-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QmEyGu3RRx68TgE9WVBXeR1CMsNZdHkEHTYP9DXu5iJ4MN+csDM5aizUlAXsteG4 A6N9RiddMe51OrBBgIrmXQ== 0001047469-98-020497.txt : 19980518 0001047469-98-020497.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020497 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAVETEK CORP CENTRAL INDEX KEY: 0001043015 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 330457664 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-32195 FILM NUMBER: 98622680 BUSINESS ADDRESS: STREET 1: 11995 EL CAMINO REAL STREET 2: STE 301 CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: 6197932300 MAIL ADDRESS: STREET 1: 11995 EL CAMINO REAL STREET 2: STE 301 CITY: SAN DIEGO STATE: CA ZIP: 92130 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____. Commission file number 333-32195 WAVETEK CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 33-0457664 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 11995 EL CAMINO REAL, SUITE 301 SAN DIEGO, CALIFORNIA 92130 (Address of Principal Executive Offices) (Zip Code) (619) 793-2300 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 ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 14, 1998, Registrant had only one class of common stock, of which there were 4,884,860 shares outstanding. WAVETEK CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 1998 and September 30, 1997. . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income for the Three and Six Months Ended March 31, 1998 and March 31, 1997. . . . . 4 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1998 and March 31, 1997. . . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . 24 ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 24 ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 24 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WAVETEK CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, SEPTEMBER 30, 1998 1997 ------------ -------------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 3,918 $ 5,695 Short-term investments, available for sale . . . . . . . . . . . . - 996 Accounts receivable (less allowance for doubtful accounts of $946 at March 31, 1998 (unaudited) and $851 at September 30, 1997) . . 25,858 25,860 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,466 15,937 Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . 2 616 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 3,611 3,611 Other current assets . . . . . . . . . . . . . . . . . . . . . . 1,427 1,730 --------- --------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 51,282 54,445 Property and equipment, net . . . . . . . . . . . . . . . . . . . . 10,931 15,110 Deferred debt issuance costs, net . . . . . . . . . . . . . . . . . 4,001 4,233 Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . 3,131 3,281 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 101 101 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,307 183 --------- --------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $71,753 $77,353 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable to banks. . . . . . . . . . . . . . . . . . . . . . . $ 3,632 $ 3,859 Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . 11,261 13,356 Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . 5,441 6,034 Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . 928 522 Other current liabilities . . . . . . . . . . . . . . . . . . . . . 8,694 9,847 Current maturities of long-term obligations . . . . . . . . . . . . 3,000 1,972 --------- --------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 32,956 35,590 Long-term obligations, less current maturities . . . . . . . . . . . 107,000 112,972 Deferred income and other liabilities . . . . . . . . . . . . . . . 1,718 431 Commitments and contingencies . . . . . . . . . . . . . . . . . . . Stockholders' equity (deficit): Common stock, par value $.01; authorized, 15,000 shares; issued and outstanding, 4,885 shares . . . . . . . . . . . . . . . 49 49 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 43,741 43,741 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (113,393) (115,048) Foreign currency translation adjustments. . . . . . . . . . . . . . (318) (382) --------- --------- Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . (69,921) (71,640) --------- --------- Total liabilities and stockholders' equity (deficit) . . . . . . . . $71,753 $77,353 --------- --------- --------- ---------
Note: The balance sheet at September 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 WAVETEK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales. . . . . . . . . . . . . . . . . . . $35,504 $39,721 $71,279 $82,216 Cost of goods sold . . . . . . . . . . . . . . 14,797 18,099 30,546 39,101 ---------- ---------- ---------- ---------- Gross margin . . . . . . . . . . . . . . . . . 20,707 21,622 40,733 43,115 Operating expenses: Marketing and selling . . . . . . . . . . . . 8,798 9,478 17,860 18,573 Research and development. . . . . . . . . . . 4,449 4,067 8,727 7,713 General and administrative. . . . . . . . . . 2,741 2,664 5,393 5,405 ---------- ---------- ---------- ---------- 15,988 16,209 31,980 31,691 ---------- ---------- ---------- ---------- Operating income . . . . . . . . . . . . . . . 4,719 5,413 8,753 11,424 Non-operating income (expense): Interest income . . . . . . . . . . . . . . . 39 88 109 136 Interest expense. . . . . . . . . . . . . . . (2,978) (126) (5,947) (239) Other, net . . . . . . . . . . . . . . . . . 15 (220) (156) (616) ---------- ---------- ---------- ---------- (2,924) (258) (5,994) (719) ---------- ---------- ---------- ---------- Income before provision for income taxes . . . 1,795 5,155 2,759 10,705 Provision for income taxes . . . . . . . . . . 718 1,861 1,104 3,865 ---------- ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . $ 1,077 $ 3,294 $ 1,655 $ 6,840 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share - basic . . . . . . . . . $ .22 $ .30 $ .34 $ .62 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share - diluted . . . . . . . . $ .21 $ .28 $ .32 $ .59 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average common shares outstanding - basic. . . 4,885 10,971 4,885 10,973 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average common shares outstanding - diluted. . 5,121 11,593 5,123 11,599 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. 4 WAVETEK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1998 1997 -------- -------- OPERATING ACTIVITIES Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,655 $6,840 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense . . . . . . . . . . . . . . . . . . . . 1,639 1,385 Amortization expense . . . . . . . . . . . . . . . . . . . . 147 292 Amortization of debt issuance costs. . . . . . . . . . . . . 329 - Provision for losses on accounts receivable. . . . . . . . . 144 165 Deferred income taxes. . . . . . . . . . . . . . . . . . . . - 435 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (5) (20) Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . (473) (6,107) Inventories and other assets. . . . . . . . . . . . . . . (1,946) 1,950 Accounts payable and accrued expenses . . . . . . . . . . (2,022) (417) Income taxes payable, net . . . . . . . . . . . . . . . . 381 1,793 -------- -------- Net cash provided by (used in) operating activities . . . . . . (151) 6,316 INVESTING ACTIVITIES Purchase of property and equipment. . . . . . . . . . . . . . . (1,596) (3,253) Proceeds from sale of property and equipment. . . . . . . . . . 106 - Purchase of short-term investments. . . . . . . . . . . . . . . - (3,000) Proceeds from sale of short-term investments. . . . . . . . . . 996 - Payments received on notes receivable . . . . . . . . . . . . . 11 75 Issuance of notes receivable. . . . . . . . . . . . . . . . . . (15) - -------- -------- Net cash used in investing activities . . . . . . . . . . . . . (498) (6,178) FINANCING ACTIVITIES Repurchase of common shares and stock options for cash. . . . . - (64) Proceeds from revolving lines of credit and long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . 639 2,186 Principal payments on revolving lines of credit and long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . (1,617) (1,109) Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . (97) - -------- -------- Net cash provided by (used in) financing activities . . . . . . (1,075) 1,013 Effect of exchange rate changes on cash and cash equivalents. . (53) (149) -------- -------- Increase (decrease) in cash and cash equivalents. . . . . . . . (1,777) 1,002 Cash and cash equivalents at beginning of period. . . . . . . . 5,695 6,126 -------- -------- Cash and cash equivalents at end of period. . . . . . . . . . . $3,918 $7,128 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest. . . . . . . . . . . . . . . . . . . . . $5,754 $ 292 -------- -------- -------- -------- Cash paid for income taxes. . . . . . . . . . . . . . . . . . . $ 32 $1,830 -------- -------- -------- --------
See accompanying notes. 5 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION Wavetek Corporation (the "Company") is a leading global designer, manufacturer and distributor of a broad range of electronic test instruments, with a primary focus on application-specific instruments for testing voice, video and data communications equipment and networks. The Company also designs, manufactures and distributes precision instruments to calibrate and test electronic equipment and provides repair, upgrade and calibration services for its products on a worldwide basis. The accompanying consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying financial statements and the financial information included herein are unaudited. However such information includes all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to fairly state the results of the interim periods. Interim results are not necessarily indicative of results to be expected for the full year. It is suggested that these consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. 2. NET INCOME PER SHARE Effective October 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted net income per share with basic and diluted net income per share. Unlike primary net income per share previously reported by the Company, basic net income per share is based only on average common shares outstanding and excludes the dilutive effects of the Company's outstanding stock options. Diluted net income per share is very similar to the previous concept of fully diluted net income per share and includes the dilutive effect of the Company's outstanding stock options. The Company has a simple capital structure and, accordingly, the only difference in the Company's computations of basic and diluted net income per share is the dilutive effect of outstanding stock options. All net income per share amounts for all periods have been presented, and where necessary, restated to conform to the requirements of SFAS 128. 3. FINANCIAL STATEMENT DETAILS Inventories consist of the following:
MARCH 31, SEPTEMBER 30, 1998 1997 --------- ------------- (DOLLARS IN THOUSANDS) Finished goods. . . . . . . . . . . $6,656 $6,451 Work-in-progress. . . . . . . . . . 3,780 3,612 Materials. . . . . . . . . . . . . 6,030 5,874 --------- ------------- $16,466 $15,937 --------- ------------- --------- -------------
6 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. SALE AND LEASEBACK FINANCING In October 1994, the Company entered into a sale and leaseback financing whereby it sold its facility in Indianapolis to a third party investor for $4.5 million, resulting in a charge to income of $1.8 million, representing the excess of the net book value of the property over the net proceeds received. The Company simultaneously entered a Master Lease Agreement with the buyer, under which the Company leased back the facility for a period of 20 years for an annual rental of $473,000, subject to annual adjustments based on the change in the consumer price index, not to exceed 3.0% per annum. In December 1994, the Company subleased a portion of this facility to a third party for five years for an annual base rental and common area expense reimbursement of $387,000. Because of the significance of the sublease in relation to the Company's master lease of the facility, generally accepted accounting principles required that the transaction be recorded as a financing transaction, whereby the building remained on the Company's balance sheet in an amount equal to the net proceeds from the sale and an offsetting long-term financing obligation was recorded. In February 1998 the sublease was no longer significant in relation to the Company's master lease of the facility. Accordingly, both the building asset and the long-term financing obligation, each in the amount of approximately $4.0 million, have been removed from the Company's balance sheet, with no impact on the Company's results of operations or its cash flows. Effective February 1, 1998, the master lease will be accounted for as an operating lease, with monthly rental payments recorded as operating expenses. 5. AGREEMENT IN PRINCIPLE TO MERGE On March 18, 1998, Wavetek Corporation and Wandel & Goltermann Management Holding GmbH jointly announced that they have reached an agreement in principle to merge the companies. The structure of the transaction and the conditions of closing are currently being negotiated. 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA The Company's payment obligations under its Senior Subordinated Notes issued in connection with certain Recapitalization Transactions in June 1997 are guaranteed by all of the Company's current and future domestic subsidiaries (collectively, the "Subsidiary Guarantors"). Wavetek U.S. Inc. is the only current Subsidiary Guarantor. Such guarantee is full and unconditional and future guarantees will be joint and several. Separate financial statements of the Subsidiary Guarantor are not presented because the Company's management has deemed that they would not be material to investors. The following supplemental condensed consolidating financial data sets forth, on an unconsolidated basis, balance sheets, statements of income and statements of cash flows data for (i) the Company ("Wavetek Corporation"), (ii) the current Subsidiary Guarantor and (iii) the Company's current foreign subsidiaries (the "Foreign Subsidiaries"). The supplemental financial data reflects the investments of Wavetek Corporation in the Subsidiary Guarantor and the Foreign Subsidiaries using the equity method of accounting. 7 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONSOLIDATING BALANCE SHEETS AS OF MARCH 31, 1998 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 1,441 $ 2,477 $ - $ 3,918 Short-term investments, available for sale - - - - - Accounts receivable (less allowance for doubtful accounts of $946) (114) 31,517 15,605 (21,150) 25,858 Inventories - 7,181 10,022 (737) 16,466 Refundable income taxes - - 2 - 2 Deferred income taxes 2,301 1,310 - - 3,611 Other current assets 29 225 1,173 - 1,427 ----------- ---------- ------------ ------------ ------------ Total current assets 2,216 41,674 29,279 (21,887) 51,282 Property and equipment, net 1,615 4,326 4,990 - 10,931 Deferred debt issuance costs, net 4,001 - - - 4,001 Intangible assets, net 3,090 - 41 - 3,131 Deferred income taxes (4) 105 - - 101 Other assets 317 2,088 87 (185) 2,307 Investment in subsidiaries 39,600 - 25 (39,625) - ----------- ---------- ------------ ------------ ------------ Total assets $ 50,835 $ 48,193 $ 34,422 $ (61,697) $ 71,753 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable to banks $ - $ - $ 3,632 $ - $ 3,632 Trade accounts payable 14,493 7,209 10,706 (21,147) 11,261 Accrued compensation 183 1,347 3,911 - 5,441 Income taxes payable (6,928) 7,071 785 - 928 Other current liabilities 2,976 2,081 3,640 (3) 8,694 Current maturities of long-term obligations 3,000 - - - 3,000 ----------- ---------- ------------ ------------ ------------ Total current liabilities 13,724 17,708 22,674 (21,150) 32,956 Long-term obligations, less current maturities 107,000 - 185 (185) 107,000 Deferred income and other liabilities 32 1,668 18 - 1,718 Commitments and contingencies Stockholders' equity (deficit): Common stock, par value $.01; authorized, 15,000 shares; issued and outstanding, 4,885 shares 49 - - - 49 Additional paid-in capital 43,741 2,137 15,064 (17,201) 43,741 Retained earnings (accumulated deficit) (113,393) 26,680 (3,201) (23,479) (113,393) Foreign currency translation adjustments (318) - (318) 318 (318) ----------- ---------- ------------ ----------- ------------ Total stockholders' equity (deficit) (69,921) 28,817 11,545 (40,362) (69,921) ----------- ---------- ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 50,835 $ 48,193 $34,422 $(61,697) $ 71,753 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
8 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONSOLIDATING BALANCE SHEETS AS OF SEPTEMBER 30, 1997 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 4,575 $ 1,120 $ - $ 5,695 Short-term investments, available for sale - 996 - - 996 Accounts receivable (less allowance for doubtful accounts of $851) (103) 20,202 16,230 (10,469) 25,860 Inventories - 5,758 11,084 (905) 15,937 Refundable income taxes 4,134 (3,521) 3 - 616 Deferred income taxes 2,301 1,310 - - 3,611 Other current assets 63 246 1,421 - 1,730 ----------- ---------- ------------ ------------ ------------ Total current assets 6,395 29,566 29,858 (11,374) 54,445 Property and equipment, net 5,690 4,428 5,015 (23) 15,110 Debt issuance costs, net 4,233 - - - 4,233 Intangible assets, net 3,224 - 57 - 3,281 Deferred income taxes (4) 105 - - 101 Other assets 226 46 96 (185) 183 Investment in subsidiaries 33,059 - 25 (33,084) - ----------- ---------- ------------ ------------ ------------ Total assets $ 52,823 $ 34,145 $ 35,051 $(44,666) $ 77,353 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable to banks $ - $ - $ 3,859 $ - $ 3,859 Trade accounts payable 5,215 5,795 12,817 (10,471) 13,356 Accrued compensation 418 1,486 4,130 - 6,034 Income taxes payable - - 522 - 522 Other current liabilities 4,727 3,042 2,077 1 9,847 Current maturities of long-term obligations 1,097 - 875 - 1,972 ----------- ---------- ------------ ------------ ------------ Total current liabilities 11,457 10,323 24,280 (10,470) 35,590 Long-term obligations, less current maturities 112,971 - 186 (185) 112,972 Deferred income and other liabilities 35 369 27 - 431 Commitments and contingencies Stockholders' equity (deficit): Common stock, par value $.01; authorized, 15,000 shares; issued and outstanding, 4,885 shares 49 - - - 49 Additional paid-in capital 43,741 2,137 15,064 (17,201) 43,741 Retained earnings (accumulated deficit) (115,048) 21,316 (4,124) (17,192) (115,048) Foreign currency translation adjustments (382) - (382) 382 (382) Total stockholders' equity (deficit) (71,640) 23,453 10,558 (34,011) (71,640) ----------- ---------- ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 52,823 $34,145 $ 35,051 $(44,666) $77,353 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
9 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONSOLIDATING STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 (DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ Net sales $- $22,196 $20,231 $(6,923) $35,504 Cost of goods sold (20) 9,127 12,876 (7,186) 14,797 ----------- ---------- ------------ ------------ ------------ Gross margin 20 13,069 7,355 263 20,707 Operating expenses: Marketing and selling 409 4,625 3,764 - 8,798 Research and development (8) 2,828 1,629 - 4,449 General and administrative 625 974 1,142 - 2,741 ----------- ---------- ------------ ------------ ------------ 1,026 8,427 6,535 - 15,988 ----------- ---------- ------------ ------------ ------------ Operating income (loss) (1,006) 4,642 820 263 4,719 Non-operating income (expense): Interest income - 36 3 - 39 Interest expense (2,921) - (57) - (2,978) Equity in net income (loss) of subsidiaries 3,619 - - (3,619) - Other, net - 278 (266) 3 15 ----------- ---------- ------------ ------------ ------------ 698 314 (320) (3,616) (2,924) ----------- ---------- ------------ ------------ ------------ Income (loss) before provision (credit) for income taxes (308) 4,956 500 (3,353) 1,795 Provision (credit) for income taxes (1,385) 1,982 121 - 718 ----------- ---------- ------------ ------------ ------------ Net income $1,077 $2,974 $379 $(3,353) $1,077 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
10 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONSOLIDATING STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 (DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ Net sales $- $21,579 $27,077 $(8,935) $39,721 Cost of goods sold (794) 9,734 17,985 (8,826) 18,099 ----------- ---------- ------------ ------------ ------------ Gross margin 794 11,845 9,092 (109) 21,622 Operating expenses: Marketing and selling 193 4,308 4,977 - 9,478 Research and development (12) 3,434 645 - 4,067 General and administrative 528 945 1,191 - 2,664 ----------- ---------- ------------ ------------ ------------ 709 8,687 6,813 - 16,209 ----------- ---------- ------------ ------------ ------------ Operating income (loss) 85 3,158 2,279 (109) 5,413 Non-operating income (expense): Interest income 9 77 11 (9) 88 Interest expense (96) - (39) 9 (126) Equity in net income of subsidiaries 3,552 - - (3,552) - Other, net 209 203 (632) - (220) ----------- ---------- ------------ ------------ ------------ 3,674 280 (660) (3,552) (258) ----------- ---------- ------------ ------------ ------------ Income before provision for income taxes 3,759 3,438 1,619 (3,661) 5,155 Provision for income taxes 465 1,062 334 - 1,861 ----------- ---------- ------------ ------------ ------------ Net income $3,294 $2,376 $1,285 $(3,661) $3,294 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
11 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONSOLIDATING STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1998 (DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ Net sales $ - $42,801 $42,721 $(14,243) $71,279 Cost of goods sold (70) 18,155 26,893 (14,432) 30,546 ----------- ---------- ------------ ------------ ------------ Gross margin 70 24,646 15,828 189 40,733 Operating expenses: Marketing and selling 840 8,816 8,204 - 17,860 Research and development (20) 5,414 3,333 - 8,727 General and administrative 1,038 1,975 2,380 - 5,393 ----------- ---------- ------------ ------------ ------------ 1,858 6,205 13,917 - 31,980 ----------- ---------- ------------ ------------ ------------ Operating income (loss) (1,788) 8,441 1,911 189 8,753 Non-operating income (expense): Interest income - 106 3 - 109 Interest expense (5,830) - (117) - (5,947) Equity in net income (loss) of subsidiaries 6,479 - - (6,479) - Other, net - 393 (552) 3 (156) ----------- ---------- ------------ ------------ ------------ 649 499 (666) (6,476) (5,994) ----------- ---------- ------------ ------------ ------------ Income (loss) before provision (credit) for income taxes (1,139) 8,940 1,245 (6,287) 2,759 Provision (credit) for income taxes (2,794) 3,576 322 - 1,104 ----------- ---------- ------------ ------------ ------------ Net income $ 1,655 $ 5,364 $ 923 $(6,287) $ 1,655 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
12 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONSOLIDATING STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1997 (DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ Net sales $- $43,434 $57,613 $(18,831) $82,216 Cost of goods sold (152) 19,826 38,366 (18,939) 39,101 ----------- ---------- ------------ ------------ ------------ Gross margin 152 23,608 19,247 108 43,115 Operating expenses: Marketing and selling 480 8,276 9,817 - 18,573 Research and development (24) 4,945 2,792 - 7,713 General and administrative 1,243 1,801 2,361 - 5,405 ----------- ---------- ------------ ------------ ------------ 1,699 15,022 14,970 - 31,691 ----------- ---------- ------------ ------------ ------------ Operating income (loss) (1,547) 8,586 4,277 108 11,424 Non-operating income (expense): Interest income 76 121 14 (75) 136 Interest expense (192) - (122) 75 (239) Equity in net income of subsidiaries 8,424 - - (8,424) - Other, net 164 96 (876) - (616) ----------- ---------- ------------ ------------ ------------ 8,472 217 (984) (8,424) (719) ----------- ---------- ------------ ------------ ------------ Income before provision for income taxes 6,925 8,803 3,293 (8,316) 10,705 Provision for income taxes 85 3,208 572 - 3,865 ----------- ---------- ------------ ------------ ------------ Net income $6,840 $5,595 $2,721 $(8,316) $6,840 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
13 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW FOR THE SIX MONTHS ENDED MARCH 31, 1998 (DOLLARS IN THOUSANDS)
WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ OPERATING ACTIVITIES Net cash provided by (used in) operating activities........................................ $322 $(3,537) $3,064 $- $(151) INVESTING ACTIVITIES Purchase of property and equipment................. (203) (568) (825) - (1,596) Proceeds from sale of short-term investments....... - 996 - - 996 Other investing activities......................... 11 (25) 116 - 102 ----------- ---------- ----------- ----------- ----------- Net cash provided by (used in) investing activities........................................ (192) 403 (709) - (498) FINANCING ACTIVITIES Proceeds from revolving lines of credit and long-term obligations............................. - - 639 - 639 Principal payments on revolving lines of credit and long-term obligations......................... (33) - (1,584) - (1,617) Debt issuance costs................................ (97) - - - (97) ----------- ---------- ----------- ----------- ----------- Net cash used in financing activities.............. (130) - (945) - (1,075) Effect of exchange rate changes on cash and cash equivalents.................................. - - (53) - (53) ----------- ---------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents....................................... - (3,134) 1,357 - (1,777) Cash and cash equivalents at beginning of period............................................ - 4,575 1,120 - 5,695 ----------- ---------- ----------- ----------- ----------- Cash and cash equivalents at end of period......... $- $ 1,441 $2,477 $- $3,918 ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
14 WAVETEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW FOR THE SIX MONTHS ENDED MARCH 31, 1997 (DOLLARS IN THOUSANDS) WAVETEK SUBSIDIARY FOREIGN CORPORATION GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------ ------------ ------------ OPERATING ACTIVITIES Net cash provided by (used in) operating activities.................................. $(10,232) $13,467 $3,081 $ - $6,316 INVESTING ACTIVITIES Purchase of property and equipment........... (943) (981) (1,329) - (3,253) Purchase of short-term investments........... - (3,000) - - (3,000) Other investing activities................... 25 50 - - 75 ----------- ---------- ------------ ------------ ------------ Net cash used in investing activities........ (918) (3,931) (1,329) - (6,178) FINANCING ACTIVITIES - Proceeds from revolving lines of credit and long-term obligations....................... - - 2,186 - 2,186 Principal payments on revolving lines of credit and long-term obligations................... (45) - (1,064) - (1,109) Divdends from subsidiary to Wavetek Corporation................................. 10,000 (10,000) - - - Capital contributions from Wavetek Corporation to subsidiaries............................. (2,578) - 2,578 - - Repayment of loans from Wavetek Corporation to subsidiaries............................. 3,837 - (3,837) - - Other financing activities................... (64) - - - (64) ----------- ---------- ------------ ------------ ------------ Net cash provided by (used in) financing activities.................................. 11,150 (10,000) (137) - 1,013 Effect of exchange rate changes on cash and cash equivalents............................ - - (149) - (149) ----------- ---------- ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents................................. - (464) 1,466 - 1,002 Cash and cash equivalents at beginning of period...................................... - 4,845 1,281 - 6,126 ----------- ---------- ------------ ------------ ------------ Cash and cash equivalents at end of period... $ - $4,381 $2,747 $ - $7,128 ----------- ---------- ------------ ------------ ------------ ----------- ---------- ------------ ------------ ------------
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements contained in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Quarterly Report on Form 10-Q which are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those risks and special considerations set forth in the Company's other SEC filings. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW Wavetek is a leading global designer, manufacturer and distributor of a broad range of electronic test instruments, with a primary focus on application-specific instruments for testing voice, video and data communications equipment and networks. The Company also designs, manufactures and distributes precision instruments to calibrate and test electronic equipment and provides repair, upgrade and calibration services for its products on a worldwide basis. The Company derives its revenues primarily from the sale of its products to a broad international base of over 5,000 customers operating in a wide range of industries. A majority of the Company's sales come from its Communications Test product lines which serve the CATV, Wireless, Telecom, LAN and Test Tools market segments of the test instrument industry. The Company also sells Calibration Instruments and provides repair, upgrade and calibration services for its products on a worldwide basis. The Company sells products that are manufactured at its four facilities located in: (i) Indianapolis, Indiana; (ii) Norwich, England; (iii) St. Etienne, France; and (iv) Munich, Germany. In major markets such as the United States, England, France and Germany, the Company sells its products to customers in their local currencies. In the rest of the world, the Company generally sells its products to customers or local distributors in the functional currency of the location where the products are manufactured. During fiscal 1997, approximately 61% of the Company's sales were generated outside of the United States and approximately 50% of the Company's sales were made in currencies other than the United States dollar. During the six months ended March 31, 1998, approximately 56% of the Company's sales were generated outside the United States and approximately 44% of the Company's sales were made in currencies other than the United States dollar. As a result of such foreign currency sales, the equivalent United States dollar amount of the Company's sales is impacted by changes in foreign currency exchange rates. The Company's ability to maintain and grow its sales depends on a variety of factors including its ability to maintain its competitive position in areas such as technology, performance, price, brand identity, quality, reliability, distribution and customer service and support, and its ability to continue to introduce new products that respond to technological change and market demand in a timely manner. Wavetek's cost of goods sold, and its resulting gross margin, are driven primarily by the cost of the material in its products, the cost of the labor to manufacture such products and the overhead expenses in its facilities. In recent years, the Company has focused on improving its gross margin by: (i) consolidating manufacturing operations; (ii) focusing its new product development efforts on lower-cost, easier to manufacture designs; (iii) controlling headcount and expenses in its manufacturing facilities; and (iv) gaining efficiencies and economies of scale in its material and component procurement activities. 16 The Company's operating expenses are substantially impacted by marketing and selling activities and by research and development activities. Marketing and selling expenses are primarily driven by: (i) sales volume, with respect to sales force expenses and commission expenses; (ii) the extent of market research activities for new product design efforts; (iii) advertising and trade show activities; and (iv) the number of new products introduced in the period. Research and development expenses are primarily driven by the number and complexity of new products under development. General and administrative expenses primarily include costs associated with the Company's administrative employees, facilities and functions. The Company incurs expenses in foreign countries primarily in the functional currencies of such locations. As a result of the Company's substantial international operations, the United States dollar amount of its expenses is impacted by changes in foreign currency exchange rates. RESULTS OF OPERATIONS The following table sets forth selected financial information as a percentage of sales for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ------ ------ ------ ------ Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 41.7 45.6 42.9 47.6 ------ ------ ------ ------ Gross margin 58.3 54.4 57.1 52.4 Operating expenses 45.0 40.8 44.9 38.5 ------ ------ ------ ------ Operating income 13.3 13.6 12.2 13.9 Interest expense, net (8.3) (.1) (8.2) (.1) Other non-operating income (expense), net .1 (.5) (.1) (.8) ------ ------ ------ ------ Income before provision for income taxes 5.1 13.0 3.9 13.0 Provision for income taxes 2.1 4.7 1.6 4.7 ------ ------ ------ ------ Net income 3.0% 8.3% 2.3% 8.3% ------ ------ ------ ------ ------ ------ ------ ------ EBITDA (1) 15.8% 15.8% 14.8% 15.9% ------ ------ ------ ------ ------ ------ ------ ------
The Company's ratio of earnings to fixed charges was as follows for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 1.6x 16.8x 1.4x 17.6x
___________ (1) EBITDA is operating income plus depreciation and amortization expense. The Company's definition of EBITDA is consistent with the definition of Consolidated Cash Flow in the Indenture related to the Company's Senior Subordinated Notes (the "Indenture"). While EBITDA should not be construed as a substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows, the Company has included EBITDA because it may be viewed as an indicator of compliance with certain covenants in the Indenture and the Company's bank credit agreement and is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance, leverage and liquidity and to determine a Company's ability to service debt. EBITDA as presented by the Company herein may not be comparable to similarly titled measures reported by other companies. In addition, the amount 17 reported by the Company as EBITDA may not be fully available for management's discretionary use due to the Company's needs to conserve funds for debt service, capital expenditures and other commitments. (2) For purposes of computing this ratio, earnings consist of income before provision for income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of deferred debt issuance costs and one-third of the rent expense from operating leases, which management believes is a reasonable approximation of the interest factor of the rent. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 NET SALES. Net sales in the three months ended March 31, 1998 decreased $4.2 million, or 10.6%, to $35.5 million from $39.7 million in the comparable fiscal 1997 period. This decrease was due to a decrease in sales to international customers of $5.5 million, or 22.7%, partially offset by an increase of $1.3 million, or 8.6%, in sales to customers in the United States. The Company's sales to customers outside the United States decreased to 53.1% of total sales in the three months ended March 31, 1998 from 61.4% in the comparable fiscal 1997 period and the portion of the Company's sales which were made in currencies other than the United States dollar decreased to approximately 41% in the three months ended March 31, 1998 from approximately 51% in the comparable fiscal 1997 period. The decrease in sales to international customers was primarily due to large shipments to international customers which were made in the three months ended March 31, 1997 and did not recur in similar magnitude in the three months ended March 31, 1998. The Company has also experienced a general reduction in its sales to customers in Asia as a result of recent economic down turns in that region. Changes in certain foreign exchange rates also had the effect of reducing the United States dollar equivalent of the Company's foreign currency sales by $1.6 million from the United States dollar equivalent amount that would have been reported if the average exchange rates in effect during the three months ended March 31, 1997 had remained in effect during the three months ended March 31, 1998. Sales of the Company's Communications Test products in the three months ended March 31, 1998 decreased $3.1 million, or 10.1%, from the comparable fiscal 1997 period primarily as a result of large shipments to international customers which were made in the three months ended March 31, 1997 and did not recur in similar magnitude in the three months ended March 31, 1998. Sales of Calibration Instruments products in the three months ended March 31, 1998 decreased $1.4 million, or 22.6%, from the comparable fiscal 1997 period, due partially to an unfavorable geographic mix of such sales resulting in less revenue per unit sold and partially to a general reduction in sales to customers in Asia as a result of recent economic down turns in that region. Sales in the three months ended March 31, 1998 from repair, upgrade and calibration services increased $0.3 million, or 9.9%, from the comparable fiscal 1997 period. GROSS MARGIN. The Company's gross margin in the three months ended March 31, 1998 decreased $0.9 million or 4.2%, to $20.7 million from $21.6 million in the comparable fiscal 1997 period. Gross margin as a percentage of sales increased to 58.3% in the three months ended March 31, 1998 from 54.4% in the comparable fiscal 1997 period. The increase in the gross margin percentage during the three months ended March 31, 1998 results primarily from increases in gross margin percentages realized from the Company's sales of Communications Test products due substantially to improvements made by the Company in recent periods to the cost structure of its manufacturing operations, including the replacement of a major manufacturing subcontractor in Europe. In addition, the Company's improved gross margin percentages were positively impacted by a favorable geographical and product mix of its sales. As a partial offset to these improved gross margin percentages, the Company experienced a reduction in gross margin percentages realized from sales of its Calibration Instruments products during the three months ended March 31, 1998 due primarily to lower sales volume and an unfavorable geographic mix of its sales. Changes in foreign exchange rates had a small unfavorable impact on the United States dollar equivalent of gross margins related to international sales denominated in foreign currencies in the three months ended March 31, 1998. 18 OPERATING EXPENSES. Operating expenses in the three months ended March 31, 1998 decreased $0.2 million, or 1.4%, to $16.0 million from $16.2 million in the comparable fiscal 1997 period. Operating expenses as a percentage of sales increased to 45.0% in the three months ended March 31, 1998 from 40.8% in the comparable fiscal 1997 period. The decrease in operating expenses in the three months ended March 31, 1998 was due to a decrease in spending for marketing and selling activities of $0.7 million, to $8.8 million, or 24.8% of sales, in the three months ended March 31, 1998 from $9.5 million, or 23.9% of sales, in the comparable fiscal 1997 period, primarily due to a reduction in sales commissions paid to independent sales representatives due to the reduced sales volume in the three months ended March 31, 1998 compared to the three months ended March 31, 1997. Although total expenses related to marketing and selling activities decreased in the three months ended March 31, 1998, such expenses increased as a percentage of sales due to the fixed portion of such expenses being spread over a lower sales volume. The reduction in marketing and selling expense was partially offset by an increase in spending for research and development activities of $0.4 million, to $4.4 million, or 12.5% of sales, in the three months ended March 31, 1998 from $4.1 million, or 10.2% of sales, in the comparable fiscal 1997 period, in order to accelerate the timing and number of new product introductions. Spending for general and administrative activities remained at approximately the same level in the three months ended March 31, 1998 as in the comparable fiscal 1997 period, however these expenses increased as a percentage of sales during the current period. Changes in foreign exchange rates had a favorable impact on the United States dollar equivalent of operating expenses denominated in foreign currencies in the three months ended March 31, 1998. NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the three months ended March 31, 1998 increased by $2.7 million over the comparable fiscal 1997 period to $2.9 million. The increase was primarily due to an increase in the Company's net interest expense to $2.9 million during the three months ended March 31, 1998 from no net expense in the comparable fiscal 1997 period, reflecting additional interest expense due to the Company's outstanding debt securities (the "Notes") and the New Credit Agreement. The increase in net interest expense was partially offset by a reduction of $0.2 million in other non-operating expenses. PROVISION FOR INCOME TAXES. The Company's effective tax rate has increased to approximately 40% in the three months ended March 31, 1998 from approximately 36% in the comparable fiscal 1997 period. NET INCOME (LOSS). As a result of the above factors, net income was $1.1 million in the three months ended March 31, 1998 as compared to $3.3 million in the comparable fiscal 1997 period. EBITDA. EBITDA was $5.6 million in the three months ended March 31, 1998 as compared to $6.3 million in the comparable fiscal 1997 period. EBITDA as a percentage of sales was 15.8% in both the three months ended March 31, 1998 and 1997. RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors, the ratio of earnings to fixed charges was 1.6x in the three months ended March 31, 1998 as compared to 16.8x in the comparable fiscal 1997 period. SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997 NET SALES. Net sales in the six months ended March 31, 1998 decreased $10.9 million, or 13.3%, to $71.3 million from $82.2 million in the comparable fiscal 1997 period. This decrease was due to a decrease in sales to international customers of $12.2 million, or 23.5%, partially offset by an increase of $1.2 million, or 4.1%, in sales to customers in the United States. The Company's sales to customers outside the United States decreased to 55.5% of total sales in the six months ended March 31, 1998 from 63.0% in the comparable fiscal 1997 period and the portion of the Company's sales 19 which were made in currencies other than the United States dollar decreased to approximately 44% in the six months ended March 31, 1998 from approximately 54% in the comparable fiscal 1997 period. The decrease in sales to international customers was primarily due to several large shipments to international customers which were made during the six months ended March 31, 1997 and did not recur in similar magnitude during the six months ended March 31, 1998. The Company has also experienced a general reduction in its sales to customers in Asia as a result of recent economic down turns in that region. Changes in certain foreign exchange rates also had the effect of reducing the United States dollar equivalent of the Company's foreign currency sales by $3.0 million from the United States dollar equivalent amount that would have been reported if the average exchange rates in effect during the six months ended March 31, 1997 had remained in effect during the six months ended March 31, 1998. Sales of the Company's Communications Test products in the six months ended March 31, 1998 decreased $8.6 million, or 13.5%, from the comparable fiscal 1997 period primarily as a result of the large shipments mentioned above that occurred during the comparable fiscal 1997 period. Sales of Calibration Instruments products in the six months ended March 31, 1998 decreased $2.9 million, or 22.2%, from the comparable fiscal 1997 period, due partially to the continued delay in a large order which was expected during the three months ended December 31, 1997 and was not received by March 31, 1998, partially to the fact that the comparable fiscal 1997 period included higher shipments in connection with a planned reduction in the backlog of this product line during that period, partially to an unfavorable geographic mix of sales and partially to a reduction in sales to customers in Asia. Sales in the six months ended March 31, 1998 from repair, upgrade and calibration services increased $0.5 million, or 9.4%, from the comparable fiscal 1997 period. GROSS MARGIN. The Company's gross margin in the six months ended March 31, 1998 decreased $2.4 million or 5.5%, to $40.7 million from $43.1 million in the comparable fiscal 1997 period. Gross margin as a percentage of sales increased to 57.1% in the six months ended March 31, 1998 from 52.4% in the comparable fiscal 1997 period. The increase in the gross margin percentage during the six months ended March 31, 1998 results primarily from increases in gross margin percentages realized from the Company's sales of Communications Test products due substantially to improvements made by the Company in recent periods to the cost structure of its manufacturing operations, including the replacement of a major manufacturing subcontractor in Europe. In addition, the Company's improved gross margin percentages were positively impacted by a favorable geographical and product mix of its sales. As a partial offset to these improved gross margin percentages, the Company experienced a reduction in gross margin percentages realized from sales of its Calibration Instruments products during the six months ended March 31, 1998 due primarily to lower sales volume and an unfavorable geographic mix of its sales. Changes in foreign exchange rates had an unfavorable impact on the United States dollar equivalent of gross margins related to international sales denominated in foreign currencies in the six months ended March 31, 1998. OPERATING EXPENSES. Operating expenses in the six months ended March 31, 1998 increased $0.3 million, or 1.0%, to $32.0 million from $31.7 million in the comparable fiscal 1997 period. Operating expenses as a percentage of sales increased to 44.9% in the six months ended March 31, 1998 from 38.5% in the comparable fiscal 1997 period. The increase in operating expenses in the six months ended March 31, 1998 was due to an increase in spending for research and development activities of $1.0 million, to $8.7 million, or 12.2% of sales, in the six months ended March 31, 1998 from $7.7 million, or 9.4% of sales, in the comparable fiscal 1997 period, in order to accelerate the timing and number of new product introductions. The increase in spending for research and development activities was partially offset by reduced spending for marketing and selling activities of $0.7 million, to $17.9 million, or 25.1% of sales, in the six months ended March 31, 1998 from $18.6 million, or 22.6% of sales, in the comparable fiscal 1997 period, primarily due to a reduction in sales commissions paid to independent sales representatives due to reduced sales volume in the six months ended March 31, 1998 compared to the six months ended March 31, 1997. Although total expenses related to marketing and selling activities decreased in the six months ended March 31, 1998, such expenses increased as a percentage of sales due to the fixed portion of such expenses being spread over a lower sales volume. Spending for general and administrative activities 20 remained at approximately the same level in the six months ended March 31, 1998 as in the comparable fiscal 1997 period, however these expenses increased as a percentage of sales during the current period. Changes in foreign exchange rates had a favorable impact on the United States dollar equivalent of operating expenses denominated in foreign currencies in the six months ended March 31, 1998. NON-OPERATING INCOME (EXPENSE). Non-operating expense, net, in the six months ended March 31, 1998 increased by $5.3 million over the comparable fiscal 1997 period to $6.0 million. The increase was primarily due to an increase in the Company's net interest expense to $5.8 million during the six months ended March 31, 1998 from $0.1 million in the comparable fiscal 1997 period, reflecting additional interest expense due to the Notes and the New Credit Agreement. The increase in net interest expense was partially offset by a reduction of $0.4 million in other non-operating expenses. PROVISION FOR INCOME TAXES. The Company's effective tax rate has increased to approximately 40% in the six months ended March 31, 1998 from approximately 36% in the comparable fiscal 1997 period. NET INCOME (LOSS). As a result of the above factors, net income was $1.7 million in the six months ended March 31, 1998 as compared to $6.8 million in the comparable fiscal 1997 period. EBITDA. EBITDA was $10.5 million in the six months ended March 31, 1998 as compared to $13.1 million in the comparable fiscal 1997 period. EBITDA as a percentage of sales decreased to 14.8% in the six months ended March 31, 1998 from 15.9% in the comparable fiscal 1997 period. RATIO OF EARNINGS TO FIXED CHARGES. As a result of the above factors, the ratio of earnings to fixed charges was 1.4x in the six months ended March 31, 1998 as compared to 17.6x in the comparable fiscal 1997 period. LIQUIDITY AND CAPITAL RESOURCES The Company's cash provided by (used in) operating activities was $(0.2 million) and $6.3 million in the six months ended March 31, 1998 and 1997, respectively. The Company had cash, cash equivalents and short-term investments at March 31, 1998 of $3.9 million. The Company invests its excess cash in money market funds and U.S. Treasury obligations. Historically the Company has funded its business through operating cash flow, has not relied on sales of equity to provide cash and has used short-term debt primarily for cash management purposes. The Company's European subsidiaries had borrowings outstanding under their existing credit agreements (the "Existing Credit Agreements") of $3.6 million at March 31, 1998 for funding short-term working capital requirements, and the Company had additional obligations outstanding totaling approximately $1.3 million in the form of letters of credit and bank guarantees. The Company's primary cash needs have been for the funding of working capital requirements (primarily inventory and accounts receivable) and capital expenditures. The Company's net cash used in investing activities was $0.5 million and $6.2 million in the six months ended March 31, 1998 and 1997, respectively. The Company's recurring cash requirements for investing activities are primarily for capital expenditures. The Company made capital expenditures in the six months ended March 31, 1998 and 1997 of approximately $1.6 million and $3.3 million, respectively. The Company's cash flows from investing activities for the six months ended March 31, 1998 and 1997 also included net proceeds from the sale of and (purchase of) short-term investments of $1.0 million and $(3.0 million), respectively. 21 The Company's net cash provided by (used in) financing activities was $(1.1 million) and $1.0 million in the six months ended March 31, 1998 and 1997, respectively. The net cash provided by (used in) financing activities substantially reflects the proceeds from and repayments for borrowings used to finance the Company's operating and investing activities, or as an application of the cash generated from these activities. As part of certain recapitalization transactions that occurred in June 1997, the Company entered into a new credit agreement (the "New Credit Agreement')with Fleet National Bank, DLJ Capital Funding, Inc. and various other lenders providing for a term loan facility of $25.0 million and a revolving credit facility providing for borrowings up to $20.0 million, of which the Company borrowed all $25.0 million of the term loan facility and none of the revolving credit facility to complete the recapitalization transactions. In connection with entering into the New Credit Agreement, the Company terminated $4.0 million of United States availability under its Existing Credit Agreements, leaving borrowing availability of approximately $9.4 million at its Foreign Subsidiaries. The Company believes that its cash flow from operations, combined with the remaining available borrowings under the Existing and New Credit Agreements will be sufficient to fund its debt service obligations, including its obligations under the Notes, and working capital requirements. FOREIGN OPERATIONS As discussed above, a significant portion of the Company's sales and expenses are denominated in currencies other than the United States dollar. In order to maintain access to such foreign currencies, the Company's subsidiaries in the United Kingdom, France and Germany have credit facilities providing for borrowings in British pounds, French francs and Deutsche marks, respectively. The revolving credit facility under the New Credit Agreement provides for up to an aggregate of $7.5 million of borrowings in British pounds, French francs and Deutsche marks. Adjustments made in translating the balance sheet accounts of the Foreign Subsidiaries from their respective functional currencies at appropriate exchange rates are included as a separate component of stockholders' equity. In addition, the Company periodically uses forward exchange contracts to hedge certain known foreign exchange exposures. Gains or losses from such contracts are included in the Company's statements of income to offset gains and losses from the underlying foreign currency transactions. The Indenture under which the Notes were issued and the New Credit Agreement permit the Company and its subsidiaries to make investments in, and intercompany loans to, the Foreign Subsidiaries. Payments to the Company or its other subsidiaries by such Foreign Subsidiaries, including the payment of dividends, redemption of capital stock or repayment of such intercompany loans, may be restricted by the credit agreements of the Foreign Subsidiaries. All intercompany loans from the Company to the Foreign Subsidiaries are pledged to the lenders under the New Credit Agreement. PERIODIC FLUCTUATIONS The Company's sales for the twelve months ended March 31, 1998 occurred approximately 25% in each of the four fiscal quarters ended June 30, 1997, September 30, 1997, December 31, 1997 and March 31, 1998. A variety of factors may cause period-to-period fluctuations in the operating results of the Company. Such factors include, but are not limited to, product mix, European summer holidays and other seasonal influences, competitive pricing pressures, materials costs, currency fluctuations, revenues and expenses related to new products and enhancements of existing products, as well as delays in customer purchases in anticipation of the introduction of new products or product enhancements by the Company or its competitors. The majority of the Company's revenues in each quarter results from orders received in that quarter. As a result, the Company establishes its production, inventory and operating expenditure levels based on anticipated revenue 22 levels. Thus, if sales do not occur when expected, expenditures levels could be disproportionately high and operating results for that quarter, and potentially future quarters, would be adversely affected. IMPACT OF YEAR 2000 In 1995, the Company evaluated its information systems for Year 2000 compliance. As a result of this activity, an Information Systems Strategic Plan was developed to address any deficiencies associated with dates and to significantly improve the Company's overall information capabilities. The Company has already addressed most of its Year 2000 date issues and continues on schedule to complete this project before it will have any material impact on the Company's ability to deliver products and services. A substantial portion of the costs of this project, including costs associated with the implementation of certain new core information systems, have already been incurred by the Company. Additional costs necessary to complete the Company's Information Systems Strategic Plan are not expected to have a material effect on the Company's results of operations or its financial condition. Failure to complete the Information Systems Strategic Plan as it relates to Year 2000 compliance could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's systems or business processes may be vulnerable to those third parties' failure to remediate their own year 2000 issues. There can be no assurance that any year 2000 issues present in the systems of such other companies on which the Company's systems or business processes rely will be timely remedied and will not have an adverse effect on the Company. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of its business, the Company from time to time is subject to legal claims. The Company does not believe that the likely outcome of any such claims or related lawsuits would have a material adverse effect on the Company or its ability to develop new products. In January 1998, the Company was sued by ComSonics, Incorporated ("ComSonics") for infringement by the Company and certain of its CATV test equipment products of ComSonics' U.S. Patent No. 4,685,065. The action seeks damages for past infringement and an injunction against continued infringement. The Company had filed an answer denying the material allegations of the complaint and alleging that the ComSonics patent is invalid. The action is at an early stage and no discovery has taken place. The Company has reached a tentative agreement to settle the action on terms that include a license to Wavetek under the ComSonics patent, fixed payments for which are to be made annually for the next six years. While there can be no assurance that a definitive settlement agreement will be entered into, the Company believes that such agreement, if executed, will not have a material effect on the Company's financial position at March 31, 1998, or its results of operations for the six months then ended, nor will it have material adverse effect on the Company or its ability to develop new products. 23 ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12.1 Schedule Re: Computation of Ratio of Earnings to Fixed Charges 27.1 Financial Data Schedule for the six months ended March 31, 1998 27.2 Restated Financial Data Schedule for the year ended September 30, 1997 and the nine months ended June 30, 1997. (b) Reports on Form 8-K The Company filed a Form 8-K/A on March 25, 1998 as an amendment to Form 8-K filed March 18, 1998 to report that on March 18, 1998, Wavetek Corporation and Wandel & Goltermann Management Holding GmbH jointly announced that they have reached an agreement in principle to merge the companies. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of the 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 14, 1998 WAVETEK CORPORATION (Registrant) /s/ VICKIE L. CAPPS ----------------------- Vickie L. Capps Chief Financial Officer 25 EX-12.1 2 EXHIBIT 12.1 EXHIBIT 12.1 SCHEDULE RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 --------- -------- --------- -------- Income before provision for income taxes. . . . . . . . . . $1,795 $5,155 $2,759 $10,705 Interest expense, including amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . 2,978 126 5,947 239 Interest portion of rental expense. . . . . . . . . . . . . 275 200 469 404 --------- -------- --------- -------- Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $5,048 $5,481 $9,175 $11,348 --------- -------- --------- -------- --------- -------- --------- -------- Interest expense, including amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . $2,978 $126 $5,947 $239 Interest portion of rental expense. . . . . . . . . . . . . 275 200 469 404 --------- -------- --------- -------- Fixed charges . . . . . . . . . . . . . . . . . . . . . . . $3,253 $ 326 $6,416 $ 643 --------- -------- --------- -------- --------- -------- --------- -------- Ratio of earnings to fixed charges. . . . . . . . . . . . . 1.6 16.8 1.4 17.6
EX-27.1 3 EXHIBIT 27.1
5 THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED MARCH 31, 1998. 1,000 6-MOS SEP-30-1998 MAR-31-1998 3,918 0 26,804 946 16,466 51,282 21,684 10,752 71,753 32,956 107,000 0 0 49 43,741 71,753 71,279 71,279 30,546 62,526 (156) 144 5,947 2,759 1,104 1,655 0 0 0 1,655 0.34 0.32
EX-27.2 4 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 1997, RESTATED IN ACCORDANCE WITH SFAS 128 1,000 YEAR 9-MOS SEP-30-1997 SEP-30-1997 SEP-30-1997 JUN-30-1997 5,695 4,059 996 3,000 26,711 27,334 851 2,054 15,937 18,202 54,445 57,241 24,738 23,630 9,628 8,857 77,353 79,963 35,590 38,477 112,972 113,995 0 0 0 0 49 49 43,741 43,748 77,353 79,963 155,279 118,700 155,279 118,700 71,216 55,479 141,854 109,966 791 861 259 252 4,008 948 8,941 7,179 2,878 2,728 6,063 4,451 0 0 0 0 0 0 6,063 4,451 0.67 0.42 0.63 0.40
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