<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, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____.
Commission file number 333-32195
WAVETEK WANDEL GOLTERMANN, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0457664
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1030 SWABIA COURT
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-3585
- --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(919) 941-5730
--------------
Registrant's Telephone Number, Including Area Code
WAVETEK WANDEL & GOLTERMANN, INC.
---------------------------------
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, 1999, Registrant
had only one class of common stock, of which there were 13,202,323 shares
outstanding.
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and September 30, 1998..................3
Consolidated Statements of Operations for the Three and Six Months Ended March 31,
1999 and March 31, 1998...............................................................4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31,
1999 and March 31, 1998...............................................................5
Notes to Consolidated Financial Statements...............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................................................27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................28
ITEM 2. CHANGES IN SECURITIES...................................................................29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.........................................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................29
ITEM 5. OTHER INFORMATION.......................................................................29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................29
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
----------------- ---------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 17,123 $ 35,544
Accounts receivable (less allowance for doubtful accounts of $4,318 at
March 31, 1999 (unaudited) and $4,432 at September 30, 1998).......... 82,295 92,281
Inventories............................................................. 61,942 74,886
Deferred income taxes................................................... 26,025 17,095
Other current assets.................................................... 17,449 12,736
----------------- ---------------
Total current assets...................................................... 204,834 232,542
Property and equipment, net............................................... 62,274 66,597
Intangible assets, net.................................................... 172,199 178,675
Other assets.............................................................. 6,161 6,710
----------------- ---------------
Total assets.............................................................. $ 445,468 $ 484,524
----------------- ---------------
----------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks.................................................. $ 21,285 $ 113,085
Trade accounts payable.................................................. 24,588 37,612
Accrued compensation.................................................... 21,219 25,907
Income taxes payable.................................................... 5,975 5,956
Other current liabilities............................................... 41,650 41,848
Notes payable to related parties........................................ 10,812 11,746
Current maturities of long-term obligations............................. 6,016 30,222
----------------- ---------------
Total current liabilities................................................. 131,545 266,376
Long-term obligations, less current maturities............................ 224,353 121,595
Pension liabilities....................................................... 39,372 39,991
Deferred income taxes..................................................... 24,479 25,582
Other non-current liabilities............................................. 5,328 5,566
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; authorized, 50,000 shares;
issued and outstanding, 13,202 shares................................. 132 132
Additional paid-in capital.............................................. 72,948 72,948
Accumulated deficit..................................................... (61,997) (57,645)
Foreign currency translation adjustments................................ 9,308 9,979
----------------- ---------------
Total stockholders' equity................................................ 20,391 25,414
----------------- ---------------
Total liabilities and stockholders' equity................................ $ 445,468 $ 484,524
----------------- ---------------
----------------- ---------------
</TABLE>
Note: The balance sheet at September 30, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales.................................................. $114,466 $ 71,253 $ 240,931 $161,513
Cost of goods sold......................................... 47,927 27,913 102,562 65,808
--------- --------- ---------- ---------
Gross margin............................................... 66,539 43,340 138,369 95,705
Operating expenses:
Marketing and selling.................................... 34,915 22,704 70,437 46,386
Research and development................................. 18,771 11,320 36,615 21,923
General and administrative............................... 11,538 5,968 23,626 12,577
Amortization of intangible assets........................ 4,874 275 9,690 541
Acquired in-process research and development............. - 5,353 - 6,714
Provisions for non-recurring charges..................... - 473 - 473
--------- --------- ---------- ---------
70,098 46,093 140,368 88,614
--------- --------- ---------- ---------
Operating income (loss).................................... (3,559) (2,753) (1,999) 7,091
Non-operating income (expense):
Interest income.......................................... 242 262 475 649
Interest expense......................................... (5,244) (1,796) (10,435) (4,361)
Other, net............................................... (370) 320 (131) (361)
--------- --------- ---------- ---------
(5,372) (1,214) (10,091) (4,073)
--------- --------- ---------- ---------
Income (loss) before provision (credit) for income taxes
and minority interest in loss............................ (8,931) (3,967) (12,090) 3,018
Provision (credit) for income taxes........................ (5,716) 733 (7,738) 7,935
Minority interest in loss.................................. - (2,619) - (2,782)
--------- --------- ---------- ---------
Net loss................................................... $ (3,215) $ (2,081) $ (4,352) $ (2,135)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net loss per share......................................... $ (0.24) $ (0.25) $ (0.33) $ (0.26)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Weighted average number of shares outstanding.............. 13,202 8,317 13,202 8,317
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities..................... $ (417) $ 20,342
INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired............................ - (12,073)
Purchase of property and equipment...................................... (7,642) (3,987)
Purchase of short-term investments, available for sale.................. - (33,250)
Proceeds from sale of short-term investments, available for sale........ - 33,250
Proceeds from sale of investments in affiliates......................... - 1,121
Other, net.............................................................. - (519)
------------ -----------
Net cash used in investing activities................................... (7,642) (15,458)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term obligations....... 139,059 22,881
Principal payments on revolving lines of credit and long-term
obligations........................................................... (145,702) (21,319)
Other, net.............................................................. (672) (1,183)
------------ -----------
Net cash provided by (used in) financing activities..................... (7,315) 379
Effect of exchange rate changes on cash and cash equivalents............ (3,047) (189)
------------ -----------
Increase (decrease) in cash and cash equivalents........................ (18,421) 5,074
Cash and cash equivalents at beginning of period........................ 35,544 9,400
------------ -----------
Cash and cash equivalents at end of period.............................. $ 17,123 $ 14,474
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.................................................. $ 9,067 $ 4,252
------------ -----------
------------ -----------
Cash paid for income taxes.............................................. $ 3,653 $ 1,025
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
5
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
On September 30, 1998, Wavetek Corporation, a Delaware corporation
("Wavetek"), and Wandel & Goltermann Management Holding GmbH, a German limited
liability company ("WG"), consummated an exchange transaction whereby the
stockholders of WG became stockholders of Wavetek, and WG became a subsidiary of
Wavetek (the "Exchange Transaction"). In connection with the Exchange
Transaction, Wavetek was renamed Wavetek Wandel Goltermann, Inc. (the
"Company"). The Exchange Transaction was accounted for as a purchase of Wavetek
by WG. Accordingly, the financial statements of the Company included herein as
of any date or for any period prior to September 30, 1998, are the historical
financial statements of WG.
The Company is a leading global designer, manufacturer and marketer of a
broad range of communications test instruments used to develop, manufacture,
install and maintain communications networks and equipment. The Company conducts
its communications test business, which addresses most sectors of the
communications test market, in four principal business areas: (1) Telecom
Networks (traditional voice/data transmissions and new multi-service networks),
(2) Enterprise Networks (local and wide-area network infrastructures), (3)
Multimedia (cable television and digital video broadcast) and (4) Wireless
(mobile telephony and data). The Company also designs, manufactures and sells
precision measurement instruments, electromagnetic measurement instruments and
general-purpose handheld test tools. In addition, the Company provides repair,
upgrade and calibration services, as well as value-added professional services
such as consulting and training on a worldwide basis. The accompanying
consolidated financial statements include the operations of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying financial statements and the financial information
included herein are unaudited. However such information includes all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary to fairly state the results of the interim periods.
Interim results are not necessarily indicative of results to be expected for the
full year. It is suggested that these consolidated financial statements be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto, included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998. Certain amounts reported in the
accompanying balance sheet as of September 30, 1998 have been reclassified to
conform to the current presentation.
2. NET INCOME (LOSS) PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE ("SFAS
128"). Basic net income (loss) per share is based only on average common shares
outstanding and excludes the dilutive effects of the Company's outstanding stock
options. Diluted net income (loss) per share includes the dilutive effect of the
Company's outstanding stock options. The Company has a simple capital structure
and, accordingly, the only difference in the Company's computations of basic and
diluted net income (loss) per share is the dilutive effect of outstanding stock
options. For the three and six months ended March 31, 1999, the effect of
outstanding stock options would have been anti-dilutive and, therefore, was not
considered in the computation of diluted loss per share for such periods. There
were no outstanding stock options in the three or six months ended March 31,
1998. All net income (loss) per share amounts for all periods have been
presented in accordance with the requirements of SFAS 128.
6
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. FINANCIAL STATEMENT DETAILS
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Materials........................................ $ 16,111 $ 19,217
Work-in-progress................................. 16,547 21,469
Finished goods................................... 29,284 34,200
--------------- --------------
$ 61,942 $ 74,886
--------------- --------------
--------------- --------------
</TABLE>
4. COMPREHENSIVE INCOME (LOSS)
On October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS 130") which established standards for reporting
and displaying comprehensive income (loss) and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income (loss) includes net income (loss) and other
comprehensive income (loss). The Company's current and accumulated other
comprehensive income (loss) as of and for the three and six month periods ended
March 31, 1999 and 1998 is comprised solely of foreign currency translation
adjustments.
Components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss......................................... $ (3,215) $ (2,081) $ (4,352) $ (2,135)
Foreign currency translation adjustments......... (345) (479) (671) (713)
--------------- --------------- --------------- ---------------
Comprehensive loss............................... $ (3,560) $ (2,560) $ (5,023) $ (2,848)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
5. MULTI-CURRENCY REVOLVING CREDIT FACILITY
In December 1998, the Company entered into a Facilities Agreement in
relation to a Multi-Currency Revolving Credit Facility and Bilateral Ancillary
Facilities (the "Credit Facility") with a syndicate of four German banks,
providing for revolving borrowings, letters of credit and bank guarantees
aggregating up to a maximum amount of 280 million Deutsche marks ($153.8 million
at March 31, 1999). The Credit Facility has a two-year term and all borrowings
bear interest at LIBOR plus 0.9% through September 30, 1999 and at LIBOR plus
1.5% thereafter. Borrowings under the Credit Facility are secured by the pledge
of 65% of the shares of Wandel Goltermann Management Holding GmbH, a subsidiary
of the Company. In addition, a $45 million tranche of the Credit Facility, which
refinanced and replaced the previously existing bank credit facility of Wavetek,
is guaranteed by a U.S. subsidiary of the Company. The Credit Facility requires
the Company to comply with certain covenants and maintain certain minimum
financial ratios. The banks agreed to waive through May 31, 1999, the
requirement that the Company maintain one such financial ratio as of March 31,
1999. The Company is currently negotiating an amendment to the ratio which it
expects to finalize prior to May 31, 1999. The Company was in compliance with
all other such requirements at March 31, 1999.
7
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SETTLEMENT OF CLAIMS
In May 1999, the Company and Trilithic, Inc. ("Trilithic") agreed to
settle the pending claims by Trilithic alleging unfair competition and patent
infringement with respect to the Company's manufacture and sale of certain cable
networks products. Under the terms of the settlement, which is expected to be
finalized in May 1999, the Company will pay Trilithic $4.5 million for a release
of all claims related to alleged past infringement and unfair competition, and
$1.2 million for a license under the subject patents. The total payments of $5.7
million are scheduled to be paid as follows: $900,000 at closing, $900,000 in
January 2000 and $650,000 annually for six years commencing January 2001.
Because this matter was a known contingent liability at the date of the Exchange
Transaction, the purchase price allocation related to the Exchange Transaction
has been adjusted as of March 31, 1999 to reflect the $4.5 million portion of
the settlement related to the resolution of all past claims. Accordingly,
accrued liabilities in the accompanying balance sheet as of March 31, 1999 have
been increased by $2.6 million to represent the expected total cost of the
settlement of $4.0 million, measured by the present value of the related
payments plus legal fees expected to be incurred to complete the settlement,
less amounts which had been provided for this matter prior to the Exchange
Transaction. A deferred tax asset of $1.0 million has been provided representing
the tax deductibility of the settlement amount and goodwill related to the
Exchange Transaction has been increased by $1.6 million. The $1.2 million
portion of the settlement payments related to future royalties will be charged
to operations over the related license period.
As previously disclosed in its Form 10-K, the Company is involved with a
dispute with certain beneficial owners of the Company's 10 1/8% Senior
Subordinated Notes due 2007 arising from the Exchange Transaction. The Company
is negotiating a resolution of the dispute and seeking consent to certain
amendments to the indenture under which the Notes were issued. The Company
expects that an agreement will be finalized during the quarter ended June 30,
1999, and the Company will be required to make a cash payment to the holders of
the Notes. Any amount paid will be accounted for by the Company as a debt
modification. The Company has included approximately $3 million in intangible
assets and accrued liabilities in the accompanying balance sheet as of March 31,
1999. The intangible asset will be amortized as additional financing expense
over the remaining life of the Notes. In connection with any such agreement, the
Company could become obligated to pay an additional amount to the holders of the
Notes on June 30, 2000 if certain events do not occur prior to that date.
Management reasonably expects such events will occur prior to June 30, 2000 and
accordingly, no amounts have been provided in the accompanying financial
statements for this contingent obligation.
8
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under its Notes are guaranteed by all
of the Company's current and future domestic subsidiaries (collectively, the
"Subsidiary Guarantors"). WGTI and Wandel Goltermann ATE Systems, Inc., which
became Subsidiary Guarantors upon completion of the Exchange Transaction, are
shown as Subsidiary Guarantors for all periods presented prior to September 30,
1998. Wavetek U.S. Inc. and its subsidiary, Digital Transport Systems, Inc., are
also included in the financial statements as of September 30, 1998 as a result
of the Exchange Transaction. Such guarantees are full and unconditional and
joint and several. Separate financial statements of the Subsidiary Guarantors
are not presented because the Company's management has deemed that they would
not be material to investors. The following supplemental condensed consolidating
financial data sets forth, on an unconsolidated basis, balance sheets,
statements of operations and statements of cash flows data for (i) the Company
(Wavetek Wandel Goltermann, Inc., formerly Wavetek Corporation, the issuer of
the Notes), (ii) the current Subsidiary Guarantors and (iii) the Company's
foreign subsidiaries (the "Foreign Subsidiaries"). The supplemental financial
data reflects the investments of the Company in the Subsidiary Guarantors and
the Foreign Subsidiaries using the equity method of accounting.
9
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 10 $ 4,872 $ 12,241 $ - $ 17,123
Accounts receivable (less allowance for
doubtful accounts of $4,318)................. 38,552 30,519 67,790 (54,566) 82,295
Inventories.................................... - 14,551 50,968 (3,577) 61,942
Deferred income taxes.......................... 3,592 6,012 4,110 12,311 26,025
Other current assets........................... 1,426 2,280 13,743 - 17,449
---------- --------- ----------- ---------- ---------
Total current assets.............................. 43,580 58,234 148,852 (45,832) 204,834
Property and equipment, net....................... 1,498 7,979 52,797 - 62,274
Intangible assets, net............................ 9,774 116,266 46,159 - 172,199
Investment in subsidiaries........................ 156,211 - - (156,211) -
Other assets...................................... 22 1,860 4,279 - 6,161
---------- --------- ----------- ---------- ---------
Total assets...................................... $ 211,085 $ 184,339 $ 252,087 $ (202,043) $ 445,468
---------- --------- ----------- ---------- ---------
---------- --------- ----------- ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks......................... $ - $ - $ 21,285 $ - $ 21,285
Trade accounts payable......................... 3,471 17,823 57,371 (54,077) 24,588
Accrued compensation........................... 1,362 5,432 14,425 - 21,219
Income taxes payable........................... (14,125) 13,884 6,216 - 5,975
Other current liabilities...................... 8,127 6,173 27,350 - 41,650
Notes payable to related parties............... - - 10,812 - 10,812
Current maturities of long-term obligations.... - 685 5,331 - 6,016
---------- --------- ----------- ---------- ---------
Total current liabilities......................... (1,165) 43,997 142,790 (54,077) 131,545
Long-term obligations, less current maturities.... 191,407 2,259 30,687 - 224,353
Pension liabilities............................... - 366 39,006 - 39,372
Deferred taxes.................................... 452 23,000 1,027 - 24,479
Other non-current liabilities..................... - 3,727 1,601 - 5,328
Commitments and contingencies
Stockholders' equity:
Common stock................................... 132 - - - 132
Additional paid-in capital..................... 72,948 168,071 87,187 (255,258) 72,948
Accumulated deficit............................ (61,997) (57,058) (59,542) 116,600 (61,997)
Foreign currency translation adjustments....... 9,308 (23) 9,331 (9,308) 9,308
---------- --------- ----------- ---------- ---------
Total stockholders' equity........................ 20,391 110,990 36,976 (147,966) 20,391
---------- --------- ----------- ---------- ---------
Total liabilities and stockholders' equity........ $ 211,085 $ 184,339 $ 252,087 $ (202,043) $ 445,468
---------- --------- ----------- ---------- ---------
---------- --------- ----------- ---------- ---------
</TABLE>
10
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 19 $ 31,143 $ 4,382 $ - $ 35,544
Accounts receivable (less allowance for
doubtful accounts of $4,432)................. 8,710 27,364 81,907 (25,700) 92,281
Inventories.................................... - 18,033 59,942 (3,089) 74,886
Deferred income taxes.......................... 3,592 4,408 9,095 - 17,095
Other current assets........................... 1,244 1,884 9,608 - 12,736
---------- --------- ----------- ---------- ---------
Total current assets.............................. 13,565 82,832 164,934 (28,789) 232,542
Property and equipment, net....................... 1,611 8,015 56,971 - 66,597
Intangible assets, net............................ 7,953 120,428 50,294 - 178,675
Investment in subsidiaries........................ 143,579 - 29,932 (173,511) -
Other assets...................................... 213 2,763 3,794 (60) 6,710
---------- --------- ----------- ---------- ---------
Total assets...................................... $ 166,921 $ 214,038 $ 305,925 $ (202,360) $ 484,524
---------- --------- ----------- ---------- ---------
---------- --------- ----------- ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks......................... $ 34,463 $ 373 $ 78,249 $ - $ 113,085
Trade accounts payable......................... 4,003 20,322 35,845 (22,558) 37,612
Accrued compensation........................... 714 5,478 19,715 - 25,907
Income taxes payable........................... (10,839) 9,978 6,817 - 5,956
Other current liabilities...................... 3,683 8,967 30,986 (1,788) 41,848
Notes payable to related parties............... - - 11,746 - 11,746
Current maturities of long-term obligations.... 24,000 741 5,481 - 30,222
---------- --------- ----------- ---------- ---------
Total current liabilities......................... 56,024 45,859 188,839 (24,346) 266,376
Long-term obligations, less current maturities.... 85,000 4,299 33,711 (1,415) 121,595
Pension liabilities............................... - - 39,991 - 39,991
Deferred taxes.................................... 238 25,156 188 - 25,582
Other non-current liabilities..................... 245 2,142 3,179 - 5,566
Commitments and contingencies
Stockholders' equity:
Common stock................................... 132 - - - 132
Additional paid-in capital..................... 72,948 168,071 85,153 (253,224) 72,948
Accumulated deficit............................ (57,645) (31,463) (55,115) 86,578 (57,645)
Foreign currency translation adjustments....... 9,979 (26) 9,979 (9,953) 9,979
---------- --------- ----------- ---------- ---------
Total stockholders' equity........................ 25,414 136,582 40,017 (176,599) 25,414
---------- --------- ----------- ---------- ---------
Total liabilities and stockholders' equity........ $ 166,921 $ 214,038 $ 305,925 $ (202,360) $ 484,524
---------- --------- ----------- ---------- ---------
---------- --------- ----------- ---------- ---------
</TABLE>
11
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ - $36,025 $ 94,383 $ (15,942) $ 114,466
Cost of goods sold................................ 11 17,274 47,122 (16,480) 47,927
---------- --------- ----------- ---------- ---------
Gross margin...................................... (11) 18,751 47,261 538 66,539
Operating expenses:
Marketing and selling.......................... 487 8,994 25,434 - 34,915
Research and development....................... 2 5,846 12,923 - 18,771
General and administrative..................... 1,824 2,388 7,326 - 11,538
Amortization of intangible assets.............. 85 3,008 1,781 - 4,874
---------- --------- ----------- ---------- ---------
2,398 20,236 47,464 - 70,098
---------- --------- ----------- ---------- ---------
Operating loss.................................... (2,409) (1,485) (203) 538 (3,559)
Non-operating income (expense):
Interest income................................ 305 85 157 (305) 242
Interest expense............................... (3,694) (153) (1,702) 305 (5,244)
Equity in net income (loss) of subsidiaries.... 439 - - (439) -
Other, net..................................... 558 35 (963) - (370)
---------- --------- ----------- ---------- ---------
(2,392) (33) (2,508) (439) (5,372)
---------- --------- ----------- ---------- ---------
Loss before provision (credit) for income taxes... (4,801) (1,518) (2,711) 99 (8,931)
Provision (credit) for income taxes............... (1,586) (112) 2,024 (6,042) (5,716)
---------- --------- ----------- ---------- ---------
Net loss.......................................... $ (3,215) $ (1,406) $ (4,735) $ 6,141 $ (3,215)
---------- --------- ----------- ---------- ---------
---------- --------- ----------- ---------- ---------
</TABLE>
12
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ - $ 14,297 $ 66,392 $ (9,436) $ 71,253
Cost of goods sold................................ - 7,331 30,018 (9,436) 27,913
---------- --------- ----------- ---------- ---------
Gross margin...................................... - 6,966 36,374 - 43,340
Operating expenses:
Marketing and selling.......................... - 3,643 19,061 - 22,704
Research and development....................... - 3,580 7,740 - 11,320
General and administrative..................... - 1,181 4,787 - 5,968
Amortization of intangible assets.............. - 71 204 - 275
Acquired in-process research and development... - 5,353 - - 5,353
Provisions for non-recurring charges........... - 473 - - 473
---------- --------- ----------- ---------- ---------
- 14,301 31,792 - 46,093
---------- --------- ----------- ---------- ---------
Operating income (loss)........................... - (7,335) 4,582 - (2,753)
Non-operating income (expense):
Interest income................................ - 97 219 (54) 262
Interest expense............................... - (54) (1,796) 54 (1,796)
Equity in net income (loss) of subsidiaries.... - - (3,989) 3,989 -
Other, net..................................... - 8 312 - 320
---------- --------- ----------- ---------- ---------
- 51 (5,254) 3,989 (1,214)
---------- --------- ----------- ---------- ---------
Loss before provision (credit) for income taxes
and minority interest in loss.................. - (7,284) (672) 3,989 (3,967)
Provision (credit) for income taxes............... - (676) 1,409 - 733
Minority interest in loss......................... - - - (2,619) (2,619)
---------- --------- ----------- ---------- ---------
Net loss.......................................... $ - $ (6,608) $ (2,081) $ 6,608 $ (2,081)
---------- --------- ----------- ---------- ---------
---------- --------- ----------- ---------- ---------
</TABLE>
13
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ - $74,859 $198,864 $ (32,792) $ 240,931
Cost of goods sold................................ 39 38,032 95,829 (31,338) 102,562
------------- -------------- ------------- -------------- --------------
Gross margin...................................... (39) 36,827 103,035 (1,454) 138,369
Operating expenses:
Marketing and selling.......................... 1,512 18,054 50,871 - 70,437
Research and development....................... 2 11,189 25,424 - 36,615
General and administrative..................... 2,885 5,377 15,364 - 23,626
Amortization of intangible assets.............. 121 6,016 3,553 - 9,690
------------- -------------- ------------- -------------- --------------
4,520 40,636 95,212 - 140,368
------------- -------------- ------------- -------------- --------------
Operating income (loss)........................... (4,559) (3,809) 7,823 (1,454) (1,999)
Non-operating income (expense):
Interest income................................ 339 135 306 (305) 475
Interest expense............................... (6,563) (293) (3,884) 305 (10,435)
Equity in net income (loss) of subsidiaries.... 2,451 - (1,452) (999) -
Other, net..................................... 693 288 (1,112) - (131)
------------- -------------- ------------- -------------- --------------
(3,080) 130 (6,142) (999) (10,091)
------------- -------------- ------------- -------------- --------------
Income (loss) before provision (credit) for
income taxes................................... (7,639) (3,679) 1,681 (2,453) (12,090)
Provision (credit) for income taxes............... (3,287) 119 5,979 (10,549) (7,738)
------------- -------------- ------------- -------------- --------------
Net loss.......................................... $(4,352) $(3,798) $ (4,298) $ 8,096 $ (4,352)
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
14
</TABLE>
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ - $ 31,022 $150,760 $(20,269) $ 161,513
Cost of goods sold................................ - 15,830 70,247 (20,269) 65,808
------------- -------------- ------------- -------------- --------------
Gross margin...................................... - 15,192 80,513 - 95,705
Operating expenses:
Marketing and selling.......................... - 7,748 38,638 - 46,386
Research and development....................... - 6,624 15,299 - 21,923
General and administrative..................... - 2,583 9,994 - 12,577
Amortization of intangible assets.............. - 141 400 - 541
Acquired in-process research and development... 5,353 1,361 - 6,714
Provisions for non-recurring charges........... - 473 - - 473
------------- -------------- ------------- -------------- --------------
- 22,922 65,692 - 88,614
------------- -------------- ------------- -------------- --------------
Operating income (loss)........................... - (7,730) 14,821 - 7,091
Non-operating income (expense):
Interest income................................ - 285 463 (99) 649
Interest expense............................... - (99) (4,361) 99 (4,361)
Equity in net income (loss) of subsidiaries.... - - (3,949) 3,949 -
Other, net..................................... - 34 (395) - (361)
------------- -------------- ------------- -------------- --------------
- 220 (8,242) 3,949 (4,073)
------------- -------------- ------------- -------------- --------------
Income (loss) before provision (credit) for
income taxes and minority interest in loss... - (7,510) 6,579 3,949 3,018
Provision (credit) for income taxes............... - (779) 8,714 - 7,935
Minority interest in loss......................... - - - (2,782) (2,782)
------------- -------------- ------------- -------------- --------------
Net loss.......................................... $ - $ (6,731) $ (2,135) $ 6,731 $ (2,135)
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
</TABLE>
15
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WAVETEK
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating
activities................................... $(23,865) $22,301 $ 1,147 $ - $ (417)
INVESTING ACTIVITIES -
Purchase of property and equipment.............. (264) (1,588) (5,790) - (7,642)
Transfer of subsidiaries........................ (28,536) - 28,536 - -
------------- ------------- ------------- -------------- ---------------
Net cash provided by (used in) investing
activities................................... (28,800) (1,588) 22,746 - (7,642)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and
long-term obligations........................ 107,352 1,402 30,305 - 139,059
Principal payments on revolving lines of credit
and long-term obligations.................... (59,408) (1,775) (84,519) - (145,702)
Dividend from subsidiary to Wavetek Wandel
Goltermann, Inc.............................. 22,000 (22,000) - - -
Capital contribution from Wavetek Wandel
Goltermann, Inc. to subsidiary............... (2,034) - 2,034 - -
Loans to subsidiaries from Wavetek Wandel
Goltermann, Inc.............................. (36,078) 6,203 29,875 - -
Repayment of loan from subsidiary to Wavetek
Wandel Goltermann, Inc....................... 28,996 (28,996) - - -
Repayment of loans to subsidiaries.............. (7,500) (1,818) 9,318 - -
Other, net...................................... (672) - - - (672)
------------- ------------- ------------- -------------- ---------------
Net cash provided by (used in) financing
activities................................... 52,656 (46,984) (12,987) - (7,315)
Effect of exchange rate changes on cash and
cash equivalents............................. - - (3,047) - (3,047)
------------- ------------- ------------- -------------- ---------------
Increase (decrease) in cash and cash
equivalents.................................. (9) (26,271) 7,859 - (18,421)
Cash and cash equivalents at beginning of
period....................................... 19 31,143 4,382 - 35,544
------------- ------------- ------------- -------------- ---------------
Cash and cash equivalents at end of period...... $ 10 $ 4,872 $ 12,241 $ - $17,123
------------- ------------- ------------- -------------- ---------------
------------- ------------- ------------- -------------- ---------------
</TABLE>
16
<PAGE>
7. 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
WANDEL
GOLTERMANN, SUBSIDIARY FOREIGN
INC. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating $ - $ (851) $ 12,693 $8,500 $ 20,342
activities...................................
INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired.... - (6,888) (5,185) - (12,073)
Purchase of property and equipment.............. - (965) (3,022) - (3,987)
Purchase of short-term investments.............. - (33,250) - - (33,250)
Proceeds from sale of short-term investments.... - 33,250 - - 33,250
Proceeds from sale of investment in affiliates.. - 304 817 - 1,121
Other, net...................................... - - (519) - (519)
------------- ------------- ------------- -------------- ---------------
Net cash used in investing activities........... - (7,549) (7,909) - (15,458)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and
long-term obligations........................ - - 22,881 - 22,881
Principal payments on revolving lines of credit
and long-term obligations.................... - - (21,319) - (21,319)
Other, net...................................... - - (1,183) - (1,183)
------------- ------------- ------------- -------------- ---------------
Net cash provided by financing activities....... - - 379 - 379
Effect of exchange rate changes on cash and
cash equivalents............................. - - (189) - (189)
------------- ------------- ------------- -------------- ---------------
Increase (decrease) in cash and cash
equivalents.................................. - (8,400) 4,974 8,500 5,074
Cash and cash equivalents at beginning of
period....................................... - 13,401 4,499 (8,500) 9,400
------------- ------------- ------------- -------------- ---------------
Cash and cash equivalents at end of period...... $ - $ 5,001 $ 9,473 $ - $ 14,474
------------- ------------- ------------- -------------- ---------------
------------- ------------- ------------- -------------- ---------------
</TABLE>
17
<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
On September 30, 1998, Wavetek Corporation, a Delaware corporation
("Wavetek"), and Wandel Goltermann Management Holding GmbH, a German limited
liability company ("WG"), consummated an exchange transaction whereby the
stockholders of WG became stockholders of Wavetek, and WG became a subsidiary of
Wavetek (the "Exchange Transaction"). In connection with the Exchange
Transaction, Wavetek was renamed Wavetek Wandel Goltermann, Inc. (the
"Company"). Although WG became a subsidiary of Wavetek, the Exchange Transaction
was treated, for accounting and reporting purposes, as a purchase of Wavetek by
WG. Accordingly, the consolidated financial statements of the Company included
herein as of any date or for any period prior to September 30, 1998 are the
historical consolidated financial statements of WG. The consolidated balance
sheets of the Company as of September 30, 1998 and March 31, 1999 and the
consolidated statement of operations for the three and six months ended March
31, 1999, included herein, reflect the Exchange Transaction and the related
purchase accounting adjustments. The Company expects net sales, cost of goods
sold, gross margin, operating expenses and interest expense to increase
significantly in fiscal 1999 as a result of the Exchange Transaction. The
Company also expects its operating expenses to increase as a result of its
acquisition of Tinwald Networking Technologies Inc. in January 1998 and
Wavetek's acquisition of Digital Transport Systems, Inc. effective September 30,
1998. In the following discussion, all references to "pro forma" financial
information mean the combined historical results of operations of Wavetek and WG
for the period indicated, as if the Exchange Transaction had been consummated as
of October 1, 1997.
GENERAL
The Company is a leading global designer, manufacturer and marketer of a
broad range of communications test instruments used to develop, manufacture,
install and maintain communications networks and equipment. The Company conducts
its communications test business, which addresses most sectors of the
communications test market, in four principal business areas: (1) Telecom
Networks (traditional voice/data transmissions and new multi-service networks),
(2) Enterprise Networks (local and wide-area network infrastructures), (3)
Multimedia (cable television and digital video broadcast) and (4) Wireless
(mobile telephony and data). The Company also designs, manufactures and sells
precision measurement instruments, electromagnetic measurement instruments and
general-purpose handheld test tools. In addition, the Company provides repair,
upgrade and calibration services, as well as value-added professional services
such as consulting and training on a worldwide basis.
The Company sells its products to a broad base of over 5,000 customers
worldwide, including (1) global communications equipment manufacturers such as
Alcatel, Cisco Systems, Inc., L.M. Ericsson Telephon AB ("Ericsson"),
International Business Machines Corp. ("IBM"), Lucent Technologies, Inc.,
Motorola, Inc., Northern Telecom, Ltd. ("Nortel"), NCR Corporation and Siemens
AG, (2) communications service providers such as AT&T Corporation,
18
<PAGE>
TeleCommunications, Inc. ("TCI"), Deutsche Telekom AG, France Telecom, Embratel,
China Telecom and Time Warner Cable and (3) the information service departments
of corporations and governmental entities such as DaimlerChrysler and the U.S.
Navy. For fiscal 1998, no customer represented more than 5% of the Company's pro
forma sales. The Company's sales are also diversified geographically.
The Company sells and services its products through (1) its global sales
and service organization of over 800 employees in over 25 countries and (2) a
global network of over 250 distributors, resellers and independent
representatives, which together provide the Company with a sales and service
presence in over 85 countries. The Company has design and manufacturing
capabilities through 11 facilities located in the United States, Germany,
France, the United Kingdom, Switzerland and Brazil.
The Company's operating expenses are substantially impacted by marketing
and selling activities and by research and development activities. Marketing and
selling expenses are primarily driven by: (1) sales volume, with respect to
sales force expenses and commission expenses; (2) the extent of market research
activities for new product design efforts; (3) advertising and trade show
activities and (4) the number of new products launched in the period. In recent
periods, the Company has increased its spending on research and development
activities primarily to accelerate the timing of new product introductions.
General and administrative expenses primarily include costs associated with the
Company's administrative employees, facilities and functions. The Company incurs
expenses in foreign countries primarily in the functional currencies of such
locations. As a result of the Company's substantial international operations,
the United States dollar amount of its expenses is impacted by changes in
foreign currency exchange rates. The Company's ability to maintain and grow its
sales depends on a variety of factors including its ability to maintain its
competitive position in areas such as technology, performance, price, brand
identity, quality, reliability, distribution and customer service and support.
The Company's sales growth also depends on its ability to continue to introduce
new products that respond to technological change and market demand in a timely
manner.
RESULTS OF OPERATIONS
The following table sets forth selected financial information as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................................ 41.9 39.2 42.6 40.7
------------ ------------ ------------ ------------
Gross margin.............................................. 58.1 60.8 57.4 59.3
Operating expenses........................................ 61.2 64.7 58.2 54.9
------------ ------------ ------------ ------------
Operating income (loss)................................... (3.1) (3.9) (0.8) 4.4
Interest expense, net..................................... (4.4) (2.1) (4.1) (2.3)
Other non-operating income (expense), net................. (0.3) 0.4 (0.1) (0.2)
------------ ------------ ------------ ------------
Income (loss) before provision (credit) for income taxes
and minority interest in loss.......................... (7.8) (5.6) (5.0) 1.9
Provision (credit) for income taxes....................... (5.0) 1.0 (3.2) 4.9
Minority interest in loss................................. - (3.7) - (1.7)
------------ ------------ ------------ ------------
Net loss.................................................. (2.8)% (2.9)% (1.8)% (1.3)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EBITDA (1)................................................ 4.7% 7.9% 7.5% 12.1%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
19
<PAGE>
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,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Ratio of earnings to fixed charges (2).................. (0.5)x (0.7)x 0.0x 1.6x
</TABLE>
- -----------
(1) EBITDA is operating income plus depreciation and amortization expense,
acquired in-process research and development, provisions for
restructuring and other non-recurring charges and, for the three and six
months ended March 31, 1999, the one-time non-cash increase in cost of
goods sold resulting from the adjustment of inventories to fair value in
connection with the Exchange Transaction. The Company's definition of
EBITDA is consistent with the definition of Consolidated Cash Flow in the
Indenture related to the Company's 10 1/8% Senior Subordinated Notes due
June 15, 2007 (the "Indenture"). While EBITDA should not be construed as
a substitute for income from operations, net income or cash flows from
operating activities in analyzing the Company's operating performance,
financial position or cash flows, the Company has included EBITDA because
it may be viewed as an indicator of compliance with certain covenants in
the Indenture and is commonly used by certain investors and analysts to
analyze and compare companies on the basis of operating performance,
leverage and liquidity and to determine a Company's ability to service
debt. EBITDA as presented by the Company herein may not be comparable to
similarly titled measures reported by other companies. In addition, the
amount reported by the Company as EBITDA may not be fully available for
management's discretionary use due to the Company's needs to conserve
funds for debt service, capital expenditures and other commitments.
(2) For purposes of computing this ratio, earnings consist of income (loss)
before provision (credit) for income taxes plus fixed charges. Fixed
charges consist of interest expense and one-third of the rent expense
from operating leases, which management believes is a reasonable
approximation of the interest factor of the rent.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales in the three months ended March 31, 1999 increased
$43.2 million, or 60.6%, to $114.5 million from $71.3 million in the comparable
fiscal 1998 period. This increase was primarily due to the addition of sales
from Wavetek following the Exchange Transaction. In addition, sales from the
historical WG portion of the Company in the three months ended March 31, 1999
increased $9.4 million, or 13.1%, from the comparable fiscal 1998 period. Sales
to international customers increased $26.3 million, or 42.2%, to $88.6 million
and sales to customers in the United States increased $16.9 million, or 188.0%,
to $25.9 million. The Company's sales to customers outside the United States
decreased to 77.4% of total sales in the three months ended March 31, 1999 from
87.4% in the comparable fiscal 1998 period. Changes in certain foreign exchange
rates had a small unfavorable impact on the United States dollar equivalent of
the Company's sales denominated in foreign currencies in the three months ended
March 31, 1999. Sales of the Company's Communications Test products in the three
months ended March 31, 1999 increased $35.7 million, or 54.4%, from the
comparable fiscal 1998 period to $101.2 million also primarily due to the
addition of sales from Wavetek following the Exchange Transaction. Sales in the
three months ended March 31, 1999 from repair, upgrade and calibration services
increased $2.0 million, or 57.4%, from the comparable fiscal 1998 period to $5.6
million.
The Company's pro forma net sales in the three months ended March 31,
1999 increased $7.7 million, or 7.2%, to $114.5 million from $106.8 million in
the comparable fiscal 1998 period.
20
<PAGE>
GROSS MARGIN. The Company's gross margin in the three months ended March
31, 1999 increased $23.2 million, or 53.5%, to $66.5 million from $43.3 million
in the comparable fiscal 1998 period due to the added gross margin on the
Wavetek sales following the Exchange Transaction. Gross margin as a percentage
of sales decreased to 58.1% in the three months ended March 31, 1999 from 60.8%
in the comparable fiscal 1998 period. The decrease in the gross margin
percentage during the three months ended March 31, 1999 resulted primarily from
increased price competition in certain markets in which the company sells and
from the impact of the change in the mix of products sold following the Exchange
Transaction. Changes in foreign exchange rates had a small favorable impact on
the United States dollar equivalent of gross margins related to international
sales denominated in foreign currencies in the three months ended March 31,
1999.
The Company's pro forma gross margin in the three months ended March 31,
1999 increased $2.5 million, or 3.9%, to $66.5 million from $64.0 million in the
comparable fiscal 1998 period. Pro forma gross margin as a percentage of pro
forma net sales decreased to 58.1% in the three months ended March 31, 1999 from
60.0% in the comparable fiscal 1998 period.
OPERATING EXPENSES. Operating expenses in the three months ended March
31, 1999 increased $24.0 million, or 52.1%, to $70.1 million from $46.1 million
in the comparable fiscal 1998 period due primarily to the addition of expenses
from Wavetek following the Exchange Transaction. Operating expenses as a
percentage of sales decreased to 61.2% in the three months ended March 31, 1999
from 64.7% in the comparable fiscal 1998 period. Marketing and selling expenses
increased $12.2 million, or 53.8%, to $34.9 million in the three months ended
March 31, 1999 from $22.7 million in the comparable fiscal 1998 period due
primarily to the addition of marketing and selling expenses from Wavetek
following the Exchange Transaction. In addition, the Company increased its
spending related to certain market development resources and fixed selling
expenses. Marketing and selling expenses as a percentage of sales decreased to
30.5% for the three months ended March 31, 1999 from 31.9% in the comparable
fiscal 1998 period. Spending for research and development activities increased
$7.5 million, or 65.8%, to $18.8 million (16.4% of sales) in the three months
ended March 31, 1999 from $11.3 million (15.9% of sales) in the comparable
fiscal 1998 period due primarily to the addition of research and development
expenses from Wavetek following the Exchange Transaction and from other
businesses acquired by the Company during fiscal 1998. The Company also
increased research and development spending in order to accelerate the timing
and number of new product introductions. General and administrative expenses
increased $5.6 million, or 93.3%, to $11.5 million (10.1% of sales) in the three
months ended March 31, 1999 from $6.0 million (8.4% of sales) in the comparable
fiscal 1998 period due to the addition of general and administrative expenses
from Wavetek following the Exchange Transaction and from other businesses
acquired by the Company during fiscal 1998. General and administrative expense
in the three months ended March 31, 1999 also includes certain retention expense
and other acquisition related compensation expense related to the Exchange
Transaction and other businesses acquired by the Company during fiscal 1998. In
addition, the Company has increased its general and administrative spending
related to its management information systems and certain other fixed
administrative costs in relation to the comparable fiscal 1998 period. Operating
expenses for the three months ended March 31, 1999 also reflect a decrease in
expenses for acquired in-process research and development and provisions for
non-recurring charges aggregating $5.8 million which occurred in the three
months ended March 31, 1998 and did not recur in the current period partially
offset by an increase in amortization of intangible assets of $4.6 million, due
primarily to the Exchange Transaction. Changes in foreign exchange rates had a
small unfavorable impact on the United States dollar equivalent of operating
expenses denominated in foreign currencies in the three months ended March 31,
1999.
Pro forma operating expenses in the three months ended March 31, 1999
increased $4.1 million, or 6.2%, to $70.1 million from $66.0 million in the
comparable fiscal 1998 period.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the three
months ended March 31, 1999 increased by $4.2 million over the comparable fiscal
1998 period to $5.4 million. The increase was primarily due to an increase in
the
21
<PAGE>
Company's net interest expense to $5.0 million during the three months ended
March 31, 1999 from $1.5 million in the comparable fiscal 1998 period,
reflecting additional interest expense due to an increase in the Company's
outstanding debt following the Exchange Transaction. Other non-operating
expenses increased by $0.7 million during the three months ended March 31, 1999
over the comparable fiscal 1998 period.
Pro forma non-operating expense, net, in the three months ended March 31,
1999 increased by $1.3 million to $5.4 million from $4.1 million in the
comparable fiscal 1998 period.
PROVISION (CREDIT) FOR INCOME TAXES. The Company's effective tax rate was
approximately 64% in the three months ended March 31, 1999. The Company's
effective tax rate takes into account the expected annual mix of income and
related tax rates by geographical location. Such effective rate also reflects
the non-deductibility of the amortization expense related to certain intangible
assets and other expenses related to the Exchange Transaction and other
acquisitions which occurred during fiscal 1998. In the three months ended March
31, 1998, the Company recorded a tax provision of $0.7 million due to
non-deductible acquired in-process research and development, which was included
in the Company's loss before taxes and minority interest in income (loss).
NET INCOME (LOSS). As a result of the above factors, net loss was $3.2
million in the three months ended March 31, 1999 as compared to $2.1 million in
the comparable fiscal 1998 period.
The Company's pro forma net loss was $3.2 million in the three months
ended March 31, 1999 as compared to $3.9 million in the comparable fiscal 1998
period.
EBITDA. As a result of the above factors, EBITDA was $5.4 million in the
three months ended March 31, 1999 as compared to $5.6 million in the comparable
fiscal 1998 period. EBITDA as a percentage of sales decreased to 4.7% in the
three months ended March 31, 1999 from 7.9% in the comparable fiscal 1998
period.
The Company's pro forma EBITDA was $5.4 million in the three months ended
March 31, 1999 as compared to $11.3 million in the comparable fiscal 1998
period.
RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors, the
ratio of earnings to fixed charges was (0.5)x in the three months ended March
31, 1999 as compared to (0.7)x in the comparable fiscal 1998 period.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales in the six months ended March 31, 1999 increased
$79.4 million, or 49.2%, to $240.9 million from $161.5 million in the comparable
fiscal 1998 period. This increase was primarily due to the addition of sales
from Wavetek following the Exchange Transaction. In addition, sales from the
historical WG part of the Company in the six months ended March 31, 1999
increased $8.8 million, or 5.5%, from the comparable 1998 period. Sales to
international customers increased $44.3 million, or 31.0%, to $187.2 million and
sales to customers in the United States increased $35.1 million, or 187.7%, to
$53.8 million. The Company's sales to customers outside the United States
decreased to 77.7% of total sales in the six months ended March 31, 1999 from
88.4% in the comparable fiscal 1998 period. Changes in certain foreign exchange
rates had a small favorable impact on the United States dollar equivalent of the
Company's sales denominated in foreign currencies in the six months ended March
31, 1999. Sales of the Company's Communications Test products in the six months
ended March 31, 1999 increased $64.8 million, or 43.3%, from the comparable
fiscal 1998 period to $214.3 million also primarily due to the addition of sales
from Wavetek following the Exchange Transaction. Sales in the
22
<PAGE>
six months ended from repair, upgrade and calibration services increased $4.6
million, or 64.5%, from the comparable fiscal 1998 period to $11.8 million.
The Company's pro forma net sales in the six months ended March 31, 1999
increased $8.1 million, or 3.5%, to $240.9 million from $232.8 million in the
comparable fiscal 1998 period.
GROSS MARGIN. The Company's gross margin in the six months ended March
31, 1999 increased $42.7 million, or 44.6%, to $138.4 million from $95.7
million in the comparable fiscal 1998 period due to the added gross margin on
the Wavetek sales following the Exchange Transaction. Gross margin as a
percentage of sales decreased to 57.4% in the six months ended March 31, 1999
from 59.3% in the comparable fiscal 1998 period. The decrease in the gross
margin percentage during the six months ended March 31, 1999 resulted
primarily from increased price competition in certain markets in which the
Company sells and from the impact of the change in the mix of products sold
following the Exchange Transaction. Gross margin in the six months ended
March 31, 1999 was also impacted by a one-time increase in cost of goods sold
resulting from the adjustment of inventories to fair value in connection with
the Exchange Transaction. Changes in foreign exchange rates had a small
favorable impact on the United States dollar equivalent of gross margins
related to international sales denominated in foreign currencies in the six
months ended March 31, 1999.
The Company's pro forma gross margin in the six months ended March 31,
1999 increased $4.7 million, or 3.5%, to $138.4 million from $133.7 million in
the comparable fiscal 1998 period. Pro forma gross margin as a percentage of pro
forma net sales was 57.4% in both the six months ended March 31, 1999 and 1998.
OPERATING EXPENSES. Operating expenses in the six months ended March 31,
1999 increased $51.8 million, or 58.4%, to $140.4 million from $88.6 million in
the comparable fiscal 1998 period due primarily to the addition of expenses from
Wavetek following the Exchange Transaction. Operating expenses as a percentage
of sales increased to 58.2% in the six months ended March 31, 1999 from 54.9% in
the comparable fiscal 1998 period. Marketing and selling expenses increased
$24.1 million, or 51.8%, to $70.4 million (29.2% of sales) in the six months
ended March 31, 1999 from $46.4 million (28.7% of sales) in the comparable
fiscal 1998 period due primarily to the addition of marketing and selling
expenses from Wavetek following the Exchange Transaction. In addition, the
Company incurred certain costs during the six months ended March 31, 1999
related to a biannual international sales and marketing meeting and increased
its spending related to certain market development resources and fixed selling
expenses. Spending for research and development activities increased $14.7
million, or 67.0%, to $36.6 million (15.2% of sales) in the six months ended
March 31, 1999 from $21.9 million (13.6% of sales) in the comparable fiscal 1998
period due primarily to the addition of research and development expenses from
Wavetek following the Exchange Transaction and from other businesses acquired by
the Company during fiscal 1998. The Company also increased research and
development spending in order to accelerate the timing and number of new product
introductions. General and administrative expenses increased $11.0 million, or
87.9%, to $23.6 million (9.8% of sales) in the six months ended March 31, 1999
from $12.6 million (7.8% of sales) in the comparable fiscal 1998 period due to
the addition of general and administrative expenses from Wavetek following the
Exchange Transaction and from other businesses acquired by the Company during
fiscal 1998. General and administrative expense in the six months ended March
31, 1999 also includes certain retention expense and other acquisition related
compensation expense related to the Exchange Transaction and other businesses
acquired by the Company during fiscal 1998. In addition, the Company has
increased its general and administrative spending related to its management
information systems and certain other fixed administrative costs in relation to
the comparable fiscal 1998 period. Operating expenses for the six months ended
March 31, 1999 also reflect an increase in amortization of intangible assets of
$9.1 million, due primarily to the Exchange Transaction, partially offset by
expenses for acquired in-process research and development and provisions for
non-recurring charges aggregating $7.2 million which occurred in the six months
ended March 31, 1998 and did not recur in the current period. Changes in
23
<PAGE>
foreign exchange rates had a small unfavorable impact on the United States
dollar equivalent of operating expenses denominated in foreign currencies in the
six months ended March 31, 1999.
Pro forma operating expenses in the six months ended March 31, 1999
increased $11.9 million, or 9.3%, to $128.5 million from $120.6 million in the
comparable fiscal 1998 period.
NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the six
months ended March 31, 1999 increased by $6.0 million over the comparable fiscal
1998 period to $10.1 million. The increase was primarily due to an increase in
the Company's net interest expense to $10.0 million during the six months ended
March 31, 1999 from $3.7 million in the comparable fiscal 1998 period,
reflecting additional interest expense due to an increase in the Company's
outstanding debt following the Exchange Transaction. The increase in net
interest expense was partially offset by a reduction of $0.2 million in other
non-operating expenses. Pro forma non-operating expense, net, was $10.1 million
in both the six months ended March 31, 1999 and 1998.
PROVISION (CREDIT) FOR INCOME TAXES. The Company's effective tax rate
decreased to approximately 64% in the six months ended March 31, 1999, from
approximately 263% in the comparable fiscal 1998 period. The Company's effective
tax rate takes into account the expected annual mix of income and related tax
rates by geographical location. Such effective rate also reflects the
non-deductibility of the amortization expense related to certain intangible
assets and other expenses related to the Exchange Transaction and other
acquisitions which occurred during fiscal 1998.
NET INCOME (LOSS). As a result of the above factors, net loss was $4.4
million in the six months ended March 31, 1999 as compared to $2.1 million in
the comparable fiscal 1998 period.
The Company's pro forma net loss was $4.4 million in the six months ended
March 31, 1999 as compared to $8.1 million in the comparable fiscal 1998 period.
EBITDA. As a result of the above factors, EBITDA was $18.0 million in the
six months ended March 31, 1999 as compared to $19.6 million in the comparable
fiscal 1998 period. EBITDA as a percentage of sales decreased to 7.5% in the six
months ended March 31, 1999 from 12.1% in the comparable fiscal 1998 period.
The Company's pro forma EBITDA was $18.0 million in the six months ended
March 31, 1999 as compared to $30.2 million in the comparable fiscal 1998
period.
RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors, the
ratio of earnings to fixed charges was 0.0x in the six months ended March 31,
1999 as compared to 1.6x in the comparable fiscal 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by (used in) operating activities was $(0.4)
million and $20.3 million in the six months ended March 31, 1999 and 1998,
respectively. The Company had cash, cash equivalents and investments at March
31, 1999 of $17.1 million. The Company invests its excess cash in highly liquid
money market funds, U.S. Treasury obligations and investment grade commercial
paper. In recent years, the Company has funded its business through operating
cash flow, has not relied on sales of equity to provide cash and has used
short-term debt primarily for cash management purposes. The Company had
borrowings outstanding under revolving credit agreements of $119.6 million at
March 31, 1999, including amounts borrowed for working capital requirements, of
which $21.3 million was classified as short-term. The Company had additional
obligations outstanding totaling approximately $9.9 million in the form of
letters of credit and bank guarantees.
24
<PAGE>
The Company's revolving lines of credit provide for total availability of $171.4
million. At March 31, 1999, the Company had unused availability under these
facilities of $41.9 million.
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 $7.6
million and $15.5 million in the six months ended March 31, 1999 and 1998,
respectively. The Company's recurring cash requirements for investing activities
are primarily for the purchase of businesses and capital expenditures. The
Company made capital expenditures in the six months ended March 31, 1999 and
1998 of approximately $7.6 million and $4.0 million, respectively.
The Company's net cash provided by (used in) financing activities was
$(7.3) million and $0.4 million in the six months ended March 31, 1999 and 1998,
respectively. The net cash provided by (used in) financing activities
substantially reflects the proceeds from and repayments for borrowings used to
finance the Company's operating and investing activities, or as an application
of the cash generated from these activities.
The Company believes that its cash flow from operations, combined with
the remaining available borrowings under its existing bank credit agreements,
including the Credit Facility discussed in Note 5 to the Company's consolidated
financial Statements included in Item 1 herein, will be sufficient to fund its
debt service obligations, including its obligations under the Notes, and working
capital requirements.
FOREIGN OPERATIONS
As discussed above, a significant portion of the Company's sales and
expenses are denominated in currencies other than the United States dollar. In
order to maintain access to such foreign currencies, the Company and certain of
its foreign subsidiaries have credit facilities providing for borrowings in
local currency. Adjustments made in translating the balance sheet accounts of
the foreign subsidiaries from their respective functional currencies at
appropriate exchange rates are included as a separate component of stockholders'
equity. In addition, the Company periodically uses forward exchange contracts
and collars to hedge certain known foreign exchange exposures. Gains or losses
from such contracts are included in the Company's consolidated statements of
operations to offset gains and losses from the underlying foreign currency
transactions.
The Indenture under which the Company's 10 1/8% Senior Subordinated Notes
due 2007 were issued permits the Company and its subsidiaries to make
investments in, and intercompany loans to, its foreign subsidiaries. Payments to
the Company or its other subsidiaries by such foreign subsidiaries, including
the payment of dividends, redemption of capital stock or repayment of such
intercompany loans, may be restricted by the credit agreements of the foreign
subsidiaries.
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies and a new common currency (the "euro"). The participating countries
adopted the euro as their common legal currency on that date. The Company is
assessing the potential impact from the euro conversion in a number of areas,
including the competitive impact of cross-border price transparency, which may
make it more difficult for businesses to charge different prices for the same
products on a country-by-country basis, and the impact on currency exchange
costs and currency exchange rate risk. At this stage of its assessment, the
Company cannot yet predict the full impact of the euro conversion on the
Company.
25
<PAGE>
PERIODIC FLUCTUATIONS
The Company's net sales occurred in the following percentages in each of
the last four quarters: 19% for the quarter ended June 30, 1998, 22% for the
quarter ended September 30, 1998, 31% for the quarter ended December 31, 1998
and 28% for the quarter ended March 31, 1999. A variety of factors may cause
period-to-period fluctuations in the operating results of the Company. Such
factors include, but are not limited to, the purchase of businesses, product
mix, European summer holidays and other seasonal influences, competitive pricing
pressures, materials costs, currency fluctuations, revenues and expenses related
to new products and enhancements of existing products, as well as delays in
customer purchases in anticipation of the introduction of new products or
product enhancements by the Company or its competitors. The majority of the
Company's revenues in each quarter results from orders received in that quarter.
As a result, the Company establishes its production, inventory and operating
expenditure levels based on anticipated revenue levels. Thus, if sales do not
occur when expected, expenditure levels could be disproportionately high and
operating results for that quarter, and potentially future quarters, would be
adversely affected.
The Company's pro forma net sales occurred in the following
percentages in each of the last four quarters: 24% for the quarter ended
June 30, 1998, 26% for the quarter ended September 30, 1998, 26% for the
quarter ended December 31, 1998 and 24% for the quarter ended March 31, 1999.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
Year 2000. This could result in a system failure or a miscalculation causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
WG and Wavetek, prior to the Exchange Transaction, independently
addressed the issues involved in the Year 2000 Issue. The Company has determined
that it will be required to modify or replace significant portions of its
hardware and software so that those systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications or
replacements of existing hardware and software, the Year 2000 Issue can be
mitigated. However, if such modifications and replacements are not made, or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. Starting in
1995, both WG and Wavetek began to evaluate their internal business and
information systems for Year 2000 compliance. The Company has completed an
assessment of the impact of the Year 2000 Issue on its internal and external
operations, and is in the process of upgrading or replacing certain hardware,
embedded chips and software programs it employs in the normal course of
business, including its manufacturing, accounting applications and certain other
administrative hardware and software systems. As a result, the Company has
already addressed many of its Year 2000 Issues and continues on schedule to
complete this project before it will have any material impact on the Company's
ability to deliver products and services.
The total cost of the year 2000 Issue project is estimated to be
approximately $2.2 million and is estimated to be completed no later than June
30, 1999 including testing and implementation. The Company has already incurred
a substantial portion of the costs of this project, including costs associated
with the implementation of certain new core information systems. Much of this
expenditure, both incurred and expected, would have been necessary in any case
as part of the regular process of maintaining and updating systems. In some
instances, the expenditures have been accelerated in order to comply with Year
2000 requirements. As of March 31, 1999, the Company has incurred approximately
$1.9 million related to the Year 2000 Issue.
26
<PAGE>
The costs of the Year 2000 Issue project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no assurance that these results will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
The Company expects to mitigate the Year 2000 Issue so that the Company's
operations or business are not materially adversely affected. In some cases, the
Company is relying upon suppliers to provide Year 2000 compliant upgrades in a
timely manner. The Company has a program in place to assess the extent to which
the Company's systems or business processes may be vulnerable to third party
non-compliance and the ability of its suppliers and business partners to
continue normal operations beyond Year 2000. Where responses from suppliers or
partners to the questions asked as part of this formal assessment program are
unsatisfactory, the Company will take steps to seek alternative suppliers or
partnerships. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted and will
not have an adverse effect on the Company's systems.
Since December 31, 1998, all Company products have been delivered Year
2000 compliant. Information has also been provided to address customer inquiries
concerning previously delivered products, including those no longer
manufactured. All expenditures for product correction have been incurred.
The Company has taken steps to minimize the risks for its business
processes and systems. Contingency plans for certain critical applications are
in place. The Company is, however, vulnerable to failures of major utilities or
service providers to become Year 2000 compliant. The Company's major facilities
include 11 discrete locations in six countries, thus mitigating any potential
impact upon the Company as a whole of any such material failures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses financial instruments, including fixed and variable rate
debt, to finance its operations. The information below summarizes the Company's
market risks associated with debt obligations outstanding as of March 31, 1999.
The following table presents principal cash flows and related weighted average
interest rates by fiscal year of maturity. Variable interest rate obligations
under the Credit Facility and other revolving bank credit agreements, capital
lease obligations and notes payable to related parties are not included in the
table. The Company has no long-term variable interest obligations other than
certain borrowings under the Credit Facility which have been classified as
long-term. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency. The actual cash flows of the instruments are
denominated in U.S. dollars ("US$"), German Deutsche marks ("DM") and other
currencies ("other") as indicated.
27
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
------------ ------------- ------------- ------------- ------------- ------------- -------------
(US$ EQUIVALENT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Obligations:
Fixed Rate (US$)........... $ - $ 685 $ 633 $ 585 $ 541 $85,500 $87,944
Average interest rate.... - 8.2% 8.2% 8.2% 8.2% 10.1% 10.1%
Fixed Rate (DM)............ $ 2,294 $4,838 $ 3,917 $3,576 $3,578 $12,870 $31,073
Average interest rate.... 4.8% 4.4% 3.8% 3.6% 3.6% 5.8% 4.8%
Fixed Rate (other)......... $ 96 $ 440 $ 185 $ 193 $ 167 $ 3,191 $ 4,272
Average interest rate.... 5.5% 8.5% 5.6% 5.6% 5.7% 5.4% 5.8%
</TABLE>
The carrying amounts of the Company's debt instruments approximate their
fair values. At March 31, 1999, the Company had interest rate cap and swap
agreements in an aggregate notional amount of $11.0 million to limit its
exposure on interest rate changes related to certain short-term variable
interest rate debt instruments. The carrying values of these interest rate
agreements approximate fair value at March 31, 1999.
The Company uses forward exchange contracts and collars in the ordinary
course of business to mitigate its exposure to changes in foreign currency
exchange rates relating to cash, accounts receivable, accounts payable,
significant transactions and anticipated future sales denominated in foreign
currencies. The terms of these contracts are generally less than one year. The
Company's risk management policies do not provide for the utilization of
financial instruments for trading purposes. Gains and losses on financial
instruments that qualify as hedges of existing assets or liabilities or firm
commitments are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs. Financial instruments which are not designated as
hedges of specific assets, liabilities, firm commitments or anticipated
transactions are marked to market and any resulting unrealized gains or losses
are recorded in "Other, net" in the accompanying consolidated statements of
operations. The Company had foreign exchange contracts outstanding for the sale
or purchase of US dollars and German Marks at March 31, 1999 and September 30,
1998 in an aggregate notional amount of $17.8 million and $25.8 million,
respectively, which mature through March 2000. While it is not the Company's
intention to terminate any of these contracts, the estimated fair value of these
contracts indicated that termination of the forward currency exchange contracts
March 31, 1999 would have resulted in a loss of $0.4 million and termination at
September 30, 1998 would have resulted in a loss of $0.6 million. Due to the
volatility of currency exchange rates, these estimated results may or may not be
realized.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company from time to time is
subject to legal claims. The Company does not believe that the likely outcome of
any such claims or related lawsuits would have a material adverse effect on the
Company or its ability to develop new products.
In May 1999, the Company and Trilithic, Inc. ("Trilithic") agreed to
settle the pending claims by Trilithic alleging unfair competition and patent
infringement with respect to the Company's manufacture and sale of certain cable
networks products. Under the terms of the settlement, which is expected to be
finalized in May 1999, the Company will pay Trilithic $4.5 million for a release
of all claims related to alleged past infringement and unfair competition, and
$1.2 million for a license under the subject patents. The total payments of $5.7
million are scheduled to be paid as follows: $900,000 at closing, $900,000 in
January 2000 and $650,000 annually for six years commencing January 2001.
28
<PAGE>
As previously disclosed in its Form 10-K, the Company is involved with a
dispute with certain beneficial owners of the Company's 10 1/8% Senior
Subordinated Notes due 2007 arising from the Exchange Transaction. The Company
is negotiating a resolution of the dispute and seeking consent to certain
amendments to the indenture under which the Notes were issued. The Company
expects that an agreement will be finalized during the quarter ended June 30,
1999, and the Company will be required to make a cash payment to the holders of
the Notes. In connection with any such agreement, the Company could become
obligated to pay an additional amount to the holders of the Notes on June 30,
2000 if certain events do not occur prior to that date. Management reasonably
expects such events will occur prior to June 30, 2000 and accordingly, no
amounts have been provided in the accompanying financial statements for this
contingent obligation.
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
10.1 Employment Agreement, effective as of October 1, 1998, by and
between Wavetek Wandel & Goltermann, Inc. and Derek Morikawa.
12.1 Schedule Re: Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule for the three and six months ended
March 31, 1999
(b) Reports on Form 8-K
None.
29
<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 17, 1999 WAVETEK WANDEL GOLTERMANN, INC.
(Registrant)
/s/VICKIE L. CAPPS
--------------------------------------------
Vickie L. Capps
Senior Vice President-Finance, Treasurer,
Secretary and Acting Chief Financial Officer
30
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of October 1, 1998, by and between
Wavetek Wandel & Goltermann, Inc., a Delaware corporation (the "Company"), and
Derek Morikawa (the "Employee").
WHEREAS, Employee has been employed as an executive officer of
Company; and
WHEREAS, Company and Employee wish to set forth the terms of the
Employee's continued employment by Company; NOW,
THEREFORE, IN CONSIDERATION OF the mutual covenants herein
contained, and other good and valuable consideration, the parties hereto agree
as follows:
EMPLOYMENT.
Company hereby employs Employee, and Employee agrees to serve as an
employee of the Company, on the terms and conditions set forth in this
Agreement.
PERIOD OF EMPLOYMENT.
The "Period of Employment" shall be the period commencing on
September 30, 1998, and ending on September 29, 2000; PROVIDED, HOWEVER, that
commencing on September 30, 1999 and on the September 30 of each year
thereafter, the term of the Agreement shall automatically be extended for one
additional year unless at least 30 days prior to any such date, Company or
Employee shall have given notice in accordance with Section 11 hereof that such
extension shall not occur.
DUTIES DURING THE PERIOD OF EMPLOYMENT.
During the Period of Employment, Employee shall serve as Chief
Operating Officer of the Company and shall have such duties and responsibilities
as are assigned to Employee by the Board of Directors of Company commensurate
with such position. Employee shall devote Employee's full business time,
attention and efforts to the affairs of Company during the Period of Employment,
PROVIDED, HOWEVER, that Employee may engage in other activities, such as
activities involving professional, charitable, educational, religious and
similar types of organizations, speaking
<PAGE>
engagements, membership on the board of directors of such other organizations as
Company may from time to time agree to, and similar type activities to the
extent that such other activities do not inhibit or prohibit the performance of
Employee's duties under this Agreement, or conflict in any material way with the
business of Company and its affiliates.
In performing such duties, Employee's principal place of employment
shall be at the Company's headquarters in North Carolina.
CURRENT CASH COMPENSATION.
As compensation for Employee's services hereunder, during the
Period of Employment Employee will be entitled to target total compensation at
the annual rate of $408,000 of which: (i) 70% shall be base salary, payable in
accordance with the Company's payroll practices for senior executives and (ii)
30% shall be target bonus, payable in accordance with Company's annual bonus
plan. Company shall review such target total compensation annually and in light
of such review may, in the discretion of the Board of Directors of Company (but
shall not be obligated to), increase such target total compensation taking into
account any change in Employee's then responsibilities, increases in the cost of
living, performance by Employee, and other pertinent factors.
OTHER EMPLOYEE BENEFITS.
VACATION AND SICK LEAVE.
Employee shall be entitled to reasonable paid annual vacation
periods and sick leave in accordance with the Company's executive vacation and
sick leave policies.
REGULAR REIMBURSED BUSINESS EXPENSES.
Company shall reimburse Employee for all expenses and
disbursements reasonably incurred by Employee in the performance of Employee's
duties during the Period of Employment, and provide such other facilities or
services as Company and Employee may, from time to time, agree are appropriate,
all in accordance with Company's established policies.
<PAGE>
EMPLOYEE BENEFIT PLANS.
In addition to the cash compensation provided for in Section 4
hereof, Employee, subject to meeting eligibility provisions and to the
provisions of this Agreement, shall be entitled to participate in Company's
employee benefit plans for U.S. executives, as presently in effect or as they
may be modified or added to by Company from time to time.
EXECUTIVE COMPENSATION PLANS.
In addition to the cash compensation provided for in Section 4
hereof and the employee benefits provided for in paragraph (c) of this Section,
Employee, subject to meeting eligibility provisions and to the provisions of
this Agreement, shall be entitled to participate in Company's executive
compensation plans, as presently in effect or as they may be modified or added
to by Company from time to time.
TERMINATION.
TERMINATION BY COMPANY WITHOUT CAUSE.
If Company should terminate the Period of Employment without
Cause as defined below, in addition to any other compensation and benefits
payable as provided for hereunder, Company shall pay to Employee a lump sum
amount equal to the base salary payable to Employee pursuant to Section 4 as of
the date of termination of the Period of Employment for the greater of (i) the
balance of the Period of Employment or (ii) twelve months.
In addition to the payment provided for above, in the event of such
termination all stock options held by Employee to purchase stock of Company
which would otherwise vest on or before January 5, 2000 shall become immediately
and fully vested. Notwithstanding anything contained herein to the contrary,
such stock option vesting is conditioned on Employee's execution of Company's
severance and general release agreement.
<PAGE>
"Cause" shall mean the willful and continued failure by Employee to
substantially perform Employee's duties with Company (other than any such
failure resulting from incapacity due to physical or mental illness) after a
demand for substantial performance is delivered to Employee by the Company
which specifically identifies the manner in which Company believes Employee has
not substantially performed his duties; conviction of, or plea of NOLO
CONTENDERE to, a felony; habitual abuse of narcotics or alcohol; fraud, material
dishonesty or gross misconduct in connection with the business of the Company.
TERMINATION BY EMPLOYEE; TERMINATION BY COMPANY FOR CAUSE.
Employee shall have the right, upon 30 days' prior written
notice given to Company, to terminate the Period of Employment. If Employee
should terminate the Period of Employment (except as provided in paragraph (c)
below) or Company should terminate the Period of Employment for Cause, Employee
will be entitled only to be paid the base annual salary otherwise payable to
Employee under paragraph (a) of Section 4 through the end of the month in which
the Period of Employment is terminated.
TERMINATION AT END OF INITIAL PERIOD OF EMPLOYMENT.
Company shall pay to Employee a lump sum amount equal to
twelve months' base salary payable pursuant to Section 4 at the rate then in
effect if the Period of Employment terminates on September 29, 2000 pursuant to
(i) notice given by either party pursuant to Section 2 or (ii) at least 90 days'
prior written notice by Employee.
CONFIDENTIAL INFORMATION.
Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to Company or any affiliate of
Company, including, without limitation, customer lists, client lists, trade
secrets, pricing policies and other business affairs of Company and any
affiliate of Company learned by Employee from Company or any such affiliate or
otherwise before or after the date of this Agreement, and not to disclose any
such confidential matter to anyone outside Company or any
<PAGE>
of its affiliates, whether during or after Employee's period of service with
Company, except as may be required by a court of law, by any governmental
agency having supervisory authority over the business of the Company or by any
administrative or legislative body (including a committee thereof) with
apparent jurisdiction to order him to divulge, disclose or make accessible
such information. Employee agrees to give Company advance written notice of
any disclosure pursuant to the preceding sentence and to cooperate with any
efforts by Company to limit the extent of such disclosure. Upon request by
Company, Employee agrees to deliver promptly to Company upon termination of
Employee's services for Company, or at any time thereafter as Company may
request, all Company or affiliate memoranda, notes, records, reports, manuals,
drawings, designs, computer files in any media and other documents (and all
copies thereof) relating to Company's or any affiliate's business and all
property of Company or any affiliate associated therewith, which Employee may
then possess or have under Employee's control, other than personal notes,
diaries, rolodexes and correspondence.
NONCOMPETITION AGREEMENT.
Without the consent in writing of the Board of Directors of
Company which will not be unreasonably withheld, upon termination of Employee's
employment for any reason whatsoever, Employee will not for a period of one year
thereafter (i) engage in, or carry on, directly or indirectly, either for
himself or as a member of a partnership or as a stockholder, investor, officer
or director of a corporation or as an employee, agent, associate, adviser or
consultant of any person, partnership or corporation, any business in
competition with the business carried on by Company or any of its affiliates or
(ii) employ or seek to employ any person then employed by the Company or any of
its affiliates. Notwithstanding the preceding sentence, Employee shall not be
prohibited from owning less than five percent (5%) of any publicly traded
corporation (whether or not such corporation is in competition with Company or
its affiliates).
<PAGE>
It is the intention of the parties hereto that the
restrictions contained in this Section be enforceable to the fullest extent
permitted by applicable law. Therefore, to the extent any court of competent
jurisdiction shall determine that any portion of the foregoing restrictions is
excessive, such provision shall not be entirely void, but rather shall be
limited or revised only to the extent necessary to make it enforceable.
Employee confirms that all restrictions in this Section are
reasonable and valid and hereby waives all defenses to the strict enforcement
thereof by Company.
REMEDY.
Should Employee engage in or perform, either directly or
indirectly, any of the acts prohibited by Sections 7 and 8 hereof, it is agreed
that Company shall be entitled to any relief that a competent court finds
appropriate against the Employee and each and every other person, firm,
organization, association, or corporation concerned therein, from the
continuance of such violative acts. The foregoing remedy available to Company
shall not be deemed to limit or prevent the exercise by Company of any or all
further rights and remedies which may be available to Company hereunder or at
law or in equity.
GOVERNING LAW.
This Agreement is governed by and is to be construed and
enforced in accordance with the laws of the State of California, without
reference to rules relating to conflicts of law. If under such law, any portion
of this Agreement is at any time deemed to be in conflict with any applicable
statute, rule, regulation or ordinance, such portion shall be deemed to be
modified or altered to conform thereto or, if that is not possible, to be
omitted from this Agreement; the invalidity of any such portion shall not affect
the force, effect and validity of the remaining portion hereof.
NOTICES.
All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person, or five (5) days after deposit
thereof in the U.S. mails, postage prepaid, for delivery
<PAGE>
as registered or certified mail, addressed to the respective party at the
address set forth below or to such other address as may hereafter be designated
by like notice. Unless otherwise notified as set forth above, notice shall be
sent to each party as follows:
EMPLOYEE, TO:
Derek Morikawa
P. O. Box 675517
Rancho Santa Fe, CA 92067
(b) Company, to:
Wavetek Wandel & Goltermann, Inc.
1030A Swabia Court
P.O. Box 113585
Research Triangle Park, North Carolina 27709-3585
Attention: Chief Executive Officer
In lieu of personal notice or notice by deposit in the U.S.
mail, a party may give notice by confirmed telegram, telex or fax, which shall
be effective upon receipt.
MISCELLANEOUS.
ENTIRE AGREEMENT.
This Agreement constitutes the entire understanding between
Company and Employee relating to employment of Employee by Company and
supersedes and cancels all prior written and oral agreements and understandings
with respect to the subject matter of this Agreement. This Agreement may be
amended but only by a subsequent written agreement of the parties. This
Agreement shall be binding upon and shall inure to the benefit of Employee,
Employee's heirs, executors, administrators and beneficiaries, and Company and
its successors.
WITHHOLDING TAXES.
All amounts payable to Employee under this Agreement shall be
subject to applicable withholding of income, employment and other taxes.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the year and day first above written.
WAVETEK WANDEL & GOLTERMANN, INC.
By: /s/ Terence J. Gooding
----------------------
Terence J. Gooding
Co-Chairman of the Board of Directors
/s/ Derek Morikawa
------------------
Derek Morikawa
<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,
------------------------------ -------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income (loss) before provision for income taxes and minority
interest in loss.......................................... $(8,931) $ (3,967) $(12,090) $ 3,018
Interest expense............................................. 5,244 1,796 10,435 4,361
Interest portion of rental expense........................... 541 487 1,556 974
--------------- -------------- --------------- ---------------
Earnings..................................................... $(3,146) $ (1,684) $ (99) $ 8,353
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
Interest expense............................................. $ 5,244 $ 1,796 $ 10,435 $ 4,361
Interest portion of rental expense........................... 541 487 1,556 974
--------------- -------------- --------------- ---------------
Fixed charges................................................ $ 5,785 $ 2,283 $ 11,991 $ 5,335
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
Ratio of earnings to fixed charges........................... (0.5)x (0.7)x 0.0x 1.6x
</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 SIX MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,123
<SECURITIES> 0
<RECEIVABLES> 86,613
<ALLOWANCES> 4,318
<INVENTORY> 61,942
<CURRENT-ASSETS> 204,834
<PP&E> 158,159
<DEPRECIATION> 95,885
<TOTAL-ASSETS> 445,468
<CURRENT-LIABILITIES> 131,545
<BONDS> 224,353
0
0
<COMMON> 132
<OTHER-SE> 72,948
<TOTAL-LIABILITY-AND-EQUITY> 445,468
<SALES> 240,931
<TOTAL-REVENUES> 240,931
<CGS> 102,562
<TOTAL-COSTS> 242,930
<OTHER-EXPENSES> 131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,435
<INCOME-PRETAX> (12,090)
<INCOME-TAX> (7,738)
<INCOME-CONTINUING> (4,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,352)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
