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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, 1998 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, 1998, 5,291,034 shares of the Registrant's $0.01 par value common
stock were outstanding.
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<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
INDEX - FORM 10-Q
JUNE 30, 1998
PART I - FINANCIAL INFORMATION PAGE
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.................................................15
SIGNATURE...................................................................16
2
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,822 $13,329
Accounts receivable-
Nonaffiliates 4,866 7,038
Affiliates 4,414 3,964
Income tax receivable 1,012 1,367
Inventories 7,690 5,596
Deferred tax assets 1,800 1,448
Other current assets 506 927
----------- ------------
Total current assets 23,110 33,669
----------- ------------
Property and equipment, at cost:
Machinery and equipment 4,971 4,614
Furniture and fixtures 6,593 5,993
----------- ------------
11,564 10,607
Accumulated depreciation (8,658) (7,721)
----------- ------------
2,906 2,886
----------- ------------
Other assets 2,300 737
----------- ------------
$28,316 $37,292
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-
Nonaffiliates $ 1,811 $ 1,530
Affiliates 1,835 1,789
Accrued compensation 1,864 1,467
Other accrued liabilities 1,981 1,847
----------- ------------
Total current liabilities 7,491 6,633
----------- ------------
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
-5,288,809 at June 30, 1998
and 5,261,022 at September 30, 1997 53 53
Additional paid-in capital 26,787 26,468
Cumulative currency translation adjustments 7 --
Retained earnings (Accumulated deficit) (6,022) 4,138
----------- ------------
20,825 30,659
----------- ------------
$28,316 $37,292
=========== ============
</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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
Revenues:
<S> <C> <C> <C> <C>
Nonaffiliates $ 5,425 $ 8,581 $20,981 $22,310
Affiliates 4,598 4,639 15,860 20,707
----------- --------- -------- ---------
Total revenues 10,023 13,220 36,841 43,017
Cost of revenues 5,416 5,587 19,347 17,959
----------- --------- --------- ---------
Gross profit 4,607 7,633 17,494 25,058
Selling, general and
administrative expenses 5,184 4,937 14,579 14,744
Product development expenses 3,320 2,686 9,111 7,618
Acquired in-process research and
development and other
non-recurring charges -- -- 5,825 --
----------- --------- ---------- ------------
Operating income (3,897) 10 (12,021) 2,696
Interest income 49 155 334 475
Foreign currency gains (losses) (66) (19) (32) (289)
----------- ------------ ----------- -----------
Income before income taxes (3,914) 146 (11,719) 2,882
Benefit from (provision for)
income taxes 780 (44) 1,559 (865)
----------- ------------ ----------- -----------
Net income $(3,134) $ 102 $(10,160) $ 2,017
=========== ============ =========== ===========
Basic earnings (loss) per share $(0.59) $ 0.02 $(1.92) $ 0.39
Weighted average number of
common shares outstanding 5,289 5,260 5,279 5,228
=========== ============ =========== ===========
Diluted earnings (loss) per share $(0.59) $ 0.02 $(1.92) $ 0.38
Weight average number of common
shares outstanding
assuming dilution 5,289 5,285 5,279 5,358
=========== ============ =========== ===========
</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,
----------------------------
1998 1997
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(10,160) $ 2,017
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 1,292 1,279
Deferred tax provision (740) (684)
Acquired in process research and development 5,353
Net change in assets and liabilities, net of
effect on acquisitions
(Increase) decrease in accounts receivable -
Nonaffiliates 2,636 (458)
Affiliates (450) 1,108
Decrease in income tax receivable 355 543
(Increase) decrease in inventories (2,020) (464)
Increase in accounts payable-
Nonaffiliates 203 470
Affiliates 46 33
Increase in other current liabilities 277 414
Other, net 450 (312)
-------------- --------------
Net cash provided by (used in) operating
activities (2,758) 3,946
-------------- --------------
Cash flows from investing activities:
Purchases of marketable securities (37,700) (48,810)
Proceeds from the sale of marketable securities 37,700 48,810
Cash used to purchase Tinwald Networking
Technologies, Inc., net of cash acquired (5,435) --
Cash used to purchase assets of Network
Intelligence, Inc. (1,453) --
Acquisitions of property and equipment (970) (830)
Acquisition of intangible assets (210) (166)
-------------- --------------
net cash used in investing activities (8,068) (996)
-------------- --------------
Cash flows from financing:
Proceeds from line of credit 650 --
Payments on line of credit (650) --
Proceeds from issuance of Common Stock, net 319 1,302
-------------- --------------
Net cash provided by (used in) financing
activities 319 1,302
-------------- --------------
Increase (decrease) in cash and cash equivalents (10,507) 4,252
Cash and cash equivalents, beginning of period 13,329 10,286
-------------- --------------
Cash and cash equivalents, end of period $ 2,822 $14,538
============== ==============
</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,
1998 and the results of operations and cash flows for the nine months ended June
30, 1998 and 1997. The results of operations for the three- and nine-month
periods ended June 30, 1998 are not necessarily indicative of the results to be
expected for the full fiscal year.
Note 2 - Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
No. 130"), and Statement of Financial Accounting Standards No. 131, SEGMENT
INFORMATION ("SFAS No. 131"). Both of these standards are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustment, minimum
pension accrual, and unrealized gains and losses on investments, shall be
reported, net of their related tax effect, to arrive at comprehensive income.
The Company intends to adopt SFAS No. 130 in fiscal 1999 and operating results
of prior periods will be reclassified. The Company's only component of other
comprehensive income is the foreign currency translation adjustment which is
currently reported as part of stockholders' equity. Historically, the Company
has operated in one business segment; however, SFAS No. 131 redefines segments
and in the future, the Company will be required to disclose certain financial
information about operating segments, products, services and geographic areas in
which they operate. The Company has not determined how operating segments will
be defined for disclosure purposes or which segments will meet the quantitative
requirements for disclosure. The adoption of SFAS No. 131 will have no impact on
the Company's future results of operations or financial position.
Note 3 - 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
1998 30, 1997
-------------- -------------
Raw materials and supplies $1,506 $1,202
Work in process 1,843 933
Finished goods 4,341 3,461
-------------- -------------
$7,690 $5,596
============== =============
6
<PAGE>
Note 4 - 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, 1998, the Company has outstanding forward currency exchange rate
contracts as follows:
MATURITY DATE NOTATIONAL AMOUNT CONTRACT RATE
------------------------ ------------------------ ------------------------
September 28, 1998 DM 2,000,000 1.8066
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 5 - 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 ($150,000
at June 30, 1998 and $146,000 at September 30, 1997) is adequate. Accounts
receivable are not collateralized.
No nonaffiliated customer accounted for 10% or more of total revenues in the
quarter or nine months ended June 30, 1998. 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.
Note 6 - Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share". 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 as
follows:
7
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Basic EPS Computation
<S> <C> <C> <C> <C>
Numerator $(3,134) $ 102 $(10,160) $2,017
Denominator:
Common Shares
Outstanding 5,289 5,260 5,279 5,228
------------- ------------- ------------- -------------
Basic EPS $(0.59) $ 0.02 $(1.92) $ 0.39
------------- ------------- ------------- -------------
Diluted EPS Computation
Numerator (3,134) $ 102 (10,160) $2,017
------------- ------------- ------------- -------------
Denominator:
Common Shares
Outstanding 5,289 5,260 5,279 5,228
Options -- 21 -- 126
Employee Stock
Purchase Plan -- 4 -- 4
------------- ------------- ------------- -------------
Total shares 5,289 5,285 5,279 5,358
------------- ------------- ------------- -------------
Diluted EPS $(0.59) $ 0.02 $(1.92) $ 0.38
============= ============= ============= =============
</TABLE>
Note 7 - Acquired In Process Research and Development and Other Non-recurring
Charges
On January 27, 1998, the Company acquired privately-held Tinwald Networking
Technologies, Inc. ("Tinwald"), and 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 $5 million,
plus the possibility of contingent payments for up to three years after the
acquisition. The Company has accounted for the transaction as a purchase and has
reflected the results of Tinwald in its consolidated financial statements since
the date of acquisition.
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 $1,596,000 and liabilities
assumed was $332,000. In addition $3,900,000 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
acquisition. The remainder of the purchase price was allocated to goodwill and
will be amortized over five years.
On March 20, 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 $1.25 million. The Company has
accounted for the transaction as a purchase. The total purchase price of
$1,453,000, 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 acquisition.
On March 28, 1998, the Board of Directors of the Company approved an Agreement
and Plan of Merger among the Company, Wandel & Goltermann Management Holding
GmbH ("WG Holding") and WG Merger Corp., a wholly owned subsidiary of WG
Holding, pursuant to which WG Merger Corp. will be merged into the Company and
each share of the Company's outstanding Common Stock (other than those owned by
WG Holding) will be converted into the right to receive $15.90 in cash. In
addition, on the effective date of the merger, holders of options outstanding
under the Company's stock option plans will receive a cash payment equal to the
difference between the option exercise prices and $15.90 per share. Completion
of the merger is subject to certain conditions, including approval of the Merger
Agreement by the Company's shareholders at a special meeting scheduled for
September 18, 1998. The Company has recorded non-recurring charges of $472,000
related to the proposed merger in the nine months ended June 30, 1998.
In connection with WG Holding's initial proposal in January 1998 to acquire the
outstanding shares of the Company's Common Stock (other than those owned by WG
Holding) for $13.00 in cash, five actions were filed in the Superior Court of
Durham County, North Carolina that alleged breaches of fiduciary duty by the
Company, its directors and, in certain of these actions, WG Holding. The Company
believes the claims made in those actions to be without merit, and the Company
intends to defend itself vigorously.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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. Important factors which could cause
actual results to differ materially are described in the following paragraphs
and are particularly noted under "Business Risks" and the Company's reports on
Forms 10-K and 10-Q on file with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
INCOME STATEMENT HIGHLIGHTS
(In thousands, except per share amounts)
NINE MONTHS ENDED
QUARTER ENDED JUNE 30, JUNE 30,
- ---------------------- ------------------------ ------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------- ------ ------- ------- ------ -------
Revenues $10,023 (24)% $13,220 $36,841 (14)% $43,017
Gross profit 4,607 (40)% 7,633 17,494 (30)% 25,058
Percentage of revenues 46% 58% 47% 58%
Operating expenses 8,504 12% 7,623 23,690 6% 22,362
Percentage of revenues 85% 58% 64% 52%
Net income (loss) (3,134) 102 (10,160) 2,017
Diluted earnings per share $(0.59) $0.02 (1.92) $0.38
REVENUES
(In thousand)
NINE MONTHS ENDED
QUARTER ENDED JUNE 30, JUNE 30,
- ---------------------- ------------------------ ------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------- ------ ------- ------- ------ -------
Domino $ 4,786 (16)% 5,721 $13,844 (14)% $16,077
DA-3x 1,316 (60)% 3,284 6,225 (59)% 15,011
Other 860 1% 855 3,014 1% 2,979
------- ------- ------- ------
Network analysis
products 6,962 (29)% 9,860 23,083 (32)% 34,067
Complementary
telecommunications
products 3,061 (9)% 3,360 13,758 54% 8,950
======= ======= ======= ======
$10,023 (24)% $13,220 $36,841 (14)% $43,017
======= ======= ======= ======
(In thousand)
NINE MONTHS ENDED
QUARTER ENDED JUNE 30, JUNE 30,
- ---------------------- ------------------------ ------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------- ------ ------- ------- ------ -------
Domestic 5,554 (38)% 8,928 $21,527 (7)% $23,154
International 4,469 4% 4,292 15,314 (23)% 19,863
======= ======= ======= ======
$10,023 (24)% $13,220 $36,841 (14)% $43,017
======= ======= ======= ======
Revenues for the quarter ended June 30, 1998 decreased 24% to $10.0
million compared to revenues of $13.2 million in the quarter ended June 30,
1997. Revenues for the nine months ended June 30, 1998 decreased 14% to $36.8
million compared to revenues of $43.0 million in the nine months ended June 30,
1997. The decreases were primarily due to decreased sales volume of the
Company's DA-3x and Domino product families partially offset by increased sales
volume of complementary telecommunications products.
9
<PAGE>
The Company's Domino product family revenues decreased 16% in the quarter
ended June 30, 1998 to $4.8 million from $5.7 million in the quarter ended June
30, 1997. Domino product family revenues for the nine months ended June 30, 1998
decreased 14% to $13.8 million compared to $16.1 million in the nine months
ended June 30, 1997. The Domino product family is a line of analyzers designed
for network service providers and operators. The Company introduced DominoLAN,
DominoWAN and DominoFDDI in fiscal 1995 followed by DominoWIZARD and
DominoREMOTE in fiscal 1996 and DominoFastEthernet and Domino ATM in fiscal 1997
and DominoGigabit and Mentor in fiscal 1998. Revenues decreased in the quarter
ended June 30, 1998 compared to the quarter ended June 30, 1997 primarily due to
a lack of significant individual orders in the U.S. The Company recorded
significant Domino revenues from two major U.S. 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. The decreased U.S. Domino revenues
were partially offset by increased revenues from international sales of Domino
family products. Quarterly revenues may fluctuate significantly as a result of a
number of factors including announcement of new products, the capital spending
patterns of the Company's customers and timing of large individual orders.
Revenues from sales of the Company's DA-3x product family decreased 60% in
the quarter ended June 30, 1998 to $1.3 million from $3.3 million in the quarter
ended June 30, 1997 and decreased 59% in the nine months ended June 30, 1998 to
$6.2 million compared to $15.0 million in the nine months ended June 30, 1997.
The DA-3x product family was first introduced in 1990. The Company introduced
AMT/OC-3 and 100BaseT modules in September 1995 which resulted in increased
sales volume in fiscal 1997 and the first half of fiscal 1998. 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. DA-3x
product family sales are expected to continue to decline over time.
The Company's complementary telecommunication product revenues decreased
9% in the quarter ended June 30, 1998 to $3.1 million from $3.4 million in the
quarter ended June 30, 1997 due to delayed deliveries of ANT-20 units from the
Company's German manufacturing affiliate. The delays resulted from strong
worldwide demand for the ANT-20. The Company expects production capabilities to
meet demand levels by the end of 1998. Complementary telecommunication product
revenues increased 54% in the nine months ended June 30, 1998 to $13.8 million
from $9.0 million in the nine months ended June 30, 1997. Revenue growth was
fueled by increased sales of products purchased from international affiliates
for resale in the United States, including ANT-20, a physical layer test
instrument for SDH, SONET and ATM, and 8610 and 8620 cellular communications
test systems.
Domestic revenues decreased 38% to $5.6 million in the quarter ended June
30, 1998 compared to $8.9 million in the quarter ended June 30, 1997. Domestic
revenues decreased 7% to $21.5 million in the nine months ended June 30, 1998
from $23.2 million in the nine months ended June 30, 1997. The decreases were
primarily due to decreased revenues from network analysis products partially
offset by increased sales volume of complementary products including the ANT-20
and 8610 and 8620 cellular communications test systems. International revenues
increased 4% to $4.5 million in the quarter ended June 30, 1998 compared to $4.3
million in the quarter ended June 30, 1997 primarily due to a 56% increase in
Domino product sales offset by a 46% decrease in DA-3x product sales.
International revenues decreased 23% to $15.3 million in the nine months ended
June 30, 1998 from $19.9 million in the nine months ended June 30, 1997
primarily due to a 55% decline in sales of DA-3x products partially offset by a
25% increase in sales of Domino products.
GROSS PROFIT
Cost of revenues consists of manufacturing costs, cost of instruments
purchased for resale, costs of services and warranty expenses. Gross profit as a
percentage of revenues decreased to 46% in the quarter ended June 30, 1998 from
58% in the quarter ended June 30, 1997 and decreased to 47% in the nine months
ended June 30, 1998 from 58% in the nine months ended June 30, 1997. The
decrease resulted from an increased proportion of revenues from other network
analysis products and complementary telecommunication products. These products
are primarily purchased for resale and carry lower margins as a percentage of
revenues than the Domino and DA-3x product families. Gross profit and gross
profit as a percentage of revenues may vary as a result of a number of factors,
including product mix, the mix of international and domestic sales and discounts
on large sales opportunities.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 5% to $5.2 million
in the quarter ended June 30, 1998 compared to $4.9 million in the quarter ended
June 30, 1997. Selling, general and administrative expenses decreased 1% to
$14.6 million in the nine months ended June 30, 1998 compared to $14.7 million
in the nine months ended June 30, 1997. As a percentage of revenues, selling,
general and administrative expenses were 52% in the quarter ended June 30, 1998
compared to 37% in the quarter ended June 30, 1997 and 40% in the nine months
ended June 30, 1998 compared to 34% in the nine months ended June 30, 1997.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses were $3.3 million in the quarter ended June
30, 1998 compared to $2.7 million in the quarter ended June 30, 1997. Product
development expenses were $9.1 million in the nine months ended June 30, 1998
compared to $7.6 million in the nine months ended June 30, 1997. As a percentage
of revenues, product development expenses were 33% in the quarter ended June 30,
1998, compared to 20% in the quarter ended June 30, 1997 and were 25% in the
nine months ended June 30, 1998 compared to 18% in the nine months ended June
30, 1997. The increase in actual spending and as a percentage of revenues in
fiscal 1998 was a result of increased staffing and expenses to support growth in
the Company's breadth of product offerings including new or improved
applications and capabilities of the Domino product family such as DominoGigabit
and Mentor interactive expert analysis and development of the Company's new
NetForce product family. The Company's product development activities are an
important element of its growth strategy, and it anticipates that it will invest
significant amounts in these areas in future periods.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER NON-RECURRING CHARGES
On January 27, 1998, the Company acquired privately-held Tinwald Networking
Technologies, Inc. ("Tinwald"), in 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 $5 million,
plus the possibility of contingent payments for up to three years after the
acquisition. The Company has accounted for the transaction as a purchase and has
reflected the results of Tinwald in its consolidated financial statements since
the date of acquisition.
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 $1,596,000 and liabilities
assumed was $332,000. In addition $3,900,000 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
acquisition. The remainder of the purchase price was allocated to goodwill and
will be amortized over five years.
On March 20, 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 $1.25 million. The Company has
accounted for the transaction as a purchase. The total purchase price of
$1,453,000, 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 acquisition.
On March 28, 1998, the Board of Directors of the Company approved an Agreement
and Plan of Merger among the Company, Wandel & Goltermann Management Holding
GmbH ("WG Holding") and WG Merger Corp., a wholly owned subsidiary of WG
Holding, pursuant to which WG Merger Corp. will be merged into the Company and
each share of the Company's outstanding common stock (other than those owned by
WG Holding) will be converted into the right to receive $15.90 in cash. In
addition, on the effective date of the merger, holders of options outstanding
under the Company's stock option plans will receive a cash payment equal to the
difference between the option exercise prices and $15.90 per share. Completion
of the merger is subject to certain conditions, including approval of the Merger
Agreement by the Company's shareholders at a special meeting. The Company has
recorded non-recurring charges of $472,000 related to the proposed merger in the
nine months ended June 30, 1998.
11
<PAGE>
FOREIGN CURRENCY LOSSES
The Company incurred foreign currency losses of $66,000 in the quarter
ended June 30, 1998 compared to foreign currency losses of $19,000 in the
quarter ended June 30, 1997. The Company incurred foreign currency losses of
$32,000 in the nine months ended June 30, 1998 compared to foreign currency
losses of $289,000 in the nine months ended June 30, 1997. The Company incurred
gains and losses in fiscal 1998 on foreign currency exchange collars, accounts
receivable, accounts payable and cash denominated in DMs as the U.S. dollar
fluctuated against the DM. In the quarter and nine months ended June 30, 1998,
the Company incurred losses on accounts receivable and cash denominated in DMs
as the U.S. dollar strengthened significantly against the DM.
INTEREST INCOME
Interest income decreased 68% to $49,000 in the quarter ended June 30,
1998 compared to $155,000 in the quarter ended June 30, 1997 and decreased 30%
to $334,000 in the nine months ended June 30, 1998 compared to $475,000 in the
nine months ended June 30, 1997. The decrease in fiscal 1998 was due to a lower
average cash balance compared to fiscal 1997.
BENEFIT FROM (PROVISION FOR) INCOME TAXES
The benefit from income taxes as a percentage of income was 20% in the
quarter ended June 30, 1998 and 13% in the nine months ended June 30, 1998
compared to a provision for income taxes of 30% in the quarter and nine months
ended June 30, 1997. The effective tax rate for the quarter and nine months is
based on the expected tax rate for the full fiscal year. The effective tax rate
in fiscal 1998 reflects the impact of non-deductible charges for acquired
in-process research and development and goodwill amortization related to
acquisitions in the quarter ended March 31, 1998.
YEAR 2000
Many computer systems were not designed to handle any dates beyond the
year 1999, and therefore computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is still
assessing the impact the year 2000 issue will have on its products and internal
information systems and has begun corrective efforts in these areas. The Company
does not anticipate that addressing the year 2000 problem for its internal
information systems and current and future products will have a material impact
on its operations or financial results. However, there can be no assurance that
these costs will not be greater than anticipated, or that corrective actions
undertaken will be completed before any year 2000 problems could occur.
The Company has certain key relationships with suppliers. If these
suppliers fail to adequately address the year 2000 issue for the products they
provide the Company, this could have a material adverse impact on the Company's
operations and financial results. The Company is still assessing the effect the
year 2000 issue will have on its suppliers and, at this time, cannot determine
the impact it will have.
BUSINESS RISKS
The following is a summary of risks affecting the business and results of
the Company and should be read in conjunction with the description of the
Company's business contained in other sections of the Company's Form 10-K for
the year ended September 30, 1997.
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.
12
<PAGE>
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 operating results. The Company's
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. During 1998, the Company generally experienced a trend toward
higher order receipts toward the end of each quarter, resulting in a higher
percentage of revenue shipments during the last month of a quarter. 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. If this trend continues
into the near future, 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.
Failure to achieve periodic revenue, earnings and other operating and
financial results as forecasted or anticipated by brokerage firms or industry
analysts could result in an immediate and adverse effect on the market price of
the Company's Common Stock. The Company may not discover, or be able to confirm,
revenue or earnings shortfalls until the end of a quarter, which could result in
a greater immediate and adverse effect on the Company's stock price.
The products offered by the Company may be considered to be capital
purchases by certain customers or prospective customers. Capital purchases are
often considered discretionary and, therefore, are canceled or delayed if the
customer experiences a downturn in its business or prospects or as a result of
economic conditions in general. Any such cancellation or delay could adversely
affect the Company's operating results.
The market for the Company's existing and planned new products is highly
competitive, and the Company expects competition to increase in the future. The
Company competes with an array of 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.
QUARTERLY OPERATING RESULTS
The results of operations for the three months ended June 30, 1998 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $10.5 million in the nine months ended
June 30, 1998 primarily due to cash used in investing activities and operating
losses incurred during the nine month period.
Net cash used by operating activities was $2.8 million and consisted
primarily of increases in inventories and net loss before depreciation,
amortization and acquisition costs, which were partially offset by decreases in
accounts receivable and income tax receivable.
13
<PAGE>
Net cash used in investing activities was $8.1 million in the nine months
ended June 30, 1998. The Company used $6.9 million to acquire Tinwald and NI.
The remaining amount used in investing activities was for acquisitions of
property and equipment and intangible assets. Acquisitions of property and
equipment consisted primarily of computer hardware and test equipment.
Acquisitions of intangible assets consisted primarily of financial,
manufacturing, product and product development software.
Net cash provided by financing activities was $319,000 in the nine months
ended June 30, 1998 and consisted of proceeds from the issuance of Common Stock
pursuant to the exercise of employee stock options and the Company's employee
stock purchase plan.
As of June 30, 1998, the Company's principal source of liquidity is cash
and cash equivalents of $2.8 million. The Company also has a $5.0 million credit
facility with a U.S. bank which expires in January 2000. 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 at least the end of fiscal 1998.
14
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
JUNE 30, 1998
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, 1998.
15
<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: August 13, 1998 By: /s/ Adelbert Kuthe
---------------------
Adelbert Kuthe
Vice President, Finance and Secretary
(Principal Financial Officer)
16
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