================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997 Commission File No. 0-23742
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 22-1867386
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1030 SWABIA COURT, RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-3585
(Address of principal executive offices and zip code)
(919) 941-5730
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of July 31, 1997, 5,260,822 shares of the Registrant's $0.01 par value common
stock were outstanding.
================================================================================
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
INDEX - FORM 10-Q
JUNE 30, 1997
<TABLE>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets................................................................................3
Consolidated Statements of Income..........................................................................4
Consolidated Statements of Cash Flows......................................................................5
Notes to Consolidated Financial Statements.................................................................6
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................9
PART II - OTHER INFORMATION......................................................................................14
SIGNATURE........................................................................................................15
</TABLE>
2
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
-------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,538 $10,286
Accounts receivable-
Nonaffiliates 8,606 8,148
Affiliates 3,960 5,068
Income tax receivable 177 720
Inventories 5,159 4,695
Deferred tax assets 1,763 1,079
Other current assets 680 349
-------------------- --------------------
Total current assets 34,883 30,345
-------------------- --------------------
Property and equipment, at cost:
Machinery and equipment 4,473 4,401
Furniture and fixtures 5,820 5,186
-------------------- --------------------
10,293 9,587
Accumulated depreciation (7,306) (6,323)
-------------------- --------------------
2,987 3,264
-------------------- --------------------
Other assets 664 689
-------------------- --------------------
$38,534 $34,298
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-
Nonaffiliates $ 1,797 $ 1,327
Affiliates 983 950
Accrued compensation 1,632 1,855
Other accrued liabilities 1,981 1,344
-------------------- --------------------
Total current liabilities 6,393 5,476
-------------------- --------------------
Shareholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.01 par value
50,000,000 shares authorized;
issued and outstanding -5,260,822 at June 30, 1997
and 5,169,052 at September 30, 1996 53 52
Additional paid-in capital 26,357 25,056
Retained earnings 5,731 3,714
-------------------- --------------------
32,141 28,822
-------------------- --------------------
$38,534 $34,298
==================== ====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
-------------------------------------------- ------------------ --- -----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------------------
1997 1996 1997 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Nonaffiliates $ 8,581 $ 8,895 $22,310 $24,221
Affiliates 4,639 6,528 20,707 19,161
------------------- ------------------- ------------------- -------------------
Total revenues 13,220 15,423 43,017 43,382
Cost of revenues 5,587 6,243 17,959 17,304
------------------- ------------------- ------------------- -------------------
Gross profit 7,633 9,180 25,058 26,078
Selling, general and administrative expenses 4,937 4,528 14,744 13,826
Product development expenses 2,686 2,445 7,618 7,479
------------------- ------------------- ------------------- -------------------
Operating income 10 2,207 2,696 4,773
Interest income 155 79 475 192
Foreign currency gains (losses) (19 ) (46 ) (289 ) (160 )
------------------- ------------------- ------------------- -------------------
Income before income taxes 146 2,240 2,882 4,805
Provision for income taxes 44 719 865 1,538
------------------- ------------------- ------------------- -------------------
Net income $ 102 $ 1,521 $ 2,017 $ 3,267
=================== =================== =================== ===================
Earnings per share $ 0.02 $ 0.29 $ 0.38 $ 0.63
Weighted average number of common shares
outstanding 5,285 5,275 5,359 5,220
=================== =================== =================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------- --
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
------------------------------------------
1997 1996
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,017 $ 3,267
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 1,279 1,436
Deferred tax provision (684) (49)
(Increase) decrease in accounts receivable -
Nonaffiliates (458) (1,131)
Affiliates 1,108 (1,826)
Decrease in income tax receivable 543 1,464
(Increase) decrease in inventories (464) 1,315
Increase (decrease) in accounts payable-
Nonaffiliates 470 (413)
Affiliates 33 662
Decrease in other current liabilities 414 538
Other, net (312) 56
------------------- ------------------
Net cash provided by operating activities 3,946 5,319
------------------- ------------------
Cash flows from investing activities:
Purchases of marketable securities (48,810) (12,000)
Proceeds from the sale of marketable securities 48,810 12,000
Acquisitions of property and equipment (830) (990)
Acquisition of intangible assets (166) (377)
------------------- ------------------
Net cash used in investing activities (996) (1,367)
------------------- ------------------
Cash flows from financing:
Repurchase of Common Stock -- (1,287)
Proceeds from issuance of Common Stock, net 1,302 498
------------------- ------------------
Net cash provided by (used in) financing activities 1,302 (789)
------------------- ------------------
Increase in cash and cash equivalents 4,252 3,163
Cash and cash equivalents, beginning of period 10,286 5,374
------------------- ------------------
Cash and cash equivalents, end of period $14,538 $ 8,537
=================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Wandel & Goltermann Technologies, Inc. and its wholly-owned subsidiaries,
collectively referred to herein as "the Company." All significant intercompany
accounts and transactions have been eliminated. Certain amounts presented in the
financial statements of prior periods have been reclassified to conform to the
method of presentation in the current period. These reclassifications are not
material.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. Certain information and footnote disclosures required for complete
financial statements have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (which consist of normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1997 and the results of operations and cash flows for the nine months ended June
30, 1997 and 1996. The results of operations for the three- and nine-month
periods ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full fiscal year.
Note 2 - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. The
components of inventories, which include materials, labor and manufacturing
overhead, consist of the following (in thousands);
JUNE 30, SEPTEMBER 30,
1997 1996
------------------- ------------------
Raw materials and supplies $1,727 $1,473
Work in process 1,130 760
Finished goods 2,302 2,462
------------------- ------------------
$5,159 $4,695
=================== ==================
Note 3 - Foreign Currencies
Inventory purchases from affiliates, certain product sales to affiliates and
certain other transactions with affiliates are denominated in German Deutsche
Marks ("DMs") and are translated into U.S. dollars at the exchange rate in
effect at the transaction date. Gains or losses resulting from changes in the
exchange rate subsequent to the transaction date are reflected in the
consolidated statements of income in the period in which they occur.
From time to time, the Company has sought to reduce its exposure to increases in
the U.S. dollar relative to the DM by purchasing forward foreign currency
exchange contracts and collars relating to cash and accounts receivable
denominated in DMs. The Company also purchases foreign currency exchange
contracts and collars relating to some of its future anticipated sales in DMs.
As of June 30, 1997, the Company has outstanding forward currency exchange rate
contracts as follows.
6
<PAGE>
<TABLE>
<CAPTION>
MATURITY DATE NOTATIONAL AMOUNT CONTRACT RATE
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
September 26, 1997 DM 1,000,000 1.6757
September 26, 1997 DM 1,000,000 1.6701
December 22, 1997 DM 1,000,000 1.6647
</TABLE>
In addition, the Company has outstanding currency exchange rate collars as
follows:
<TABLE>
<CAPTION>
MATURITY DATE NOTATIONAL AMOUNT COLLAR RANGE
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
September 26, 1997 DM 1,000,000 1.6349 - 1.7100
September 26, 1997 DM 1,000,000 1.5982 - 1.7500
December 26, 1997 DM 1,000,000 1.6294 - 1.7100
</TABLE>
Cash and accounts receivable denominated in DMs are revalued at each balance
sheet date at the then current exchange rate, and any unrealized gain or loss is
recognized in the consolidated statement of income. Any foreign currency
exchange collars or contracts are revalued at each balance sheet date at the
then current exchange rate, and any unrealized gain or loss is recognized in the
consolidated statement of income.
Note 4 - Major Customers and Consideration of Credit Risk
In the normal course of business, the Company extends credit to various
nonaffiliated companies, primarily developers and manufacturers of network
systems in the United States. The Company manages its exposure to credit risk
from nonaffiliated customers through credit approval and monitoring procedures.
The Company believes that its portfolio of receivables from nonaffiliated
customers is well diversified and the allowance for doubtful accounts ($170,000
at June 30, 1997 and $125,000 at September 30, 1996) is adequate. Accounts
receivable are not collateralized.
Two nonaffiliate customers accounted for 14% and 11%, respectively, of total
revenues in the quarter ended June 30, 1997. One nonaffiliated customer
accounted for 10% of total revenues for the nine months ended June 30, 1997.
One nonaffiliated customer accounted for 15% of total revenues in the quarter
ended June 30, 1996. No nonaffiliated customer accounted for 10% or more of
total revenues in the nine months ended June 30, 1996.
Note 5 - Effects of Recent Accounting Pronouncements
The financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings
Per Share," in February 1997. The Company is required to adopt SFAS No. 128 for
the quarter ended December 31, 1997. This statement establishes standards for
computing and presenting earnings per share (EPS) and makes them comparable to
international EPS standards. The statement requires dual presentation of basic
and diluted EPS on the face of the income statement and requires a
reconciliation of the numerator and denomination of the basic EPS computation to
the numerator and denominator of the diluted EPS calculation. If the Company has
been required to report EPS under this statement, EPS for the quarters and nine
months ended June 30, 1997 and 1996 would be as follows:
7
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------------------ -----------------------------------------
1997 1996 1997 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator $ 102 $ 1,521 $2,017 $3,267
Denominator:
Common Shares Outstanding 5,260 5,160 5,228 5,158
------------------- ------------------- ------------------- -------------------
Basic EPS $ 0.02 $ 0.29 $ 0.39 $ 0.63
=================== =================== =================== ====================
Diluted EPS Computation
Numerator $ 102 $1,521 $2,017 $3,267
------------------- ------------------- ------------------- -------------------
Denominator:
Common Shares Outstanding 5,260 5,160 5,228 5,158
Options 21 110 126 54
Employee Stock Purchase Plan 4 5 4 4
------------------- ------------------- ------------------- -------------------
Total shares 5,285 5,275 5,358 5,216
------------------- ------------------- ------------------- -------------------
Diluted EPS $ 0.02 $ 0.29 $ 0.38 $ 0.63
=================== =================== =================== ===================
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities and Exchange Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, which reflect the
Company's current judgment on those issues. Because such statements apply to
future events, they are subject to risks and uncertainties that could cause
actual results to differ materially. Additional information concerning factors
that could cause actual results to materially differ from those in the
forward-looking statements is contained in the Company's other SEC filings,
including its Registration Statement on Form S-1, copies of which are available
upon request from the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the
Consolidated Statements of Operations expressed as a percentage of total
revenues:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------- ---------------------------------
1997 1996 1997 1996
-------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Revenues:
Nonaffiliates 64.9 % 57.7 % 51.9 % 55.8 %
Affiliates 35.1 42.3 48.1 44.2
---------------- --------------- -------------- ------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues 42.3 40.5 41.7 39.9
---------------- --------------- -------------- ------------------
Gross profit 57.7 59.5 58.3 60.1
Selling, general and administrative expenses 37.3 29.4 34.3 31.9
Product development expenses 20.3 15.8 17.7 17.2
---------------- --------------- -------------- ------------------
Operating income 0.1 14.3 6.3 11.0
Interest income 1.2 0.5 1.1 0.4
Foreign currency gains (losses) (0.2 ) (0.3 ) (0.7 ) (0.4 )
---------------- --------------- -------------- ------------------
Income before income taxes 1.1 14.5 6.7 11.0
Provision for income taxes 0.3 4.6 2.0 3.5
---------------- --------------- -------------- ------------------
Net income 0.8 % 9.9 % 4.7 % 7.5 %
================ =============== ============== ==================
</TABLE>
The following table presents, for the periods indicated, the Company's revenues
from the sale of internetwork analysis products and complementary
telecommunication products and such revenues as a percentage of total revenues:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------------------------- --------------------------------------------------
1997 1996 1997 1996
----------------------- ---------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Internetwork analysis products:
DA-3x $ 3,284 24.8 % $ 7,797 50.6 % $15,011 34.9 % $24,195 55.8 %
Domino 5,721 43.3 4,185 27.1 16,077 37.4 10,066 23.2
Other 855 6.5 663 4.3 2,979 6.9 2,252 5.2
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total internetwork
analysis products 9,860 74.6 12,645 82.0 34,067 79.2 36,513 84.2
Complementary telecom-
munication products 3,360 25.4 2,778 18.0 8,950 20.8 6,869 15.8
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total revenues $13,220 100.0 % $15,423 100.0 % $43,017 100.0 % $43,382 100.0 %
=========== ========== ========== ========== =========== =========== =========== ===========
</TABLE>
9
<PAGE>
The following table presents, for the periods indicated, the Company's total
revenues from domestic and international sales and such revenues as a percentage
of total revenues:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------------------------- -------------------------------------------------
1997 1996 1997 1996
----------------------- ---------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 8,928 67.5 % $ 9,070 58.8 % $23,154 53.8 % $24,678 56.9 %
Europe 2,428 18.4 3,814 24.7 11,236 26.1 10,746 24.8
Pacific Rim 1,577 11.9 1,941 12.6 4,990 11.6 5,528 12.7
Canada 254 1.9 536 3.5 1,253 2.9 1,611 3.7
Central and South America 33 0.3 62 0.4 2,384 5.6 819 1.9
----------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Total revenues $13,220 100.0 % $15,423 100.0 % $43,017 100.0 % $43,382 100.0 %
=========== ========== ========== ========== =========== ========== =========== ===========
</TABLE>
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
TOTAL REVENUES. Total revenues decreased $2.2 million, or 14.3%, to
$13.2 million in the quarter ended June 30, 1997 from $15.4 million in the
quarter ended June 30, 1996 due to decreased sales volume of the Company's DA-3x
product family partially offset by increased sales volume of the Domino product
family and complementary telecommunications products. Quarterly revenues may
fluctuate significantly as a result of a number of factors including
announcements of new products, the capital spending patterns of the Company's
customers and the timing of large individual orders.
Domestic revenues decreased 1.6% to $8.9 million in the quarter ended
June 30, 1997 compared to $9.1 million in the quarter ended June 30, 1996
primarily due to decreased DA-3x revenues offset by increased sales volume of
the Domino product family and complementary products including the ANT-20.
International revenues decreased 32.4% to $4.3 million in the quarter ended June
30, 1997 compared to $6.3 million in the quarter ended June 30, 1996 primarily
due to declining sales of DA-3x products in Europe and the Pacific Rim and a
lack of large individual orders.
Revenues from sales of the Company's DA-3x product family decreased
$4.5 million, or 57.9%, to $3.3 million in the quarter ended June 30, 1997 from
$7.8 million in the quarter ended June 30, 1996 due to decreased unit volumes.
Revenues in the quarter ended June 30, 1996 included significant volumes related
to the Company's ATM/OC-3 and 100BaseT modules which were introduced in
September 1995 and reached full production in January 1996. The Company has
continued to improve and update the DA-3x product family; however, the Company
has not released any major new interface modules since September 1995. While the
Company plans to introduce a new 100BaseT module, improved ATM functionality,
and new marketing efforts in the fourth quarter of fiscal 1997, DA-3x product
family sales are expected to decline over time as a proportion of total
revenues.
Revenues from sales of the Company's Domino product family increased
$1.5 million, or 36.7%, to $5.7 million in the quarter ended June 30, 1997
compared to $4.2 million in the quarter ended June 30, 1996. The Domino product
family is a newer generation of analyzers designed for network service providers
and operators. The Company introduced DominoLAN, DominoWAN and Domino FDDI in
fiscal 1995 followed by DominoWIZARD and DominoREMOTE in fiscal 1996 and
DominoFastEthernet in December 1996. Revenues have increased as the Company has
continued to expand product offerings and sales channels for this product
family. In addition, the Company recorded significant Domino revenues from two
major customers in the quarter ended June 30, 1997 for use in network
installation and maintenance. These two nonaffiliate customers accounted for 14%
and 11%, respectively, of total revenues in the quarter ended June 30, 1997. In
the quarter ended June 30, 1996, the Company recorded significant Domino
revenues related to sales to a major U.S. manufacturer of network equipment
which utilizes the Domino product line for pre- and post-sales activities. This
nonaffiliated customer accounted for 15% of total revenues in the quarter ended
June 30, 1996.
Revenues of complementary telecommunication products increased by
$582,000, or 21.0%, to $3.4 million in the quarter ended June 30, 1997 from $2.8
million in the quarter ended June 30, 1996 primarily due to an increase in
revenues from sales of new products purchased from international affiliates for
resale in the United States, including ANT-20, a physical layer test instrument
for SDH, SONET and ATM.
10
<PAGE>
GROSS PROFIT. Gross profit decreased $1.6 million, or 16.9%, to $7.6
million in the quarter ended June 30, 1997 from $9.2 million in the quarter
ended June 30, 1996. Gross margin decreased to 57.7% in the quarter ended June
30, 1997 from 59.5% in the quarter ended June 30, 1996 primarily due to the
increased proportion of revenues from other network analysis products and
complementary telecommunications products. These products are primarily
purchased for resale and carry lower margins than the DA-3x and Domino product
families which are developed, manufactured and distributed by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $409,000, or 9.0%, to $4.9 million in the
quarter ended June 30, 1997 from $4.5 million in the quarter ended June 30, 1996
primarily due to increased marketing, promotional and advertising expenses.
Selling, general and administrative expenses, as a percentage of revenues,
increased to 37.3% in the quarter ended June 30, 1997 from 29.4% in the quarter
ended June 30, 1996.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$241,000, or 9.9%, to $2.7 million in the quarter ended June 30, 1997 from $2.4
million in the quarter ended June 30, 1996 primarily due to an increase in the
number of development personnel. Product development expenses, as a percentage
of revenues, increased to 20.3% in the quarter ended June 30, 1997 from 15.8% in
the quarter ended June 30, 1996. The Company's product development activities
are an important element of its growth strategy, and it anticipates that it will
invest increasing amounts in these areas in future quarters.
INTEREST INCOME. Interest income increased $76,000 to $155,000 in the
quarter ended June 30, 1997 from $79,000 in the quarter ended June 30, 1996 due
to a higher average cash balance on hand.
FOREIGN CURRENCY GAINS (LOSSES). Foreign currency losses decreased
$27,000 to $19,000 in the quarter ended June 30, 1997 from $46,000 in the
quarter ended June 30, 1996. In the quarter ended June 30, 1997, the Company
incurred losses on accounts receivable and cash denominated in DMs offset by
gains on foreign currency contracts and collars as the U.S. dollar strengthened
significantly against the DM.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
$44,000 in the quarter ended June 30, 1997 from $719,000 in the quarter ended
June 30, 1996. The Company's effective tax rate was 30% in the quarter ended
June 30, 1997 and 32% in the quarter ended June 30, 1996.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES. Total revenues decreased $365,000, or 0.8%, to $43.0
million in the nine months ended June 30, 1997 from $43.4 million in the nine
months ended June 30, 1996 due to decreased sales volume of the Company's DA-3x
product family partially offset by increased sales volume of the Domino product
family and complementary telecommunications products. Product revenues may
fluctuate significantly as a result of a number of factors including
announcements of new products, the capital spending patterns of the Company's
customers and the timing of large individual orders.
Domestic revenues decreased 6.2 % to $23.2 million in the nine months
ended June 30, 1997 compared to $24.7 million in the nine months ended June 30,
1996 primarily due to decreased DA-3x sales partially offset by increased sales
volume of the Domino product family and complementary products including the
ANT-20. International revenues increased 6.2% to $19.9 million in the nine
months ended June 30, 1997 compared to $18.7 million in the nine months ended
June 30, 1996 primarily due to sales growth in Central and South America
resulting from large orders from the Brazilian national telecommunications
company in the first and second quarters of fiscal 1997.
Revenues from sales of the Company's DA-3x product family decreased
$9.2 million, or 38.0%, to $15.0 million in the nine months ended June 30, 1997
from $24.2 million in the nine months ended June 30, 1996. Revenues in the nine
months ended June 30, 1996 included significant volumes related to the Company's
ATM/OC-3 and 100BaseT modules which were introduced in September 1995. The
Company has continued to improve and update the DA-3x product family; however,
the Company has not released any major new interface modules since September
1995. While the Company plans to introduce a new 100BaseT module, improved ATM
functionality, and new marketing efforts in the fourth quarter of fiscal 1997,
DA-3x product family sales are expected to decline over time as a proportion of
total revenues..
11
<PAGE>
Revenues from sales of the Company's Domino product family increased
$6.0 million, or 59.7% to $16.1 million in the nine months ended June 30, 1997
from $10.1 million in the nine months ended June 30, 1996. The Domino product
family is a newer generation of analyzers designed for network service providers
and operators. The Company introduced DominoLAN, DominoWAN and Domino FDDI in
fiscal 1995 followed by DominoWIZARD and DominoREMOTE in fiscal 1996 and
DominoFastEthernet in December 1996. Revenues have increased as the Company has
continued to expand product offerings and sales channels for this product
family.
Revenues of complementary telecommunication products increased $2.1
million, or 30.3%, to $9.0 million in the nine months ended June 30, 1997 from
$6.9 million in the nine months ended June 30, 1996 primarily due to an increase
in revenues from sales of new products purchased from international affiliates
for resale in the United States, including ANT-20, a physical layer test
instrument for SDH, SONET and ATM.
GROSS PROFIT. Gross profit decreased $1.0 million, or 3.9%, to $25.1
million in the nine months ended June 30, 1997 from $26.1 million in the nine
months ended June 30, 1996. Gross margin decreased to 58.3% in the nine months
ended June 30, 1997 from 60.1% in the nine months ended June 30, 1996 primarily
due to the increased proportion of revenues from other network analysis
products, including the Domain product family, and complementary
telecommunications product. These products are primarily purchased for resale
and carry lower margins than the DA-3x and Domino product families which are
developed, manufactured and distributed by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $918,000, or 6.6%, to $14.7 million in the
nine months ended June 30, 1997 from $13.8 million in the nine months ended June
30, 1996 due to increased marketing personnel, advertising and promotional
expenditures. Selling, general and administrative expenses, as a percentage of
revenues, increased to 34.3% in the nine months ended June 30, 1997 from 31.9%
in the nine months ended June 30, 1996.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$139,000, or 1.9%, to $7.6 million in the nine months ended June 30, 1997 from
$7.5 million in the nine months ended June 30, 1996. Product development
expense, as a percentage of revenues, increased to 17.7% in the nine months
ended June 30, 1997 from 17.2% in the nine months ended June 30, 1996. The
Company's product development activities are an important element of its growth
strategy and it anticipates that it will invest increasing amounts in these
areas in future periods.
INTEREST INCOME. Interest income increased $283,000 to $475,000 in the
nine months ended June 30, 1997 from $192,000 in the quarter ended June 30, 1996
due to a higher average cash balance on hand.
FOREIGN CURRENCY GAINS (LOSSES). The Company recorded foreign currency
losses of $289,000 in the nine months ended June 30, 1997 compared to losses of
$160,000 in the nine months ended June 30, 1996. In the nine months ended June
30, 1997, the Company incurred losses on accounts receivable and cash
denominated in DMs partially offset by gains on foreign currency contracts and
collars as the U.S. dollar strengthened significantly against the DM.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
$865,000 in the nine months ended June 30, 1997 from $1.5 million in the nine
months ended June 30, 1996. The Company's effective tax rate was 30% in the nine
months ended June 30, 1997 and 32% in the nine months ended June 30, 1996.
QUARTERLY OPERATING RESULTS
The results of operations for the three and nine months ended June 30,
1997 are not necessarily indicative of the results to be expected for the full
fiscal year. Quarterly results have been affected by the timing of expenditures
for product development and marketing programs and by the hiring of product
development, marketing, sales and administrative personnel. Quarterly results
have also been affected by realized foreign currency gains or losses and by the
recording at the end of each period of unrealized foreign currency gains or
losses related to the revaluation of DM denominated receivables and payables and
any forward foreign currency exchange contracts related to such receivables and
some anticipated sales to affiliates. Further, the Company's expense levels have
been based, in part, on its expectations of future revenues. If expected revenue
levels are not achieved in the future in a particular quarter, quarterly results
may be adversely affected.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $4.3 million in the nine months
ended June 30, 1997 primarily from income before depreciation and amortization
and from proceeds related to the issuance of Common Stock.
Net cash generated from operations was $3.9 million in the nine months
ended June 30,1997. The primary source of these funds was net income before
depreciation and amortization. Accounts receivable at June 30, 1997 decreased by
$650,000, compared to September 30, 1996. Inventories increased to $5.2 million
at June 30, 1997 from $4.7 million at September 30, 1996.
Net cash used in investing activities was $996,000 in the nine months
ended June 30, 1997. All of the cash used in investing activities was the result
of acquisitions of property and equipment and intangible assets. Acquisitions of
property and equipment consist primarily of computer hardware and test
equipment. Acquisitions of intangible assets consist primarily of financial,
manufacturing, and product development software.
Net cash provided by financing activities was $1.3 million in the nine
months ended June 30, 1997 and consisted of proceeds from the issuance of Common
Stock pursuant to the exercise of employee stock options and the Employee Stock
Purchase Plan.
In March 1995, the Company entered into a $5.0 million line of credit
facility with a U.S. bank which expires in January 1998. Through June 30, 1997,
there have been no borrowings under this facility. The Company believes that
cash generated from operations, together with existing cash balances and
borrowings available under the Company's U.S. bank line of credit facility, will
be sufficient to satisfy the Company's requirements for working capital and
capital expenditures through fiscal 1998.
BUSINESS RISKS
The Company's future operating results may be adversely affected by
certain factors and trends of its market which are beyond its control. The
market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products. The Company believes that its future success will depend, in part, on
its ability to continue to develop, introduce and sell both new and enhanced
products on a timely basis. The Company is committed to continuing investments
in research and development; however, there is no assurance that these efforts
will result in the development of products for the appropriate platforms or
operating systems, or the timely release or market acceptance of new products.
The Company's results may be adversely affected by the actions of
existing or future competitors including established and emerging computer,
communications, intelligent network wiring, network management and test
instrument companies. Some of the Company's competitors have greater name
recognition, more extensive engineering, manufacturing and marketing
capabilities, and significantly greater financial, technological and personnel
resources than the Company. There can be no assurance that the Company will be
able to compete successfully in the future with existing or new competitors.
The Company generally operates with very little backlog and most of its
revenues in each quarter result from orders booked in that quarter. The Company
plans its expenditures based on its expectations as to future revenues and, if
revenues should fail to meet expectations, this could cause expenses to be
disproportionately high. Accordingly, a decline in near term revenues could have
a material adverse effect on the Company's quarterly operating results. The
Company's quarterly operating results may also fluctuate significantly as a
result of a number of other factors, including the capital spending patterns of
the Company's customers, general economic and political conditions, the timing
of domestic and international orders, increased competition, variations in the
mix of the Company's sales and announcements of new products by the Company or
its competitors. Orders in the most recent quarters were received by the Company
later in their respective quarters than in prior quarters. The Company's ability
to forecast achievement of market and internal expectations of quarterly revenue
levels and operating results is delayed and becomes more difficult when orders
are placed later in the quarter. It is anticipated this trend will continue into
the near future. If so, there is more risk that the Company may not attain
quarterly revenue objectives, and, therefore, could have a material adverse
effect on the Company's operating results.
13
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
JUNE 30, 1997
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
No reports on Form 8-K were filed on behalf of the company for the
three month period ended June 30, 1997.
14
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
(Registrant)
Date: July 31, 1997 By: /s/ Adelbert Kuthe
------------------------
Adelbert Kuthe
Vice President, Finance and Secretary
(Principal Financial Officer)
15
<PAGE>
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<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-START> Oct-01-1997
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