<PAGE>
Prospectus Supplement No.4 to Prospectus dated November 4, 1997
August 17, 1998
$85,000,000
WAVETEK CORPORATION
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007
This Prospectus Supplement is intended to be read in conjunction with
the Prospectus dated November 4, 1997 (the "Prospectus") with respect to the
10 1/8% Senior Subordinated Notes Due 2007. Capitalized terms used in this
Prospectus Supplement and not otherwise defined herein shall have the same
meanings as in the Prospectus.
On August 13, 1998, the Company filed with the Securities and Exchange
Commission a Quarterly Report on Form 10-Q, a copy of which is attached
hereto and deemed to be a part hereof. At June 30, 1998, the Company had
approximately $106 million of outstanding debt and stockholders' deficit of
$70.1 million. As of June 30, 1998, the Company and its subsidiaries had
approximately $21 million of outstanding debt that effectively ranks senior
to the Notes and the Subsidiary Guarantees. Additional debt may be incurred
by the Company and its Subsidiaries from time to time, subject to certain
restrictions. For the nine months ended June 30, 1998, the Company's ratio
of earnings to fixed charges was 1.2x.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION
WITH AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus Supplement has been prepared for and is to be used by
Donaldson, Lufkin & Jenrette Securities Corporation in connection with offers
and sales of the New Notes related to market-making transactions, at
prevailing market prices, at prices related thereto or at negotiated prices.
See "Plan of Distribution".
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<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 June 30, 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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11995 EL CAMINO REAL, SUITE 301
SAN DIEGO, CALIFORNIA 92130
(Address of Principal Executive Offices) (Zip Code)
(619) 793-2300
Registrant's Telephone Number, Including Area Code
NOT APPLICABLE
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 13, 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 JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 and September 30, 1997.................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended June 30,
1998 and June 30, 1997................................................................ 4
Consolidated Statements of Cash Flows for the Nine Months Ended June 30,
1998 and June 30, 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......................................................................... 24
ITEM 2. CHANGES IN SECURITIES..................................................................... 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 24
ITEM 5. OTHER INFORMATION......................................................................... 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 24
</TABLE>
<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>
JUNE 30, SEPTEMBER 30,
1998 1997
--------------- ------------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 6,385 $ 5,695
Short-term investments, available for sale.......................... - 996
Accounts receivable (less allowance for doubtful accounts
of $1,212 at June 30, 1998 (unaudited) and $851 at
September 30, 1997).............................................. 27,407 25,860
Inventories......................................................... 17,085 15,937
Refundable income taxes............................................. - 616
Deferred income taxes............................................... 3,611 3,611
Other current assets................................................ 1,667 1,730
--------------- ------------------
Total current assets.................................................. 56,155 54,445
Property and equipment, net........................................... 10,821 15,110
Deferred debt issuance costs, net..................................... 3,847 4,233
Deferred merger costs................................................. 600 -
Intangible assets, net................................................ 3,059 3,281
Deferred income taxes................................................. 101 101
Other assets.......................................................... 2,062 183
--------------- ------------------
Total assets.......................................................... $ 76,645 $ 77,353
--------------- ------------------
--------------- ------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to banks.............................................. $ 8,875 $ 3,859
Trade accounts payable.............................................. 12,343 13,356
Accrued compensation................................................ 5,953 6,034
Income taxes payable................................................ 561 522
Other current liabilities........................................... 7,323 9,847
Current maturities of long-term obligations......................... 4,000 1,972
--------------- ------------------
Total current liabilities............................................. 39,055 35,590
Long-term obligations, less current maturities........................ 106,000 112,972
Deferred income and other liabilities................................. 1,704 431
Commitments and contingencies.........................................
Stockholders' 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................................................. (113,711) (115,048)
Foreign currency translation adjustments............................ (193) (382)
--------------- ------------------
Total stockholders' deficit........................................... (70,114) (71,640)
--------------- ------------------
Total liabilities and stockholders' deficit........................... $ 76,645 $ 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 OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 35,756 $ 36,484 $ 107,035 $ 118,700
Cost of goods sold..................................... 15,959 16,378 46,505 55,479
---------------- ----------------- --------------- -----------------
Gross margin........................................... 19,797 20,106 60,530 63,221
Operating expenses:
Marketing and selling................................ 9,739 9,340 27,598 27,913
Research and development............................. 4,172 3,922 12,899 11,635
General and administrative........................... 3,546 2,473 8,939 7,878
Stock option compensation related
to recapitalization................................. - 7,061 - 7,061
---------------- ----------------- --------------- -----------------
17,457 22,796 49,436 54,487
---------------- ----------------- --------------- -----------------
Operating income (loss)................................ 2,340 (2,690) 11,094 8,734
Non-operating income (expense):
Interest income...................................... 44 118 153 254
Interest expense..................................... (2,996) (709) (8,944) (948)
Other, net........................................... (55) (245) (210) (861)
---------------- ----------------- --------------- -----------------
(3,007) (836) (9,001) (1,555)
---------------- ----------------- --------------- -----------------
Income (loss) before provision (credit) for
income taxes.......................................... (667) (3,526) 2,093 7,179
Provision (credit) for income taxes.................... (349) (1,137) 756 2,728
---------------- ----------------- --------------- -----------------
Net income (loss)...................................... $ (318) $ (2,389) $ 1,337 $ 4,451
---------------- ----------------- --------------- -----------------
---------------- ----------------- --------------- -----------------
Net income (loss) per share - basic.................... $ (.07) $ (.25) $ .28 $ .42
---------------- ----------------- --------------- -----------------
---------------- ----------------- --------------- -----------------
Net income (loss) per share - diluted.................. $ (.07) $ (.25) $ .27 $ .40
---------------- ----------------- --------------- -----------------
---------------- ----------------- --------------- -----------------
Average common shares outstanding - basic.............. 4,885 9,633 4,885 10,526
---------------- ----------------- --------------- -----------------
---------------- ----------------- --------------- -----------------
Average common shares outstanding - diluted............ 4,885 9,633 5,115 11,123
---------------- ----------------- --------------- -----------------
---------------- ----------------- --------------- -----------------
</TABLE>
See accompanying notes.
4
<PAGE>
WAVETEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1998 1997
--------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................. $ 1,337 $ 4,451
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation expense.................................................. 2,474 2,102
Amortization expense.................................................. 221 430
Amortization of debt issuance costs................................... 483 33
Provision for losses on accounts receivable........................... 435 252
Deferred income taxes................................................. - 435
Other, net............................................................ (82) (65)
Changes in operating assets and liabilities:
Accounts receivable.............................................. (1,913) (6,948)
Inventories and other assets..................................... (2,914) (335)
Accounts payable and accrued expenses............................ (2,282) 6,136
Income taxes payable, net........................................ 10 540
--------------- ----------------
Net cash provided by (used in) operating activities..................... (2,231) 7,031
INVESTING ACTIVITIES
Purchase of property and equipment...................................... (2,261) (4,784)
Proceeds from sale of property and equipment............................ 152 53
Purchase of short-term investments...................................... - (3,000)
Proceeds from sale of short-term investments............................ 996 -
Payments received on notes receivable................................... 11 169
Issuance of notes receivable............................................ (15) -
--------------- ----------------
Net cash used in investing activities................................... (1,117) (7,562)
FINANCING ACTIVITIES
Issuance of common shares for cash...................................... - 42,856
Repurchase of common shares and stock options for cash.................. - (152,564)
Proceeds from revolving lines of credit and long-term obligations....... 5,881 114,144
Principal payments on revolving lines of credit and long-term
obligations............................................................ (1,726) (1,489)
Debt issuance costs..................................................... (97) (4,326)
--------------- ----------------
Net cash provided by (used in) financing activities..................... 4,058 (1,379)
Effect of exchange rate changes on cash and cash equivalents............ (20) (157)
--------------- ----------------
Increase (decrease) in cash and cash equivalents........................ 690 (2,067)
Cash and cash equivalents at beginning of period........................ 5,695 6,126
--------------- ----------------
Cash and cash equivalents at end of period.............................. $ 6,385 $ 4,059
--------------- ----------------
--------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.................................................. $ 10,747 $ 440
--------------- ----------------
--------------- ----------------
Cash paid for income taxes.............................................. $ 143 $ 1,963
--------------- ----------------
--------------- ----------------
</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 (LOSS) 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 (loss) per
share with basic and diluted net income (loss) per share. Unlike primary net
income (loss) per share previously reported by the Company, 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 is very similar to the previous concept
of fully diluted net income (loss) 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 (loss) per share is the dilutive effect of
outstanding stock options. For the three months ended June 30, 1998 and 1997,
the effect of outstanding stock options would have been anti-dilutive and,
therefore, was not considered in the computation of diluted net income (loss)
per share for such periods. All net income (loss) 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>
JUNE 30, SEPTEMBER 30,
1998 1997
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods......................... $ 6,815 $ 6,451
Work-in-progress....................... 4,351 3,612
Materials.............................. 5,919 5,874
---------------- ----------------
$ 17,085 $ 15,937
---------------- ----------------
---------------- ----------------
</TABLE>
6
<PAGE>
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 is accounted for as an operating lease, with monthly rental
payments recorded as operating expenses.
5. AGREEMENT TO MERGE
On June 15, 1998, Wavetek Corporation and Wandel & Goltermann
Management Holding GmbH jointly announced that they have signed definitive
agreements to merge the companies. The structure of the transaction and the
timing of closing are currently being determined.
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
operations 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>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 1998
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ - $ 4,518 $ 1,867 $ - $ 6,385
Short-term investments, available for sale............. - - - - -
Accounts receivable (less allowance for
doubtful accounts of $1,212)........................ (116) 33,209 17,526 (23,212) 27,407
Inventories............................................ - 6,961 11,068 (944) 17,085
Refundable income taxes................................ - - - - -
Deferred income taxes.................................. 2,301 1,310 - - 3,611
Other current assets................................... 139 242 1,286 - 1,667
------------- ------------- -------------- ------------- -------------
Total current assets...................................... 2,324 46,240 31,747 (24,156) 56,155
Property and equipment, net............................... 1,592 4,340 4,889 - 10,821
Deferred debt issuance costs, net......................... 3,847 - - - 3,847
Deferred merger costs..................................... 600 - - - 600
Intangible assets, net.................................... 3,024 - 35 - 3,059
Deferred income taxes..................................... (4) 105 - - 101
Other assets.............................................. 217 1,947 83 (185) 2,062
Investment in subsidiaries................................ 41,735 - 25 (41,760) -
------------- ------------- -------------- ------------- -------------
Total assets.............................................. $ 53,335 $ 52,632 $ 36,779 $ (66,101) $ 76,645
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks................................. $ 5,000 $ - $ 3,875 $ - $ 8,875
Trade accounts payable................................. 15,995 7,599 11,968 (23,219) 12,343
Accrued compensation................................... 216 1,783 3,954 - 5,953
Income taxes payable................................... (8,853) 8,490 924 - 561
Other current liabilities.............................. 1,059 2,108 4,149 7 7,323
Current maturities of long-term obligations............ 4,000 - - - 4,000
------------- ------------- -------------- ------------- -------------
Total current liabilities................................. 17,417 19,980 24,870 (23,212) 39,055
Long-term obligations, less current maturities............ 106,000 - 185 (185) 106,000
Deferred income and other liabilities..................... 32 1,644 28 - 1,704
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)................ (113,711) 28,871 (3,175) (25,696) (113,711)
Foreign currency translation adjustments............... (193) - (193) 193 (193)
------------- ------------- -------------- ------------- -------------
Total stockholders' equity (deficit)...................... (70,114) 31,008 11,696 (42,704) (70,114)
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Total liabilities and stockholders' equity (deficit)...... $ 53,335 $ 52,632 $ 36,779 $ (66,101) $ 76,645
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
</TABLE>
8
<PAGE>
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
------------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ - $ 4,575 $ 1,120 $ - $ 5,695
Short-term investments, available for sale............. - 996 - - 996
Accounts receivable (less allowance for
doubtful accounts of $851)............................ (103) 20,202 16,230 (10,469) 25,860
Inventories............................................ - 5,758 11,084 (905) 15,937
Refundable income taxes................................ 4,134 (3,521) 3 - 616
Deferred income taxes.................................. 2,301 1,310 - - 3,611
Other current assets................................... 63 246 1,421 - 1,730
------------- ------------ -------------- ------------- -------------
Total current assets...................................... 6,395 29,566 29,858 (11,374) 54,445
Property and equipment, net............................... 5,690 4,428 5,015 (23) 15,110
Debt issuance costs, net.................................. 4,233 - - - 4,233
Intangible assets, net.................................... 3,224 - 57 - 3,281
Deferred income taxes..................................... (4) 105 - - 101
Other assets.............................................. 226 46 96 (185) 183
Investment in subsidiaries................................ 33,059 - 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>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ - $ 22,811 $ 20,515 $ (7,570) $ 35,756
Cost of goods sold................................... 27 10,331 12,964 (7,363) 15,959
-------------- ------------- -------------- -------------- -------------
Gross margin......................................... (27) 12,480 7,551 (207) 19,797
Operating expenses:
Marketing and selling............................. 370 5,283 4,086 - 9,739
Research and development.......................... (2) 2,267 1,907 - 4,172
General and administrative........................ 907 1,526 1,113 - 3,546
-------------- ------------- -------------- -------------- -------------
1,275 9,076 7,106 - 17,457
-------------- ------------- -------------- -------------- -------------
Operating income (loss).............................. (1,302) 3,404 445 (207) 2,340
Non-operating income (expense):
Interest income................................... - 39 5 - 44
Interest expense.................................. (2,950) - (46) - (2,996)
Equity in net income (loss) of subsidiaries....... 2,012 - - (2,012) -
Other, net........................................ (3) 210 (264) 2 (55)
-------------- ------------- -------------- -------------- -------------
(941) 249 (305) (2,010) (3,007)
-------------- ------------- -------------- -------------- -------------
Income (loss) before provision (credit) for
income taxes........................................ (2,243) 3,653 140 (2,217) (667)
Provision (credit) for income taxes.................. (1,925) 1,462 114 - (349)
-------------- ------------- -------------- -------------- -------------
Net income (loss).................................... $ (318) $ 2,191 $ 26 $ (2,217) $ (318)
-------------- ------------- -------------- -------------- -------------
-------------- ------------- -------------- -------------- -------------
</TABLE>
10
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $ - $ 21,325 $ 24,231 $ (9,072) $ 36,484
Cost of goods sold.................................... (92) 9,525 15,590 (8,645) 16,378
------------- ----------- -------------- -------------- -------------
Gross margin.......................................... 92 11,800 8,641 (427) 20,106
Operating expenses:
Marketing and selling.............................. 220 4,883 4,237 - 9,340
Research and development........................... (12) 2,378 1,556 - 3,922
General and administrative......................... 418 1,012 1,050 (7) 2,473
Stock option compensation related
to recapitalization............................... 1,926 2,318 2,817 - 7,061
------------- ----------- -------------- -------------- -------------
2,552 10,591 9,660 (7) 22,796
------------- ----------- -------------- -------------- -------------
Operating income (loss)............................... (2,460) 1,209 (1,019) (420) (2,690)
Non-operating income (expense):
Interest income.................................... - 100 18 - 118
Interest expense................................... (669) - (40) - (709)
Equity in net income of subsidiaries............... (1,165) - - 1,165 -
Other, net......................................... 181 32 (458) - (245)
------------- ----------- -------------- -------------- -------------
(1,653) 132 (480) 1,165 (836)
------------- ----------- -------------- -------------- -------------
Income before provision (credit) for income taxes..... (4,113) 1,341 (1,499) 745 (3,526)
Provision (credit) for income taxes................... (1,724) 545 42 - (1,137)
------------- ----------- -------------- -------------- -------------
Net income (loss)..................................... $ (2,389) $ 796 $ (1,541) $ 745 $ (2,389)
------------- ----------- -------------- -------------- -------------
------------- ----------- -------------- -------------- -------------
</TABLE>
11
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ - $ 65,612 $ 63,236 $ (21,813) $ 107,035
Cost of goods sold............................... (43) 28,486 39,857 (21,795) 46,505
------------- ------------ -------------- ------------ -------------
Gross margin..................................... 43 37,126 23,379 (18) 60,530
Operating expenses:
Marketing and selling......................... 1,210 14,099 12,289 - 27,598
Research and development...................... (22) 7,681 5,240 - 12,899
General and administrative.................... 1,945 3,501 3,493 - 8,939
------------- ------------ -------------- ------------ -------------
3,133 25,281 21,022 - 49,436
------------- ------------ -------------- ------------ -------------
Operating income (loss).......................... (3,090) 11,845 2,357 (18) 11,094
Non-operating income (expense):
Interest income............................... - 145 8 - 153
Interest expense.............................. (8,780) - (164) - (8,944)
Equity in net income of subsidiaries.......... 8,491 - - (8,491) -
Other, net.................................... (3) 603 (815) 5 (210)
------------- ------------ -------------- ------------ -------------
(292) 748 (971) (8,486) (9,001)
------------- ------------ -------------- ------------ -------------
Income (loss) before provision (credit)
for income taxes................................ (3,382) 12,593 1,386 (8,504) 2,093
Provision (credit) for income taxes.............. (4,719) 5,038 437 - 756
------------- ------------ -------------- ------------ -------------
Net income....................................... $ 1,337 $ 7,555 $ 949 $ (8,504) $ 1,337
------------- ------------ -------------- ------------ -------------
------------- ------------ -------------- ------------ -------------
</TABLE>
12
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK SUBSIDIARY FOREIGN
CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $ - $ 64,759 $ 81,844 $ (27,903) $ 118,700
Cost of goods sold.................................... (244) 29,351 53,956 (27,584) 55,479
------------- ------------ -------------- -------------- --------------
Gross margin.......................................... 244 35,408 27,888 (319) 63,221
Operating expenses:
Marketing and selling.............................. 700 13,159 14,054 - 27,913
Research and development........................... (36) 7,323 4,348 - 11,635
General and administrative......................... 1,661 2,813 3,411 (7) 7,878
Stock option compensation related
to recapitalization............................... 1,926 2,318 2,817 - 7,061
------------- ------------ -------------- -------------- --------------
4,251 25,613 24,630 (7) 54,487
------------- ------------ -------------- -------------- --------------
Operating income (loss)............................... (4,007) 9,795 3,258 (312) 8,734
Non-operating income (expense):
Interest income.................................... 76 221 32 (75) 254
Interest expense................................... (861) - (162) 75 (948)
Equity in net income of subsidiaries............... 7,259 - - (7,259) -
Other, net......................................... 345 128 (1,334) - (861)
------------- ------------ -------------- -------------- --------------
6,819 349 (1,464) (7,259) (1,555)
------------- ------------ -------------- -------------- --------------
Income before provision (credit) for income taxes..... 2,812 10,144 1,794 (7,571) 7,179
Provision (credit) for income taxes................... (1,639) 3,753 614 - 2,728
------------- ------------ -------------- -------------- --------------
Net income............................................ $ 4,451 $ 6,391 $ 1,180 $ (7,571) $ 4,451
------------- ------------ -------------- -------------- --------------
------------- ------------ -------------- -------------- --------------
</TABLE>
13
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED JUNE 30, 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... $ (4,586) $ (134) $ 2,489 $ - $ (2,231)
INVESTING ACTIVITIES
Purchase of property and equipment...................... (295) (880) (1,086) - (2,261)
Proceeds from sale of short-term investments............ - 996 - - 996
Other investing activities.............................. 11 (39) 176 - 148
------------ ----------- -------------- ------------- -------------
Net cash provided by (used in) investing activities..... (284) 77 (910) - (1,117)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and
long-term obligations.................................. 5,000 - 881 - 5,881
Principal payments on revolving lines of credit and
long-term obligations.................................. (33) - (1,693) - (1,726)
Debt issuance costs..................................... (97) - - - (97)
------------ ----------- -------------- ------------- -------------
Net cash provided by (used in) financing activities..... 4,870 - (812) - 4,058
Effect of exchange rate changes on cash and
cash equivalents.. .................................... - - (20) - (20)
------------ ----------- -------------- ------------- -------------
Increase (decrease) in cash and cash equivalents........ - (57) 747 - 690
Cash and cash equivalents at beginning of period........ - 4,575 1,120 - 5,695
------------ ----------- -------------- ------------- -------------
Cash and cash equivalents at end of period.............. $ - $ 4,518 $ 1,867 $ - $ 6,385
------------ ----------- -------------- ------------- -------------
------------ ----------- -------------- ------------- -------------
</TABLE>
14
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(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..... $ (7,307) $ 13,102 $ 1,236 $ - $ 7,031
INVESTING ACTIVITIES
Purchase of short-term investments...................... - (3,000) - - (3,000)
Purchase of property and equipment...................... (1,179) (1,565) (2,040) - (4,784)
Other investing activities.............................. 25 160 37 - 222
------------- ----------- ------------ -------------- -------------
Net cash used in investing activities................... (1,154) (4,405) (2,003) - (7,562)
FINANCING ACTIVITIES
Issuance of common shares for cash...................... 42,856 - - - 42,856
Repurchase of common shares and stock options
for cash............................................... (152,564) - - - (152,564)
Proceeds from revolving lines of credit and
long-term obligations.................................. 110,000 - 4,144 - 114,144
Principal payments on revolving lines of credit and
long-term obligations................................ (68) - (1,421) - (1,489)
Debt issuance costs..................................... (4,326) - - - (4,326)
Dividends from subsidiaries to Wavetek Corporation...... 11,304 (10,000) (1,304) - -
Capital contributions from Wavetek Corporation to
subsidiaries........................................... (2,578) - 2,578 - -
Repayment of loans from Wavetek Corporation to
subsidiaries........................................... 3,837 - (3,837) - -
Other financing activities.............................. -
------------- ----------- ------------ -------------- -------------
Net cash provided by (used in) financing activities..... 8,461 (10,000) 160 - (1,379)
Effect of exchange rate changes on cash and
cash equivalents....................................... - - (157) - (157)
------------- ----------- ------------ -------------- -------------
Decrease in cash and cash equivalents................... - (1,303) (764) - (2,067)
Cash and cash equivalents at beginning of period........ - 4,845 1,281 - 6,126
------------- ----------- ------------ -------------- -------------
Cash and cash equivalents at end of period.............. $ - $ 3,542 $ 517 $ - $ 4,059
------------- ----------- ------------ -------------- -------------
------------- ----------- ------------ -------------- -------------
</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 nine months ended June 30,
1998, approximately 54% of the Company's sales were generated outside the
United States and approximately 43% 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................................... 44.6 44.9 43.4 46.7
-------------- -------------- -------------- --------------
Gross margin........................................... 55.4 55.1 56.6 53.3
Operating expenses..................................... 48.8 62.5 46.2 45.9
-------------- -------------- -------------- --------------
Operating income (loss)................................ 6.6 (7.4) 10.4 7.4
Interest expense, net.................................. (8.3) (1.6) (8.2) (0.7)
Other non-operating income (expense), net............. (0.2) (0.7) (0.2) (0.7)
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes....... (1.9) (9.7) 2.0 6.0
Provision (credit) for income taxes................... (1.0) 3.1 0.8 (2.3)
-------------- -------------- -------------- --------------
Net income (loss)...................................... 0.9% (6.6)% 1.2% 3.7%
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
EBITDA (1)............................................. 9.1% 14.3% 12.9% 15.4%
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The Company's ratio of earnings to fixed charges was as follows for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ratio of earnings to fixed charges (2)................ 0.8x (2.8)x 1.2x 5.4x
</TABLE>
- -----------
(1) EBITDA is operating income plus depreciation, amortization expense and
stock option compensation related to recapitalization. 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
reported by the Company as EBITDA may not be fully
17
<PAGE>
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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales in the three months ended June 30, 1998
decreased $0.7 million, or 2%, to $35.8 million from $36.5 million in the
comparable fiscal 1997 period. This decrease was due to a decrease in sales
to international customers of $2.5 million, or 12.7%, partially offset by an
increase of $1.8 million, or 10.7%, in sales to customers in the United
States. The Company's sales to customers outside the United States decreased
to 48.4% of total sales in the three months ended June 30, 1998 from 54.4% 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 39% in the three months ended June 30, 1998 from
approximately 45% in the comparable fiscal 1997 period. The decrease in sales
to international customers was primarily due to (i) a reduction in sales to
customers in Asia due to recent economic downturns in that region and certain
large shipments to Asian customers which were made in the three months ended
June 30, 1997 that did not recur in similar magnitude in the three months
ended June 30, 1998, (ii) certain sales from orders backlog of newly released
products which were made in the three months ended June 30, 1997 that did not
recur in similar magnitude in the three months ended June 30, 1998 and (iii)
a reduction in sales of a product line of the Company due to delays in the
completion of a new product. Such product was completed and began shipping at
volume levels in June 1998. Changes in certain foreign exchange rates also
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
June 30, 1998. The increase in sales to customers in the United States was
primarily due to an increase in orders in the United States for certain
products of the Company, due to improved market penetration, and an increase
in sales from orders backlog in the three months ended June 30, 1998,
compared to the three months ended June 30, 1997, in two product lines of the
Company due to the release of new products in the United States. Sales of the
Company's Communications Test products in the three months ended June 30,
1998 increased $1.8 million, or 6.8%, from the comparable fiscal 1997 period
primarily due to the increase in sales to customers in the United States
discussed above. Sales of Calibration Instruments products in the three
months ended June 30, 1998 decreased $2.3 million, or 31.4%, 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
certain sales from orders backlog of newly released products which were made
in the three months ended June 30, 1997 that did not recur in similar
magnitude in the three months ended June 30, 1998. Sales in the three months
ended June 30, 1998 from repair, upgrade and calibration services decreased
$0.2 million, or 5.6%, from the comparable fiscal 1997 period.
GROSS MARGIN. The Company's gross margin in the three months ended
June 30, 1998 decreased $0.3 million or 1.5%, to $19.8 million from $20.1
million in the comparable fiscal 1997 period. Gross margin as a percentage of
sales increased to 55.4% in the three months ended June 30, 1998 from 55.1%
in the comparable fiscal 1997 period. The increase in the gross margin
percentage during the three months ended June 30, 1998 resulted 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
18
<PAGE>
of its Calibration Instruments products during the three months ended June
30, 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 June 30, 1998.
OPERATING EXPENSES. Operating expenses in the three months ended June
30, 1998 decreased $5.3 million, or 23.4%, to $17.5 million from $22.8
million in the comparable fiscal 1997 period. Operating expenses as a
percentage of sales decreased to 48.8% in the three months ended June 30,
1998 from 62.5% in the comparable fiscal 1997 period. The decrease in
operating expenses in the three months ended June 30, 1998 was due to a
one-time charge of $7.1 million, or 19.4% of sales, in the three months ended
June 30, 1997 for stock option compensation related to certain
recapitalization transactions of the Company that occurred in June 1997.
Excluding that charge, operating expenses in the three months ended June 30,
1998 increased $1.7 million, or 10.9%, from the comparable fiscal 1997
period. The increase in operating expenses in the three months ended June 30,
1998 was primarily due to an increase in spending for general and
administrative activities of $1.0 million, to $3.5 million, or 9.9% of sales,
in the three months ended June 30, 1998 from $2.5 million, or 6.8% of sales,
in the comparable 1997 period, primarily due to expenses incurred in the
three months ended June 30, 1998 in connection with certain legal claims
against the Company and an increase in expense in the three months ended June
30, 1998 related to the Company's management information systems. In
addition, spending for marketing and selling activities increased by $0.4
million, to $9.7 million, or 27.2% of sales, in the three months ended June
30, 1998 from $9.3 million, or 25.6% of sales, in the comparable 1997 period,
primarily due to the addition of certain marketing personnel and certain
recruiting and relocation costs incurred in connection with recruiting
activities for new marketing and sales personnel during the three months
ended June 30, 1998. Spending for research and development activities also
increased by $0.3 million, to $4.2 million, or 11.7% of sales, in the three
months ended June 30, 1998 from $3.9 million, or 10.7% of sales, in the
comparable 1997 period, in order to accelerate the timing of new product
introductions. Changes in foreign exchange rates had a small favorable impact
on the United States dollar equivalent of operating expenses denominated in
foreign currencies in the three months ended June 30, 1998.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the
three months ended June 30, 1998 increased by $2.2 million over the
comparable fiscal 1997 period to $3.0 million. The increase was primarily due
to an increase in the Company's net interest expense to $3.0 million during
the three months ended June 30, 1998 from $0.6 million 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 (CREDIT) FOR INCOME TAXES. The Company's effective tax rate
decreased to approximately 36% in the nine months ended June 30, 1998, from
approximately 38% in the comparable fiscal 1997 period. The provisions
(credits) for income taxes for the three months ended June 30, 1998 and 1997
include certain adjustments, which are not material in amount, to reflect
these revised estimates of the Company's annualized effective tax rates.
NET INCOME (LOSS). As a result of the above factors, net loss was
$0.3 million in the three months ended June 30, 1998 as compared to $2.4
million in the comparable fiscal 1997 period.
EBITDA. As a result of the above factors, EBITDA was $3.2 million in
the three months ended June 30, 1998 as compared to $5.2 million in the
comparable fiscal 1997 period. EBITDA as a percentage of sales decreased to
9.1% in the three months ended June 30, 1998 from 14.3% in the comparable
fiscal 1997 period.
19
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors,
the ratio of earnings to fixed charges was 0.8x in the three months ended
June 30, 1998 as compared to (2.8)x in the comparable fiscal 1997 period.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales in the nine months ended June 30, 1998 decreased
$11.7 million, or 9.8%, to $107.0 million from $118.7 million in the
comparable fiscal 1997 period. This decrease was due to a decrease in sales
to international customers of $14.4 million, or 20.1%, partially offset by an
increase of $2.7 million, or 5.7%, in sales to customers in the United
States. The Company's sales to customers outside the United States decreased
to 53.5% of total sales in the nine months ended June 30, 1998 from 60.3% 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 43% in the nine months ended June 30, 1998 from
approximately 51% 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 nine months ended June 30,
1997 and did not recur in similar magnitude during the nine months ended June
30, 1998. The Company has also experienced a reduction in its sales to
customers in Asia as a result of recent economic down turns in that region
and a reduction of sales in a product line due to delays in the completion of
a new product. 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 $2.8 million from the United States dollar equivalent
amount that would have been reported if the average exchange rates in effect
during the nine months ended June 30, 1997 had remained in effect during the
nine months ended June 30, 1998. Sales of the Company's Communications Test
products in the nine months ended June 30, 1998 decreased $6.8 million, or
7.6%, from the comparable fiscal 1997 period primarily as a result of the
large shipments mentioned above that occurred during the comparable fiscal
1997 period and the delay in the completion of the new product also mentioned
above. Sales of Calibration Instruments products in the nine months ended
June 30, 1998 decreased $5.2 million, or 25.6%, from the comparable fiscal
1997 period, due 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 due to a newly released
product, partially to an unfavorable geographic mix of sales and partially to
a reduction in sales to customers in Asia. Sales in the nine months ended
June 30, 1998 from repair, upgrade and calibration services increased $0.4
million, or 4.0%, from the comparable fiscal 1997 period.
GROSS MARGIN. The Company's gross margin in the nine months ended
June 30, 1998 decreased $2.7 million or 4.3%, to $60.5 million from $63.2
million in the comparable fiscal 1997 period. Gross margin as a percentage of
sales increased to 56.6% in the nine months ended June 30, 1998 from 53.3% in
the comparable fiscal 1997 period. The increase in the gross margin
percentage during the nine months ended June 30, 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 nine months ended June 30,
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 nine months ended June 30,
1998.
OPERATING EXPENSES. Operating expenses in the nine months ended June
30, 1998 decreased $5.1 million, or 9.3%, to $49.4 million from $54.5 million
in the comparable fiscal 1997 period. Operating expenses as a percentage of
sales increased to 46.2% in the nine months ended June 30, 1998 from 45.9% in
the comparable fiscal 1997 period. The decrease
20
<PAGE>
in operating expenses in the nine months ended June 30, 1998 was due to a
one-time charge of $7.1 million, or 5.9% of sales, in the nine months ended
June 30, 1997 for stock option compensation related to certain
recapitalization transactions of the Company that occurred in June 1997.
Excluding that charge, operating expenses in the nine months ended June 30,
1998 increased $2.0 million, or 4.2%, from the comparable fiscal 1997 period.
The increase in operating expenses in the nine months ended June 30, 1998 was
partially due to an increase in spending for research and development
activities of $1.3 million, to $12.9 million, or 12.1% of sales, in the nine
months ended June 30, 1998 from $11.6 million, or 9.8% of sales, in the
comparable 1997 period, in order to accelerate the timing and number of new
product introductions. In addition, spending for general and administrative
activities increased by $1.0 million, to $8.9 million, or 8.4% of sales, in
the nine months ended June 30, 1998 from $7.9 million, or 6.6% of sales, in
the comparable 1997 period, primarily due to expenses incurred in the nine
months ended June 30, 1998 in connection with certain legal claims against
the Company and an increase in expense in the nine months ended June 30, 1998
related to the Company's management information systems. As a partial offset
to these increased expenses, spending for marketing and selling activities
decreased by $0.3 million, to $27.6 million, or 25.8% of sales, in the nine
months ended June 30, 1998 from $27.9 million, or 23.5% of sales, in the
comparable 1997 period, primarily due to a reduction in sales commissions
paid to independent sales representatives due to reduced sales volumes in the
nine months ended June 30, 1998 compared to the nine months ended June 30,
1997, partially offset by the addition of certain marketing personnel and
certain recruiting and relocation costs incurred in connection with
recruiting activities for new marketing and sales personnel during the nine
months ended June 30, 1998. Although total expenses related to marketing and
selling activities decreased in the nine months ended June 30, 1998, such
expenses increased as a percentage of sales due to the fixed portion of such
expenses being spread over a lower sales volume. Changes in foreign exchange
rates had a favorable impact on the United States dollar equivalent of
operating expenses denominated in foreign currencies in the nine months ended
June 30, 1998.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the
nine months ended June 30, 1998 increased by $7.4 million over the comparable
fiscal 1997 period to $9.0 million. The increase was primarily due to an
increase in the Company's net interest expense to $8.8 million during the
nine months ended June 30, 1998 from $0.7 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 $0.7 million in other non-operating expenses.
PROVISION FOR INCOME TAXES. The Company's effective tax rate
decreased to approximately 36% in the nine months ended June 30, 1998 from
approximately 38% in the comparable fiscal 1997 period.
NET INCOME. As a result of the above factors, net income was $1.3
million in the nine months ended June 30, 1998 as compared to $4.5 million in
the comparable fiscal 1997 period.
EBITDA. As a result of the above factors, EBITDA was $13.8 million in
the nine months ended June 30, 1998 as compared to $18.3 million in the
comparable fiscal 1997 period. EBITDA as a percentage of sales decreased to
12.9% in the nine months ended June 30, 1998 from 15.4% 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 1.2x in the nine months ended June
30, 1998 as compared to 5.4x in the comparable fiscal 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by (used in) operating activities was
$(2.2 million) and $7.0 million in the nine months ended June 30, 1998 and
1997, respectively. The Company had cash, cash equivalents and short-term
investments
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at June 30, 1998 of $6.4 million. The Company invests its excess cash in
money market funds and U.S. Treasury obligations. Historically the Company
has funded its business through operating cash flow, has not relied on sales
of equity to provide cash and has used short-term debt primarily for cash
management purposes. The Company had borrowings outstanding under revolving
credit agreements of $8.9 million at June 30, 1998 for funding short-term
working capital requirements and 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
$1.1 million and $7.6 million in the nine months ended June 30, 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 nine months ended June 30, 1998 and 1997 of approximately
$2.3 million and $4.8 million, respectively. The Company's cash flows from
investing activities for the nine months ended June 30, 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.
The Company's net cash provided by (used in) financing activities was
$4.1 million and ($1.4) million in the nine months ended June 30, 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. The Company borrowed $5 million under this revolving credit
facility in June 1998. In connection with entering into the New Credit
Agreement, the Company terminated $4.0 million of United States availability
under its existing credit agreements ("Existing Credit Agreements"), leaving
borrowing availability of approximately $9.2 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
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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.
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to establish fixed conversion rates between
their existing currencies and a new common currency (the "euro"). The
participating countries have agreed to adopt 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 can
not yet predict the anticipated impact of the euro conversion on the Company.
PERIODIC FLUCTUATIONS
The Company's sales for the twelve months ended June 30, 1998
occurred approximately 25% in each of the four fiscal quarters ended
September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 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 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.
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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 Company has
reached an agreement to settle the action on terms that include a payment by
Wavetek to ComSonics of $400,000 to settle all claims arising from Wavetek
sales for all prior periods and through December 31, 1998, and a license to
Wavetek under the ComSonics patent commencing January 1, 1999, fixed payments
for which are to be made annually commencing January 1, 1999, in the amount
of $766,667 for the next six years. The definitive settlement agreement did
not have a material effect on the Company's financial position at June 30,
1998, or its results of operations for the nine months then ended, nor will
it have material adverse effect on the Company or its ability to develop new
products.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.1 Exchange and Merger Agreement Dated as of June 12, 1998
By and Among Wavetek Corporation, Wandel & Goltermann
Management Holding GmbH and the Stockholders listed on
the Signature Pages Thereto
10.2 Stockholders Agreement Dated as of June 12, 1998 and
Effective as of the Effective Time By and Among Wavetek
Corporation and the Stockholders Listed on the Signature
Pages Thereto
10.3 First Amendment to Credit Agreement dated of July 21,
1998 entered into by and among Wavetek Corporation,
the Lenders listed on the Signature Pages Thereof, DLJ
Capital Funding, Inc. and Fleet National Bank
12.1 Schedule Re: Computation of Ratio of Earnings to Fixed
Charges
27.1 Financial Data Schedule for the nine months ended June 30, 1998
</TABLE>
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(b) Reports on Form 8-K
The Company filed a Form 8-K on June 15, 1998 to report that on
June 15, 1998, Wavetek Corporation and Wandel & Goltermann
Management Holding GmbH jointly announced that they have signed
definitive agreements to merge the companies.
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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: August 14, 1998 WAVETEK CORPORATION
(Registrant)
/s/ VICKIE L. CAPPS
----------------------------------
Vickie L. Capps
Chief Financial Officer
26
