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 May 31, 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 12,203,402 Shares
- ---------------------------- --------------------------
Class Outstanding June 19, 2002
WEGENER CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction ...................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Nine Months Ended
May 31, 2002 and June 1, 2001 ..................................4
Consolidated Balance Sheets - May 31,
2002 (Unaudited) and August 31, 2001 ...........................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Nine Months Ended May 31,
2002 and June 1, 2001 ..........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended May 31,
2002 and June 1, 2001 ..........................................7
Notes to Consolidated Financial
Statements (Unaudited) ......................................8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................13-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................17
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 31, 2002; the consolidated statements
of shareholders' equity as of May 31, 2002, and June 1, 2001; the consolidated
statements of operations for the three and nine months ended May 31, 2002, and
June 1, 2001; and the consolidated statements of cash flows for the nine months
ended May 31, 2002, and June 1, 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 Nine months ended
MAY 31, June 1, MAY 31, June 1,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Revenue $ 6,290,810 $ 5,364,599 $ 18,184,128 $ 14,128,390
- ----------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 4,092,591 3,983,713 11,935,666 11,497,420
Selling, general and administrative 1,005,889 1,358,731 3,126,042 3,933,098
Research and development 582,003 687,543 1,872,496 2,224,511
- ----------------------------------------------------------------------------------------------------------
Operating costs and expenses 5,680,483 6,029,987 16,934,204 17,655,029
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 610,327 (665,388) 1,249,924 (3,526,639)
Interest expense (19,425) (16,792) (49,389) (40,654)
Interest income 14,596 3,343 20,074 58,958
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 605,498 (678,837) 1,220,609 (3,508,335)
Income tax expense (benefit) 226,000 (243,000) 453,000 (1,262,000)
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 379,498 $ (435,837) $ 767,609 $ (2,246,335)
==========================================================================================================
Net earnings (loss) per share:
Basic $ .03 $ (.04) $ .06 $ (.19)
Diluted $ .03 $ (.04) $ .06 $ (.19)
==========================================================================================================
Shares used in per share calculation
Basic 12,185,519 11,943,294 12,138,011 11,892,499
Diluted 12,350,796 11,943,294 12,159,661 11,892,499
==========================================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, August 31,
2002 2001
- ------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 4,714,330 $ 1,926,723
Accounts receivable 2,485,962 1,076,420
Inventories 5,092,554 7,485,883
Deferred income taxes 2,292,000 2,207,000
Other 101,761 134,095
- ------------------------------------------------------------------------------------
Total current assets 14,686,607 12,830,121
Property and equipment, net 3,143,192 3,664,292
Capitalized software costs, net 659,848 895,442
Deferred income taxes 579,000 1,228,000
Other assets 9,181 42,617
- ------------------------------------------------------------------------------------
$ 19,077,828 $ 18,660,472
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,047,761 $ 1,694,923
Accrued expenses 2,234,373 2,009,482
Customer deposits 789,509 813,125
Current maturities of long-term obligations 6,454 44,695
- ------------------------------------------------------------------------------------
Total current liabilities 4,078,097 4,562,225
Long-term obligations, less current maturities 5,442 10,379
- ------------------------------------------------------------------------------------
Total liabilities 4,083,539 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 19,551,119 19,751,694
Deficit (4,441,801) (5,209,410)
Less treasury stock, at cost (238,175) (577,562)
- ------------------------------------------------------------------------------------
Total shareholders' equity 14,994,289 14,087,868
- ------------------------------------------------------------------------------------
$ 19,077,828 $ 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 -- -- (210,368) -- (161,804) 348,667
Value of stock options granted for
services -- -- 222,282 -- -- --
Value of stock
option compensation -- -- (342,800) -- -- --
Net loss for the nine months -- -- -- (2,246,335) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, at June 1, 2001 12,314,575 $ 123,146 $ 19,993,682 $ (5,479,444) 319,667 $ (688,840)
===================================================================================================================================
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 -- -- (200,575) -- (158,415) 339,387
Net earnings for the nine months -- -- -- 767,609 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2002 12,314,575 $ 123,146 $ 19,551,119 $ (4,441,801) 111,173 $ (238,175)
===================================================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
MAY 31, June 1,
2002 2001
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net earnings (loss) $ 767,609 $ (2,246,335)
Adjustments to reconcile net earnings (loss) to
cash provided by (used for) operating activities
Depreciation and amortization 1,287,577 1,293,003
Issuance of treasury stock for
compensation expenses 113,431 138,299
Non-cash stock option
compensation -- (480,800)
Other non-cash expenses -- 222,282
Provision for bad debt allowance 155,000 95,000
Provision for inventory reserves 300,000 575,000
Provision for deferred income taxes 564,000 (1,262,000)
Changes in assets and liabilities
Accounts receivable (1,564,542) 88,816
Inventories 2,093,329 220,014
Other assets 32,334 (127,984)
Accounts payable and accrued expenses (422,271) 90,647
Customer deposits (23,616) 1,024,323
- ------------------------------------------------------------------------------------------
3,302,851 (369,735)
- ------------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (123,644) (431,277)
Capitalized software additions (368,267) (275,865)
- ------------------------------------------------------------------------------------------
(491,911) (707,142)
- ------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES
Repayment of long-term debt (43,178) (423,642)
Proceeds from long-term debt -- 18,114
Debt issuance costs (5,536) --
Proceeds from stock options exercised 25,381 --
- ------------------------------------------------------------------------------------------
(23,333) (405,528)
- ------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,787,607 (1,482,405)
Cash and cash equivalents, beginning of period 1,926,723 2,072,853
- ------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,714,330 $ 590,448
==========================================================================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the nine months for:
Interest $ 49,389 $ 40,654
Income taxes $ (210,499) $ (106,536)
==========================================================================================
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.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as
issued by the Securities and Exchange Commission. Revenue is recognized when
persuasive evidence of an agreement with the customer exists, products are
shipped or title passes pursuant to the terms of the agreement with the
customer, the amount due from the customer is fixed or determinable,
collectibility is reasonably assured, and when there are no significant future
performance obligations. Service revenues are recognized at the time of
performance. The Company recognizes revenue in certain circumstances before
delivery has occurred. In such circumstances, risk of ownership has passed to
the buyer, the buyer has made a written fixed commitment to purchase the
finished goods, the buyer has requested the finished goods be held for future
delivery as designated by them, and no additional performance obligations exist
by the Company. For these transactions, the finished goods are segregated from
inventory and normal billing and credit terms are granted.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and if future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history, and credit
worthiness of the customer. If management determines that collection is not
reasonably assured or future performance obligations exist, revenue recognition
is deferred until these conditions are satisfied.
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.
8
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
MAY 31, August 31,
2002 2001
---------------------------------------------------------------------
(UNAUDITED)
Accounts receivable - trade $ 2,859,435 $ 1,237,403
Other receivables 85,938 144,038
---------------------------------------------------------------------
2,945,373 1,381,441
Less allowance for
doubtful accounts (459,411) (305,021)
---------------------------------------------------------------------
$ 2,485,962 $ 1,076,420
=====================================================================
NOTE 3 INVENTORIES
Inventories are summarized as follows:
MAY 31, August 31,
2002 2001
---------------------------------------------------------------------
(UNAUDITED)
Raw material $ 2,165,517 $ 3,097,056
Work-in-process 4,234,430 5,332,635
Finished goods 2,935,054 3,212,686
---------------------------------------------------------------------
9,335,001 11,642,377
Less inventory reserves (4,242,447) (4,156,494)
---------------------------------------------------------------------
$ 5,092,554 $ 7,485,883
=====================================================================
During the first nine months of fiscal 2002 inventory reserves were increased by
charges to cost of sales of $400,000 and were reduced by inventory write-offs of
approximately $314,000. The Company's inventory reserve of approximately
$4,242,000 at May 31, 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 nine months ended May 31, 2002, income tax expense of $453,000 was
comprised of a deferred federal and state income tax expense of $415,000 and
$38,000 respectively. Net deferred tax assets decreased $564,000 to $2,871,000
principally due to decreases in net operating loss carryforwards in the first
nine months of fiscal 2002 and receipt of tax refunds of $111,000 as a result of
federal income tax law changes. 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.
9
At May 31, 2002, the Company had a federal net operating loss carryforward of
approximately $1,652,000, 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 $138,000.
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
--------------------------------------------------------------------------------
MAY 31, 2002 June 1, 2001
-------------------------------------- --------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 379,498 $ (435,837)
========== ==========
BASIC EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 379,498 12,185,519 $ .03 $ (435,837) 11,943,294 $ (.04)
Effect of dilutive potential
common shares:
Stock options -- 165,277 -- --
------------------------ -------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 379,498 12,350,796 $ .03 $ (435,837) 11,943,294 $ (.04)
======================== ========== ========================= ==========
Nine months ended
--------------------------------------------------------------------------------
MAY 31, 2002 June 1, 2001
-------------------------------------- --------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 767,609 $(2,246,335)
========== ===========
BASIC EARNINGS(LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 767,609 12,138,011 $ .06 $(2,246,335) 11,892,499 $ (.19)
Effect of dilutive potential
common shares:
Stock options -- 21,650 -- --
------------------------ -------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ 767,609 12,159,661 $ .06 $(2,246,335) 11,892,499 $ (.19)
======================== ========== ========================== ==========
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 Nine months ended
------------------------------------------------------------------------
MAY 31, June 1, MAY 31, June 1,
2002 2001 2002 2001
------------------------------------------------------------------------
Common stock options:
Number of shares 907,550 1,200,800 1,016,409 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 Nine months ended
------------------------------------------------------------------------
MAY 31, June 1, MAY 31, June 1,
2002 2001 2002 2001
------------------------------------------------------------------------
Product Line
Direct Broadcast Satellite $ 5,680,666 $ 4,923,762 $ 16,923,982 $ 12,066,716
Telecom and Custom Products 519,194 314,919 900,918 1,649,586
Service 90,950 125,918 359,228 412,088
------------------------------------------------------------------------
$ 6,290,810 $ 5,364,599 $ 18,184,128 $ 14,128,390
========================================================================
Revenues by geographic area are as follows:
Three months ended Nine months ended
------------------------------------------------------------------------
MAY 31, June 1, MAY 31, June 1,
2002 2001 2002 2001
------------------------------------------------------------------------
Geographic Area
United States $ 5,896,795 $ 5,053,165 $ 17,126,167 $ 11,594,244
Latin America 150,693 102,011 526,266 1,193,058
Canada 77,789 13,949 164,680 66,790
Europe 34,364 158,556 171,521 1,000,790
Other 131,169 36,918 195,494 273,508
------------------------------------------------------------------------
$ 6,290,810 $ 5,364,599 $ 18,184,128 $ 14,128,390
========================================================================
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 Nine months ended
-------------------------------------------------------
MAY 31, June 1, MAY 31, June 1,
2002 2001 2002 2001
-------------------------------------------------------
Customer 1 10.8% 40.2% 11.6% 19.6%
Customer 2 36.2% (a) 24.4% (a)
Customer 3 (a) (a) (A) 10.8%
Customer 4 (a) 17.6% (A) (a)
Customer 5 13.3% (a) 31.9% (a)
(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 May 31, 2002, the amount of
remaining purchase commitments ranged from $527,000 to $677,000. 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 $2,023,000 at May 31, 2002. Pursuant to the above agreements, at
May 31, 2002, the Company had outstanding letters of credit in the amount of
$2,292,000.
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 nine 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 317,000 shares of common stock
were granted to employees and employee directors at a weighted average exercise
price of $ .83. During the first nine months of fiscal 2002, options for 29,500
shares of common stock were exercised at a weighted average exercise price of $
...86 and options for 96,500 shares at an exercise price of $1.44 were forfeited.
At May 31, 2002, options for 1,455,425 shares of common stock were outstanding
with a weighted average exercise price of $1.67 and with exercise prices ranging
from $ .63 to $5.63. At May 31, 2002, options for 1,013,075 shares of common
stock were available for issuance under the 1998 Incentive Plan.
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 NINE MONTHS ENDED MAY 31, 2002 COMPARED TO THREE AND NINE MONTHS ENDED
JUNE 1, 2001
The operating results for the three and nine month periods ended May 31, 2002
were net earnings of $379,000 or $ .03 per share and $768,000 or $ .06 per
share, respectively, compared to a net loss of $(436,000) or $(0.04) per share
and a net loss of $(2,246,000) or $(0.19) per share, respectively, for the three
and nine month periods ended June 1, 2001.
REVENUES - The Company's revenues for the three months ended May 31, 2002 were
$6,291,000, up 17.3% from revenues of $5,365,000 for the three months ended June
1, 2001. Revenues for the nine months ended May 31, 2002 were $18,184,000, up
28.7% from revenues of $14,128,000 for the nine months ended June 1, 2001.
Direct Broadcast Satellite (DBS) revenues increased $757,000 or 15.4% in the
third quarter of fiscal 2002 to $5,681,000 from $4,924,000 in the same period of
fiscal 2001. For the nine months ended May 31, 2002, DBS revenues increased
$4,857,000 or 40.3% to $16,924,000 from $12,067,000 for the nine months ended
June 1, 2001. The increase in revenues for the three and nine 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 third quarter of fiscal 2002. In
accordance with a multi-year contract to provide programming to network
subscribers, revenue was recognized on digital receivers beginning initially in
the fourth quarter of fiscal 2001 and continued throughout the first three
quarters of fiscal 2002. Additionally, during the first nine 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 increased $204,000 or 64.9% in the
third quarter of fiscal 2002 to $519,000 from $315,000 in the same period of
fiscal 2001. For the nine months ended May 31, 2002,Telecom and Custom Products
Group revenues decreased $749,000 or 45.4% to $901,000 from $1,650,000 for the
nine months ended June 1, 2001. The increase in revenues for the three months
ended May 31, 2002, was primarily due to an increase in orders from a
distributor to provide commercial insertion equipment to a cable television
operator. The decrease in revenues for the nine month period 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 May 31, 2002, three customers each accounted for
36.2%, 13.3%, and 10.8% of revenues, respectively. For the three months ended
June 1, 2001, two customers accounted for 40.2% and 17.6% of revenues,
respectively. For the nine months ended May 31, 2002, three customers accounted
for 31.9%, 24.4% and 11.6% of revenues, respectively. For the nine months ended
June 1, 2001, two customers accounted for 19.6% and 10.8% 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 $13,028,000 at May 31, 2002, compared to $19,057,000 at August 31,
2001, and $21,300,000 at June 1, 2001.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 34.9%
and 34.4% for the three and nine month periods ended May 31, 2002, compared to
25.7% and 18.6% for the three and nine month periods ended June 1, 2001. Gross
profit margin dollars increased $817,000 and $3,617,000 for the three and nine
month periods ended May 31, 2002, respectively, from the same periods ended June
1, 2001. The increases in margin dollars and percentages for the three and nine
months ended May 31, 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 program initiated in fiscal 2001, and 3) lower offshore contract
manufacturing costs of certain DBS products. Profit margins in the three and
nine month periods of fiscal 2002 included inventory reserve charges of $200,000
and $400,000 compared to $150,000 and $575,000 for the same periods of fiscal
2001.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses decreased $353,000 or 26.0% to $1,006,000 for the three months ended
May 31, 2002, from $1,359,000 for the three months ended June 1, 2001. For the
nine months ended May 31, 2002, SG&A expenses decreased $807,000 or 20.5% to
$3,126,000 from $3,933,000 for the same period ended June 1, 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 nine months of
fiscal 2002 were not subject to variable stock option compensation adjustments
compared to a benefit of $481,000 in the first nine months of fiscal 2001.
Excluding this benefit, SG&A decreased $1,288,000 or 29.2% in the first nine
months of fiscal 2002 compared to the same period of fiscal 2001. The three and
nine 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 16.0% and 17.2% for the three and nine month periods ended
May 31, 2002, respectively compared to 25.3% and 27.8% for the same periods of
fiscal 2001.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $722,000 or 11.5% of revenues and
$2,241,000 or 12.3% of revenues for the three and nine month periods ended May
31, 2002, compared to $788,000 or 14.7% of revenues and $2,500,000 or 17.7% of
revenues for the same periods of fiscal 2001. Capitalized software development
costs amounted to $140,000 and $368,000 for the third quarter and first nine
months of fiscal 2002 compared to $101,000 and $276,000 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 $582,000 or 9.3% of revenues and $1,872,000 or 10.3%
of revenues for the three and nine months ended May 31, 2002, compared to
$688,000 or 12.8% of revenues and $2,225,000 or 15.7% of revenues for the same
periods of fiscal 2001. The decrease in expenses for the three and nine months
ended May 31, 2002, included lower personnel and overhead expenses which were
offset by higher engineering consulting costs. The expenditures for research and
development for the fourth quarter of fiscal 2002 are expected to continue at
current run rates.
INTEREST EXPENSE - Interest expense increased $2,000 to $19,000 for the three
months ended May 31, 2002, from $17,000 for the three months ended June 1, 2001.
For the nine months ended May 31, 2002, interest expense increased $8,000 to
$49,000 from $41,000 for the same period ended June 1, 2001. The increases for
the three and nine month periods in fiscal 2002 were primarily due to an
increase in the average outstanding letter of credit commitment balances.
INTEREST INCOME - Interest income was $15,000 and $20,000 for the three and nine
month periods ended May 31, 2002, compared to $3,000 and $59,000 for the same
periods ended June 1, 2001. The increase for the three months ended May 31,
2002, was due to higher average cash equivalent balances which offset lower
investment yields during the period. The decrease for the nine months ended May
31, 2002, was mainly due to lower investment yields during the period.
14
INCOME TAX EXPENSES - For the nine months ended May 31, 2002, income tax expense
of $453,000 was comprised of a deferred federal and state tax expense of
$415,000 and $38,000, respectively. Net deferred tax assets decreased $564,000
in the first nine months of fiscal 2002 to $2,871,000, principally due to
decreases in net operating loss carryforwards during the period and receipt of
tax refunds of $111,000 as a result of federal income tax law changes.
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:
REVENUE RECOGNITION - The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, as issued by the Securities and Exchange Commission.
Revenue is recognized when persuasive evidence of an agreement with the customer
exists, products are shipped or title passes pursuant to the terms of the
agreement with the customer, the amount due from the customer is fixed or
determinable, collectibility is reasonably assured, and when there are no
significant future performance obligations. Service revenues are recognized at
the time of performance. The Company recognizes revenue in certain circumstances
before delivery has occurred. In such circumstances, risk of ownership has
passed to the buyer, the buyer has made a written fixed commitment to purchase
the finished goods, the buyer has requested the finished goods be held for
future delivery as designated by them, and no additional performance obligations
exist by the Company. For these transactions, the finished goods are segregated
from inventory and normal billing and credit terms are granted.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and if future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history, and credit
worthiness of the customer. If management determines that collection is not
reasonably assured or future performance obligations exist, revenue recognition
is deferred until these conditions are satisfied.
In the three and nine month periods ended May 31, 2002, revenues to one customer
in the amount of $1,260,000 were recorded prior to delivery. At May 31, 2002,
accounts receivable for these revenues were paid in full.
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. At May 31, 2002, inventories, net of
reserve provisions, amounted to $5,093,000.
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. At May 31, 2002,
capitalized software costs, net of accumulated amortization, amounted to
$660,000.
15
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. At May 31, 2002, net deferred tax assets amount to $2,871,000.
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. At May 31, 2002, accounts receivable net
of allowances for doubtful accounts amounted to $2,486,000.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED MAY 31, 2002
During the first nine months of fiscal 2002, cash and cash equivalent balances
increased $2,787,000 to $4,714,000 at May 31, 2002 from $1,927,000 at August 31,
2001. Operating activities provided $3,303,000 of cash. Net earnings adjusted
for non-cash expenses provided $3,188,000 of cash, while changes in accounts
receivable, customer deposits, accounts payable and accrued expenses used
$2,010,000 of cash. Changes in inventories and other assets provided $2,125,000
of cash. Cash used by investing activities for property and equipment
expenditures and capitalized software additions was $492,000. Financing
activities used cash of $43,000 for scheduled repayments of long-term
obligations and $6,000 for term loan facility fees. Proceeds from exercised
stock options provided $25,000 of cash.
During the third quarter of fiscal 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 May 31, 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 May 31, 2002, no balances were outstanding on the revolving line
of credit or the equipment term loan portions of the loan facility.
Additionally, at May 31, 2002, approximately $1,497,000 net of outstanding
letters of credit in the amount of $2,292,000 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 operations through
fiscal 2003.
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 May 31, 2002, the amount of
remaining purchase commitments ranged from $527,000 to $677,000. 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 $2,023,000 at May 31, 2002. Pursuant to the above agreements, at
May 31, 2002, the Company had outstanding letters of credit in the amount of
$2,292,000.
16
A summary of the Company's long-term contractual obligations as of May 31, 2002
consisted of:
OPERATING PURCHASE
DEBT LEASES COMMITMENTS
Fiscal 2002 $1,500 $ 74,000 $2,550,000 to $2,700,000
Fiscal 2003 6,000 227,000 -
Fiscal 2004 5,000 224,000 -
Fiscal 2005 - 114,000 -
Fiscal 2006 - 2,000 -
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
May 31, 2002, subject to variable interest rate fluctuations.
At May 31, 2002, the Company's cash equivalents consisted of bank commercial
paper in the amount of $3,650,000. 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.
PART II. OTHER INFORMATION
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ITEM 3. LEGAL PROCEEDINGS
On June 25, 2002, a complaint was filed in the U.S. District Court for the
District of Nevada by StarGuide Digital Networks, Inc., a Nevada corporation,
against Wegener Communications, Inc. ("WCI"), alleging that WCI had infringed
two United States patents held by StarGuide. The complaint also contains
allegations on intentional interference by WCI with an employment agreement
between StarGuide and a then former employee of WCI, as well as trade secrets
misappropriation. The plaintiff seeks preliminary and permanent injunctions
enjoining WCI for further patent infringement, compensatory damages, enhanced
and punitive damages for any willful infringement or interference with contract,
and costs and attorney's fees. WCI has not been served with the summons or
complaint but intends to file an answer denying the allegations contained in the
complaint and intends to vigorously defend itself in this matter. Management of
the Company believes that the outcome of this litigation will not have a
material adverse effect on the Company's financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits: 4.1 Loan and Security Agreement - Fourth Amendment
dated March 28, 2002, by and between Wegener Communications, Inc.
and LaSalle National Bank respecting $5,000,000 combined
revolving credit note and term note.
(b.) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended May 31, 2002.
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: June 28, 2002 By: /s/ Robert A. Placek
----------------------------
Robert A. Placek
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: June 28, 2002 By: /s/ C. Troy Woodbury, Jr.
----------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)