<PAGE>
Exhibit 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Wavetek Wandel Goltermann, Inc.
We have audited the accompanying consolidated balance sheets of Wavetek
Wandel Goltermann, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wavetek Wandel Goltermann,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Raleigh, North Carolina,
December 2, 1999.
F-1
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 17,089 $ 35,544
Accounts receivable (less allowance for doubtful accounts
of $4,608 in 1999 and $4,432 in 1998)..................... 102,532 92,281
Inventories................................................ 62,515 74,886
Deferred income taxes...................................... 8,922 17,095
Other current assets....................................... 13,636 12,736
-------- --------
Total current assets..................................... 204,694 232,542
Property, plant and equipment, net........................... 60,575 66,597
Intangible assets, net....................................... 162,482 178,675
Other non-current assets..................................... 6,982 6,710
-------- --------
Total assets............................................. $434,733 $484,524
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................. $ 17,510 $113,085
Current portion of long-term obligations................... 6,202 30,222
Current portion of long-term obligations to related
parties................................................... 10,721 11,746
Trade payables............................................. 31,549 37,612
Accrued compensation....................................... 26,626 25,907
Income taxes payable....................................... 4,250 5,956
Other current liabilities.................................. 38,838 41,848
-------- --------
Total current liabilities................................ 135,696 266,376
Long-term obligations, net of current portion................ 228,083 121,595
Pension liabilities.......................................... 35,671 35,511
Deferred income taxes........................................ 7,957 25,582
Other non-current liabilities................................ 9,389 10,046
-------- --------
Total liabilities........................................ 416,796 459,110
-------- --------
Commitments and contingencies (Notes 1, 3, 4, 5, 6, and 11)
Stockholders' equity:
Common stock, par value $.01, 50,000 shares authorized,
13,202 shares issued and outstanding...................... 132 132
Additional paid-in capital................................. 72,948 72,948
Accumulated deficit........................................ (65,641) (57,645)
Other comprehensive income................................. 10,498 9,979
-------- --------
Total stockholders' equity............................... 17,937 25,414
-------- --------
Total liabilities and stockholders' equity............... $434,733 $484,524
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $497,258 $327,888 $281,887
Cost of goods sold............................... 204,733 130,863 113,812
-------- -------- --------
Gross margin................................... 292,525 197,025 168,075
Operating expenses:
Marketing and selling.......................... 146,387 95,338 82,687
Research and development....................... 71,439 47,730 37,322
General and administrative..................... 42,074 24,837 24,263
Amortization of intangible assets.............. 19,967 1,182 1,346
Acquired in-process research and development... -- 32,925 1,743
Provisions for restructuring operations and
other
non-recurring charges......................... 2,379 9,369 --
-------- -------- --------
Total operating expenses..................... 282,246 211,381 147,361
-------- -------- --------
Operating income (loss)........................ 10,279 (14,356) 20,714
Other (income) expense, net:
Interest income............................... (677) (977) (1,610)
Interest expense.............................. 20,965 7,629 8,509
Other, net.................................... 1,069 4,814 (790)
-------- -------- --------
Other (income) expense, net.................. 21,357 11,466 6,109
-------- -------- --------
Income (loss) before provision (benefit) for
income taxes
and minority interest in income (loss).......... (11,078) (25,822) 14,605
Provision (benefit) for income taxes............. (3,082) 6,541 7,362
Minority interest in income (loss)............... -- (5,096) 185
-------- -------- --------
Net income (loss)................................ $ (7,996) $(27,267) $ 7,058
======== ======== ========
Basic and diluted earnings (loss) per share...... $ (0.61) $ (3.28) $ 0.85
======== ======== ========
Weighted average number of shares outstanding.... 13,202 8,317 8,317
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997, 1998 and 1999
(Dollars and Shares in Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Other Total
------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
------ ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996................... 8,317 $ 83 $32,930 $(31,856) $ 8,251 $ 9,408
Sales of stock by
subsidiaries......... -- -- 505 -- -- 505
Dividends............. -- -- -- (1,987) -- (1,987)
Net income............ -- -- -- 7,058 -- 7,058
Foreign currency
translation
adjustments.......... -- -- -- -- 3,623 3,623
------ ---- ------- -------- ------- --------
Balance, September 30,
1997................... 8,317 83 33,435 (26,785) 11,874 18,607
Sales of stock by
subsidiaries......... -- -- 662 -- -- 662
Shares issued in
connection with the
Exchange Transaction
with Wavetek
Corporation.......... 4,885 49 38,851 -- -- 38,900
Dividends............. -- -- -- (3,593) -- (3,593)
Net loss.............. -- -- -- (27,267) -- (27,267)
Foreign currency
translation
adjustments.......... -- -- -- -- (1,895) (1,895)
------ ---- ------- -------- ------- --------
Balance, September 30,
1998................... 13,202 132 72,948 (57,645) 9,979 25,414
Net loss.............. -- -- -- (7,996) -- (7,996)
Foreign currency
translation
adjustments.......... -- -- -- -- 519 519
------ ---- ------- -------- ------- --------
Balance, September 30,
1999................... 13,202 $132 $72,948 $(65,641) $10,498 $ 17,937
====== ==== ======= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................. $ (7,996) $(27,267) $ 7,058
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Minority interest in net income (loss)...... -- (5,096) 185
Depreciation and amortization expense....... 35,468 10,214 9,704
Acquired in-process research and
development................................ -- 32,925 1,743
Restructuring and other non-recurring
charges.................................... 2,379 2,937 --
Deferred income taxes....................... (12,985) 1,978 4,600
Changes in operating assets and liabilities,
net of effect of purchased businesses:
Accounts receivable....................... (14,083) (4,415) (6,520)
Inventories............................... 16,995 2,282 (8,239)
Other current assets...................... (1,610) 1,876 (3,643)
Accounts payable and accrued expenses..... (15,024) 2,174 10,051
Income taxes payable, net................. (2,342) 1,572 2,383
Pension liabilities....................... 484 3,180 698
Other, net................................ 3,025 (438) (507)
--------- -------- --------
Net cash provided by operating
activities.............................. 4,311 21,922 17,513
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired
of $1,363 and $1,312 in 1998 and 1997,
respectively............................... -- (45,207) (6,658)
Cash acquired in connection with Exchange
Transaction................................ -- 31,329 --
Proceeds from sale of investments in
affiliates................................. -- 1,757 1,890
Purchase of property, equipment, and
intangibles................................ (16,760) (10,416) (9,356)
Proceeds from sale of property, plant and
equipment.................................. 1,977 -- 3,999
Purchase of short-term investments,
available for sale......................... -- (41,100) (76,160)
Sale of short-term investments, available
for sale................................... -- 41,100 76,160
Payments received for notes receivable from
related parties............................ -- 6,042 740
Increases in notes receivable from related
parties.................................... -- (1,081) (1,607)
--------- -------- --------
Net cash used in investing activities.... (14,783) (17,576) (10,992)
FINANCING ACTIVITIES:
Proceeds from revolving lines of credit and
long-term obligations...................... 212,711 56,241 1,961
Principal payments on revolving lines of
credit and long-term obligations........... (218,659) (35,647) (12,084)
Cash dividends paid to stockholders......... -- (2,043) (1,188)
Proceeds from long-term obligations to
related parties............................ -- 3,364 63
Principal payments on long-term obligations
to related parties......................... -- (258) --
Other, net.................................. (672) -- --
--------- -------- --------
Net cash provided by (used in) financing
activities.............................. (6,620) 21,657 (11,248)
Effect of exchange rate changes on cash and
cash equivalents........................... (1,363) 141 (289)
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................ (18,455) 26,144 (5,016)
Cash and cash equivalents at beginning of
year....................................... 35,544 9,400 14,416
--------- -------- --------
Cash and cash equivalents at end of year.... $ 17,089 $ 35,544 $ 9,400
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest...................... $ 14,028 $ 7,103 $ 8,314
========= ======== ========
Cash paid for income taxes, net of income
tax refunds received....................... $ 5,444 $ 2,038 $ 3,346
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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"). Following the Exchange Transaction,
Wavetek was ultimately renamed Wavetek Wandel Goltermann, Inc. (the "Company").
The Exchange Transaction was accounted for as a purchase of Wavetek by WG in
accordance with Accounting Principles Board Opinion ("APB") No. 16, Business
Combinations. 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 business in two principle business areas, communications test
business and other test products. The Company conducts its communications test
business, which addresses most sectors of the communications test market, in
four product 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). These products provide
comprehensive testing solutions to a wide range of end users. The Company's
high-end instruments are used during the product development phase to stress
test product functionality and performance. Other products are used during the
production process to verify conformance to manufacturing specifications, while
the Company's enhanced portable field service tools enable field technicians to
quickly install, repair and maintain complex network infrastructure as well as
validate service levels. The Company also provides distributed remote test
systems to many of its service provider customers, which allow such customers
to more efficiently utilize their network engineers to monitor and test service
levels, and designs, manufactures and sells precision 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, training and rental services on a worldwide basis.
The Company's operating expenses are substantially impacted by marketing and
selling activities as well as 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, and its ability to continue to introduce new products that respond
to technological change and market demand in a timely manner.
F-6
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Certain items
in the prior years have been reclassified to conform with the current year
presentation.
Foreign Currency
The accounts of foreign subsidiaries consolidated herein have been
translated from their respective functional currencies into U.S. dollars based
on the current exchange rates at the end of the period for the balance sheet
and an average rate for the period on the statements of operations. Cumulative
translation adjustments are included as a separate component of stockholders'
equity as "Other Comprehensive Income." Exchange gains and losses from foreign
currency transactions are included in "Other (income) expense, net" in the
accompanying consolidated statements of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates include, among other things, assessing the
collectibility of accounts receivable, the use and recoverability of inventory,
costs of future product returns under warranty and provisions for contingencies
expected to be incurred. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments, Available for Sale
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents approximate their fair values. As part of the Company's
cash management program, the Company invests in highly liquid investments,
primarily investment grade commercial paper, U.S. Treasury Securities,
guaranteed obligations of the U.S. government or its agencies, mutual funds
which invest in U.S. Treasury Securities, preferred stock and municipal bonds.
The interest and dividend rates on these securities are reset on a frequent
basis. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
these securities are classified as "available-for-sale" securities. The Company
held no available-for-sale securities as of September 30, 1999 and 1998. For
purposes of financial statement presentation, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. The Company evaluates the financial strength of the institutions
in which significant investments are made and believes that related credit risk
is limited to an acceptable level.
Inventories
Inventories are valued at cost determined on the first-in, first-out basis,
not in excess of market. Costs include direct material, labor and manufacturing
overhead.
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Materials................................................. $13,997 $19,217
Work-in-progress.......................................... 18,172 21,469
Finished goods............................................ 30,346 34,200
------- -------
$62,515 $74,886
======= =======
</TABLE>
F-7
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation for
financial statement purposes is computed using the straight-line method based
upon the estimated useful lives of the various classes of assets which range
from 3 to 50 years for buildings and improvements and from 3 to 10 years for
fixtures and equipment.
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Land.................................................. $ 4,750 $ 6,073
Building and improvements............................. 47,468 52,699
Fixtures and equipment................................ 104,178 107,626
156,396 166,398
Less: accumulated depreciation and amortization....... (95,821) (99,801)
-------- --------
$ 60,575 $ 66,597
======== ========
</TABLE>
Intangible Assets
The Company has various intangible assets which include the excess of
purchase price over net tangible assets of businesses acquired (goodwill),
acquired core technologies, as well as other intangible assets. All the values
and lives were based on independent appraisals.
Goodwill represents the amount by which the purchase price of businesses
acquired exceeds the fair market value of the net tangible and identifiable
intangible assets acquired under the purchase method of accounting associated
with three acquisitions: the Exchange Transaction, WGTI (See Note 3), and STS
(See Note 3). Goodwill associated with these acquisitions is being amortized on
a straight-line basis over fifteen (15) years for the Exchange Transaction and
five (5) years for WGTI and STS.
Acquired core technologies was recorded in connection with the acquisitions
of WGTI ($3.3 million) and STS ($2.6 million) as well as the Exchange
Transaction ($84.1 million). The amortization period in connection with the
acquisitions of WGTI and STS is five (5) years and for the Exchange Transaction
is ten (10) years.
Other intangible assets include assembled work force associated with the
Exchange Transaction and WGTI, deferred financing costs associated with the
multi-currency and senior subordinated notes described in Note 5, and a patent
license. These intangible assets are being amortized over five (5) to fifteen
(15) years.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Goodwill.............................................. $ 71,016 $ 69,802
Less accumulated amortization....................... (7,187) (739)
Acquired core technologies............................ 90,032 90,032
Less accumulated amortization....................... (10,277) (660)
Other................................................. 36,648 29,537
Less accumulated amortization....................... (17,750) (9,297)
-------- --------
$162,482 $178,675
======== ========
</TABLE>
F-8
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company, at each balance sheet date, evaluates the recoverability of the
carrying amount of its intangible assets if circumstances suggest that it has
been impaired. If this review indicates that the value of the intangible assets
is not recoverable, as principally determined based on the estimated
undiscounted cash flows of the entity which gave rise to the intangible asset,
over the remaining amortization period, then the Company's carrying value of
the intangible asset would be reduced by the estimated shortfall in cash flows.
Impairment of Long-lived Assets
The Company, at each balance sheet date, evaluates the recoverability of the
carrying amount of its long-lived assets in accordance with SFAS no. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." If this review indicates that the value of such assets is
not recoverable over the remaining amortization period, then the Company's
carrying value of the asset would be reduced based upon the estimated fair
value.
Debt Instruments
The carrying amounts of the Company's debt instruments approximate their
fair values. The fair value of the Company's debt instruments is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Revenue and Credit Risk
The Company recognizes revenues when the following four criteria are met as
specified in the AICPA's Statement of Position No. 97-2, "Software Revenue
Recognition": (1) Persuasive evidence of an arrangement exists, (2) Delivery
has occurred, (3) The vendor's fee is fixed or determinable, and (4)
Collectibility is probable. These criteria are normally met at the time of
shipment to the customer. Service revenues are recognized as services are
performed. The Company accrues related product return reserves and warranty
expenditures, as products shipped include a one-year warranty, at the time of
sale.
The Company grants credit to its customers based on an evaluation of the
customers' financial condition and generally collateral is not required. Credit
losses have traditionally been minimal and within management's expectations.
Net Income (loss) Per Share
Effective October 1, 1997 the Company adopted SFAS No. 128, EARNINGS PER
SHARE. SFAS No. 128 replaced the calculation of primary and fully diluted net
income (loss) per share with basic and diluted net income (loss) per share. Net
income (loss) per share--basic is based only on net income (loss) of the
Company and the weighted average number of common shares outstanding. Net
income (loss) per share--diluted includes the dilutive effect of the Company's
outstanding stock options in the calculation of the number of weighted average
number of common shares outstanding. 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 fiscal year ended September 30, 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. All
net income (loss) per share amounts for all periods have been presented, and
where necessary, restated to conform to the requirements of SFAS No. 128.
F-9
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions
of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but requires pro forma
disclosure in the footnotes to the consolidated financial statements as if the
measurement provisions of SFAS No. 123 had been adopted. The Company has
continued accounting for its stock-based compensation in accordance with the
provisions of APB 25. See Note 6 for discussion of SFAS No. 123 disclosures.
Derivative Financial Instruments
The Company uses derivative financial instruments, primarily 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 also uses interest rate cap
agreements to mitigate its exposure to changes in interest rates on variable
interest rate debt instruments. The terms of such agreements are generally in
excess of one year. The Company's risk management policies prohibit financial
instruments to be used 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 as adjustments of carrying amounts when
the hedged transaction occurs. Financial instruments that 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 (income) expense, net" in the accompanying consolidated
statements of operations. At September 30, 1999 and 1998, the Company had
foreign exchange contracts outstanding in an aggregate notional amount of $18.4
million and $25.8 million, respectively. While it is not the Company's
intention to terminate any of these contracts, the estimated fair value of
these contracts indicated that termination of the forward currency exchange
contracts at September 30, 1999 and 1998 would have resulted in a gain of $0.1
million and a loss of $0.6 million, respectively. Due to the volatility of
currency exchange rates, these estimated results may or may not be realized. At
September 30, 1999 and 1998, the Company had interest rate cap agreements
outstanding with notional values of $10.9 million and $8.9 million,
respectively, which had carrying values that approximated fair value.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by
SFAS No. 137, an amendment to SFAS No. 133. This statement requires companies
to record derivatives on the balance sheet as assets and liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. These statements are not expected to
have a material impact on the Company's consolidated financial statements. This
statement is effective for fiscal years beginning after June 15, 2000, with
earlier adoption encouraged. The Company will adopt this accounting standard in
fiscal 2001.
2. EXCHANGE TRANSACTION
On September 30, 1998, Wavetek and WG consummated the Exchange Transaction
whereby the stockholders of WG received 8,317,463 shares of Common Stock of
Wavetek valued by an independent appraisal at $38.7 million plus cash of 2.0
million Deutsche marks ($1.2 million) and WG became a subsidiary of Wavetek.
Following the Exchange Transaction, Wavetek was ultimately renamed Wavetek
Wandel
F-10
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goltermann, Inc. 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. In addition, the historical
stockholders' equity of the Company has been retroactively restated to reflect
the equivalent number of shares issued in connection with the Exchange
Transaction.
The purchase price of Wavetek, including expenses of the transaction, was
deemed to be $41.5 million and was allocated to the assets acquired and
liabilities assumed, based on their estimated fair values as determined by an
independent valuation. The fair value of assets acquired was $271.1 million,
including $56.7 million of goodwill which is being amortized over 15 years, and
liabilities assumed was $229.6 million. The Company allocated $11.8 million of
the purchase price to in-process research and development projects that had not
reached technological feasibility, which the Company expensed at the date of
the Exchange Transaction.
In connection with the Exchange Transaction and related restructuring
activities, the Company recorded approximately $4.5 million of restructuring
and other non-recurring charges in fiscal 1998. This expense included
elimination of one duplicate product line, costs of consolidation of certain
sales and service operations, accounting and tax consulting charges and
severance payments.
3. ACQUISITIONS
Purchase Of The Minority Interest In Wandel & Goltermann Technologies, Inc.
During fiscal 1997, the Company's ownership interests in its then publicly-
traded U.S. subsidiary, Wandel & Goltermann Technologies, Inc. ("WGTI"), was
increased by the repurchases of common shares of WGTI on the open market. The
Company's ownership interest was increased from 57% as of September 30, 1996,
to 62% as of September 30, 1997. The total purchase cost of shares acquired was
$4.5 million and was accounted for as a purchase. The Company allocated $1.4
million of the purchase price to in-process research and development projects
that had not reached technological feasibility, which the Company expensed at
the date of acquisition. In addition, $1.2 million of the purchase price was
allocated to goodwill and other intangibles and is being amortized over five
years.
On September 18, 1998, the Company purchased the remaining outstanding
minority interest in WGTI for $15.90 per share, or $32.3 million. The Company
allocated $14.3 million of the purchase price to in-process research and
development projects that had not reached technological feasibility, which the
Company expensed at the date of acquisition. In addition, $11.5 million of the
purchase price was allocated to goodwill and other intangibles and is being
amortized over five years. In connection with the acquisition of WGTI, the
Company incurred non-recurring charges of $4.8 million in fiscal 1998. These
costs included $3.4 million of stock option compensation, $0.9 million of
severance expenses and $0.5 million of legal and consulting expenses incurred
by WGTI.
Purchase Of Digital Transport Systems, Inc.
On September 30, 1998, Wavetek U.S. Inc., a U.S. subsidiary of the Company,
acquired privately-held Digital Transport Systems, Inc. ("DTS"), a digital
broadcast test equipment company based in San Diego, California. Under the
terms of the acquisition, Wavetek U.S. Inc. acquired all of the outstanding
stock of DTS for an initial payment of $1.1 million, plus subsequent fixed and
contingent payments for four years after the acquisition. The Company accounted
for the transaction as a purchase and the assets acquired and the liabilities
assumed were recorded at their estimated fair values aggregating $0.5 million
and $0.9 million, respectively. In addition, $1.5 million of the purchase price
was allocated to in-process research and development projects that
F-11
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
had not reached technological feasibility, which the Company charged to expense
on the acquisition date. Fixed payments are due November 15, 1999, 2000, 2001
and 2002 of $0.5 million, $0.4 million, $0.4 million and $0.4 million,
respectively. Contingent payments, based upon future annual sales of DTS, are
also due annually for the next four years in amounts between $0.2 million and
$0.5 million. All subsequent payments are being expensed as incurred and are
not material to the Company.
Purchase Of Switching Test Solutions AG
In fiscal 1997, the Company purchased 40% of the outstanding capital stock
of Switching Test Solutions AG, ("STS") for $2.0 million. The Company allocated
$0.3 million of the purchase price to in-process research and development
projects that had not reached technological feasibility, which the Company
expensed at the date of acquisition. In addition, $0.6 million of the purchase
price was allocated to goodwill and other intangibles and is being amortized
over five years. This investment was accounted for using the equity method of
accounting in fiscal 1997.
At the beginning of fiscal 1998, the Company purchased the remaining 60%
interest in STS for a purchase price of $6.5 million. The Company allocated
$1.4 million of the purchase price to in-process research and development
projects that had not reached technological feasibility, which the Company
expensed at the date of acquisition. In addition, $3.3 million of the purchase
price was allocated to goodwill and other intangibles and is being amortized
over five years. The accounts and results of STS have been included in the
Company's consolidated financial statements from the date of the acquisition of
the remaining 60% interest.
In February 1998, the Company sold 400 shares, or 10%, of the common stock
of STS to the new CEO of the Company for a purchase price of $0.8 million,
which was paid in April 1998. In connection with this transaction, the CEO and
two principal owners and directors of the Company entered into put and call
options related to the shares sold to the CEO. In September 1998, the two
shareholders exercised the call options and purchased the shares of common
stock of STS held by the CEO. Subsequently, the Company purchased these shares
from the two principal owners for $0.8 million in cash. The Company allocated
$0.1 million of the purchase price to in-process research and development
projects that had not reached technological feasibility, which the Company
expensed at the date of acquisition. In addition, $0.3 million of the purchase
price has been allocated to goodwill and other intangibles and is being
amortized over five years.
Other Acquisitions
In January 1998, the Company acquired privately-held Tinwald Networking
Technologies Inc. ("Tinwald"), an Ontario Canada-based developer of software
analysis tools. Under the terms of the transaction, the Company acquired all of
the outstanding common stock of Tinwald for an initial payment of approximately
$5.0 million, plus the possibility of contingent payments for up to three years
after the acquisition. The Company accounted for the transaction as a purchase.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as determined by an independent valuation.
The fair value of tangible assets acquired was approximately $1.6 million and
liabilities assumed was approximately $0.3 million. In addition, approximately
$3.9 million of the purchase price was allocated to in-process research and
development projects that had not reached technological feasibility, which the
Company expensed at the date of the acquisition. The remainder of the purchase
price, including expenses related to the purchase, of $0.3 million has been
allocated to goodwill and is being amortized over five years.
In March 1998, the Company acquired the assets of privately held Network
Intelligence, Inc. ("NI"), a California-based developer of network performance
management software. Under the terms of the transaction, the Company acquired
all of the assets of NI for an initial payment of $1.3 million. The Company
accounted
F-12
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the transaction as a purchase. The total purchase price of approximately
$1.5 million, including expenses related to the purchase, was allocated to in-
process research and development projects that had not reached technological
feasibility, which the Company expensed at the date of the acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Exchange Transaction and the
acquisitions of WGTI, STS, Tinwald and NI had all occurred as of the beginning
of each period presented:
<TABLE>
<CAPTION>
For The Year
Ended September
30,
------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Revenues............................................. $469,773 $437,485
Loss before extraordinary items...................... (51,542) (45,781)
Net loss............................................. (56,053) (50,292)
Net loss per share................................... $ (4.25) $ (3.81)
</TABLE>
The unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense
as a result of goodwill and other intangible assets. They do not purport to be
indicative of the results of operations which would have resulted had the
combinations been consummated on the first day of each period presented. In
addition, the pro forma results are not intended to be a projection of future
results of operations of the consolidated entities.
4. NOTES PAYABLE
Notes payable are as follows:
<TABLE>
<CAPTION>
September 30,
----------------
1999 1998
------- --------
(Dollars In
Thousands)
<S> <C> <C>
Notes payable -- banks................................... $17,148 $112,685
Notes payable -- other................................... 362 400
------- --------
Total.................................................. $17,510 $113,085
======= ========
</TABLE>
At September 30, 1998, $59.6 million of the notes payable to banks was
outstanding, as described in Note 5 below, in connection with the Bank Pooling
Agreement. These amounts were repaid in January 1999.
On September 30, 1998, the Company borrowed money from two German banks,
aggregating $29.7 million, at interest rates ranging from 5.0625% to 6.7%, on
an unsecured basis in order to repay the New Credit Agreement, as defined
below. These amounts were repaid on January 4, 1999.
Certain of the Company's foreign subsidiaries have agreements with banks
providing for short-term revolving advances and overdraft facilities in an
aggregate total amount of approximately $17.9 million. At September 30, 1999
and 1998, aggregate amounts of $6.0 million and $19.0 million, respectively,
had been borrowed under these facilities. Revolving borrowings under these
agreements bear interest at variable rates ranging from 2.1875% to 7.0% as of
September 30, 1999. Certain of these bank agreements also provide for long-term
borrowings and are generally secured by the assets of the local subsidiary and
the guarantee of the Company. Most of these agreements do not have stated
expiration dates, but are cancelable by the banks at any time. At September 30,
1999, the Company was contingently liable for outstanding letters of credit and
bank guarantees aggregating $7.4 million.
F-13
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM BORROWINGS
Long-term obligations are as follows:
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
-------- --------
(Dollars In
Thousands)
<S> <C> <C>
Senior Subordinated Notes; total principal balance due June
15, 2007; interest payable semi-annually on June 15 and
December 15 at 10.125%..................................... $ 85,000 $ 85,000
Multi-Currency Revolving Credit Facility and Bilateral
Ancillary Facilities due December 2000; interest payable
over variable periods at LIBOR plus 1.5% (7.58% and 7.46%
for three and six month loans, respectively, at September
30, 1999).................................................. 118,352 --
Term loan payable to banks, interest was payable at LIBOR
plus 2.5% (8.125%)......................................... -- 24,000
Term loans payable to banks under Bank Pooling Agreement;
payable in quarterly installments through 2011; interest
payable at rates set on dates of borrowing ranging from
5.5% to 7.75%; secured by certain inventories, trade
Receivables, fixed assets and other assets of the Company
and the share capital of certain subsidiaries.............. -- 20,906
Term loans payable to banks; payable in semi-annual
installments through 2007; interest ranging from 3.5% to
6.95%; secured by mortgages on certain facilities.......... 23,840 12,617
Credit facilities with banks with various maturity dates;
interest rates ranging from 4.12% to 10.5% payable semi-
annually................................................... 3,524 4,735
Other obligations.......................................... 625 874
-------- --------
Unsecured non-interest bearing promissory note recorded at
present value on issuance date at implied interest rate of
8.1875%; issued in connection with license of technology;
payable in six annual installments of $0.8 million
commencing January 1999.................................... 2,944 3,685
Less: current maturities................................... (6,202) (30,222)
-------- --------
Total long-term obligations................................ 234,285 151,817
Long-term obligations, less current maturities............. $228,083 $121,595
======== ========
</TABLE>
F-14
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999, the future annual principal payments on long-term
obligations outstanding at September 30, 1999, were as follows (in thousands):
<TABLE>
<S> <C>
2000............................................... $ 6,202
2001............................................... 118,049
2002............................................... 4,326
2003............................................... 4,259
2004............................................... 3,029
Thereafter......................................... 98,420
--------
Total long-term obligations...................... 234,285
Less: current portion.............................. (6,202)
--------
$228,083
========
</TABLE>
On June 11, 1997, Wavetek issued $85.0 million in aggregate principal amount
of Senior Subordinated Notes (the "Notes") pursuant to an Indenture (the
"Indenture") between the Company and the Bank of New York, as trustee. The
Notes bear interest at 10.125%, payable semi-annually on each June 15 and
December 15. The total principal balance of the Notes is due June 15, 2007. On
or after June 15, 2002, the Notes will be redeemable at the option of the
Company, in whole or in part, at the following redemption prices (expressed as
percentages of principal amount) plus accrued and unpaid interest and
liquidated damages, if any; 105.063% if redeemed during the twelve-month period
beginning on June 15, 2002; 103.375% if redeemed during the twelve-month period
beginning on June 15, 2003; 101.688% if redeemed during the twelve month period
beginning of June 15, 2004, and 100% thereafter. Notwithstanding the foregoing,
during the first three years following the issue date of the Notes, the Company
may redeem up to 33 1/3% of the aggregate principal amount of the Notes with
the proceeds of one or more public equity offerings, as defined in the
Indenture, at a redemption price of 110.125% of the principal amount thereof,
in each case plus accrued and unpaid interest and liquidated damages, if any.
The Notes are guaranteed on a senior subordinated basis by the Company's
current and future subsidiaries in the United States. The Indenture requires
the Company to comply with various affirmative and negative covenants. The
Company believes it was in compliance with all such covenants at September 30,
1999. The fair market value of the Notes was $71.0 million as of December 20,
1999.
In June 1997, Wavetek also entered into a credit agreement with a group of
five lending banks (the "Lenders") including DLJ Capital Funding Inc. as
Syndication Agent and Fleet National Bank as Administrative Agent. The Company
had $24.0 million outstanding under the term facility and $4.8 million
outstanding under the revolving credit facility at September 30, 1998; which
was repaid on October 2, 1998 with the proceeds from the proceeds of unsecured
short-term loans from two German banks (see Note 4). Accordingly, all such
amounts were classified as current liabilities in the accompanying consolidated
balance sheet as of September 30, 1998. This facility was superceded by the
Credit Facility described below.
In November 1997, WG and one of its German subsidiaries entered into a
collateral pooling agreement with six banks (the "Bank Pooling Agreement"). The
collateral pooling agreement had an indefinite term, however, it could be
terminated by either party with a notice period of three months prior to the
end of any calendar quarter, but not before December 31, 1998. In January 1999,
the Company repaid the outstanding amounts with proceeds from the issuance of
the Credit Facility, defined below. The Bank Pooling Agreement provided for
term loans and revolving credit facilities up to a maximum of approximately
$116 million at terms and interest rates negotiated at the date of each
borrowing. Under the Bank Pooling Agreement, the Company had short-term
borrowings outstanding of $59.6 million at September 30, 1998 which has been
classified as "Notes payable to banks." The short-term borrowings bore interest
rates ranging from 5.5% to 7.75% at
F-15
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1998. The Bank Pooling Agreement was secured by certain
inventories, trade receivables, fixed assets and other assets of WG and the
share capital of certain of its subsidiaries. This facility was superceded by
the Credit Facility described below.
In December 1998, the Company entered into a Facilities Agreement, due
December 2000, 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
($152.7 million at September 30, 1999). The Credit Facility, which was amended
on May 28, 1999 to reduce the interest coverage ratio, as defined in the Credit
Facility, includes a commitment fee of 0.25% of the daily average unutilized
portion of the Credit Facility, and requires proceeds from certain transactions
to repay the Exceeding Amount, as defined in the Credit Facility. The Credit
Facility has a two-year term and all borrowings thereunder bear interest at
LIBOR plus 0.9% through May 31, 1999 and at LIBOR plus 1.5% thereafter.
Borrowings under the Credit Facility are secured by the pledge of 65% of the
shares of Wavetek Wandel Goltermann GmbH, a subsidiary of the Company. In
addition, a $45.0 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, as amended, requires
the Company to comply with certain covenants and maintain certain minimum
financial ratios. The Company was in compliance with all requirements of the
Credit Facility, as amended, at September 30, 1999. The Company pledged 65% of
WG shares and $45.0 million related to WGTI as guarantees. At September 30,
1999, the Company had drawn $118.3 million under the Credit Facility, as
amended, and $33.2 million was available for future borrowings. In January
1999, additional amounts were borrowed under the Credit Facility to refinance
certain bank debt at the Company's subsidiaries, and certain bank guarantees
were provided under the Credit Facility to secure other subsidiary bank
borrowings.
6. STOCKHOLDERS' EQUITY
In September 1998, the Company increased its authorized capital stock to 55
million shares, of which 50 million shares were designated as Common Stock and
5 million shares were designated as Preferred Stock. Previously, the Company
had authorized capital stock of 15 million shares, all of which was designated
as Common Stock. All authorized shares have a par value of $.01 per share. No
preferred stock has been issued by the Company.
No dividends were declared or paid in fiscal 1999. In fiscal 1998, the
Company declared dividends of $3.6 million of which $2.0 million was paid in
cash, $0.7 million was paid as a decrease to notes receivable from related
parties and $0.9 million was paid as an increase to long-term obligations to
related parties. In fiscal 1997, the Company declared dividends of $2.0 million
of which $1.2 million was paid in cash, $0.4 million was paid as a decrease to
notes receivable from related parties and $0.4 million was paid as an increase
to long-term obligations to related parties.
Prior to the Exchange Transaction, Wavetek had, and immediately following
the Exchange Transaction, the Company had 513,298 options outstanding under the
Company's Amended and Restated Stock Option Plan ("the Stock Option Plan") at
prices ranging from $1.25 to $17.91 per share and which expire through 2009.
Under the Stock Option Plan, options to purchase an aggregate of up to
1,320,232 shares of Common Stock may be issued at an exercise price equal to
the fair value of the shares at the date of grant. The Stock Option Plan
provides for the issuance of both incentive and non-qualified stock options.
Options may be granted under the Stock Option Plan through August 1, 2008,
generally vest and become exercisable over three to four years, and have a ten
(10) year term.
F-16
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock option activity is as follows:
Weighted
<TABLE>
<CAPTION>
Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding at September 30, 1997.............. -- --
Options of Wavetek............................. 513,298 $10.48
Grants......................................... -- --
Exercises...................................... -- --
Cancellations.................................. -- --
--------
Outstanding at September 30, 1998.............. 513,298 10.48
Grants......................................... 477,263 14.50
Exercises...................................... -- --
Cancellations.................................. (110,352) 13.51
--------
Outstanding at September 30, 1999.............. 880,209 12.28
========
Weighted average fair value of options granted
during 1999................................... $ 2.92
</TABLE>
Exercise prices and weighted average remaining contractual lives for the
options outstanding under the Stock Option Plan as of September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Number of Average
Options Life Exercise Options Exercise
Exercisable Prices Outstanding (years) Price Exercisable Price
------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.25--$2.57.......... 121,750 3.86 $ 1.71 121,750 $ 1.71
$5.21................. 105,750 5.77 $ 5.21 60,500 $ 5.21
$12.50--$14.50........ 472,493 9.24 $14.44 82,752 $14.31
$17.91................ 180,216 7.95 $17.91 93,658 $17.91
------- ---- ------ ------- ------
$1.25--$17.91......... 880,209 7.82 $12.28 358,660 $ 9.44
======= ==== ====== ======= ======
</TABLE>
As of September 30, 1999, options have a weighted average remaining
contractual life of approximately 7.82 years. Options to purchase 358,660
shares were exercisable and 420,023 shares are available for future grant under
the Stock Option Plan.
The Company uses APB Opinion No. 25 to account for all stock-based employee
compensation arrangements, however, SFAS No. 123 requires pro forma information
to be disclosed regarding the amount of net income (loss) determined as if the
Company had accounted for its employee stock options under the fair value
method prescribed by SFAS No. 123. For the purpose of determining such pro
forma net income, the fair value of these options was estimated as of the date
of grant using the Black-Scholes option pricing model with the following
assumptions for 1999: risk-free interest rate of 4.49%, no annual dividends and
an expected option life of five years. The pro forma effects of applying SFAS
No. 123 to options granted in fiscal 1999 on the Company's net loss and basic
and diluted net loss per share, are $(0.3) million and $(0.02), respectively.
There are no pro forma effects of applying SFAS No. 123 to net income (loss)
and net income (loss) per share in fiscal 1998 and 1997.
F-17
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. OTHER COMPREHENSIVE INCOME (LOSS)
On October 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which established standards for reporting and displaying
comprehensive loss and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
loss includes net loss and other comprehensive income (loss). The Company's
current and accumulated other comprehensive income (loss) as of the year ended
September 30, 1999, 1998 and 1997 is comprised solely of foreign currency
translation adjustments and is included in the Statements of Stockholders'
Equity.
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1999 1998 1997
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Net income (loss)...................... $(7,996) $(27,267) $ 7,058
Foreign currency translation
adjustments........................... 519 (1,895) 3,623
-------- --------- --------
Comprehensive income (loss)............ $(7,477) $(29,162) $10,681
======== ========= ========
</TABLE>
8. INCOME TAXES
The provision (benefit) for income taxes is comprised as follows:
<TABLE>
<CAPTION>
Years Ended September
30,
-----------------------
1999 1998 1997
------- ------ ------
(in thousands)
<S> <C> <C> <C>
Federal:
Current....................................... $ -- $ (866) $ (123)
Deferred...................................... (3,818) (2,151) 57
------- ------ ------
(3,818) (3,017) (66)
------- ------ ------
State:
Current....................................... 191 -- 73
Deferred...................................... 132 -- (7)
------- ------ ------
323 -- 66
------- ------ ------
Foreign:
Current....................................... 6,179 5,429 2,812
Deferred...................................... (5,766) 4,129 4,550
------- ------ ------
413 9,558 7,362
------- ------ ------
Total provision (benefit) for income taxes.. $(3,082) $6,541 $7,362
======= ====== ======
</TABLE>
F-18
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of income taxes computed at the U.S. federal statutory
tax rate to income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Federal income tax at statutory rate.............. (35.0)% (35.0)% 35.0%
State income taxes, net of federal tax benefit.... 7.8 -- 0.5
Foreign tax rate differential..................... (10.2) 6.3 10.3
Benefit from foreign sales corporation............ -- -- (1.1)
Acquired in-process research and development and
amortization of goodwill......................... 28.5 45.8 --
Recognition of tax loss carryforwards............. (19.8) -- --
Other, net........................................ 4.3 (1.6) (0.5)
----- ----- ----
(24.4) 15.5 44.2
Changes in valuation allowance.................... (3.4) 9.8 6.2
----- ----- ----
Effective income tax rate......................... (27.8)% 25.3% 50.4%
===== ===== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of September 30, 1999
and 1998 are set forth in the following table.
The significant components of deferred tax assets and liabilities at
September 30, 1999 and 1998 result from:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Inventories........................................ $ 5,908 $ 6,845
Accrued and unpaid expenses........................ 2,426 6,508
Property, plant and equipment...................... 2,641 1,138
Intangible assets.................................. 1,870 3,089
Pension plans...................................... 2,414 3,253
Tax credit carryforwards........................... 3,562 3,179
Net operating loss carryforwards................... 32,543 24,707
Other.............................................. 377 946
-------- --------
Total deferred tax assets........................ 51,741 49,665
Deferred tax liabilities:
Intangible assets.................................. (34,847) (39,736)
Property, plant and equipment...................... (1,157) (1,480)
Pension plans...................................... -- (1,551)
Other.............................................. -- (233)
-------- --------
Total deferred tax liabilities................... (36,004) (43,000)
-------- --------
Valuation allowance.............................. (14,772) (15,152)
-------- --------
Net deferred tax assets (liabilities)............ $ 965 $ (8,487)
======== ========
</TABLE>
F-19
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999, the Company's German subsidiaries had net
operating loss carryforwards of approximately $56.2 million, which can be used
indefinitely. The Company's U.S. subsidiaries had net operating loss
carryforwards of approximately $16.2 million and tax credit carryforwards of
approximately $2.6 million which can be used through 2019, subject to certain
restrictions on amounts which may be used in each year. The Company's French
subsidiaries had net operating loss carryforwards of approximately $4.4 million
which expire on various dates during the next five years. The Company's other
various worldwide subsidiaries have net operating loss carryforwards of
approximately $8.6 million which expire on various dates beyond the next five
years.
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Management believes
sufficient uncertainty exists regarding the realizability of deferred tax
assets that a valuation allowance is required. The Company continually reviews
the adequacy of the valuation allowance and is recognizing these benefits only
as reassessment indicates that it is more likely than not that the benefits
will be realized.
9. RETIREMENT BENEFITS
Defined Benefit Plans
The Company sponsors several qualified and non-qualified pension plans for
its employees. For those Company employees participating in defined benefit
plans, benefits are generally based upon years of service and compensation or
stated amounts for each year of service. Assets of the various pension plans
consist primarily of managed funds that have underlying investments in stocks
and bonds. The Company's policy for funded plans is to make contributions equal
to or greater than the requirements prescribed by law in each country.
The following table provides a reconciliation of the changes in the plans'
benefits obligations for the years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Obligation at October 1......................... $ 49,743 $ 40,557
Service cost.................................... 1,688 3,116
Interest cost................................... 3,024 2,739
Actuarial gain/loss............................. 2,656 912
Foreign currency exchange rate changes.......... 111 2,466
Benefits paid................................... (2,204) (1,785)
Plan amendments................................. -- 1,738
Business combinations........................... 72 --
----------- -----------
Obligation at September 30...................... $55,090 $49,743
=========== ===========
</TABLE>
F-20
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of the changes in the fair
value of assets under the benefits plans for the years ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Fair value of plan assets at October 1.......... $ 10,984 $ 11,603
Actual return on plan assets.................... 3,462 (623)
Foreign currency exchange rate changes.......... 113 (384)
Employer contributions.......................... 775 640
Benefits paid................................... (347) (252)
Business combinations........................... 73 --
Divestitures.................................... (101) --
----------- -----------
Fair value of plan assets at September 30....... $ 14,959 $ 10,984
=========== ===========
</TABLE>
The following table represents a statement of the funded status for the
years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
-------- --------
(Dollars in
Thousands)
<S> <C> <C>
Net amount recognized................................ $(35,671) $(35,511)
Unrecognized net gain/loss........................... (4,459) (3,248)
-------- --------
Funded status........................................ $(40,130) $(38,759)
======== ========
</TABLE>
The following table provides the amounts recognized in the consolidated
balance sheets as of September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
-------- --------
(Dollars in
Thousands)
<S> <C> <C>
Prepaid benefit cost................................. $ 805 $ 736
Accrued benefit liability............................ (36,476) (36,247)
-------- --------
Net amount recognized................................ $(35,671) $(35,511)
======== ========
</TABLE>
The following table provides the components of the net periodic benefit cost
for the plans for the years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Service cost.................................... $ 1,688 $ 3,116
Interest cost................................... 3,024 2,739
Expected return of plan assets.................. (1,097) (623)
Amortization of net gain/loss................... 179 --
----------- -----------
Net periodic pension cost....................... $ 3,794 $ 5,232
=========== ===========
</TABLE>
F-21
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table as of September 30, 1999 and 1998:
Weighted average assumptions as of:
<TABLE>
<CAPTION>
September
30,
-------------
1999 1998
----- -----
(Dollars in
Thousands)
<S> <C> <C>
Discount rate............................................. 6.5% 6.3%
Expected return on plan assets............................ 7.5 7.5
Rate of compensation increase............................. 1.0 3.9
</TABLE>
Defined Contribution Plans
In certain countries, the Company's employees participate in Company
sponsored defined contribution plans. Contributions by the Company to these
plans were $1.4 million, $0.8 million and $0.7 million in fiscal 1999, 1998 and
1997, respectively.
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," as of September 30, 1999. SFAS No. 131
establishes annual and interim reporting standards for an enterprise's
operating segment and related disclosures about its products, services,
geographic areas and major customers.
Based on its organizational structure, the Company operates in two
reportable segments: communications test and other test products. The Company's
reportable segments represent business units that primarily offer similar
products and services. The Company's communications test business includes
Telecom Networks, Enterprise Networks, Multimedia, Wireless and the Service
business. Other test products include Test Tools, Precision Measurement
Instruments and electromagnetic measurement instruments.
The Company's chief operating decision makers utilize revenue and operating
income (loss) information, as defined below, in assessing performance and
making overall operating decisions and resource allocations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
F-22
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operating segments for the fiscal year ended
September 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Communications Other Test
Test Products Corporate Total
-------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Revenues from external
customers................... $468,231 $29,011 $ 16 $ 497,258
Intersegment revenues........ 225,662 32,282 -- 257,944
Elimination of intersegment
revenues.................... (225,662) (32,282) -- (257,944)
-------- ------- --------- ---------
Total revenues........... $468,231 $29,011 $ 16 $ 497,258
======== ======= ========= =========
Operating income (loss):
Operating income (loss) on
reportable segments(1)...... $ 36,486 $ 2,261 $ (5,837) $ 32,910
Amortization of intangible
assets...................... 2,488 154 17,325 19,967
Restructuring and other non-
recurring charges........... -- -- 2,379 2,379
Elimination of intersegment
profits..................... -- -- 285 285
-------- ------- --------- ---------
Operating income (loss)
(2)....................... 33,998 2,107 (25,826) 10,279
Net interest expense:
Interest (revenue)......... (615) (38) (24) (677)
Interest expense........... 4,682 290 15,993 20,965
-------- ------- --------- ---------
Net interest expense..... 4,067 252 15,969 20,288
Other expense, net........... -- 1,368 (299) 1,069
-------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income
(loss)........................ $ 29,931 $ 487 $ (41,496) $ (11,078)
======== ======= ========= =========
Assets:
Total assets from reportable
segments.................... $187,502 $10,351 $ 154,905 $ 352,758
Elimination of receivables
from corporate.............. (58,076) (3,602) -- (61,678)
-------- ------- --------- ---------
129,426 6,749 154,905 291,080
Unallocated goodwill......... -- -- 53,860 53,860
Unallocated acquired core
technologies................ -- -- 74,290 74,290
Unallocated other
intangibles................. -- -- 15,503 15,503
-------- ------- --------- ---------
Total assets............. $129,426 $ 6,749 $ 298,558 $ 434,733
======== ======= ========= =========
Capital expenditures........... $ 15,382 $ 954 $ 424 $ 16,760
Depreciation and amortization:
Depreciation................. 11,596 719 687 13,002
Amortization of intangible
assets...................... 5,306 329 16,831 22,466
</TABLE>
---------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), including intersegment profits, and excluding
amortization of intangible assets and restructuring and other non-recurring
charges.
(2) Per consolidated statement of operations.
F-23
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operating segments for the fiscal year ended
September 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Communications Other Test
Test Products Corporate Total
-------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Revenues from external
customers................... $318,745 $ 9,061 $ 82 $ 327,888
Intersegment revenues........ 37,289 -- -- 37,289
Elimination of intersegment
revenues.................... (37,289) -- -- (37,289)
-------- ------- --------- ---------
Total revenues............. $318,745 $ 9,061 $ 82 $ 327,888
======== ======= ========= =========
OPERATING INCOME (LOSS):
Operating income (loss) on
reportable segments(1)...... $ 28,464 $ (200) $ 1,972 $ 30,236
Amortization of intangible
assets...................... 1,182 -- -- 1,182
Acquired in-process research
and development............. 21,125 -- 11,800 32,925
Restructuring and other non-
recurring charges........... 9,369 -- -- 9,369
Elimination of intersegment
profits..................... -- -- 1,116 1,116
-------- ------- --------- ---------
Operating income (loss)
(2)....................... (3,212) (200) (10,944) (14,356)
Net interest expense:
Interest (revenue)......... (580) (16) (381) (977)
Interest expense........... 3,938 112 3,579 7,629
-------- ------- --------- ---------
Net interest expense....... 3,358 96 3,198 6,652
Other (income) expense, net.. (1,969) (126) 6,909 4,814
-------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income
(loss)........................ $ (4,601) $ (170) $ (21,051) $ (25,822)
======== ======= ========= =========
ASSETS:
Total assets from reportable
segments.................... $218,421 $ 9,856 $ 145,335 $ 373,612
Elimination of receivables
from corporate.............. (43,759) (1,242) -- (45,001)
-------- ------- --------- ---------
174,662 8,614 145,335 328,611
Unallocated goodwill......... -- -- 56,789 56,789
Unallocated acquired core
technologies................ -- -- 84,100 84,100
Unallocated other
intangibles................. -- -- 15,024 15,024
-------- ------- --------- ---------
Total assets............... $174,662 $ 8,614 $ 301,248 $ 484,524
======== ======= ========= =========
Capital expenditures........... $ 9,902 $ 514 $ -- $ 10,416
DEPRECIATION AND AMORTIZATION:
Depreciation................. 7,434 211 -- 7,645
Amortization of intangible
assets...................... 1,182 -- -- 1,182
</TABLE>
---------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), including intersegment profits, and excluding
amortization of intangible assets, acquired in-process research and
development and restructuring and other non-recurring charges.
(2) Per consolidated statement of operations.
F-24
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operating segments for the fiscal year ended
September 30, 1997 is as follows (in thousands):
Communications Other Test
<TABLE>
<CAPTION>
Test Products Total
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Revenues from external customers............... $274,135 $7,752 $281,887
Intersegment revenues.......................... 29,944 847 30,791
Elimination of intersegment revenues........... (29,944) (847) (30,791)
-------- ------ --------
Total revenues............................. $274,135 $7,752 $281,887
======== ====== ========
OPERATING INCOME (LOSS):
Operating income (loss) on reportable segments
(1)........................................... $ 23,233 $ 570 $ 23,803
Amortization of intangible assets.............. 1,346 -- 1,346
Acquired in-process research and development... 1,743 -- 1,743
-------- ------ --------
Operating income (loss) (2).................. 20,144 570 20,714
Net interest expense:
Interest (revenue)........................... (1,566) (44) (1,610)
Interest expense............................. 8,275 234 8,509
-------- ------ --------
Net interest expense....................... 6,709 190 6,899
Other (income) expense, net.................... (768) (22) (790)
-------- ------ --------
Income (loss) before provision (benefit) for
income taxes and minority
interest in income (loss)...................... $ 14,203 $ 402 $ 14,605
======== ====== ========
ASSETS:
Total assets from reportable segments.......... $211,752 $5,988 $217,740
Unallocated goodwill........................... 4,345 123 4,468
-------- ------ --------
Total assets............................... $216,097 $6,111 $222,208
======== ====== ========
Capital expenditures........................... $ 9,099 $ 257 $ 9,356
DEPRECIATION AND AMORTIZATION:
Depreciation................................... 8,689 246 8,935
Amortization of intangible assets.............. 1,346 -- 1,346
</TABLE>
---------------------
Notes:
(1) Operating income (loss) on reportable segments is defined by management as
operating income (loss), excluding amortization of intangible assets and
acquired in-process research and development.
(2) Per consolidated statement of operations.
F-25
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operations by geographic areas is shown in
the table below. The Company manages its operations in two primary geographic
areas: (i) North American operations which includes the United States, Canada,
Mexico, Central and South America, and (ii) European Operations which includes
Europe and Asia-Pacific.
Net sales represents the locations of sales to the Company's customers.
Income (loss) before provision (benefit) for income taxes and total assets is
reported based on the location of the Company's facilities. Intercompany
transfers are made at arm's length between the various geographic areas.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Net sales:
Europe...................................... $ 231,494 $ 176,437 $ 148,037
Canada, Mexico, Central and South America... 76,281 69,725 62,922
Asia-Pacific................................ 71,933 44,258 40,417
United States............................... 117,550 37,468 30,511
--------- --------- ---------
Consolidated net sales........................ $ 497,258 $ 327,888 $ 281,887
========= ========= =========
Income (loss) before provision (benefit) for
income taxes and minority interest in
income (loss):
Europe...................................... $ 17,361 $ 14,871 $ 28,056
Canada, Mexico, Central and South America... (232) 131 1,668
Asia-Pacific................................ 726 864 (203)
United States............................... (28,090) (38,495) (1,329)
Eliminations................................ (843) (3,193) (13,587)
--------- --------- ---------
Consolidated income (loss) before provision
(benefit) for income taxes and minority
interest in income (loss).................... $ (11,078) $ (25,822) $ 14,605
========= ========= =========
Total assets:
Europe...................................... $ 421,078 $ 515,203 $ 364,722
Canada, Mexico, Central and South America... 24,927 26,174 12,786
Asia-Pacific................................ 21,493 14,341 14,095
United States............................... 424,741 263,101 42,432
Eliminations................................ (457,506) (334,295) (211,827)
--------- --------- ---------
Consolidated total assets..................... $ 434,733 $ 484,524 $ 222,208
========= ========= =========
</TABLE>
For fiscal 1999, no one customer accounted for more than 5% of the Company's
sales, and the top ten customers, each of which is a global company with global
affiliates, represented approximately 18% of the Company's sales.
F-26
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company rents certain facilities under operating leases. The leases
generally provide that the Company pay the taxes, insurance and maintenance
expenses related to the leased property. Certain leases include renewal options
and/or options to purchase the leased property. The Company also rents
equipment and other facilities on a month-to-month basis. Total rent expense
was $8.2 million, $5.8 million, and $4.4 million for fiscal 1999, 1998 and
1997, respectively.
In 1991, Wavetek entered into a sale/leaseback arrangement for its San Diego
manufacturing facility with an affiliate of a major stockholder. The lease runs
through June 2006 with the minimum annual rental of $0.6 million, subject to
annual consumer price index adjustments. The original gain on the transaction
was deferred and is being amortized over the original ten-year lease term.
The Company's U.S. corporate headquarters located in North Carolina and the
office and manufacturing facilities of two of the Company's U.S. subsidiaries
are leased from a partnership affiliated with certain major stockholders of the
Company. Under these leases, which expire on September 30, 2005 and 2010,
annual rent of $1.2 million is payable in monthly installments and is adjusted
annually for changes in the consumer price index.
At September 30, 1999, the annual future minimum lease payments under
noncancelable operating leases and the future minimum annual lease receipts
under noncancelable subleases are as follows:
<TABLE>
<CAPTION>
Lease Lease
Payments Receipts
-------- --------
(In Thousands)
<S> <C> <C>
2000.................................................... $ 8,989 $ 484
2001.................................................... 7,890 492
2002.................................................... 5,084 492
2003.................................................... 4,420 492
2004.................................................... 4,306 492
Later years............................................. 18,872 82
------- ------
Total minimum lease payments.......................... $49,561 $2,534
======= ======
</TABLE>
Litigation and Other Claims
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. It is management's opinion that the likely
outcome of any such proceedings and claims would not have a material adverse
effect on the Company's future results of operations or financial position.
In May 1999, the Company resolved its dispute with certain beneficial owners
of the Company's 10.125% Senior Subordinated Notes due 2007 arising from the
Exchange Transaction. The Company made a cash payment to the holders of the
Notes and entered into a supplemental indenture with the Trustee providing for
amendments to the Indenture under which the Notes were issued. In connection
with such agreement, the Company will become obligated to pay $2.125 million to
certain holders of the Notes on June 30, 2000, in cash or additional notes, in
the event that the Company does not consummate an initial public offering
producing gross cash proceeds in excess of $75 million by such date.
The Company hired a new chief financial officer as of October 1, 1999 and
terminated his employment on December 14, 1999. The individual has disputed the
basis for his termination and is claiming that he is entitled
F-27
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to his compensation for the remainder of the two year term of his employment
contract. The Company does not believe the magnitude of this dispute is
material to the Company.
12. RELATED PARTY TRANSACTIONS
At September 30, 1999 and 1998, the Company had unsecured notes payable to
stockholders of $10.7 million and $12.3 million, respectively. These
obligations bear interest at 7.75%, payable quarterly, and are due at the
earlier of an initial public offering of the Company's Common Stock or December
2000. The Company recorded interest expense related to these obligations of
$0.8 million, $0.8 million and $0.9 million, in 1999, 1998 and 1997,
respectively.
The Company leases its facility in Research Triangle Park, North Carolina,
including its corporate headquarters and the facilities of its subsidiaries
Wandel & Goltermann Technologies, Inc. and Wandel & Goltermann ATE Systems,
Inc., from a partnership which is owned by a member of the Company's board of
directors and his children, who are all also shareholders of the Company, and
certain other family members. Under the leases, which expire in September 2005
and September 2010, annual rent of $1.5 million is payable in monthly
installments and is adjusted annually for changes in the consumer price index.
The Company leases its headquarters for its local area network and Test
Tools business in San Diego, California from a corporation controlled by the
co-chairman of the Company's board of directors for an annual rent of $0.6
million, plus annual consumer price index adjustments, not to exceed 3% per
annum. The lease expires in June 2006.
The Company leases certain offices and manufacturing facilities in Eningen,
Germany for one of its German subsidiaries from the mother of the co-chairman
of the Company's board of directors. The Company paid annual rent of $0.3
million under the lease, which was terminated in July 1999.
In February 1998, the Company sold 400 shares, or 10%, of the common stock
of its then wholly-owned subsidiary Switching Test Solutions AG ("STS") to the
Company's president and chief executive officer for a purchase price of $0.8
million, which was paid in April 1998. In connection with this transaction, the
president and chief executive officer, a member of the Company's board of
directors, and a co-chairman of the Company's board of directors and
shareholder, entered into put and call options related to the shares sold to
the president and chief executive officer. In September 1998, a member of the
Company's board of directors and a co-chairman of the Company's board of
directors exercised the call options and purchased the shares of STS held by
the Company's president and chief executive officer. Subsequently, the Company
purchased these shares from a member of the Company's board of directors and a
co-chairman of the Company's board of directors for $0.8 million.
13. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's payment obligations under the Notes are guaranteed by all of
the Company's current and future domestic subsidiaries (collectively, the
"Subsidiary Guarantors"). WGTI and Wandel & Goltermann ATE Systems, Inc., which
became Subsidiary Guarantors upon completion of the Exchange Transaction, are
shown as Subsidiary Guarantors for all periods presented. Wavetek U.S. Inc. and
its subsidiary, Digital Transport Systems, Inc., are also Subsidiary
Guarantors. 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, 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.
F-28
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING BALANCE SHEETS
As of September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 11 $ 4,578 $ 12,500 $ -- $ 17,089
Accounts receivable
(less allowance for
doubtful accounts of
$4,608).............. 42,956 46,715 87,312 (74,451) 102,532
Inventories........... -- 13,884 52,388 (3,757) 62,515
Deferred income
taxes................ 561 4,482 3,879 -- 8,922
Other current assets.. 156 1,917 11,563 -- 13,636
-------- -------- -------- ---------- --------
Total current assets.... 43,684 71,576 167,642 (78,208) 204,694
Property, plant and
equipment, net......... 1,361 8,013 51,201 -- 60,575
Intangible assets, net.. 5,617 110,170 46,695 -- 162,482
Investment in
subsidiaries........... 167,992 -- -- (167,992) --
Other non-current
assets................. 6 1,988 4,988 -- 6,982
-------- -------- -------- ---------- --------
Total assets........ $218,660 $191,747 $270,526 $ (246,200) $434,733
======== ======== ======== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......... $ -- $ -- $ 17,510 $ -- $ 17,510
Long-term
obligations--
current.............. -- 685 5,517 -- 6,202
Long-term obligations
to related parties--
current.............. -- -- 10,721 -- 10,721
Trade payables........ 17,236 17,322 61,873 (64,882) 31,549
Accrued compensation.. 396 6,734 19,496 -- 26,626
Income taxes payable.. (18,986) 18,978 4,258 -- 4,250
Other current
liabilities.......... 4,516 5,786 28,536 -- 38,838
-------- -------- -------- ---------- --------
Total current
liabilities........ 3,162 49,505 147,911 (64,882) 135,696
Long-term obligations--
non-current............ 198,080 7,784 31,695 (9,476) 228,083
Pension liabilities..... -- -- 35,671 -- 35,671
Deferred income taxes... (519) 19,953 (11,477) -- 7,957
Other non-current
liabilities............ -- 4,088 5,301 -- 9,389
-------- -------- -------- ---------- --------
Total liabilities... 200,723 81,330 209,101 (74,358) 416,796
-------- -------- -------- ---------- --------
Commitments and
contingencies
Stockholders' equity:
Common stock.......... 132 -- -- -- 132
Additional paid-in
capital.............. 72,948 171,121 87,187 (258,308) 72,948
Accumulated deficit... (65,641) (60,682) (36,282) 96,964 (65,641)
Other comprehensive
income (loss)........ 10,498 (22) 10,520 (10,498) 10,498
-------- -------- -------- ---------- --------
Total stockholders'
equity............. 17,937 110,417 61,425 (171,842) 17,937
-------- -------- -------- ---------- --------
Total liabilities
and stockholders'
equity............. $218,660 $191,747 $270,526 $ (246,200) $434,733
======== ======== ======== ========== ========
</TABLE>
F-29
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING BALANCE SHEETS
As of September 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, 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, plant 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........... $ 34,463 $ 373 $ 78,249 $ -- $113,085
Long-term obligations--
current................ 24,000 741 5,481 -- 30,222
Long-term obligations to
related parties--
current................ -- -- 11,746 -- 11,746
Trade payables.......... 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
-------- -------- -------- --------- --------
Total current
liabilities.......... 56,024 45,859 188,839 (24,346) 266,376
Long-term obligations--
non-current.............. 85,000 4,299 33,711 (1,415) 121,595
Pension liabilities....... -- -- 35,511 -- 35,511
Deferred income taxes..... 238 25,156 188 -- 25,582
Other non-current
liabilities.............. 245 2,142 7,659 -- 10,046
-------- -------- -------- --------- --------
Total liabilities..... 141,507 77,456 265,908 (25,761) 459,110
-------- -------- -------- --------- --------
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)
Other comprehensive
income (loss).......... 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>
F-30
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Year Ended September 30, 1999
(Dollars In Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ -- $158,576 $392,999 $ (54,317) $497,258
Cost of goods sold...... 39 76,419 181,924 (53,649) 204,733
-------- -------- -------- --------- --------
Gross margin............ (39) 82,157 211,075 (668) 292,525
Operating expenses:
Marketing and
selling.............. 1,801 38,574 106,012 -- 146,387
Research and
development.......... -- 22,506 48,933 -- 71,439
General and
administrative....... 2,809 11,218 28,047 -- 42,074
Amortization of
intangible assets.... 136 12,189 7,642 -- 19,967
Provisions for
restructuring and
other non-recurring
charges.............. 286 296 1,797 -- 2,379
-------- -------- -------- --------- --------
Total operating
expenses........... 5,032 84,783 192,431 -- 282,246
-------- -------- -------- --------- --------
Operating income
(loss)................. (5,071) (2,626) 18,644 (668) 10,279
Other (income) expense,
net:
Interest income....... (1,187) (227) (450) 1,187 (677)
Interest expense...... 14,468 737 6,947 (1,187) 20,965
Equity in net income
(loss) of
subsidiaries......... (4,866) -- -- 4,866 --
Other, net............ (563) 79 1,553 -- 1,069
-------- -------- -------- --------- --------
Total other (income)
expense, net 7,852 589 8,050 4,866 21,357
-------- -------- -------- --------- --------
Income (loss) before
provision (benefit)
for income taxes..... (12,923) (3,215) 10,594 (5,534) (11,078)
Provision (benefit) for
income taxes........... (4,927) 3,745 (1,633) (267) (3,082)
-------- -------- -------- --------- --------
Net income (loss)....... $ (7,996) $ (6,960) $ 12,227 $ (5,267) $ (7,996)
======== ======== ======== ========= ========
</TABLE>
F-31
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Year Ended September 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 59,261 $305,916 $(37,289) $327,888
Cost of goods sold...... -- 32,278 137,680 (39,095) 130,863
----- -------- -------- -------- --------
Gross margin............ -- 26,983 168,236 1,806 197,025
Operating expenses:
Marketing and
selling.............. -- 17,181 78,157 -- 95,338
Research and
development.......... -- 13,891 33,839 -- 47,730
General and
administrative....... -- 5,281 19,556 -- 24,837
Amortization of
intangible assets.... -- -- 1,182 -- 1,182
Acquired in-process
research
and development...... -- 24,342 8,583 -- 32,925
Provisions for
restructuring and
other non-recurring
charges.............. -- 4,820 4,549 -- 9,369
----- -------- -------- -------- --------
Total operating
expenses........... -- 65,515 145,866 -- 211,381
----- -------- -------- -------- --------
Operating income
(loss)................. -- (38,532) 22,370 1,806 (14,356)
Other (income) expense,
net: --
Interest income....... -- (351) (807) 181 (977)
Interest expense...... -- 181 7,629 (181) 7,629
Other, net............ -- 133 4,681 -- 4,814
----- -------- -------- -------- --------
Total other (income)
expense, net....... -- (37) 11,503 -- 11,466
----- -------- -------- -------- --------
Income (loss) before
provision (benefit)
for income taxes and
minority interest in
income (loss)........ -- (38,495) 10,867 1,806 (25,822)
Provision (benefit) for
income taxes........... -- (3,017) 9,558 -- 6,541
Minority interest in
income (loss).......... -- -- 124 (5,220) (5,096)
----- -------- -------- -------- --------
Net income (loss)....... $ -- $(35,478) $ 1,185 $ 7,026 $(27,267)
===== ======== ======== ======== ========
</TABLE>
F-32
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENTS OF OPERATIONS
For The Year Ended September 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ -- $61,302 $258,945 $(38,360) $281,887
Cost of goods sold...... -- 27,311 125,944 (39,443) 113,812
----- ------- -------- -------- --------
Gross margin............ -- 33,991 133,001 1,083 168,075
Operating expenses:
Marketing and
selling.............. -- 15,870 66,817 -- 82,687
Research and
development.......... -- 12,510 24,812 -- 37,322
General and
administrative....... -- 5,324 18,939 -- 24,263
Amortization of
intangible assets.... -- -- 1,346 -- 1,346
Acquired in-process
research and
development.......... -- 1,401 342 -- 1,743
----- ------- -------- -------- --------
Total operating
income............. -- 35,105 112,256 -- 147,361
----- ------- -------- -------- --------
Operating income
(loss)................. -- (1,114) 20,745 1,083 20,714
Other (income) expense,
net:
Interest income....... -- (639) (1,094) 123 (1,610)
Interest expense...... -- 123 8,509 (123) 8,509
Other, net............ -- 217 (1,007) -- (790)
----- ------- -------- -------- --------
Total other (income)
expense, net....... -- (299) 6,408 -- 6,109
----- ------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interest in income... -- (815) 14,337 1,083 14,605
Provision for income
taxes.................. -- -- 7,362 -- 7,362
Minority interest in
income................. -- -- -- 185 185
----- ------- -------- -------- --------
Net income (loss)....... $ -- $ (815) $ 6,975 $ 898 $ 7,058
===== ======= ======== ======== ========
</TABLE>
F-33
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............. $ (26,343) $20,955 $ 9,699 $ -- $ 4,311
INVESTING ACTIVITIES
Purchase of property,
plant and equipment.. (483) (3,928) (12,349) -- (16,760)
Proceeds from sale of
property, plant and
equipment............ -- -- 1,977 -- 1,977
Transfer of
subsidiaries......... (28,536) -- 28,536 -- --
--------- ------- -------- ----- --------
Net cash provided by
(used in) investing
activities......... (29,019) (3,928) 18,164 -- (14,783)
FINANCING ACTIVITIES
Proceeds from
revolving lines of
credit and long-term
obligations.......... 126,475 6,464 79,772 -- 212,711
Principal payments on
revolving lines of
credit and long-term
obligations.......... (71,859) (6,837) (139,963) -- (218,659)
Dividend from
subsidiary to Wavetek
Wandel Goltermann,
Inc.................. 22,000 (22,000) -- -- --
Capital contribution
from Wavetek Wandel
Goltermann, Inc. to
subsidiary........... (4,215) -- 4,215 -- --
Loans to subsidiaries
from Wavetek Wandel
Goltermann, Inc...... (62,195) 8,738 53,457 -- --
Repayment of loan from
subsidiary to Wavetek
Wandel Goltermann,
Inc.................. 53,320 (29,196) (24,124) -- --
Repayment of loans
from subsidiaries.... (7,500) (1,818) 9,318 -- --
Other, net............ (672) 1,057 (1,057) -- (672)
--------- ------- -------- ----- --------
Net cash provided by
(used in) financing
activities......... 55,354 (43,592) (18,382) -- (6,620)
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- (1,363) -- (1,363)
--------- ------- -------- ----- --------
Increase (decrease) in
cash and cash
equivalents............ (8) (26,565) 8,118 -- (18,455)
Cash and cash
equivalents at
beginning of period.... 19 31,143 4,382 -- 35,544
--------- ------- -------- ----- --------
Cash and cash
equivalents at end of
period................. $ 11 $ 4,578 $ 12,500 $ -- $ 17,089
========= ======= ======== ===== ========
</TABLE>
F-34
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............. $ -- $ (7,100) $ 20,522 $ 8,500 $ 21,922
INVESTING ACTIVITIES:
Purchases of
businesses, net of
cash acquired........ -- (39,182) (6,025) -- (45,207)
Cash acquired in
connection with the
Exchange
Transaction.......... 19 30,438 872 -- 31,329
Purchase of short-term
investments.......... -- (41,100) -- -- (41,100)
Proceeds from sale of
short-term
investments.......... -- 41,100 -- -- 41,100
Purchase of property,
plant and equipment.. -- (1,779) (8,637) -- (10,416)
Other, net............ -- 302 6,416 -- 6,718
----- -------- -------- ------- --------
Net cash provided
by (used in)
investing
activities....... 19 (10,221) (7,374) -- (17,576)
FINANCING ACTIVITIES:
Proceeds from
revolving lines of
credit and long-term
obligations.......... -- 1,455 54,786 -- 56,241
Principal payments on
revolving lines of
credit and long-term
obligations.......... -- (1,087) (34,560) -- (35,647)
Capital contributions
from the Company to
subsidiaries......... -- 34,695 (34,695) -- --
Cash dividends paid to
stockholders......... -- -- (2,043) -- (2,043)
Other, net............ -- -- 3,106 -- 3,106
----- -------- -------- ------- --------
Net cash provided
by (used in)
financing
activities....... -- 35,063 (13,406) -- 21,657
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- 141 -- 141
----- -------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ 19 17,742 (117) 8,500 26,144
Cash and cash
equivalents at
beginning of year...... -- 13,401 4,499 (8,500) 9,400
----- -------- -------- ------- --------
Cash and cash
equivalents at end of
year................... $ 19 $ 31,143 $ 4,382 $ -- $ 35,544
===== ======== ======== ======= ========
</TABLE>
F-35
<PAGE>
WAVETEK WANDEL GOLTERMANN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For The Year Ended September 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Wavetek Wandel Subsidiary Foreign
Goltermann, Inc. Guarantors Subsidiaries Eliminations Consolidated
---------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES.. $ -- $ 3,411 $ 22,602 $(8,500) $ 17,513
INVESTING ACTIVITIES:
Purchase of
businesses, net of
cash acquired....... (6,658) (6,658)
Purchase of short-
term investments.... -- (76,160) -- -- (76,160)
Proceeds from sale of
short-term
investments......... -- 76,160 -- -- 76,160
Purchase of property,
plant and
equipment........... -- (1,728) (7,628) -- (9,356)
Other, net........... -- 1,413 3,609 -- 5,022
----- -------- -------- ------- --------
Net cash used in
investing
activities........ -- (315) (10,677) -- (10,992)
FINANCING ACTIVITIES:
Proceeds from
revolving lines of
credit and long-term
obligations......... -- -- 1,961 -- 1,961
Principal payments on
revolving lines of
credit and long-term
obligations......... -- -- (12,084) -- (12,084)
Cash dividends paid
to stockholders..... -- (1,188) -- (1,188)
Other, net........... -- -- 63 -- 63
----- -------- -------- ------- --------
Net cash used in
financing
activities........ -- -- (11,248) -- (11,248)
Effect of exchange rate
changes on cash and
cash equivalents...... -- -- (289) -- (289)
----- -------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents........... -- 3,096 388 (8,500) (5,016)
Cash and cash
equivalents at
beginning of year..... -- 10,305 4,111 -- 14,416
----- -------- -------- ------- --------
Cash and cash
equivalents at end of
year.................. $ -- $ 13,401 $ 4,499 $(8,500) $ 9,400
===== ======== ======== ======= ========
</TABLE>
F-36
