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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 March 31, 1998 Commission File No. 33-74564
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 22-1867386
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1030 SWABIA COURT, RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-3585
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(Address of principal executive offices and zip code)
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(919) 941-5730
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(Registrant's telephone number, including area code)
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Not applicable
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(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 May 1, 1998, 5,288,652 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
MARCH 31, 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...................................................14
SIGNATURE.....................................................................15
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
1998 1997
-------------------- ---------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,910 $13,329
Accounts receivable-
Nonaffiliates 5,916 7,038
Affiliates 3,971 3,964
Income tax receivable 426 1,367
Inventories 7,285 5,596
Deferred tax assets 3,268 1,448
Other current assets 534 927
-------------------- ---------------------
Total current assets 26,310 33,669
-------------------- ---------------------
Property and equipment, at cost:
Machinery and equipment 4,794 4,614
Furniture and fixtures 6,402 5,993
--------------------
---------------------
11,196 10,607
Accumulated depreciation (8,333) (7,721)
-------------------- ---------------------
2,863 2,886
-------------------- ---------------------
Other assets 1,127 737
-------------------- ---------------------
$30,300 $37,292
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-
Nonaffiliates $ 1,801 $ 1,530
Affiliates 1,584 1,789
Accrued compensation 1,085 1,467
Other accrued liabilities 1,854 1,847
-------------------- ---------------------
Total current liabilities 6,324 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 20,000,000 shares authorized;
shares issued and outstanding- 5,287,982 at March 31, 1998 and
5,261,022 at September 30, 1997 53 53
Additional paid-in capital 26,772 26,468
Cumulative currency translation adjustments 39
Retained earnings (Accumulated deficit) (2,888 ) 4,138
-------------------- ---------------------
23,976 30,659
-------------------- ---------------------
$30,300 $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
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------------- ------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
Revenues:
<S> <C> <C> <C> <C>
Nonaffiliates $ 7,747 $ 7,247 $15,556 $13,729
Affiliates 4,720 7,095 11,262 16,068
----------------- ----------------- ----------------- -----------------
Total revenues 12,467 14,342 26,818 29,797
Cost of revenues 6,454 6,260 13,931 12,372
----------------- ----------------- ----------------- -----------------
Gross profit 6,013 8,082 12,887 17,425
Selling, general and administrative expenses 4,397 4,673 9,395 9,807
Product development expenses 3,187 2,482 5,791 4,932
Acquired in-process research and development
and other non-recurring charges 5,825 -- 5,825 --
----------------- ----------------- ----------------- -----------------
Operating income (loss) (7,396) 927 (8,124) 2,686
Interest income 97 172 285 320
Foreign currency gains (losses) 8 (263) 34 (270)
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes (7,291) 836 (7,805) 2,736
Benefit from (provision for) income taxes 676 (251) 779 (821)
----------------- ----------------- ----------------- -----------------
Net income (loss) $(6,615) $ 585 $(7,026) $1,915
================= ================= ================= =================
Basic earnings (loss) per share $ (1.25) $ 0.11 $ (1.33) $ 0.37
Weighted average number of common shares
outstanding 5,288 5,243 5,274 5,212
================= ================= ================= =================
Diluted earnings (loss) per share (1.25) $ 0.11 (1.33) $ 0.35
Weighted average number of common shares
outstanding assuming dilution 5,288 5,427 5,274 5,395
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
--------------------------------------
1998 1997
----------------- ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (7,026) $1,915
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 812 829
Deferred tax benefit (834) (344)
Acquired in process research and development 5,353 --
Net change in assets and liabilities, net of effect of acquisitions:
(Increase) decrease in accounts receivable -
Nonaffiliates 1,586 1,349
Affiliates (7) (1,370)
Decrease in income tax receivable 941 616
(Increase) decrease in inventories (1,615) (237)
Increase (decrease) in accounts payable-
Nonaffiliates 193 510
Affiliates (205) (260)
Decrease in other current liabilities (629) (169)
Other, net 431 (114)
------------------- ------------------
Net cash provided by (used in) operating activities (1,000) 2,725
------------------- ------------------
Cash flows from investing activities:
Purchases of marketable securities (33,250) (25,550)
Proceeds from the sale of marketable securities 33,250 25,550
Cash used to purchase Tinwald Networking Technologies, Inc.,
net of cash acquired (5,435) --
Cash used to purchase the assets of Network Intelligence, Inc. (1,453) --
Acquisitions of property and equipment (543) (504)
Acquisition of intangible assets (292) (32)
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Net cash used in investing activities (7,723) (536)
------------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 304 1,291
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Net cash provided by financing activities 304 1,291
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Increase (decrease) in cash and cash equivalents (8,419) 3,480
Cash and cash equivalents, beginning of period 13,329 10,286
------------------- ------------------
Cash and cash equivalents, end of period $ 4,910 $13,766
=================== ==================
</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 March 31,
1998 and the results of operations and cash flows for the three months ended
March 31, 1998 and 1997. The results of operations for the quarter ended March
31, 1998 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);
MARCH 31, SEPTEMBER 30,
1998 1997
------------------- --------------------
Raw materials and supplies $1,625 $1,202
Work in process 1,573 933
Finished goods 4,087 3,461
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$7,285 $5,596
=================== ====================
Note 3 - Foreign Currencies
Certain product sales to affiliates and 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. In addition, the Company purchases foreign currency exchange
contracts and collars relating to some of its future anticipated sales in DMs.
As of March 31, 1998 the Company has outstanding forward currency exchange rate
contracts or collars as follows:
DUE DATE NOTATIONAL AMOUNT RATE
--------------- --------------------------- ----------
June 26, 1998 DM 1,000,000 1.7754
June 26, 1998 DM 2,000,000 1.7223
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
6
<PAGE>
collars or any 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, manufacturers and service
providers 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 ($146,000 at March 31, 1998 and 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 six months ended March 31, 1998 or 1997. One nonaffiliated customer
accounted for 18% of total revenues in the quarter ended March 31, 1997 and 10%
of total revenues in the six months ended March 31, 1997.
Note 5 - 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:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------- -------------------------------------
1998 1997 1998 1997
--------------- -------------- ----------------- ------------------
Basic EPS Computation
<S> <C> <C> <C> <C>
Numerator $(6,615) $ 585 $(7,026) $1,915
Denominator:
Common Shares Outstanding 5,288 5,243 5,274 5,212
--------------- -------------- ----------------- ------------------
Basic EPS $ (1.25) $ 0.11 $ (1.33) $ 0.37
--------------- -------------- ----------------- ------------------
Diluted EPS Computation
Numerator $(6,615) $ 585 $(7,026) $1,915
--------------- -------------- ----------------- ------------------
Denominator:
Common Shares Outstanding 5,288 5,243 5,274 5,212
Options -- 184 -- 178
Employee Stock Purchase Plan -- -- -- 5
--------------- -------------- ----------------- ------------------
Total shares 5,288 5,427 5,274 5,395
--------------- -------------- ----------------- ------------------
Diluted EPS $ (1.25) $ 0.11 $ (1.33) $ 0.35
============== ============== ================ ==================
</TABLE>
Note 6 - 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"), 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 $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.
7
<PAGE>
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
quarter end March 31, 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, six 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
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
- -------------------------------- ---------------------------------- ----------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
--------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $12,467 (13%) $14,342 $26,818 (10%) $29,797
Gross profit 6,013 (26%) 8,082 12,887 (26%) 17,425
Percentage of revenues 48% 56% 48% 59%
Operating expenses 7,584 6% 7,155 15,186 3% 14,739
Percentage of revenues 61% 50% 57% 49%
Net income (loss) (6,615) (1,231%) 585 (7,026) (467%) 1,915
Diluted earnings per share $ (1.25) (1,236%) $ 0.11 $ (1.33) (480%) $ 0.35
REVENUES
(In thousand)
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
- -------------------------------- ---------------------------------- ---------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
--------- ---------- ---------- ---------- ---------- --------
Domino $ 4,529 (13%) $ 5,208 $ 9,058 (13%) $10,356
DA-3x 1,726 (63%) 4,715 4,909 (58%) 11,727
Other 917 (34%) 1,385 2,154 1% 2,124
--------- ---------- ---------- ---------
Network analysis products 7,172 (37%) 11,308 16,121 (33%) 24,207
Complementary telecom-
munications products 5,295 75% 3,034 10,697 91% 5,590
--------- ---------- ---------- ---------
$12,467 (13%) $14,342 $26,818 (10%) $29,797
========= ========== ========== =========
(In thousand)
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
- -------------------------------- ---------------------------------- ---------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
--------- ---------- ---------- ---------- ---------- --------
Domestic $ 7,924 6% $ 7,508 $15,974 12% $14,226
International 4,543 (34%) 6,834 10,844 (30%) 15,571
--------- ---------- ---------- ---------
$12,467 (13%) $14,342 $26,818 (10%) $29,797
========= ========== ========== =========
</TABLE>
Revenues for the quarter ended March 31, 1998 decreased 13% to $12.5
million compared to revenues of $14.3 million in the quarter ended March 31,
1997. Revenues for the six months ended March 31, 1998 decreased 10% to $26.8
million compared to revenues of $29.8 million in the six months ended March 31,
1997. The
9
<PAGE>
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.
The Company's Domino product family revenues decreased 13% in the
quarter ended March 31, 1998 to $4.5 million from $5.2 million in the quarter
ended March 31, 1997. Domino product family revenues for the six months ended
March 31, 1998 decreased 13% to $9.1 million compared to $10.4 million in the
six months ended March 31, 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 in fiscal
1997 and Domino ATM in fiscal 1998. Revenues decreased in the quarter ended
March 31, 1998 compared to the quarter ended March 31, 1997 primarily due to a
lack of significant individual orders in the quarter ended March 31, 1998.
Revenues from sales of the Company's DA-3x product family decreased 63%
in the quarter ended March 31, 1998 to $1.7 million from $4.7 million in the
quarter ended March 31, 1997 and decreased 58% in the six months ended March 31,
1998 to $4.9 million compared to $11.7 million in the six months ended March 31,
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 1996 and the first half of fiscal 1997. 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
as a proportion of total revenues.
The Company's complementary telecommunication product revenues
increased 75% in the quarter ended March 31, 1998 to $5.3 million from $3.0
million in the quarter ended March 31, 1997. Complementary telecommunication
product revenues increased 91% in the six months ended March 31, 1998 from $5.6
million in the six months ended March 31, 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 increased 6% to $7.9 million in the quarter ended
March 31, 1998 compared to $7.5 million in the quarter ended March 31, 1997.
Domestic revenues increased 12% to $16.0 million in the six months ended March
31, 1998 from $14.2 million in the six months ended March 31, 1997. The
increases were primarily due to increased sales volume of complementary products
including the ANT-20 and 8610 and 8620 cellular communications test systems.
International revenues decreased 34% to $4.5 million in the quarter ended March
31, 1998 compared to $6.8 million in the quarter ended March 31, 1997 and 30% to
$10.8 million in the six months ended March 31, 1998 from $15.6 million in the
six months ended March 31, 1997 primarily due to declining sales of DA-3x
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 48% in the quarter ended March 31, 1998 from
56% in the quarter ended March 31, 1997 and decreased to 48% in the six months
ended March 31, 1998 from 59% in the six months ended March 31, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 6% to $4.4
million in the quarter ended March 31, 1998 compared to $4.7 million in the
quarter ended March 31, 1997. Selling, general and administrative expenses
10
<PAGE>
decreased 4% to $9.4 million in the six months ended March 31, 1998 compared to
$9.8 million in the six months ended March 31, 1997. As a percentage of
revenues, selling, general and administrative expenses were 35% in the quarter
ended March 31, 1998 compared to 33% in the quarter ended March 31, 1997 and 35%
in the six months ended March 31, 1998 compared to 33% in the six months ended
March 31, 1997.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses were $3.2 million in the quarter ended
March 31, 1998 compared to $2.5 million in the quarter ended March 31, 1997.
Product development expenses were $5.8 million in the six months ended March 31,
1998 compared to $4.9 million in the six months ended March 31, 1997. As a
percentage of revenues, product development expenses were 26% in the quarter
ended March 31, 1998, compared to 17% in the quarter ended March 31, 1997 and
were 22% in the six months ended March 31, 1998 compared to 17% in the six
months ended March 31, 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 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 increasing 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"), 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 $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
quarter end March 31, 1998.
FOREIGN CURRENCY LOSSES
The Company incurred foreign currency gains of $8,000 in the quarter
ended March 31, 1998 compared to foreign currency losses of $263,000 in the
quarter ended March 31, 1997. The Company incurred foreign currency gains of
$34,000 in the six months ended March 31, 1998 compared to foreign currency
losses of $270,000 in the
11
<PAGE>
six months ended March 31, 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 six months ended March 31, 1997, the Company incurred losses on
accounts receivable and cash denominated in DM as the U.S. dollar strengthened
significantly against the DM.
INTEREST INCOME
Interest income decreased 44% to $97,000 in the quarter ended March 31,
1998 compared to $172,000 in the quarter ended March 31, 1997 and decreased 11%
to $285 in the six months ended March 31, 1998 compared to $320,000 in the six
months ended March 31, 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 9% in the
quarter ended March 31, 1998 and 10% in the six months ended March 31, 1998
compared to a provision for income taxes of 30% in the quarter and six months
ended March 31, 1997. The effective tax rate for the quarter and six 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.
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.
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 1997, 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.
12
<PAGE>
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 March 31, 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 $8.4 million in the six months
ended March 31, 1998 primarily due to cash used in investing activities and
operating losses incurred during the six month period.
Net cash used by operating activities was $1.0 million and consisted
primarily of increases in inventories, net loss before depreciation,
amortization and acquisition costs, plus a decrease in accounts payable and
current liabilities which were partially offset by decreases in accounts
receivable and income tax receivable.
Net cash used in investing activities was $7.7 million in the six
months ended March 31, 1998. The Company used $6.9 million to acquire Tinwald
and NI. The remaining amount was 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 $304,000 in the six
months ended March 31, 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 March 31, 1998, the Company's principal source of liquidity is
cash and cash equivalents of $4.9 million. The Company believes that cash
generated from operations, together with existing cash balances, will be
sufficient to satisfy the Company's requirements for working capital and capital
expenditures through at least the end of fiscal 1998.
13
<PAGE>
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
MARCH 31, 1998
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(b) Reports on Form 8-K
On February 4, 1998, the Company filed a Form 8-K for the
Company's acquisition of all of the outstanding common stock of Tinwald
Network Technologies, Inc.
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: May 1, 1998 By: /s/ Adelbert Kuthe
----------------------
Adelbert Kuthe
Vice President, Finance and Secretary
(Principal Financial Officer)
15
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