UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 1, 2002
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 12,157,563 Shares
- ---------------------------- -------------------------------
Class Outstanding March 25, 2002
WEGENER CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 1, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction .....................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Six Months Ended
March 1, 2002 and March 2, 2001 ..................................4
Consolidated Balance Sheets - March 1,
2002 (Unaudited) and August 31, 2001 .............................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Six Months Ended March 1,
2002 and March 2, 2001 ...........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended March 1,
2002 and March 2, 2001 ...........................................7
Notes to Consolidated Financial
Statements (Unaudited) ........................................8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..........................13-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......17
PART II. OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders .............18
Item 5. None
Item 6. Exhibits and Reports on Form 8-K ................................18
Signatures ......................................................19
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 March 1, 2002; the consolidated statements
of shareholders' equity as of March 1, 2002, and March 2, 2001; the consolidated
statements of operations for the three and six months ended March 1, 2002, and
March 2, 2001; and the consolidated statements of cash flows for the six months
ended March 1, 2002, and March 2, 2001, have been prepared without audit. The
consolidated balance sheet as of August 31, 2001, 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 31,
2001, 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
MARCH 1, March 2, MARCH 1, March 2,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
Revenue $ 5,860,702 $ 3,766,210 $ 11,893,318 $ 8,763,791
- ------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 3,776,353 3,297,310 7,843,075 7,513,707
Selling, general and administrative 1,043,088 1,567,148 2,120,153 2,574,367
Research and development 626,648 810,898 1,290,493 1,536,968
- ------------------------------------------------------------------------------------------------------
Operating costs and expenses 5,446,089 5,675,356 11,253,721 11,625,042
- ------------------------------------------------------------------------------------------------------
Operating income (loss) 414,613 (1,909,146) 639,597 (2,861,251)
Interest expense (11,878) (10,620) (29,964) (23,862)
Interest income 3,211 10,525 5,478 55,615
- ------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 405,946 (1,909,241) 615,111 (2,829,498)
Income tax expense (benefit) 150,000 (683,000) 227,000 (1,019,000)
- ------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 255,946 $ (1,226,241) $ 388,111 $ (1,810,498)
======================================================================================================
Net earnings (loss) per share:
Basic $ .02 $ (.10) $ .03 $ (.15)
Diluted $ .02 $ (.10) $ .03 $ (.15)
======================================================================================================
Shares used in per share calculation
Basic 12,143,507 11,878,685 12,114,258 11,867,101
Diluted 12,167,259 11,878,685 12,136,695 11,867,101
======================================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 1, August 31,
2002 2001
- --------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 3,673,157 $ 1,926,723
Accounts receivable 1,306,905 1,076,420
Inventories 6,128,119 7,485,883
Deferred income taxes 2,194,000 2,207,000
Other 121,908 134,095
- --------------------------------------------------------------------------------
Total current assets 13,424,089 12,830,121
Property and equipment, net 3,327,540 3,664,292
Capitalized software costs, net 720,895 895,442
Deferred income taxes 1,014,000 1,228,000
Other assets 16,056 42,617
- --------------------------------------------------------------------------------
$ 18,502,580 $ 18,660,472
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,241,818 $ 1,694,923
Accrued expenses 1,832,231 2,009,482
Customer deposits 851,608 813,125
Current maturities of long-term obligations 6,454 44,695
- --------------------------------------------------------------------------------
Total current liabilities 3,932,111 4,562,225
Long-term obligations, less current maturities 6,905 10,379
- --------------------------------------------------------------------------------
Total liabilities 3,939,016 4,572,604
- --------------------------------------------------------------------------------
Commitments and contingencies
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 19,598,097 19,751,694
Deficit (4,821,299) (5,209,410)
Less treasury stock, at cost (336,380) (577,562)
- --------------------------------------------------------------------------------
Total shareholders' equity 14,563,564 14,087,868
- --------------------------------------------------------------------------------
$ 18,502,580 $ 18,660,472
================================================================================
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 September 1, 2000 12,314,575 $ 123,146 $ 20,324,568 $ (3,233,109) 481,471 $ (1,037,507)
Treasury stock reissued through
stock options and 401(k) plan -- -- (124,476) -- (99,275) 213,925
Value of stock options granted for
services -- -- 148,188 -- -- --
Value of stock
option compensation -- -- (345,000) -- -- --
Net loss for the six months -- -- -- (1,810,498) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, at March 2, 2001 12,314,575 $ 123,146 $ 20,003,280 $ (5,043,607) 382,196 $ (823,582)
====================================================================================================================================
Balance at August 31, 2001 12,314,575 $ 123,146 $ 19,751,694 $ (5,209,410) 269,588 (577,562)
Treasury stock reissued through
stock options and 401(k) plan -- -- (153,597) -- (112,576) 241,182
Net earnings for the six months -- -- -- 388,111 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 2002 12,314,575 $ 123,146 $ 19,598,097 $ (4,821,299) 157,012 $ (336,380)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
MARCH 1, March 2,
2002 2001
- --------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net earnings (loss) $ 388,111 $(1,810,498)
Adjustments to reconcile net earnings (loss) to
cash provided by (used for)
operating activities
Depreciation and amortization 871,713 847,323
Issuance of treasury stock for
compensation expenses 74,185 89,449
Non-cash stock option
compensation -- (484,000)
Other non-cash expenses -- 148,188
Provision for bad debt allowance 80,000 75,000
Provision for inventory reserves 200,000 425,000
Provision for deferred income taxes 227,000 (1,019,000)
Changes in assets and liabilities
Accounts receivable (310,485) 852,432
Inventories 1,157,764 (676,832)
Other assets 12,187 (91,365)
Accounts payable and accrued expenses (630,356) 28,232
Customer deposits 38,483 1,267,341
- --------------------------------------------------------------------------------
2,108,602 (348,730)
- --------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (105,425) (227,505)
Capitalized software additions (228,428) (175,072)
- --------------------------------------------------------------------------------
(333,853) (402,577)
- --------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES
Repayment of long-term debt (41,715) (294,072)
Proceeds from stock options exercised 13,400 --
- --------------------------------------------------------------------------------
(28,315) (294,072)
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,746,434 (1,045,379)
Cash and cash equivalents, beginning of period 1,926,723 2,072,853
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,673,157 $ 1,027,474
================================================================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the six months for:
Interest $ 29,964 $ 23,862
Income taxes $ (99,440) $ --
================================================================================
See accompanying notes to consolidated financial statements.
7
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 31, 2001.
EARNINGS PER SHARE
Basic and diluted net earnings per share were computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." 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. 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.
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 2002 and 2001 each contain fifty-two
weeks.
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
MARCH 1, August 31,
2002 2001
---------------------------------------------------------------------------
(UNAUDITED)
Accounts receivable - trade $ 1,611,795 $ 1,237,403
Other receivables 79,338 144,038
---------------------------------------------------------------------------
1,691,133 1,381,441
Less allowance for
doubtful accounts (384,228) (305,021)
---------------------------------------------------------------------------
$ 1,306,905 $ 1,076,420
===========================================================================
8
NOTE 3 INVENTORIES
Inventories are summarized as follows:
MARCH 1, August 31,
2002 2001
---------------------------------------------------------------------------
(UNAUDITED)
Raw material $ 2,600,384 $ 3,097,056
Work-in-process 4,565,251 5,332,635
Finished goods 3,002,848 3,212,686
---------------------------------------------------------------------------
10,168,483 11,642,377
Less inventory reserves (4,040,364) (4,156,494)
---------------------------------------------------------------------------
$ 6,128,119 $ 7,485,883
===========================================================================
During the first six months of fiscal 2002 inventory reserves were increased by
charges to cost of sales of $200,000 and were reduced by inventory write-offs of
$316,000. The Company's inventory reserve of approximately $4,040,000 at March
1, 2002, is to provide for items that are potentially slow moving, excess, or
obsolete. Changes in market conditions, lower than expected customer demand, and
rapidly changing technology could result in additional obsolete and slow-moving
inventory that is unsaleable or saleable at reduced prices. No estimate can be
made of a range of amounts of loss from obsolescence that are reasonably
possible should the Company's sales efforts not be successful.
NOTE 4 INCOME TAXES (UNAUDITED)
For the six months ended March 1, 2002, income tax expense of $227,000 was
comprised of a deferred federal and state income tax expense of $209,000 and
$18,000 respectively. Net deferred tax assets decreased $227,000 to $3,208,000
principally due to decreases in net operating loss carryforwards in the first
six months. Realization of deferred tax assets is dependent on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets will be realized based
on the Company's backlog, financial projections and operating history. The
amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of further taxable income during the
carryforward period are reduced.
At March 1, 2002, the Company had a federal net operating loss carryforward of
approximately $2,583,000, which expires in fiscal 2020 and fiscal 2021.
Additionally, the Company had general business and foreign tax credit
carryforwards of $106,000 expiring in fiscal 2004 and an alternative minimum tax
credit of $249,000.
9
NOTE 5 EARNINGS PER SHARE (UNAUDITED)
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
-----------------------------------------------------------------------------------
MARCH 1, 2002 March 2, 2001
--------------------------------------- ---------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
------------ ------------ ------- ------------ ------------ -------
Net earnings (loss) $ 255,946 $ (1,226,241)
============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 255,946 12,143,507 $ .02 $ (1,226,241) 11,878,685 $ (.10)
Effect of dilutive potential
common shares:
Stock options -- 23,752 -- --
---------------------------- ----------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 255,946 12,167,259 $ .02 $ (1,226,241) 11,878,685 $ (.10)
============================ ======= ============================ =======
Six months ended
-----------------------------------------------------------------------------------
MARCH 1, 2002 March 2, 2001
--------------------------------------- ---------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
------------ ------------ ------- ------------ ------------ -------
Net earnings (loss) $ 388,111 $ (1,810,498)
============ ============
BASIC EARNINGS(LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 388,111 12,114,258 $ .03 $ (1,810,498) 11,867,101 $ (.15)
Effect of dilutive potential
common shares:
Stock options -- 22,437 -- --
---------------------------- ----------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 388,111 12,136,695 $ .03 $ (1,810,498) 11,867,101 $ (.15)
============================ ======= ============================ =======
10
Stock options excluded from the diluted net earnings (loss) per share
calculation due to their anti-dilutive effect are as follows:
Three months ended Six months ended
---------------------------------------------------------------
MARCH 1, March 2, MARCH 1, March 2,
2002 2001 2002 2001
---------------------------------------------------------------
Common stock options:
Number of shares 1,011,550 1,200,800 1,059,650 1,200,800
Exercise price $1.41 to $5.63 $.63 to $5.63 $1.00 to $5.63 $.63 to $5.63
===============================================================
NOTE 6 SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS (UNAUDITED)
In accordance with Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information, the Company
operates within a single reportable segment, the manufacture and sale of
satellite communications equipment.
In this single operating segment the Company has three sources of revenue as
follows:
Three months ended Six months ended
---------------------------------------------------------------
MARCH 1, March 2, MARCH 1, March 2,
2002 2001 2002 2001
---------------------------------------------------------------
Product Line
Direct Broadcast Satellite $ 5,640,263 $ 3,043,456 $11,243,316 $ 7,142,955
Telecom and Custom Products 108,148 577,949 381,724 1,334,667
Service 112,291 144,805 268,278 286,169
---------------------------------------------------------------
$ 5,860,702 $ 3,766,210 $11,893,318 $ 8,763,791
===============================================================
Revenues by geographic area are as follows:
Three months ended Six months ended
---------------------------------------------------------------
MARCH 1, March 2, MARCH 1, March 2,
2002 2001 2002 2001
---------------------------------------------------------------
Geographic Area
United States $ 5,633,243 $ 3,373,048 $11,229,372 $ 6,541,679
Latin America 89,131 98,891 375,574 1,199,320
Canada 35,754 35,732 86,892 52,841
Europe 101,171 156,152 137,156 842,234
Other 1,403 102,387 64,324 127,717
---------------------------------------------------------------
$ 5,860,702 $ 3,766,210 $11,893,318 $ 8,763,791
===============================================================
11
All of the Company's long-lived assets are located in the United States.
Customers representing 10% or more of the respective period's revenues are as
follows:
Three months ended Six months ended
----------------------------------------------
MARCH 1, March 2, MARCH 1, March 2,
2002 2001 2002 2001
----------------------------------------------
Customer 1 19.2% (a) 18.2% (a)
Customer 2 53.1% 18.7% 41.7% (a)
Customer 3 (a) 16.3% 12.0% (a)
Customer 4 (a) 15.4% (a) 14.1%
Customer 5 (a) 12.8% (a) (a)
Customer 6 (a) (a) (a) 11.5%
(a) Revenues for the period were less than 10% of total revenues.
NOTE 7 COMMITMENTS
During the second quarter of fiscal 2001, the Company entered into a
manufacturing and purchasing agreement for certain finished goods inventories.
The agreement committed the Company to purchase, over a twelve-month period,
amounts ranging from approximately $2,565,000 to $3,287,000 depending on actual
products purchased. Pursuant to the agreement, at March 1, 2002, the amount of
remaining purchase commitments ranged from $784,000 to $1,007,000. In addition,
the Company entered into a cancelable manufacturing and purchasing agreement of
finished goods inventories for which the Company has firm customer order
commitments. The Company had outstanding purchase commitments under this
agreement of $1,897,000 at March 1, 2002. Pursuant to the above agreements, at
March 1, 2002, the Company had outstanding letters of credit in the amount of
$2,164,000.
NOTE 8 STOCK OPTIONS
An amendment to the 1998 Incentive Plan was approved at the 2002 Annual Meeting
of Stockholders to increase the number of shares available for grants and awards
under the Plan from 1,000,000 to 2,000,000. During the first six months of
fiscal 2002 options for 230,375 shares of common stock were granted to directors
at an exercise price of $1.00 and options for 22,000 shares of common stock were
granted to certain employees pursuant to employment agreements, at a weighted
average exercise price of $.66. During the first six months of fiscal 2002,
options for 20,000 shares of common stock were exercised at an exercise price of
$.67. At March 1, 2002, options for 1,266,425 shares of common stock were
outstanding with a weighted average exercise price of $1.85 and with exercise
prices ranging from $.60 to $5.63. At March 1, 2002, options for 1,308,075
shares of common stock were available for issuance under the 1998 Incentive
Plan. Subsequent to March 1, 2002, options for 295,000 shares of common stock
were granted at an exercise price of $.84.
12
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 31, 2001, contained in the Company's 2001 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 31, 2001, 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 MARCH 1, 2002 COMPARED TO THREE AND SIX MONTHS ENDED
MARCH 2, 2001
The operating results for the three and six month periods ended March 1, 2002
were net earnings of $256,000 or $.02 per share and $388,000 or $.03 per share,
respectively, compared to a net loss of $(1,226,000) or $(.10) per share and a
net loss of $(1,810,000) or $(.15) per share, respectively, for the three and
six month periods ended March 2, 2001.
REVENUES - The Company's revenues for the three months ended March 1, 2002 were
$5,861,000, up 55.6% from revenues of $3,766,000 for the three months ended
March 2, 2001. Revenues for the six months ended March 1, 2002 were $11,893,000,
up 35.7% from revenues of $8,764,000 for the six months ended March 2, 2001.
Direct Broadcast Satellite (DBS) revenues increased $2,597,000 or 85.3% in the
second quarter of fiscal 2002 to $5,640,000 from $3,043,000 in the same period
of fiscal 2001. For the six months ended March 1, 2002, DBS revenues increased
$4,100,000 or 57.4% to $11,243,000 from $7,143,000 for the six months ended
March 2, 2001. The increase in revenues for the three and six month periods was
a result of a high backlog of orders at the beginning of fiscal 2002 compared to
the beginning of fiscal 2001. Shipments of network equipment, which initially
began in the first quarter of fiscal 2002 to Roberts Communications to provide
television coverage of horseracing to off-track betting venues throughout the
United States, continued throughout the second quarter of fiscal 2002. Shipments
of digital receivers, which initially began in the fourth quarter of fiscal 2001
on a multi-year contract to provide programming to network subscribers,
continued throughout the first and second quarters of fiscal 2002. Additionally,
during the first six months of fiscal 2002, shipments of digital receivers were
completed to FOX Digital and FOX Sports Net for their broadcast and cable
television networks.
Telecom and Custom Products Group revenues decreased $470,000 or 81.3% in the
second quarter of fiscal 2002 to $108,000 from $578,000 in the same period of
fiscal 2001. For the six months ended March 1, 2002, Telecom and Custom Products
Group revenues decreased $953,000 or 71.4% to $382,000 from $1,335,000 for the
six months ended March 2, 2001. The decrease in revenues for the three and six
month periods was mainly due to lower levels of shipments of cable television
headend products to distributors as a result of the continued slowdown in
purchases by major cable television operators.
13
For the three months ended March 1, 2002, two customers each accounted for 53.1%
and 19.2% of revenues, respectively. For the three months ended March 2, 2001,
four customers individually accounted for 10% or more of revenues. For the six
months ended March 1, 2002, three customers accounted for 41.7%, 18.2% and 12.0%
of revenues, respectively. For the six months ended March 2, 2001, two customers
accounted for 14.1% and 11.5% of revenues, respectively. Sales to a relatively
small number of major customers have typically comprised a majority of the
Company's revenues and that trend is expected to continue throughout fiscal 2002
and beyond. Future revenues are subject to the timing of significant orders from
customers and are difficult to forecast. As a result future revenue levels may
fluctuate from quarter to quarter. The Company's backlog is comprised of
undelivered, firm customer orders, which are scheduled to ship within eighteen
months. WCI's backlog was approximately $14,810,000 at March 1, 2002, compared
to $19,057,000 at August 31, 2001, and $20,700,000 at March 2, 2001.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 35.6%
and 34.1% for the three and six month periods ended March 1, 2002, compared to
12.5% and 14.3% for the three and six month periods ended March 2, 2001. Gross
profit margin dollars increased $1,615,000 and $2,800,000 for the three and six
month periods ended March 1, 2002, from the same periods ended March 2, 2001.
The increases in margin dollars and percentages for the three and six months
ended March 1, 2002, were mainly due to 1) higher revenue during the periods
which resulted in lower unit fixed overhead costs, 2) a reduction in
manufacturing labor and overhead costs as a result of the Company's cost
reduction and restructuring programs initiated in fiscal 2001, and 3) lower
offshore contract manufacturing costs of certain DBS products. Profit margins in
the three and six month periods of fiscal 2002 included inventory reserve
charges of $100,000 and $200,000 compared to $175,000 and $425,000 for the same
periods of fiscal 2001.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses decreased $524,000 or 33.4% to $1,043,000 for the three months ended
March 1, 2002, from $1,567,000 for the three months ended March 2, 2001. For the
six months ended March 1, 2002, SG&A expenses decreased $454,000 or 17.6% to
$2,120,000 from $2,574,000 for the same period ended March 2, 2001. During the
fourth quarter of fiscal 2001 tax reimbursement features were removed from
common stock options. As a result, SG&A expenses in the first six months of
fiscal 2002 were not subject to variable stock option compensation adjustments
compared to a benefit of $484,000 in the first six months of fiscal 2001.
Excluding this benefit, SG&A decreased $938,000 or 30.7% in the first six months
of fiscal 2002 compared to the same period of fiscal 2001. The three and six
month decreases are primarily due to cost reduction efforts initiated in the
last half of fiscal 2001 which resulted in reductions in corporate professional
fees principally associated with a national financial relations program that was
discontinued during the fourth quarter of fiscal 2001, lower sales and marketing
compensation expenses, lower administrative compensation expense and lower
travel and entertainment expense. As a percentage of revenues, SG&A expenses
were 17.8% for both the three and six month periods ended March 1, 2002,
compared to 41.6% and 29.4% for the same periods of fiscal 2001.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $735,000 or 12.5% of revenues and
$1,519,000 or 12.8% of revenues for the three and six month periods ended March
1, 2002, compared to $886,000 or 23.5% of revenues and $1,712,000 or 19.5% of
revenues for the same periods of fiscal 2001. Capitalized software development
costs amounted to $108,000 and $228,000 for the second quarter and first six
months of fiscal 2002 compared to $75,000 and $175,000 for the same periods of
fiscal 2001. The increases in capitalized software costs are due to increased
expenditures on COMPEL network control software and software associated with new
digital video products. Research and development expenses, excluding capitalized
software expenditures, were $627,000 or 10.7% of revenues and $1,290,000 or
10.9% of revenues for the three and six months ended March 1, 2002, compared to
$811,000 or 21.5% of revenues and $1,537,000 or 17.5% of revenues for the same
periods of fiscal 2001. The decrease in expenses for the three months ended
March 1, 2002, was primarily due to decreases in personnel, overhead, and
engineering consulting costs. The decrease in expenses for the six months ended
March 1, 2002, included lower personnel, overhead and prototype expenses which
were offset by higher engineering consulting costs. The expenditures for
research and development for the second half of fiscal 2002 are expected to
continue at a rate similar to that of the first half of fiscal 2002.
INTEREST EXPENSE - Interest expense increased $1,000 to $12,000 for the three
months ended March 1, 2002, from $11,000 for the three months ended March 2,
2001. For the six months ended March 1, 2002, interest expense increased $6,000
to $30,000 from $24,000 for the same period ended March 2, 2001. The increases
for the three and six month periods in fiscal 2002 were primarily due to an
increase in the average outstanding letter of credit commitment balances.
14
INTEREST INCOME - Interest income was $3,000 and $5,000 for the three and six
month periods ended March 1, 2002, compared to $11,000 and $56,000 for the same
periods ended March 2, 2001. The decrease for the three and six months ended
March 1, 2002, was mainly due to lower average cash equivalent balances and a
decrease in investment yields during the periods.
INCOME TAX EXPENSES - For the six months ended March 1, 2002, income tax expense
of $227,000 was comprised of a deferred federal and state tax expense of
$209,000 and $18,000, respectively. Net deferred tax assets decreased $227,000
in the first six months of fiscal 2002 to $3,208,000, principally due to
decreases in net operating loss carryforwards during the period. Realization of
deferred tax assets is dependent on generating sufficient future taxable income
prior to the expiration of the loss and credit carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax assets will be realized. The amount of the tax assets
considered realizable, however, could be reduced in the near term if estimates
of further taxable income during the carryforward period are reduced.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are very important to the portrayal of the Company's
financial condition and results of operations and require management's most
subjective or difficult judgements. These policies are as follows:
INVENTORY RESERVES - Inventories are valued at the lower of cost (at standard,
which approximates actual cost on a first-in, first-out basis) or market.
Inventories include the cost of raw materials, labor and manufacturing overhead.
The Company makes inventory reserve provisions for obsolete or slow moving
inventories as necessary to properly reflect inventory value. These reserves are
to provide for items that are potentially slow moving, excess, or obsolete.
Changes in market conditions, lower than expected customer demand, and rapidly
changing technology could result in additional obsolete and slow moving
inventory that is unsaleable or saleable at reduced prices which could require
additional inventory reserve provisions.
CAPITALIZED SOFTWARE COSTS - Software development costs are capitalized
subsequent to establishing the technological feasibility of a product.
Capitalized costs are amortized based on the larger of the amounts computed
using (a) the ratio that current gross revenues for each product bears to the
total of current and anticipated future gross revenues for that product or (b)
the straight-line method over the remaining estimated economic life of the
product. Expected future revenues and estimated economic lives are subject to
revisions due to market conditions, technology changes, and other factors
resulting in shortfalls of expected revenues or reduced economic lives which
could result in additional amortization expense or write-offs.
DEFERRED TAX ASSET VALUATION ALLOWANCE - Deferred tax assets are recognized for
deductible temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits will be
realized. Realization of the Company's deferred tax assets is dependent on
generating sufficient future taxable income prior to the expiration of the loss
and credit carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized based on the Company's backlog, financial projections and operating
history. The amount of the deferred tax assets considered realizable, however,
could be reduced if estimates of further taxable income during the carryforward
period are reduced. Any reduction in the realizable value of deferred tax assets
would result in a charge to income tax expense in the period such determination
was made.
ACCOUNTS RECEIVABLE VALUATION - The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
15
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED MARCH 1, 2002
During the first six months of fiscal 2002, cash and cash equivalent balances
increased $1,746,000 to $3,673,000 at March 1, 2002 from $1,927,000 at August
31, 2001. Operating activities provided $2,109,000 of cash. Net earnings
adjusted for non-cash expenses provided $1,841,000 of cash, while changes in
accounts receivable, customer deposits, accounts payable and accrued expenses
used $902,000 of cash. Changes in inventories and other assets provided
$1,170,000 of cash. Cash used by investing activities for property and equipment
expenditures and capitalized software additions was $334,000. Financing
activities used cash of $42,000 for scheduled repayments of long-term
obligations and proceeds from exercised stock options provided $13,000 of cash.
Subsequent to March 1, 2002, WCI's bank loan facility was amended to provide a
maximum available credit limit of $5,000,000 with sublimits as defined. The
amended loan facility matures on June 30, 2003, or upon demand and requires an
annual facility fee of 1% of the maximum credit limit. The loan facility
consists of a term loan and a revolving line of credit with a combined borrowing
limit of $5,000,000, bearing interest at the bank's prime rate (4.75% at March
1, 2002).
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. At March 1, 2002, no balances were outstanding on the revolving line
of credit or the equipment term loan portions of the loan facility.
Additionally, at March 1, 2002, approximately $633,000 net of outstanding
letters of credit in the amount of $2,164,000 was available to borrow under the
advance formulas.
The Company is required to maintain a minimum tangible net worth with annual
increases at each fiscal year end commencing with fiscal year 2003, retain
certain key employees, limit expenditures of Wegener Corporation to $600,000 per
fiscal year, maintain certain financial ratios, and is precluded from paying
dividends. The Company believes that the amended loan facility along with cash
and cash equivalent balances will be sufficient to support fiscal 2002
operations.
During the second quarter of fiscal 2001, the Company entered into a
manufacturing and purchasing agreement for certain finished goods inventories.
The agreement committed the Company to purchase, over a twelve-month period,
amounts ranging from approximately $2,565,000 to $3,287,000 depending on actual
products purchased. Pursuant to the agreement, at March 1, 2002, the amount of
remaining purchase commitments ranged from $784,000 to $1,007,000. In addition,
the Company entered into a cancelable manufacturing and purchasing agreement of
finished goods inventories for which the Company has firm customer order
commitments. The Company had outstanding purchase commitments under this
agreement of $1,897,000 at March 1, 2002. Pursuant to the above agreements, at
March 1, 2002, the Company had outstanding letters of credit in the amount of
$2,164,000.
A summary of the Company's long-term contractual obligations as of March 1, 2002
consisted of:
OPERATING PURCHASE
DEBT LEASES COMMITMENTS
------ --------- ------------------------
Fiscal 2002 $3,000 $112,000 $2,681,000 to $2,904,000
Fiscal 2003 6,000 227,000 --
Fiscal 2004 5,000 224,000 --
Fiscal 2005 -- 114,000 --
Fiscal 2006 -- 2,000 --
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates relate
primarily to its revolving line of credit and cash equivalents. The interest
rate on certain advances under the line of credit and term loan facility
fluctuates with the bank's prime rate. There were no borrowings outstanding at
March 1, 2002, subject to variable interest rate fluctuations.
At March 1, 2002, the Company's cash equivalents consisted of bank commercial
paper in the amount of $3,400,000. The cash equivalents have maturities of less
than three months and therefore are subject to minimal market risk.
The Company does not enter into derivative financial instruments. All sales and
purchases are denominated in U.S. dollars.
17
PART II. OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 22, 2002, the Annual Meeting of Shareholders was held and the shares
present voted on the following matters:
(1.) The shareholders approved the election of the following nominees
to the Board of Directors:
(A.) Class I Directors
C. Troy Woodbury, Jr.
10,988,690 votes FOR
399,272 votes WITHHELD
Joe K. Parks
10,864,048 votes FOR
523,914 votes WITHHELD
The terms of office of Thomas G. Elliott and James H. Morgan, Jr.
as class II directors, and Keith N. Smith and Robert A. Placek as
class III directors, continued subsequent to the Annual Meeting.
Mr Smith resigned from the Board of Directors on March 12, 2002.
(2.) An amendment to the Company's 1998 Incentive Plan to increase the
number of shares available for grants and awards under the plan
from 1,000,000 to 2,000,000 was approved with 5,728,973 votes
for, 1,194,704 votes against, and 24,148 votes abstaining.
(3.) The appointment of BDO Seidman, LLP as auditors for the Company
for the fiscal year 2002 was approved with 11,096,674 votes FOR,
219,380 votes AGAINST, and 71,908 votes ABSTAINING.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) None
(b.) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended March 1, 2002.
18
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: March 28, 2002 By: /s/ Robert A. Placek
-------------------------------------
Robert A. Placek
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: March 28, 2002 By: /s/ C. Troy Woodbury, Jr.
-------------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
19