FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to_________________
Commission file No. 0-11003
WEGENER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0371341
(State of incorporation) (I.R.S. Employer
Identification No.)
11350 TECHNOLOGY CIRCLE, DULUTH, GEORGIA 30097-1502
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 623-0096
REGISTRANT'S WEB SITE: HTTP://WWW.WEGENER.COM
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:
Common Stock, $.01 par value 11,685,868 Shares
- ---------------------------- -------------------------
Class Outstanding June 28, 1999
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
Form 10-Q For the Quarter Ended May 28, 1999
INDEX
Page(s)
-------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Introduction ....................................................... 3
Consolidated Statements of Operations
(Unaudited) - Three and Nine Months Ended
May 28, 1999 and May 29, 1998,...................................... 4
Consolidated Balance Sheets - May 28,
1999 (Unaudited) and August 28, 1998 ............................... 5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Nine Months Ended May 28,
1999 and May 29, 1998,.............................................. 6
Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended May 28,
1999 and May 29, 1998,.............................................. 7
Notes to Consolidated Financial
Statements (Unaudited) .......................................... 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 12-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 16
PART II. Other Information
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K .................................. 17
Signatures ........................................................ 18
2
<PAGE>
PART I. FINANCIAL INFORMATION Item 1. Financial Statements
- ----------------------------- ----------------------------
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The consolidated balance sheet as of May 28, 1999; the consolidated statements
of shareholders' equity as of May 28, 1999 and May 29, 1998; the consolidated
statements of operations for the three and nine months ended May 28, 1999 and
May 29, 1998; and the consolidated statements of cash flows for the nine months
ended May 28, 1999 and May 29, 1998; have been prepared without audit. The
consolidated balance sheet as of August 28, 1998 has been examined by
independent certified public accountants. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K, for the fiscal year ended August 28,
1998, File No. 0-11003.
In the opinion of the Company, the statements for the unaudited interim
periods presented include all adjustments, which were of a normal recurring
nature, necessary to present a fair statement of the results of such interim
periods. The results of operations for the interim periods presented are not
necessarily indicative of the results of operations for the entire year.
3
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
MAY 28, May 29, MAY 28, May 29,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,049,500 $ 9,856,824 $ 20,541,706 $ 26,728,108
- -------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 4,472,989 6,372,206 13,317,249 17,376,137
Selling, general, and administrative 1,281,114 1,398,765 3,673,863 3,643,979
Research and development 789,162 628,856 2,147,282 1,997,142
- -------------------------------------------------------------------------------------------------------------
Operating costs and expenses 6,543,265 8,399,827 19,138,394 23,017,258
- -------------------------------------------------------------------------------------------------------------
Operating income 506,235 1,456,997 1,403,312 3,710,850
Interest expense (33,130) (56,873) (111,513) (195,552)
Interest income 72,300 144,793 248,217 380,349
- -------------------------------------------------------------------------------------------------------------
Earnings before income taxes 545,405 1,544,917 1,540,016 3,895,647
Income tax expense 202,000 589,000 570,000 1,482,000
- -------------------------------------------------------------------------------------------------------------
Net earnings $ 343,405 $ 955,917 $ 970,016 $ 2,413,647
=============================================================================================================
Net earnings per share
Basic $ .03 $ .08 $ .08 $ .21
Diluted $ .03 $ .08 $ .08 $ .20
=============================================================================================================
Shares used in per share
calculation
Basic 11,764,308 11,920,135 11,905,732 11,697,534
Diluted 11,933,309 12,278,345 12,058,425 12,074,941
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MAY 28, August 28,
1999 1998
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 7,767,998 $ 6,492,760
Accounts receivable 5,030,810 5,314,938
Inventories 6,200,260 7,120,393
Deferred income taxes 1,205,750 1,011,000
Other 271,129 23,710
- ---------------------------------------------------------------------------------------------------
Total current assets 20,475,947 19,962,801
Property and equipment 4,335,904 4,523,297
Capitalized software costs 1,115,748 1,211,914
Other assets 31,050 207,002
- ---------------------------------------------------------------------------------------------------
$ 25,958,649 $ 25,905,014
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,814,804 $ 2,113,205
Accrued expenses 1,760,119 1,490,041
Customer deposits 827,963 784,621
Current maturities of long-term obligations 618,016 597,664
- ---------------------------------------------------------------------------------------------------
Total current liabilities 5,020,902 4,985,531
Long-term obligations, less current maturities 752,245 1,231,338
Deferred income taxes 571,000 608,000
- ---------------------------------------------------------------------------------------------------
Total liabilities 6,344,147 6,824,869
- ---------------------------------------------------------------------------------------------------
Commitments
Shareholders' equity
Common stock, $.01 par value, 20,000,000 shares
authorized; 12,314,575 shares issued 123,146 123,146
Additional paid-in capital 19,470,589 19,407,417
Retained earnings (deficit) 852,524 (117,492)
Less treasury stock, at cost (588,707 and 358,546
shares) (831,757) (332,926)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 19,614,502 19,080,145
- ---------------------------------------------------------------------------------------------------
$ 25,958,649 $ 25,905,014
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
------------ Paid-in Earnings --------------
Shares Amount Capital (Deficit) Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at August 29, 1997 11,363,917 $ 113,639 $18,084,700 $(2,877,675) (432,730) $ (401,810)
Treasury stock reissued through
stock options and 401(k) plan -- -- 52,620 -- 55,063 51,129
Issuance of common stock for
convertible debentures 950,658 9,507 1,238,320 -- -- --
Net earnings for the nine months -- -- -- 2,413,647 -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, at May 29, 1998 12,314,575 $ 123,146 $19,375,640 $ (464,028) (377,667) $ (350,681)
================================================================================================================================
BALANCE, at August 28, 1998 12,314,575 $ 123,146 $19,407,417 $ (117,492) (358,546) $ (332,926)
Treasury stock reissued through
stock options and 401(k) plan -- -- 63,172 -- 86,339 80,169
Treasury stock repurchased -- -- -- -- (316,500) (579,000)
Net earnings for the nine months -- -- -- 970,016 -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, AT MAY 28, 1999 12,314,575 $ 123,146 $19,470,589 $ 852,524 (588,707) $ (831,757)
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
MAY 28, May 29,
1999 1998
- --------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 970,016 $ 2,413,647
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation and amortization 1,205,191 1,544,012
Bad debt allowance 125,000 50,000
Warranty reserves 150,000 --
Inventory reserves 250,000 650,000
Issuance of treasury stock for
compensation expenses 130,044 79,756
Deferred income taxes (231,750) 994,000
Changes in assets and liabilities
Accounts receivable 159,128 (155,779)
Inventories 670,133 1,499,571
Other assets (156,929) 13,424
Accounts payable and accrued expenses (178,323) 491,780
Customer deposits 43,342 (622,747)
- --------------------------------------------------------------------------------------
3,135,852 6,957,564
- --------------------------------------------------------------------------------------
CASH (USED) BY INVESTMENT ACTIVITIES
Property and equipment expenditures (533,828) (351,971)
Capitalized software additions (302,342) (323,154)
- --------------------------------------------------------------------------------------
(836,170) (675,125)
- --------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Proceeds from long-term debt 1,359,508 --
Purchase of treasury stock (579,000) --
Repayment of long-term debt and capitalized
lease obligations (1,818,249) (422,950)
Proceeds from stock options exercised 13,297 24,094
- --------------------------------------------------------------------------------------
(1,024,444) (398,856)
- --------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,275,238 5,883,583
Cash and cash equivalents, beginning of period 6,492,760 2,242,433
- --------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,767,998 $ 8,126,016
======================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 121,586 $ 193,995
Income taxes $ 240,000 $ --
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are set
forth in Note 1 to the Company's audited consolidated financial
statements included in the annual report on Form 10-K for the year
ended August 28, 1998.
Earnings Per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No, 128, "Earnings Per Share" (SFAS 128). SFAS 128
establishes standards for computing and presenting earnings per share
(EPS), and supersedes APB Opinion No. 15. The Statement replaces
primary EPS with basic EPS and requires a dual presentation of basic
and diluted EPS.
Basic net earnings per share is computed by dividing net earnings
available to common shareholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period
and excludes the dilutive effect of stock options and convertible
debentures. Diluted net earnings per share gives effect to all
dilutive potential common shares outstanding during a period. In
computing diluted net earnings per share, the average stock price for
the period is used in determining the number of shares assumed to be
reacquired under the treasury stock method from the exercise of stock
options and the if-converted method to compute the dilutive effect of
convertible debentures.
Comprehensive Net Income
During the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standards No.130, "Reporting Comprehensive
Income," (SFAS 130) which establishes standards for the reporting of
comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income. For the three and
nine month periods ending May 28, 1999 and May 29, 1998 the Company's
net income and total comprehensive income were the same.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
vary from these estimates.
Fiscal Year
The Company uses a fifty-two, fifty-three week year. The fiscal year
ends on the Friday closest to August 31. Fiscal years 1999 and 1998
contain fifty-three and fifty-two weeks, respectively.
8
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
MAY 28, August 28,
1999 1998
----------- -----------
(UNAUDITED)
Accounts receivable - trade $ 5,283,060 $ 5,139,414
Recoverable income taxes -- 295,000
Other receivables 119,132 137,515
----------- -----------
5,402,192 5,571,929
Less allowance for
doubtful accounts (371,382) (256,991)
----------- -----------
$ 5,030,810 $ 5,314,938
=========== ===========
NOTE 3 INVENTORIES
Inventories are summarized as follows:
MAY 28, August 28,
1999 1998
----------- -----------
(UNAUDITED)
Raw material $ 2,267,502 $ 2,692,937
Work-in-process 3,346,600 3,139,249
Finished goods 2,284,652 2,727,727
----------- -----------
7,898,754 8,559,913
Less inventory reserves (1,698,494) (1,439,520)
----------- -----------
$ 6,200,260 $ 7,120,393
=========== ===========
NOTE 4 INCOME TAXES
For the nine months ended May 28, 1999, income tax expense of $570,000
was comprised of a current federal and state income tax expense of
$735,800 and $65,950, respectively, and a deferred federal and state
tax benefit of $211,800 and $19,950, respectively. Net deferred tax
assets increased $231,750 in the first nine months of fiscal 1999.
9
<PAGE>
NOTE 5 EARNINGS PER SHARE
The following tables represent required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net earnings per share
computations.
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------------------------------
MAY 28, 1999 May 29, 1998
------------------------------------- ----------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $343,405 $955,917
======== ========
Basic earnings per share:
Net earnings available
to common shareholders $343,405 11,764,308 $0.03 $955,917 11,920,135 $0.08
===== =====
Effect of dilutive potential
common shares:
Stock options -- 169,001 -- 358,210
Convertible debentures -- -- -- --
-------- ---------- -------- ----------
Diluted earnings per share:
Net earnings available
to common shareholders
plus assumed conversions $343,405 11,933,309 $0.03 $955,917 12,278,345 $0.08
======== ========== ===== ======== ========== =====
<CAPTION>
Nine months ended
-----------------------------------------------------------------------------------
MAY 28, 1999 May 29, 1998
------------------------------------- -----------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator amount
----------- ------------- ------ ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $970,016 $2,413,647
======== ==========
Basic earnings per share:
Net earnings available
to common shareholders $970,016 11,905,732 $0.08 $2,413,647 11,697,534 $0.21
===== =====
Effect of dilutive potential
common shares:
Stock options -- 152,693 -- 226,744
Convertible debentures -- -- 9,156 150,663
--------- ---------- ---------- ----------
Diluted earnings per share:
Net earnings available
to common shareholders
plus assumed conversions $970,016 12,058,425 $0.08 $2,422,803 12,074,941 $0.20
======== ========== ===== ========== ========== =====
</TABLE>
10
<PAGE>
Options and convertible debentures excluded from the diluted earnings per share
calculation due to their anti-dilutive effect are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------------------- --------------------------------------
MAY 28, May 29, MAY 28, May 29,
1999 1998 1999 1998
------------------ ----------------- ---------------- -----------------
Common stock options:
<S> <C> <C> <C> <C>
Number of shares 6,000 26,000 6,000 48,500
Range of exercise prices $1.78 $3.25 to 12.13 $1.78 $2.44 TO 12.13
================== ================= ================ =================
</TABLE>
NOTE 6 MAJOR CUSTOMERS
Customers representing 10% or more of the respective periods' revenues are
as follows:
Three months ended Nine months ended
----------------------- ------------------------
MAY 28 May 29, MAY 28, May 29,
1999 1998 1999 1998
-------- --------- --------- ---------
Customer 1 27.3% 53.8% 23.5% 39.1%
Customer 2 15.2% (a) 10.1% (a)
Customer 3 (A) (a) 10.0% (a)
Customer 4 (A) (a) (A) 10.5%
(a) Revenues for the period were less than 10% of total revenues.
11
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended August 28, 1998 contained in the Company's 1998 Annual Report on Form
10-K.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results, future business or product
development plans, research and development activities, capital spending,
financing sources or capital structure, the effects of regulation and
competition, and are thus prospective. Such forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, economic conditions, customer plans and commitments, product
demand, governmental regulation, rapid technological developments and changes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, availability of materials, new and existing
well-capitalized competitors, and other uncertainties detailed in the Company's
Form 10-K for the year ended August 28, 1998 and from time to time in the
Company's periodic Securities and Exchange Commission filings.
The Company, through Wegener Communications, Inc. (WCI), a wholly-owned
subsidiary, designs and manufactures communications transmission and receiving
equipment for the business broadcast, data communications, cable and broadcast
radio and television industries.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MAY 28, 1999 COMPARED TO THREE AND NINE MONTHS ENDED
MAY 29, 1998
The operating results for the three and nine month periods ended May 28, 1999
were net earnings of $343,000 or $0.03 per share and net earnings of $970,000 or
$0.08 per share, respectively, compared to $956,000 or $0.08 per share and
$2,414,000 or $0.20 per share, respectively, for the three and nine month
periods ended May 29, 1998.
REVENUES - The Company's revenues for the three months ended May 28, 1999 were
$7,050,000, down 28.5% from revenues of $9,857,000 for the three months ended
May 29, 1998. Revenues were $20,542,000 for the nine months ended May 28, 1999,
down 23.1% from revenues of $26,728,000 for the nine months ended May 29, 1998.
Direct Broadcast Satellite (DBS) revenues decreased $3,186,000 or 35.4% in the
third quarter of fiscal 1999 to $5,824,000 from $9,010,000 in the same period of
fiscal 1998. The decrease was due to lower shipments of digital video products,
principally to one customer for conversion of their cable television broadcast
network from analog to digital compression technology. Telecom and Customer
Products Group revenues increased $355,000 or 51.7% in the third quarter of
fiscal 1999 to $1,042,000 from $687,000 in the same period of fiscal 1998. The
increase was mainly due to higher levels of shipments of cue and control
equipment to provide local commercial insertion capabilities to cable television
headend systems. For the three months ended May 28, 1999, two customers
accounted for approximately 27.3% and 15.2% of total revenues.
12
<PAGE>
For the nine months ended May 28, 1999, DBS revenues decreased $5,056,000 or
22.3% to $17,606,000 from $22,662,000 for the nine months ended May 29, 1998.
The decrease was due to lower shipments of digital video products principally to
one cable television broadcast network customer. For the nine months ended May
28, 1999, Telecom and Custom Product Group revenues decreased $1,127,000 or
32.4% to $2,355,000 from $3,482,000 for the nine months ended May 29, 1998. The
decrease was mainly due to lower levels of shipments of cue and control
equipment. For the nine months ended May 28, 1999, three customers accounted for
approximately 23.5%, 10.1% and 10.0%, respectively of total revenues. The
Company's backlog is comprised of undelivered, firm customer orders, which are
scheduled to ship within eighteen months. WCI's total backlog was approximately
$5.3 million at May 28, 1999, compared to $12.6 million at August 28, 1998 and
$11.5 million at May 29, 1998.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 36.5%
and 35.2% for the three and nine month periods ended May 28, 1999 compared to
35.4% and 35.0% for the three and nine month periods ended May 29, 1998. Gross
profit margin dollars decreased $908,000 and $2,128,000 for the three and nine
month periods ended May 28, 1999 from the same periods ended May 29, 1998. The
decreases in margin dollars were mainly due to lower sales during the periods.
Gross profit margin percentages were favorably impacted in the three and nine
month periods ended May 28, 1999 by a product mix of lower variable cost
components which was offset by higher unit fixed costs due to the decrease in
sales volumes. Profit margins in the three and nine month periods of fiscal 1999
included: 1) inventory reserve charges of $100,000 and $250,000 compared to
$300,000 and $650,000 for the same periods of fiscal 1998 and 2) warranty
provisions of $150,000 and $150,000 compared to no provisions for the same
periods of fiscal 1998. Additionally, the three and nine month periods of fiscal
1999 had no charges for write-offs of capitalized software compared to $100,000
and $200,000 in the same periods of fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses decreased $118,000 or 8.4% to $1,281,000 for the three months ended May
28, 1999 from $1,399,000 for the three months ended May 29, 1998. For the nine
months ended May 28, 1999 SG&A expenses increased $30,000 or .8% to $3,674,000
from $3,644,000 for the same period ended May 29, 1998. The decrease for the
three months ended May 28, 1999 was due to lower marketing and sales incentives
expenses which were partially offset by increases in professional fees, bad debt
provisions, and software implementation and conversion expenses. The increase
for the nine months ended May 28, 1999 was due to increases in bad debt
provisions, non-employee administrative costs, software implementation and
conversion costs which were partially offset by decreases in marketing and sales
incentive expenses. As a percentage of revenues, SG&A expenses were 18.2% and
17.9% for the three and nine month periods ended May 28, 1999 compared to 14.2%
and 13.6% for the same periods of fiscal 1998. The increases in percentages for
the three and nine months ended May 28, 1999 compared to the three and nine
months ended May 29, 1998 were primarily due to lower revenues.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $909,000 and $2,449,000 for the
three and nine month periods ended May 28, 1999, compared to $755,000 and
$2,320,000 for the same periods of fiscal 1998. Capitalized software development
costs amounted to $120,000 and $302,000 for the third quarter and first nine
months of fiscal 1999 compared to $126,000 and $323,000 for the same periods of
fiscal 1998. The increase in expenditures for the three and nine months ended
May 28, 1999 is primarily due to increases in engineering consulting and group
medical insurance expenses. Research and development expenses, excluding
capitalized software expenditures, were $789,000 or 11.2% of revenues and
$2,147,000 or 10.5% of revenues for the three and nine months ended May 28, 1999
compared to $629,000 or 6.4% of revenues and $1,997,000 or 7.5% of revenues for
the same periods of fiscal 1998.
13
<PAGE>
INTEREST EXPENSE - Interest expense decreased $24,000 to $33,000 for the three
months ended May 28, 1999 from $57,000 for the three months ended May 29, 1998.
For the nine months ended May 28, 1999, interest expense decreased $84,000 to
$112,000 from $196,000 for the same period ended May 29, 1998. The decreases for
the three and nine month fiscal 1999 periods were primarily due to a decrease in
the average outstanding balance of indebtedness and a decrease in the interest
rate on the mortgage debt.
INTEREST INCOME - Interest income was $72,000 and $248,000 for the three and
nine months ended May 28, 1999, respectively compared to $145,000 and $380,000
for the same periods ended May 29, 1998. The decreases were due to lower average
cash equivalent balances during the periods and a decrease in investment yields.
INCOME TAX EXPENSES - For the nine months ended May 28, 1999, income tax expense
of $570,000 was comprised of a federal and state current income tax expense of
$735,800 and $65,950, respectively, and a federal and state deferred income tax
benefit of $211,800 and $19,950, respectively. Net deferred tax assets increased
$231,750 in the first nine months of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED MAY 28, 1999
During the first nine months of fiscal 1999, operating activities provided cash
of $3,136,000. Net earnings adjusted for non-cash expenses provided $2,598,000
of cash, while changes in accounts receivable, inventories and customer deposit
balances provided $873,000 of cash. Changes in accounts payable, accrued
expenses and other assets used $335,000 of cash. Cash used by investing
activities for property and equipment expenditures and capitalized software
additions was $836,000. Financing activities used cash of $459,000 for scheduled
repayments of long-term obligations and $579,000 for repurchase of common stock.
Proceeds from stock options exercised provided cash of $13,000.
On January 28, 1999 the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to one million shares of its common stock over
the next twelve months. As of May 28, 1999, the Company had repurchased 316,500
shares of its common stock in open market transactions at an average price of
$1.83. Subsequent to the third quarter an additional 40,000 shares were
repurchased bringing the year-to-date total of repurchased shares to 356,500 at
an average price of $1.83.
On August 4, 1998, WCI amended its secured revolving line of credit and term
loan facility ("loan facility") with a bank to provide a maximum available
credit limit of $10,000,000 (previously $8,500,000). The credit limit increase
provides for advances of up to 70% of the appraised value of certain real
property subject to a sublimit of $1,500,000. The loan facility was also amended
to extend the term through June 21, 2000 or upon demand, to reduce the interest
rate to the bank's prime rate (7.75% at May 28, 1999) (previously prime plus
1/2% on the revolving line and prime plus 1 1/2% on the term line) and to amend
the annual facility fee to $55,000 plus an additional .75% of $3,000,000, if
borrowings exceed $5,500,000 (previously $85,000). Advances for real property
are payable in equal principal installments over 35 months and bear interest at
a fixed annual rate of 250 basis points over the five year U.S. Treasury rate in
effect at the time of disbursement. During the first quarter of fiscal 1999,
$1,360,000 was advanced to pay off the existing mortgage note balance. At the
time of disbursement the annual interest rate was set at 6.519%.
The term loan facility provides for a maximum of $1,000,000 for advances of up
to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over sixty months with a balloon payment due at maturity. The revolving
line of credit is subject to availability advance formulas of 80% against
eligible accounts receivable; 20% of eligible raw materials inventories; 20% of
eligible work-in-process kit inventories; and 40% to 50% of eligible finished
goods inventories. Advances against inventory are subject to a sublimit of
$2,000,000. Revolving line of credit advances plus equipment term loan advances
are subject to a sublimit of $8,500,000. At May 28, 1999, the outstanding
balance on real property advances was $1,088,000. No balances were outstanding
on the revolving line of credit or equipment term loan portions of the loan
facility. Additionally, at May 28, 1999, approximately $4,617,000 was available
to borrow under the advance formulas.
14
<PAGE>
The Company expects that its current cash and cash equivalents combined with
expected cash flows from operating activities and the Company's available
line-of-credit will be sufficient to support the Company's operations during
fiscal 1999 and 2000.
YEAR 2000
State of Readiness
- ------------------
Management of the Company has reviewed the Company's current information systems
and has found them, with a few minor exceptions, to be Year 2000 compliant.
However, the Company is currently in the process of replacing its older
information systems with new systems that offer easier access to more data and
are certified to be able to handle the Year 2000 transition. Conversions to the
new systems are expected to be completed during the first quarter of fiscal
2000.
Management of the Company has reviewed and tested the Company's phone, voice
mail, e-mail, and security systems and all are believed to be Year 2000
compliant. Utility companies have been contacted and have reported to the
Company that only minor problems have been noted in regards to their billing
software as a result of their Year 2000 testing completed to date.
The Company has requested Year 2000 compliance statements from all major vendors
and service providers. There have been no indications that these parties will
not be Year 2000 compliant. However, there can be no absolute assurances in this
regard and their failure to be compliant remains a possibility. If vendors and
service providers are not Year 2000 compliant, there can be no assurance that
the Company will be able to find suitable alternate sources and contract with
them on reasonable terms, or at all, and such inability could have a material
adverse impact on the Company's business and results of operations.
All test equipment used in engineering, service, and manufacturing departments
has been reviewed and is Year 2000 compliant or not date dependent.
All of the Company's products have been reviewed for Year 2000 compliance. All
are compliant with the exception of certain minor problems in the schedule and
repetitive scheduler programs of an older version of uplink software. All
customers affected by this are being offered a migration path to newer software
which is Year 2000 compliant.
Costs to Address the Year 2000 Issues
- -------------------------------------
Management of the Company believes the impact of the Year 2000 transition on the
Company's internal systems will not result in material costs to the Company or
have a material adverse impact on future results.
Risks of the Year 2000 Issues
- -----------------------------
The main risk to the Company with respect to Year 2000 is the failure of major
vendors and service providers to be Year 2000 compliant. Failure on their part
could result in delays in obtaining parts, increased cost of parts, and overall
inability to manufacture products in the event of a shutdown of major utility
providers. Major vendors and service providers have reported to the Company that
they will be Year 2000 compliant. The Company cannot estimate the financial
impact of any failure to be Year 2000 compliant by such third party vendors and
service providers.
15
<PAGE>
Contingency Plans
- -----------------
The Company does not have a contingency plan for Year 2000 compliance because it
does not anticipate that it will fail to be Year 2000 compliant, particularly in
relation to those systems, software programs, and hardware that are under its
control. However, there can be no assurances that all measures being taken to
avoid Year 2000 problems will be effective and as such, unforeseen issues could
arise that could lead to a material adverse effect upon the Company's business,
operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No response to this item is required.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27-Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended May 28, 1999.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEGENER CORPORATION
-------------------
(Registrant)
Date: July 1, 1999 By: /s/ Robert A. Placek
--------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: July 1, 1999 By: /s/ C. Troy Woodbury, Jr.
-------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
18
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<FISCAL-YEAR-END> SEP-03-1999
<PERIOD-START> AUG-29-1998
<PERIOD-END> MAY-28-1999
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<SECURITIES> 0
<RECEIVABLES> 5,402,192
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0
0
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