8.3) (.1) (8.2) (.1)
Other non-operating income (expense), net .1 (.5) (.1) (.8)
------ ------ ------ ------
Income before provision for income taxes 5.1 13.0 3.9 13.0
Provision for income taxes 2.1 4.7 1.6 4.7
------ ------ ------ ------
Net income 3.0% 8.3% 2.3% 8.3%
------ ------ ------ ------
------ ------ ------ ------
EBITDA (1) 15.8% 15.8% 14.8% 15.9%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The Company's ratio of earnings to fixed charges was as follows for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Ratio of earnings to fixed charges (2) 1.6x 16.8x 1.4x 17.6x
</TABLE>
___________
(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 Company's bank 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
17
<PAGE>
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 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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales in the three months ended March 31, 1998 decreased
$4.2 million, or 10.6%, to $35.5 million from $39.7 million in the comparable
fiscal 1997 period. This decrease was due to a decrease in sales to
international customers of $5.5 million, or 22.7%, partially offset by an
increase of $1.3 million, or 8.6%, in sales to customers in the United
States. The Company's sales to customers outside the United States decreased
to 53.1% of total sales in the three months ended March 31, 1998 from 61.4%
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 41% in the three months ended March 31, 1998 from
approximately 51% in the comparable fiscal 1997 period. The decrease in sales
to international customers was primarily due to large shipments to
international customers which were made in the three months ended March 31,
1997 and did not recur in similar magnitude in the three months ended March
31, 1998. The Company has also experienced a general reduction in its sales
to customers in Asia as a result of recent economic down turns in that
region. 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 $1.6 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 March 31, 1997 had remained in effect during
the three months ended March 31, 1998. Sales of the Company's Communications
Test products in the three months ended March 31, 1998 decreased $3.1
million, or 10.1%, from the comparable fiscal 1997 period primarily as a
result of large shipments to international customers which were made in the
three months ended March 31, 1997 and did not recur in similar magnitude in
the three months ended March 31, 1998. Sales of Calibration Instruments
products in the three months ended March 31, 1998 decreased $1.4 million, or
22.6%, from the comparable fiscal 1997 period, due partially to an
unfavorable geographic mix of such sales resulting in less revenue per unit
sold and partially to a general reduction in sales to customers in Asia as a
result of recent economic down turns in that region. Sales in the three
months ended March 31, 1998 from repair, upgrade and calibration services
increased $0.3 million, or 9.9%, from the comparable fiscal 1997 period.
GROSS MARGIN. The Company's gross margin in the three months ended March
31, 1998 decreased $0.9 million or 4.2%, to $20.7 million from $21.6 million
in the comparable fiscal 1997 period. Gross margin as a percentage of sales
increased to 58.3% in the three months ended March 31, 1998 from 54.4% in the
comparable fiscal 1997 period. The increase in the gross margin percentage
during the three months ended March 31, 1998 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 March 31,
1998 due primarily to lower sales volume and an unfavorable geographic mix of
its sales. Changes in foreign exchange rates had a small unfavorable impact
on the United States dollar equivalent of gross margins related to
international sales denominated in foreign currencies in the three months
ended March 31, 1998.
18
<PAGE>
OPERATING EXPENSES. Operating expenses in the three months ended March
31, 1998 decreased $0.2 million, or 1.4%, to $16.0 million from $16.2 million
in the comparable fiscal 1997 period. Operating expenses as a percentage of
sales increased to 45.0% in the three months ended March 31, 1998 from 40.8%
in the comparable fiscal 1997 period. The decrease in operating expenses in
the three months ended March 31, 1998 was due to a decrease in spending for
marketing and selling activities of $0.7 million, to $8.8 million, or 24.8%
of sales, in the three months ended March 31, 1998 from $9.5 million, or
23.9% of sales, in the comparable fiscal 1997 period, primarily due to a
reduction in sales commissions paid to independent sales representatives due
to the reduced sales volume in the three months ended March 31, 1998 compared
to the three months ended March 31, 1997. Although total expenses related to
marketing and selling activities decreased in the three months ended March
31, 1998, such expenses increased as a percentage of sales due to the fixed
portion of such expenses being spread over a lower sales volume. The
reduction in marketing and selling expense was partially offset by an
increase in spending for research and development activities of $0.4 million,
to $4.4 million, or 12.5% of sales, in the three months ended March 31, 1998
from $4.1 million, or 10.2% of sales, in the comparable fiscal 1997 period,
in order to accelerate the timing and number of new product introductions.
Spending for general and administrative activities remained at approximately
the same level in the three months ended March 31, 1998 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 March 31, 1998.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the three
months ended March 31, 1998 increased by $2.7 million over the comparable
fiscal 1997 period to $2.9 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 March 31, 1998 from no net expense in the comparable
fiscal 1997 period, reflecting additional interest expense due to the
Company's outstanding debt securities (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 March 31, 1998 from approximately
36% in the comparable fiscal 1997 period.
NET INCOME (LOSS). As a result of the above factors, net income was $1.1
million in the three months ended March 31, 1998 as compared to $3.3 million in
the comparable fiscal 1997 period.
EBITDA. EBITDA was $5.6 million in the three months ended March 31, 1998 as
compared to $6.3 million in the comparable fiscal 1997 period. EBITDA as a
percentage of sales was 15.8% in both the three months ended March 31, 1998 and
1997.
RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors, the
ratio of earnings to fixed charges was 1.6x in the three months ended March 31,
1998 as compared to 16.8x in the comparable fiscal 1997 period.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales in the six months ended March 31, 1998 decreased
$10.9 million, or 13.3%, to $71.3 million from $82.2 million in the
comparable fiscal 1997 period. This decrease was due to a decrease in sales
to international customers of $12.2 million, or 23.5%, partially offset by an
increase of $1.2 million, or 4.1%, in sales to customers in the United
States. The Company's sales to customers outside the United States decreased
to 55.5% of total sales in the six months ended March 31, 1998 from 63.0% in
the comparable fiscal 1997 period and the portion of the Company's sales
19
<PAGE>
which were made in currencies other than the United States dollar decreased
to approximately 44% in the six months ended March 31, 1998 from
approximately 54% in the comparable fiscal 1997 period. The decrease in sales
to international customers was primarily due to several large shipments to
international customers which were made during the six months ended March 31,
1997 and did not recur in similar magnitude during the six months ended March
31, 1998. The Company has also experienced a general reduction in its sales
to customers in Asia as a result of recent economic down turns in that
region. 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 $3.0 million from the United States dollar equivalent
amount that would have been reported if the average exchange rates in effect
during the six months ended March 31, 1997 had remained in effect during the
six months ended March 31, 1998. Sales of the Company's Communications Test
products in the six months ended March 31, 1998 decreased $8.6 million, or
13.5%, from the comparable fiscal 1997 period primarily as a result of the
large shipments mentioned above that occurred during the comparable fiscal
1997 period. Sales of Calibration Instruments products in the six months
ended March 31, 1998 decreased $2.9 million, or 22.2%, from the comparable
fiscal 1997 period, due partially to the continued delay in a large order
which was expected during the three months ended December 31, 1997 and was
not received by March 31, 1998, 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, partially
to an unfavorable geographic mix of sales and partially to a reduction in
sales to customers in Asia. Sales in the six months ended March 31, 1998 from
repair, upgrade and calibration services increased $0.5 million, or 9.4%,
from the comparable fiscal 1997 period.
GROSS MARGIN. The Company's gross margin in the six months ended March 31,
1998 decreased $2.4 million or 5.5%, to $40.7 million from $43.1 million in the
comparable fiscal 1997 period. Gross margin as a percentage of sales increased
to 57.1% in the six months ended March 31, 1998 from 52.4% in the comparable
fiscal 1997 period. The increase in the gross margin percentage during the six
months ended March 31, 1998 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 six
months ended March 31, 1998 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 six
months ended March 31, 1998.
OPERATING EXPENSES. Operating expenses in the six months ended March 31,
1998 increased $0.3 million, or 1.0%, to $32.0 million from $31.7 million in
the comparable fiscal 1997 period. Operating expenses as a percentage of
sales increased to 44.9% in the six months ended March 31, 1998 from 38.5% in
the comparable fiscal 1997 period. The increase in operating expenses in the
six months ended March 31, 1998 was due to an increase in spending for
research and development activities of $1.0 million, to $8.7 million, or
12.2% of sales, in the six months ended March 31, 1998 from $7.7 million, or
9.4% of sales, in the comparable fiscal 1997 period, in order to accelerate
the timing and number of new product introductions. The increase in spending
for research and development activities was partially offset by reduced
spending for marketing and selling activities of $0.7 million, to $17.9
million, or 25.1% of sales, in the six months ended March 31, 1998 from $18.6
million, or 22.6% of sales, in the comparable fiscal 1997 period, primarily
due to a reduction in sales commissions paid to independent sales
representatives due to reduced sales volume in the six months ended March 31,
1998 compared to the six months ended March 31, 1997. Although total expenses
related to marketing and selling activities decreased in the six months ended
March 31, 1998, such expenses increased as a percentage of sales due to the
fixed portion of such expenses being spread over a lower sales volume.
Spending for general and administrative activities
20
<PAGE>
remained at approximately the same level in the six months ended March 31,
1998 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 six
months ended March 31, 1998.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the six
months ended March 31, 1998 increased by $5.3 million over the comparable
fiscal 1997 period to $6.0 million. The increase was primarily due to an
increase in the Company's net interest expense to $5.8 million during the six
months ended March 31, 1998 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 $0.4 million in other non-operating expenses.
PROVISION FOR INCOME TAXES. The Company's effective tax rate has
increased to approximately 40% in the six months ended March 31, 1998 from
approximately 36% in the comparable fiscal 1997 period.
NET INCOME (LOSS). As a result of the above factors, net income was $1.7
million in the six months ended March 31, 1998 as compared to $6.8 million in
the comparable fiscal 1997 period.
EBITDA. EBITDA was $10.5 million in the six months ended March 31, 1998
as compared to $13.1 million in the comparable fiscal 1997 period. EBITDA as
a percentage of sales decreased to 14.8% in the six months ended March 31,
1998 from 15.9% 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 1.4x in the six months ended March
31, 1998 as compared to 17.6x in the comparable fiscal 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by (used in) operating activities was $(0.2
million) and $6.3 million in the six months ended March 31, 1998 and 1997,
respectively. The Company had cash, cash equivalents and short-term
investments at March 31, 1998 of $3.9 million. The Company invests its
excess cash in money market funds and U.S. Treasury obligations. Historically
the Company has funded its business through operating cash flow, has not
relied on sales of equity to provide cash and has used short-term debt
primarily for cash management purposes. The Company's European subsidiaries
had borrowings outstanding under their existing credit agreements (the
"Existing Credit Agreements") of $3.6 million at March 31, 1998 for funding
short-term working capital requirements, and the Company had additional
obligations outstanding totaling approximately $1.3 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
$0.5 million and $6.2 million in the six months ended March 31, 1998 and
1997, respectively. The Company's recurring cash requirements for investing
activities are primarily for capital expenditures. The Company made capital
expenditures in the six months ended March 31, 1998 and 1997 of approximately
$1.6 million and $3.3 million, respectively. The Company's cash flows from
investing activities for the six months ended March 31, 1998 and 1997 also
included net proceeds from the sale of and (purchase of) short-term
investments of $1.0 million and $(3.0 million), respectively.
21
<PAGE>
The Company's net cash provided by (used in) financing activities was
$(1.1 million) and $1.0 million in the six months ended March 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.
As part of certain recapitalization transactions that occurred in June
1997, the Company entered into a new credit agreement (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
$9.4 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.
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 under which the Notes were issued 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 sales for the twelve months ended March 31, 1998 occurred
approximately 25% in each of the four fiscal quarters ended June 30, 1997,
September 30, 1997, December 31, 1997 and March 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, 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
22
<PAGE>
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.
IMPACT OF YEAR 2000
In 1995, the Company evaluated its information systems for Year 2000
compliance. As a result of this activity, an Information Systems Strategic
Plan was developed to address any deficiencies associated with dates and to
significantly improve the Company's overall information capabilities. The
Company has already addressed most of its Year 2000 date 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. A substantial
portion of the costs of this project, including costs associated with the
implementation of certain new core information systems, have already been
incurred by the Company. Additional costs necessary to complete the Company's
Information Systems Strategic Plan are not expected to have a material effect
on the Company's results of operations or its financial condition. Failure
to complete the Information Systems Strategic Plan as it relates to Year 2000
compliance could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company has
initiated formal communications with all of its significant suppliers to
determine the extent to which the Company's systems or business processes may
be vulnerable to those third parties' failure to remediate their own year
2000 issues. There can be no assurance that any year 2000 issues present in
the systems of such other companies on which the Company's systems or
business processes rely will be timely remedied and will not have an adverse
effect on the Company.
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.
In January 1998, the Company was sued by ComSonics, Incorporated
("ComSonics") for infringement by the Company and certain of its CATV test
equipment products of ComSonics' U.S. Patent No. 4,685,065. The action seeks
damages for past infringement and an injunction against continued
infringement. The Company had filed an answer denying the material
allegations of the complaint and alleging that the ComSonics patent is
invalid. The action is at an early stage and no discovery has taken place.
The Company has reached a tentative agreement to settle the action on terms
that include a license to Wavetek under the ComSonics patent, fixed payments
for which are to be made annually for the next six years. While there can be
no assurance that a definitive settlement agreement will be entered into, the
Company believes that such agreement, if executed, will not have a material
effect on the Company's financial position at March 31, 1998, or its results
of operations for the six months then ended, nor will it have material
adverse effect on the Company or its ability to develop new products.
23
<PAGE>
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 for the six months ended March 31, 1998
27.2 Restated Financial Data Schedule for the year ended September 30,
1997 and the nine months ended June 30, 1997.
(b) Reports on Form 8-K
The Company filed a Form 8-K/A on March 25, 1998 as an amendment to
Form 8-K filed March 18, 1998 to report that on March 18, 1998,
Wavetek Corporation and Wandel & Goltermann Management Holding GmbH
jointly announced that they have reached an agreement in principle to
merge the companies.
24
<PAGE>
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: May 14, 1998 WAVETEK CORPORATION
(Registrant)
/s/ VICKIE L. CAPPS
-----------------------
Vickie L. Capps
Chief Financial Officer
25
<PAGE>
EXHIBIT 12.1
SCHEDULE RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Income before provision for income taxes. . . . . . . . . . $1,795 $5,155 $2,759 $10,705
Interest expense, including amortization of debt issuance
costs . . . . . . . . . . . . . . . . . . . . . . . . . . 2,978 126 5,947 239
Interest portion of rental expense. . . . . . . . . . . . . 275 200 469 404
--------- -------- --------- --------
Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $5,048 $5,481 $9,175 $11,348
--------- -------- --------- --------
--------- -------- --------- --------
Interest expense, including amortization of debt issuance
costs . . . . . . . . . . . . . . . . . . . . . . . . . . $2,978 $126 $5,947 $239
Interest portion of rental expense. . . . . . . . . . . . . 275 200 469 404
--------- -------- --------- --------
Fixed charges . . . . . . . . . . . . . . . . . . . . . . . $3,253 $ 326 $6,416 $ 643
--------- -------- --------- --------
--------- -------- --------- --------
Ratio of earnings to fixed charges. . . . . . . . . . . . . 1.6 16.8 1.4 17.6
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTHS ENDED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,918
<SECURITIES> 0
<RECEIVABLES> 26,804
<ALLOWANCES> 946
<INVENTORY> 16,466
<CURRENT-ASSETS> 51,282
<PP&E> 21,684
<DEPRECIATION> 10,752
<TOTAL-ASSETS> 71,753
<CURRENT-LIABILITIES> 32,956
<BONDS> 107,000
0
0
<COMMON> 49
<OTHER-SE> 43,741
<TOTAL-LIABILITY-AND-EQUITY> 71,753
<SALES> 71,279
<TOTAL-REVENUES> 71,279
<CGS> 30,546
<TOTAL-COSTS> 62,526
<OTHER-EXPENSES> (156)
<LOSS-PROVISION> 144
<INTEREST-EXPENSE> 5,947
<INCOME-PRETAX> 2,759
<INCOME-TAX> 1,104
<INCOME-CONTINUING> 1,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,655
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.32
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR
ENDED SEPTEMBER 30, 1997 AND AS OF AND FOR THE NINE MONTHS ENDED JUNE 30,
1997, RESTATED IN ACCORDANCE WITH SFAS 128
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997
<CASH> 5,695 4,059
<SECURITIES> 996 3,000
<RECEIVABLES> 26,711 27,334
<ALLOWANCES> 851 2,054
<INVENTORY> 15,937 18,202
<CURRENT-ASSETS> 54,445 57,241
<PP&E> 24,738 23,630
<DEPRECIATION> 9,628 8,857
<TOTAL-ASSETS> 77,353 79,963
<CURRENT-LIABILITIES> 35,590 38,477
<BONDS> 112,972 113,995
0 0
0 0
<COMMON> 49 49
<OTHER-SE> 43,741 43,748
<TOTAL-LIABILITY-AND-EQUITY> 77,353 79,963
<SALES> 155,279 118,700
<TOTAL-REVENUES> 155,279 118,700
<CGS> 71,216 55,479
<TOTAL-COSTS> 141,854 109,966
<OTHER-EXPENSES> 791 861
<LOSS-PROVISION> 259 252
<INTEREST-EXPENSE> 4,008 948
<INCOME-PRETAX> 8,941 7,179
<INCOME-TAX> 2,878 2,728
<INCOME-CONTINUING> 6,063 4,451
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,063 4,451
<EPS-PRIMARY> 0.67 0.42
<EPS-DILUTED> 0.63 0.40
</TABLE>
