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 February 26, 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, as of March 25, 1999.
Common Stock, $.01 par value 11,864,089 Shares
- ---------------------------- --------------------------
Class Outstanding March 25, 1999
WEGENER CORPORATION AND SUBSIDIARIES
Form 10-Q For the Quarter Ended February 26, 1999
INDEX
Page(s)
-------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Introduction .......................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Six Months Ended
February 26, 1999 and February 27, 1998 ............................4
Consolidated Balance Sheets - February 26,
1999 (Unaudited) and August 28, 1998 ...............................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Six Months Ended February 26,
1999 and February 27, 1998 .........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended February 26,
1999 and February 27, 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. Submission of Matters to a Vote of Security Holders ..............17
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 February 26, 1999; the consolidated
statements of shareholders' equity as of February 26, 1999 and February 27,
1998; the consolidated statements of operations for the three and six months
ended February 26, 1999 and February 27, 1998; and the consolidated statements
of cash flows for the six months ended February 26, 1999 and February 27, 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 Six months ended
FEBRUARY 26, February 27, FEBRUARY 26, February 27,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
Revenues $ 7,025,955 $ 10,165,264 $ 13,492,206 $ 16,871,284
- -----------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 4,476,980 6,472,192 8,844,260 11,003,931
Selling, general, and administrative 1,267,010 1,194,904 2,392,749 2,245,214
Research and development 724,481 698,390 1,358,120 1,368,286
- -----------------------------------------------------------------------------------------------------------
Operating costs and expenses 6,468,471 8,365,486 12,595,129 14,617,431
- -----------------------------------------------------------------------------------------------------------
Operating income 557,484 1,799,778 897,077 2,253,853
Interest expense (34,887) (62,893) (78,383) (138,679)
Interest income 92,961 157,922 175,917 235,556
- -----------------------------------------------------------------------------------------------------------
Earnings before income taxes 615,558 1,894,807 994,611 2,350,730
Income tax expense 220,000 720,000 368,000 893,000
- -----------------------------------------------------------------------------------------------------------
Net earnings $ 395,558 $ 1,174,807 $ 626,611 $ 1,457,730
===========================================================================================================
Net earnings per share:
Basic $ .03 $ .10 $ .05 $ .13
Diluted $ .03 $ .10 $ .05 $ .12
===========================================================================================================
Shares used in per share calculation
Basic 12,001,631 11,826,964 11,986,754 11,586,234
Diluted 12,206,553 12,003,591 12,131,871 11,967,977
===========================================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
FEBRUARY 26, August 28,
1999 1998
- ---------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 7,442,596 $ 6,492,760
Accounts receivable 4,839,404 5,314,938
Inventories 6,760,547 7,120,393
Deferred income taxes 1,085,500 1,011,000
Other 149,660 23,710
- ---------------------------------------------------------------------------------------
Total current assets 20,277,707 19,962,801
Property and equipment 4,415,438 4,523,297
Capitalized software costs 1,114,760 1,211,914
Other assets 59,051 207,002
- ---------------------------------------------------------------------------------------
$ 25,866,956 $ 25,905,014
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,680,216 $ 2,113,205
Accrued expenses 1,591,082 1,490,041
Customer deposits 972,719 784,621
Current maturities of long-term obligations 644,511 597,664
- ---------------------------------------------------------------------------------------
Total current liabilities 4,888,528 4,985,531
Long-term obligations, less current maturities 897,167 1,231,338
Deferred income taxes 571,000 608,000
- ---------------------------------------------------------------------------------------
Total liabilities 6,356,695 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 19,450,451 19,407,417
Retained earnings (deficit) 509,119 (117,492)
Less treasury stock, at cost (450,486 and 358,546
shares) (572,455) (332,926)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 19,510,261 19,080,145
- ---------------------------------------------------------------------------------------
$ 25,866,956 $ 25,905,014
=======================================================================================
See accompanying notes to consolidated financial statements.
5
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Treasury Stock
------------ Paid-in --------------
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 -- -- 20,670 -- 22,325 20,730
Issuance of common stock for
convertible debentures 950,658 9,507 1,238,320 -- -- --
Net earnings for the six months -- -- -- 1,457,730 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, AT FEBRUARY 27, 1998 12,314,575 $ 123,146 $19,343,690 $(1,419,945) (410,405) $ (381,080)
=================================================================================================================================
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 -- -- 43,034 -- 53,060 49,268
Treasury stock repurchased -- -- -- -- (145,000) (288,797)
Net earnings for the six months -- -- -- 626,611 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, AT FEBRUARY 26, 1999 12,314,575 $ 123,146 $19,450,451 $ 509,119 (450,486) $ (572,455)
=================================================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
FEBRUARY 26, February 27,
1999 1998
- --------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Net earnings $ 626,611 $ 1,457,730
Adjustments to reconcile net earnings to
cash provided (used) by operating activities
Depreciation and amortization 817,496 966,135
Issuance of treasury stock for
compensation expenses 84,755 38,682
Bad debt allowance 50,000 --
Inventory reserves 150,000 350,000
Deferred income taxes (111,500) 893,000
Changes in assets and liabilities
Accounts receivable 425,534 638,651
Inventories 209,846 1,043,883
Other assets (137,583) 16,381
Accounts payable and accrued expenses (331,948) (709,998)
Customer deposits 188,098 3,495,507
- --------------------------------------------------------------------------------------
1,971,309 8,189,971
- --------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY INVESTMENT ACTIVITIES
Property and equipment expenditures (270,187) (246,460)
Capitalized software additions (182,712) (197,347)
- --------------------------------------------------------------------------------------
(452,899) (443,807)
- --------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Proceeds from long-term debt 1,359,508 --
Purchase of treasury stock (288,797) --
Repayment of long-term debt and capitalized
lease obligations (1,646,832) (284,072)
Proceeds from stock options exercised 7,547 2,719
- --------------------------------------------------------------------------------------
(568,574) (281,353)
- --------------------------------------------------------------------------------------
Increase in cash and cash equivalents 949,836 7,464,811
Cash and cash equivalents, beginning of period 6,492,760 2,242,433
- --------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,442,596 $ 9,707,244
=====================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 88,456 $ 140,806
Income taxes $ -- $ --
=====================================================================================
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
six month periods ending February 26, 1999 and February 27, 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:
FEBRUARY 26, August 28,
1999 1998
----------- -----------
(UNAUDITED)
Accounts receivable - trade $ 5,000,319 $ 5,139,414
Recoverable income taxes -- 295,000
Other receivables 139,837 137,515
----------- -----------
5,140,156 5,571,929
Less allowance for
doubtful accounts (300,752) (256,991)
----------- -----------
$ 4,839,404 $ 5,314,938
=========== ===========
NOTE 3 INVENTORIES
Inventories are summarized as follows:
FEBRUARY 26, August 28,
1999 1998
----------- -----------
(UNAUDITED)
Raw material $ 2,909,151 $ 2,692,937
Work-in-process 2,982,748 3,139,249
Finished goods 2,467,142 2,727,727
----------- -----------
8,359,041 8,559,913
Less inventory reserves (1,598,494) (1,439,520)
----------- -----------
$ 6,760,547 $ 7,120,393
=========== ===========
NOTE 4 INCOME TAXES
For the six months ended February 26, 1999, income tax expense of
$368,000 was comprised of a current federal and state income tax
expense of $439,300 and $40,200, respectively, and a deferred federal
and state tax benefit of $101,300 and $10,200, respectively. Net
deferred tax assets increased $111,500 in the first six 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
------------------------------------------------------------------------
FEBRUARY 26, 1999 February 27, 1998
---------------------------------- ----------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
Net earnings $395,558 $1,174,807
======== ==========
Basic earnings per share:
Net earnings available
to common shareholders $395,558 12,001,631 $ 0.03 $1,174,807 11,826,964 $0.10
====== =====
Effect of dilutive potential common shares:
Stock options -- 204,922 -- 128,988
Convertible debentures -- -- 988 47,639
---------------------- ---------- ----------
Diluted earnings per share:
Net earnings available
to common shareholders
plus assumed conversions $395,558 12,206,553 $ 0.03 $1,175,795 12,003,591 $0.10
======== ========== ====== ========== ========== =====
Six months ended
------------------------------------------------------------------------
FEBRUARY 26, 1999 February 27, 1998
---------------------------------- ----------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
Net earnings $626,611 $1,457,730
======== ==========
Basic earnings per share:
Net earnings available
to common shareholders 626,611 11,986,754 $ 0.05 $1,457,730 11,586,234 $0.13
====== =====
Effect of dilutive potential common shares:
Stock options -- 145,117 -- 155,749
Convertible debentures -- -- 9,156 225,994
---------------------- ---------- ----------
Diluted earnings per share:
Net earnings available
to common shareholders
plus assumed conversions $626,611 12,131,871 $ 0.05 $1,466,886 11,967,977 $0.12
======== ========== ====== ========== ========== =====
10
Stock options excluded from the diluted net earnings per share calculation due
to their anti-dilutive effect are as follows:
Three months ended Six months ended
FEBRUARY 26, February 27, FEBRUARY 26, February 27,
1999 1998 1999 1998
--------- -------------- --------- --------------
Common stock options:
Number of shares 6,000 48,500 6,000 48,500
Range of exercise prices $ 1.78 $2.44 to 12.13 $ 1.78 $2.44 to 12.13
========= ============== ========= ==============
NOTE 6 MAJOR CUSTOMERS
Customers representing 10% or more of the respective period's revenues
are as follows:
Three months ended Six months ended
FEBRUARY 26, February 27, FEBRUARY 26, February 27,
1999 1998 1999 1998
----------------------------------------------------------------------
Customer 1 41.3% 49.1% 21.5% 30.5%
Customer 2 20.3% (a) 10.8% (a)
Customer 3 (A) (a) 13.8% (a)
Customer 4 (A) (a) (A) 10.7%
Customer 5 (A) (a) (A) 14.7%
(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 SIX MONTHS ENDED FEBRUARY 26, 1999 COMPARED TO THREE AND SIX MONTHS
ENDED FEBRUARY 27, 1998
The operating results for the three and six month periods ended February 26,
1999 were net earnings of $396,000 or $0.03 per share and net earnings of
$627,000 or $0.05 per share, respectively, compared to $1,175,000 or $0.10 per
share and $1,458,000 or $0.12 per share, respectively, for the three and six
month periods ended February 27, 1998.
REVENUES - The Company's revenues for the three months ended February 26, 1999
were $7,026,000, down 30.9% from revenues of $10,165,000 for the three months
ended February 27, 1998. Revenues were $13,492,000 for the six months ended
February 26, 1999, down 20.0% from revenues of $16,871,000 for the six months
ended February 27, 1998.
Direct Broadcast Satellite (DBS) revenues decreased $2,188,000 or 26.4% in the
second quarter of fiscal 1999 to $6,109,000 from $8,297,000 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 decreased $948,000 or 56.9% in the second
quarter of fiscal 1999 to $718,000 from $1,666,000 in the same period of fiscal
1998. The decrease was mainly due to lower levels of shipments of cue and
control equipment to provide local commercial insertion capabilities to
12
cable television headend systems. For the three months ended February 26, 1999,
two customers accounted for approximately 41.3% and 20.3%, respectively, of
revenues.
For the six months ended February 26, 1999, DBS revenues decreased $1,870,000 or
13.7% to $11,782,000 from $13,652,000 for the six months ended February 27,
1998. The decrease was due to decreased shipments of digital video products
principally to one cable television broadcast network customer. For the six
months ended February 26, 1999, Telecom and Custom Product Group revenues
decreased $1,482,000 or 53.0% to $1,313,000 from $2,795,000 for the six months
ended February 27, 1998. The decrease was mainly due to lower levels of
shipments of cue and control equipment. For the six months ended February 26,
1999 three customers accounted for 21.5%, 10.8% and 13.8%, respectively of
revenues. The Company's backlog is comprised of undelivered, firm customer
orders, which are scheduled to ship within eighteen months. WCI's backlog was
approximately $6,900,000 at February 26, 1999, compared to $12,596,000 at August
28, 1998 and $16,100,00 at February 27, 1998.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 36.3%
and 34.4% for the three and six month periods ended February 26, 1999 compared
to 36.3% and 34.8% for the three and six month periods ended February 27, 1998.
Gross profit margin dollars decreased $1,144,000 and $1,219,000 for the three
and six month periods ended February 26, 1999 from the same periods ended
February 27, 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 six month periods ended February 26, 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 six
month periods of fiscal 1999 included inventory reserve charges of $100,000 and
$150,000 compared to $300,000 and $350,000 for the same periods of fiscal 1998.
Additionally, the three and six month periods of fiscal 1998 included a $100,000
charge for write-offs of capitalized software compared to none in the same
periods of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses increased $72,000 or 6.0% to $1,267,000 for the three months ended
February 26, 1999 from $1,195,000 for the three months ended February 27, 1998.
For the six months ended February 26, 1999, SG&A expenses increased $148,000 or
6.6% to $2,393,000 from $2,245,000 for the same period ended February 27, 1998.
The three and six month changes were mainly due to increases in marketing
expenses, bad debt provisions, and non-employee administrative costs which were
partially offset by lower sales incentive expenses. As a percentage of revenues,
SG&A expenses were 18.0% and 17.7% for the three and six month periods ended
February 26, 1999 compared to 11.8% and 13.3% for the same periods of fiscal
1998. The increases in percentages for the three and six months ended February
26, 1999 compared to the same periods of fiscal 1998 were primarily due to lower
revenues.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $822,000, or 11.7% of revenues and
$1,541,000 or 11.4% of revenues for the three and six month periods ended
February 26, 1999, compared to $788,000 or 7.8% of revenues and $1,565,000 or
9.3% of revenues for the same periods of fiscal 1998. Capitalized software
development costs amounted to $98,000 and $183,000 for the second quarter and
first six months of fiscal 1999 compared to $90,000 and $197,000 for the same
periods of fiscal 1998. The increase in expenditures for the three months ended
February 26, 1999 was primarily due to an increase in engineering personnel
expenses. The decrease in expenditures for the six months ended February 26,
1999 was primarily due to lower prototype material expenses. Research and
development expenses, excluding capitalized software expenditures, were $724,000
or 10.3% of revenues and $1,358,000 or 10.1% of revenues for the three and six
months ended February 26, 1999 compared to $698,000 or 6.9% of revenues and
$1,368,000 or 8.1% of revenues for the same periods of fiscal 1998.
13
INTEREST EXPENSE - Interest expense decreased $28,000 to $35,000 for the three
months ended February 26, 1999 from $63,000 for the three months ended February
27, 1998. For the six months ended February 26, 1999, interest expense decreased
$61,000 to $78,000 from $139,000 for the same period ended February 27, 1998.
The decreases for the three and six month periods in fiscal 1999 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 $93,000 and $176,000 for the three and six
month periods ended February 26, 1999, compared to $158,000 and $236,000 for the
same periods ended February 27, 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 six months ended February 26, 1999, income tax
expense of $368,000 was comprised of a current federal and state income tax
expense of $439,300 and $40,200, respectively, and a deferred federal and state
tax benefit of $101,300 and $10,200, respectively. Net deferred tax assets
increased $111,500 in the first six months of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED FEBRUARY 26, 1999
During the first six months of fiscal 1999, operating activities provided cash
of $1,971,000. Net earnings adjusted for non-cash expenses provided $1,617,000
of cash, while changes in accounts receivable, inventories and customer deposit
balances provided $824,000 of cash. Changes in accounts payable, accrued
expenses and other assets used $470,000 of cash. Cash used by investing
activities for property and equipment expenditures and capitalized software
additions was $453,000. Financing activities used cash of $287,000 for scheduled
repayments of long-term obligations and $289,000 for the repurchase of common
stock. Proceeds from stock options exercised provided cash of $8,000.
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. During the second quarter of fiscal 1999, the Company
repurchased 145,000 shares of its common stock in open market transactions at an
average price of $1.99. Subsequent to the second quarter an additional 109,000
shares have been repurchased bringing the year-to-date total of repurchased
shares to 254,000 at an average price of $1.84.
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 February 26, 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 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 material inventories; 20% of
eligible work-in-process kit inventories; and 40% to 50% of eligible finished
goods inventories. Advances
14
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 February 26, 1999, the outstanding balance on real property
advances was $1,204,000. No balances were outstanding on the revolving line of
credit or equipment term loan portions of the loan facility. Additionally, at
February 26, 1999, approximately $3,386,000 was available to borrow under the
advance formulas.
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.
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 by the end of fiscal 1999.
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 are 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
15
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.
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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On January 28, 1999, the Annual Meeting of Shareholders was held and
the following matters were voted upon:
(1.) The shareholders approved the election of the following nominees
to the Board of Directors:
(A.) Class I Directors
C. Troy Woodbury, Jr.
11,314,645 votes FOR
204,434 votes WITHHELD
Joe K. Parks
11,254,218 votes FOR
264,861 votes WITHHELD
(B.) Class III Director
Thomas G. Elliot
11,377,640 votes FOR
141,439 votes WITHHELD
The terms of office of James H. Morgan, Jr., and Robert A. Placek
continued subsequent to the Annual Meeting.
(2.) An amendment to the Company's Certificate of Incorporation to
authorize a class of preferred stock was defeated with 4,291,703
votes FOR, 1,308,064 votes AGAINST, and 380,011 votes ABSTAINING.
Broker non-votes totaled 5,539,302.
(3.) The appointment of BDO Seidman, LLP as auditors for the Company
for the fiscal year 1999 was approved with 11,286,177 votes FOR,
92,792 votes AGAINST, and 140,011 votes ABSTAINING.
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 February 26, 1999.
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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: April 1, 1999 By: /s/ Robert A. Placek
-----------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: April 1, 1999 By: /s/ C. Troy Woodbury, Jr.
-----------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
18