-----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, QgMYzMxlEGokbDpc7FTDI+XgZVJFz3m6tNnbtbsat+IwrlR+f4Mx78r9qooxYWwb qmJBSK0qifK7gYCocxwVog== 0001012709-99-000447.txt : 19990702 0001012709-99-000447.hdr.sgml : 19990702 ACCESSION NUMBER: 0001012709-99-000447 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990528 FILED AS OF DATE: 19990701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEGENER CORP CENTRAL INDEX KEY: 0000715073 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 810371341 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11003 FILM NUMBER: 99658210 BUSINESS ADDRESS: STREET 1: 11350 TECHNOLOGY CIRCLE CITY: DULUTH STATE: GA ZIP: 30136-1528 BUSINESS PHONE: 4046230096 MAIL ADDRESS: STREET 1: 11350 TECHNOLOGY CIRCLE CITY: DULUTH STATE: GA ZIP: 30136-1528 FORMER COMPANY: FORMER CONFORMED NAME: TELECRAFTER CORP DATE OF NAME CHANGE: 19890718 10-Q 1 WEGENER CORPORATION - 3RD QUARTER 10-Q 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 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 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 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Nine months ended MAY 28, May 29, MAY 28, May 29, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------- 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 =============================================================================================================
See accompanying notes to consolidated financial statements. 4 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
MAY 28, August 28, 1999 1998 - --------------------------------------------------------------------------------------------------- ASSETS Current assets 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 ===================================================================================================
See accompanying notes to consolidated financial statements. 5 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Common Stock Additional Retained Treasury Stock ------------ Paid-in Earnings -------------- Shares Amount Capital (Deficit) Shares Amount - -------------------------------------------------------------------------------------------------------------------------------- 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) ================================================================================================================================
See accompanying notes to consolidated financial statements. 6 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended MAY 28, May 29, 1999 1998 - -------------------------------------------------------------------------------------- CASH PROVIDED (USED) BY OPERATING ACTIVITIES 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 $ -- ======================================================================================
See accompanying notes to consolidated financial statements. 7 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 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 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.
Three months ended ----------------------------------------------------------------------------------- MAY 28, 1999 May 29, 1998 ------------------------------------- ---------------------------------------- PER Per EARNINGS SHARES SHARE Earnings Shares share (NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount ----------- ------------- ------ ----------- ------------- ------ 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 ======== ========== ===== ======== ========== ===== Nine months ended ----------------------------------------------------------------------------------- MAY 28, 1999 May 29, 1998 ------------------------------------- ----------------------------------------- PER Per EARNINGS SHARES SHARE Earnings Shares share (NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator amount ----------- ------------- ------ ----------- ------------ ------ 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 ======== ========== ===== ========== ========== =====
10 Options and convertible debentures excluded from the diluted earnings per share calculation due to their anti-dilutive effect are as follows:
Three months ended Nine months ended ---------------------------------------- -------------------------------------- MAY 28, May 29, MAY 28, May 29, 1999 1998 1999 1998 ------------------ ----------------- ---------------- ----------------- Common stock options: 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 ================== ================= ================ =================
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 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 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS SEP-03-1999 AUG-29-1998 MAY-28-1999 7,767,998 0 5,402,192 (371,382) 6,200,260 20,475,947 12,756,084 (8,420,179) 25,958,649 5,020,902 752,245 0 0 123,146 19,491,356 25,958,649 20,541,706 20,541,706 13,317,249 19,013,394 (248,217) 125,000 111,513 1,540,016 570,000 970,016 0 0 0 970,016 0.08 0.08
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