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 November 29, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the ExchangeAct).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value 12,267,825 Shares
- ---------------------------- -----------------------------
Class Outstanding December 30, 2002
WEGENER CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 29, 2002
INDEX
Page(s)
-------
PART I. Financial Information
Item 1. Financial Statements
Introduction ........................................................3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
November 29, 2002 and November 30, 2001 .............................4
Consolidated Balance Sheets - November 29,
2002 (Unaudited) and August 30, 2002 ................................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Three Months Ended November 29,
2002 and November 30, 2001 ..........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended November 29,
2002 and November 30, 2001 ..........................................7
Notes to Consolidated Financial
Statements (Unaudited) ...........................................8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................12-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........16
Item 4. Controls and Procedures.............................................16
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
Certifications .....................................................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 November 29, 2002; the consolidated
statements of shareholders' equity as of November 29, 2002 and November 30,
2001; the consolidated statements of operations for the three months ended
November 29, 2002 and November 30, 2001; and the consolidated statements of cash
flows for the three months ended November 29, 2002 and November 30, 2001 have
been prepared without audit. The consolidated balance sheet as of August 30,
2002 has been audited 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 30, 2002, 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
NOVEMBER 29, November 30,
2002 2001
- --------------------------------------------------------------------------------
Revenue $ 3,945,118 $ 6,032,616
- --------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 2,643,910 4,066,722
Selling, general, and administrative 1,229,281 1,077,065
Research and development 655,514 663,845
- --------------------------------------------------------------------------------
Operating costs and expenses 4,528,705 5,807,632
- --------------------------------------------------------------------------------
Operating income (loss) (583,587) 224,984
Interest expense (14,667) (18,086)
Interest income 19,708 2,267
- --------------------------------------------------------------------------------
Earnings (loss) before income taxes (578,546) 209,165
Income tax expense (benefit) (209,000) 77,000
- --------------------------------------------------------------------------------
Net earnings (loss) $ (369,546) $ 132,165
================================================================================
Net earnings (loss) per share:
Basic $ (0.03) $ 0.01
Diluted $ (0.03) $ 0.01
================================================================================
Shares used in per share calculation
Basic 12,267,825 12,085,008
Diluted 12,267,825 12,100,664
================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 29, August 30,
2002 2002
- ------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 6,107,195 $ 5,117,756
Accounts receivable 1,561,171 3,037,762
Inventories 3,774,647 3,920,673
Deferred income taxes 2,099,000 2,225,000
Other 64,468 90,066
- ------------------------------------------------------------------------------------
Total current assets 13,606,481 14,391,257
Property and equipment, net 3,061,106 2,995,332
Capitalized software costs, net 635,285 641,710
Deferred income taxes 958,000 623,000
Other assets 36,056 48,556
- ------------------------------------------------------------------------------------
$ 18,296,928 $ 18,699,855
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,567,842 $ 1,424,101
Accrued expenses 1,315,129 1,409,369
Customer deposits 660,482 777,023
Current maturities of long-term obligations 6,120 6,120
- ------------------------------------------------------------------------------------
Total current liabilities 3,549,573 3,616,613
Long-term obligations, less current maturities 2,803 4,294
- ------------------------------------------------------------------------------------
Total liabilities 3,552,376 3,620,907
- ------------------------------------------------------------------------------------
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 19,465,306 19,513,977
Deficit (4,771,376) (4,401,830)
Less treasury stock, at cost (72,524) (156,345)
- ------------------------------------------------------------------------------------
Total shareholders' equity 14,744,552 15,078,948
- ------------------------------------------------------------------------------------
$ 18,296,928 $ 18,699,855
====================================================================================
See accompanying notes to consolidated financial statements.
5
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Additional Treasury Stock
------------ Paid-in --------------
Shares Amount Capital Deficit Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at August 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 -- -- (98,491) -- (66,274) 141,985
Net earnings for the three months -- -- -- 132,165 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE at November 30, 2001 12,314,575 $ 123,146 $ 19,653,203 $ (5,077,245) 203,314 $ (435,577)
==================================================================================================================================
Balance at August 30, 2002 12,314,575 $ 123,146 $ 19,513,977 $ (4,401,830) 72,977 $ (156,345)
Treasury stock reissued through
stock options and 401(k) plan -- -- (48,671) -- (39,125) 83,821
Net loss for the three months -- -- -- (369,546) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 29, 2002 12,314,575 $ 123,146 $ 19,465,306 $ (4,771,376) 33,852 (72,524)
==================================================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
NOVEMBER 29, November 30,
2002 2001
- --------------------------------------------------------------------------------------
CASH USED FOR OPERATING ACTIVITIES
Net earnings (loss) $ (369,546) $ 132,165
Adjustments to reconcile net earnings (loss) to
cash used for operating activities
Depreciation and amortization 380,747 434,813
Issuance of treasury stock for
compensation expenses 35,150 36,794
Provision for bad debts 15,000 30,000
Provision for inventory reserves -- 100,000
Provision for deferred income taxes (209,000) 77,000
Changes in assets and liabilities
Accounts receivable 1,461,591 (729,347)
Inventories 146,026 (170,219)
Other assets 25,598 55,506
Accounts payable and accrued expenses 49,501 (94,262)
Customer deposits (116,541) (19,092)
- --------------------------------------------------------------------------------------
1,418,526 (146,642)
- --------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (233,685) (55,256)
Capitalized software additions (193,911) (120,022)
- --------------------------------------------------------------------------------------
(427,596) (175,278)
- --------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES
Repayment of long-term debt and capitalized
lease obligation (1,491) (40,268)
Proceeds from stock options exercised -- 6,700
- --------------------------------------------------------------------------------------
(1,491) (33,568)
- --------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 989,439 (355,488)
Cash and cash equivalents, beginning of period 5,117,756 1,926,723
- --------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 6,107,195 $ 1,571,235
======================================================================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the three months for:
Interest $ 14,667 $ 18,086
Income taxes -- $ (99,440)
======================================================================================
See accompanying notes to consolidated financial statements.
7
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are set forth in
Note 1 to the Company's audited consolidated financial statements included in
the annual report on Form 10-K for the year ended August 30, 2002.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as
published by the staff of 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 (commonly referred to as "bill and hold" transactions). In
such circumstances, among other things, 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
scheduled and 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. As of November
29, 2002, revenues to one customer in the amount of $1,302,000 were recorded
prior to delivery as bill and hold transactions. At November 29, 2002, accounts
receivable for these revenues amounted to $72,000.
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 accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," the Company included all shipping and handling billings to customer
in revenues, and freight costs incurred for product shipments have been included
in cost of products sold.
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 2003 and 2002 each contain fifty-two
weeks.
8
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
NOVEMBER 29, August 30,
2002 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
Accounts receivable - trade $ 1,847,449 $ 3,314,046
Other receivables 75,308 75,308
- --------------------------------------------------------------------------------
1,922,757 3,389,354
Less allowance for
doubtful accounts (361,586) (351,592)
- --------------------------------------------------------------------------------
$ 1,561,171 $ 3,037,762
================================================================================
NOTE 3 INVENTORIES
Inventories are summarized as follows:
NOVEMBER 29, August 30,
2002 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
Raw material $ 2,760,452 $ 2,917,924
Work-in-process 1,493,721 1,639,620
Finished goods 2,935,837 3,143,736
- --------------------------------------------------------------------------------
7,190,010 7,701,280
Less inventory reserves (3,415,363) (3,780,607)
- --------------------------------------------------------------------------------
$ 3,774,647 $ 3,920,673
================================================================================
During the first quarter of fiscal 2003 inventory reserves were reduced by
inventory write-offs of $365,000. The Company's inventory reserve of
approximately $3,415,000 at November 29, 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
For the three months ended November 29, 2002, income tax benefit of $209,000 was
comprised of a deferred federal and state income tax benefit of $197,000 and
$12,000, respectively. Net deferred tax assets increased $209,000 to $3,057,000
principally due to an increase in net operating loss carryforwards in the first
quarter. 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 future taxable income during the
carryforward period are reduced.
At November 29, 2002, the Company had a federal net operating loss carryforward
of approximately $2,526,000, which expires in fiscal 2020 and fiscal 2021.
Additionally, the Company had general business and foreign tax credit
carryforwards of $98,000 expiring in fiscal 2004 and an alternative minimum tax
credit of $138,000.
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 (loss) per
share computations. The calculation of earnings per share is subject to rounding
differences.
--------------------------------------------------------------------------------------
NOVEMBER 29, 2002 NOVEMBER 30, 2001
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
--------------------------------------------------------------------------------------
Net earnings (loss) $(369,546) $132,165
--------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) available
to common shareholders $(369,546) 12,267,825 $(0.03) $132,165 12,085,008 $0.01
======================================================================================
Effect of dilutive potential
common shares:
Stock options -- -- -- 15,656
--------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Net earnings (loss) available
to common shareholders $(369,546) 12,267,825 $(0.03) $132,165 12,100,664 $0.01
======================================================================================
Stock options which were excluded from the diluted net earnings (loss) per share
calculation due to their anti-dilutive effect are as follows:
Three months ended
---------------------------------------
NOVEMBER 29, 2002 November 30, 2001
---------------------------------------
Common stock options:
Number of shares 1,435,425 1,011,550
Range of exercise prices $ .75 TO $5.63 $ .75 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.
10
In this single operating segment the Company has three sources of revenues as
follows:
Three months ended
---------------------------------
NOVEMBER 29, November 30,
2002 2001
---------------------------------
Product Line
Direct Broadcast Satellite $3,482,568 $5,603,053
Telecom and Custom Products 351,375 273,576
Service 111,175 155,987
---------------------------------
$3,945,118 $6,032,616
=================================
Revenues by geographic areas are as follows:
Three months ended
---------------------------------
NOVEMBER 29, November 30,
2002 2001
---------------------------------
Geographic Area
United States $3,755,166 $5,596,129
Latin America 56,400 286,443
Canada 66,730 51,137
Europe 52,274 35,985
Other 14,548 62,922
---------------------------------
$3,945,118 $6,032,616
=================================
All of the Company's long-lived assets are located in the United States.
Customers representing 10% or more of the respective periods' revenues are as
follows:
Three months ended
---------------------------------
NOVEMBER 29, November 30,
2002 2001
---------------------------------
Customer 1 50.3% 17.2%
Customer 2 (A) 30.6%
Customer 3 (A) 17.4%
(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 November 29, 2002, remaining
purchase commitments amounted to $241,000. 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 $1,217,000
at November 29, 2002. Subsequent to November 29, 2002, the Company committed to
an additional $1,189,000 of inventory purchases. Pursuant to the above
agreements, at November 29, 2002, the Company had outstanding letters of credit
in the amount of $1,458,000.
11
WEGENER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1. of this Quarterly Report
and the audited consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended August 30, 2002 contained in the Company's 2002
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, government regulation, rapid technological developments and changes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, material availability, new and existing
well-capitalized competitors, and other uncertainties detailed in the Company's
Form 10-K for the year ended August 30, 2002 and from time to time in the
Company's periodic Securities and Exchange Commission filings.
The Company manufactures satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI 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 MONTHS ENDED NOVEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
2001
The operating results for the three month period ended November 29, 2002, were a
net loss of $(370,000) or $(0.03) per share compared to net earnings of $132,000
or $0.01 per share for the three month period ended November 30, 2001.
REVENUES - The Company's revenues for the first quarter of fiscal 2003 decreased
$2,088,000 or 34.6% to $3,945,000 from $6,033,000 for the same period in fiscal
2002.
Direct Broadcast Satellite (DBS) revenues (including service revenues) decreased
$2,165,000 or 37.6%, in the first quarter of fiscal 2003 to $3,594,000 from
$5,759,000 for the same period in fiscal 2002. The decrease in revenues was a
result of a lower backlog of orders at the beginning of fiscal 2003 compared to
the beginning of fiscal 2002. Revenues and order backlog are subject to the
timing of significant orders from customers, and as a result, revenue levels may
fluctuate from quarter to quarter. DBS revenues were adversely impacted by
delayed purchasing decisions in the digital satellite transmission market and
delayed product introductions by the Company. The first quarter of fiscal 2002
included shipments of network equipment to Roberts Communications to provide
television coverage of horseracing to off-track betting venues throughout the
United States and shipments of digital receivers to FOX Digital and FOX Sports
Net for their broadcast and cable television networks. Telecom and Custom
Products Group revenues increased $77,000 or 28.1% to $351,000 in the first
quarter of fiscal 2003 from $274,000 in the first quarter of fiscal 2002. The
increase was mainly due to increased shipments of cue and control equipment to
provide local commercial insertion capabilities to cable television operators.
For the three months ended November 29, 2002, one customer accounted for 50.3%
of revenues. For the three months ended November 30, 2001, three other customers
accounted for 30.6%, 17.4% and 17.2% 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 2003. The Company's backlog is comprised of undelivered, firm customer
orders, which are scheduled to ship within eighteen months. WCI's backlog was
approximately $12.8 million at November 29, 2002, compared to $10.7 million at
August 30, 2002, and $17.2 million at November 30, 2001. One customer accounted
for 72.4% of the backlog at November 29, 2002.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 33.0%
for the three month period ended November 29, 2002, compared to 32.6% for the
three month period ended November 30, 2001. Gross margin percentages were
favorably impacted by a product mix with lower variable cost components which
was offset by higher unit fixed costs due to lower revenues. Gross profit margin
dollars decreased $665,000 for the three month period ended November 29, 2002
12
compared to the same period ended November 30, 2001. The decrease in margin
dollars was mainly due to lower revenues during the period. Profit margins in
the first quarter of fiscal 2002 included inventory reserve charges of $100,000
compared to none for the same period of fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses increased $152,000 or 14.1% to $1,229,000 in the first quarter of
fiscal 2003 from $1,077,000 in the first quarter of fiscal 2002. SG&A
professional fees increased $347,000 mainly due to an increase in legal expenses
related to a complaint filed by StarGuide Digital Networks, Inc. against WCI
primarily alleging patent infringement. (See Item 1. Legal Proceedings.) The
increase in professional fees was offset by reductions in administrative and
corporate overhead expenses, outside sales agents commissions, marketing
expenses and bad debt provisions. As a percentage of revenues, selling, general
and administrative expenses were 31.2% for the three month period ended November
29, 2002 compared to 17.9% for the same period ended November 30, 2001.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $850,000 or 21.5% of revenues in
the first quarter of fiscal 2003 compared to $784,000 or 13.0% of revenues for
the same period of fiscal 2002. Capitalized software development costs amounted
to $194,000 in the first quarter of fiscal 2003 compared to $120,000 in the
first quarter of fiscal 2002. The increases in capitalized software costs during
the first quarter of fiscal 2003 compared to 2002 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 development costs, were $656,000 or 16.6% of revenues in the first
quarter of fiscal 2003, and $664,000 or 11.0% of revenues in the same period of
fiscal 2002.
INTEREST EXPENSE - Interest expense decreased $3,000 to $15,000 in the first
quarter of fiscal 2003 from $18,000 in the same period in fiscal 2002. The
decrease was primarily due to a decrease in average outstanding letter of credit
commitment balances.
INTEREST INCOME - Interest income was $20,000 for the three months ended
November 29, 2002 compared to $2,000 for the same period ended November 30,
2001. The increase was primarily due to higher average cash equivalent balances.
INCOME TAX EXPENSE - For the three months ended November 29, 2002, income tax
benefit of $209,000 was comprised of a deferred federal and state income tax
benefit of $197,000 and $12,000, respectively.
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 published by the staff of 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 (commonly referred to as "bill and hold"
transactions). In such circumstances, among other things, 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 scheduled and 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. As of November 29, 2002, revenues to one customer in the amount of
$1,302,000 were recorded prior to delivery as bill and hold transactions. At
November 29, 2002, accounts receivable for these revenues amounted to $72,000.
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.
13
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 November 29, 2002, inventories, net
of reserve provisions, amounted to $3,775,000.
CAPITALIZED SOFTWARE COSTS - Software development costs are capitalized
subsequent to establishing technological feasibility. 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 November 29, 2002, capitalized software
costs, net of accumulated amortization, amounted to $635,000.
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 future 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 November 29, 2002, deferred tax assets amount to $3,057,000 of
which approximately $884,000 relates to net operating loss carryforwards which
expire in fiscal 2020 and 2021 and $98,000 of general business and foreign tax
credits expiring in fiscal 2004 and an alternative minimum tax credit of
$138,000.
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 November 29, 2002, accounts receivable
net of allowances for doubtful accounts amounted to $1,561,000.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED NOVEMBER 29, 2002
At November 30, 2002, the Company's primary sources of liquidity were cash and
cash equivalents of $6,107,000 and a $5,000,000 bank loan facility. Cash and
cash equivalents increased $989,000 during the first quarter of fiscal 2003.
During the first quarter of fiscal 2003, operating activities provided
$1,419,000 of cash. Net loss adjusted for non-cash expenses used $147,000 of
cash, while changes in accounts receivable and customer deposit balances
provided $1,345,000 of cash. Changes in accounts payable and accrued expenses,
inventories, and other assets provided $221,000 of cash. Cash used by investing
activities for property and equipment expenditures and capitalized software
additions was $428,000. Financing activities used cash of $1,500 for scheduled
repayments of long-term debt.
WCI's bank loan facility provides a maximum available credit limit of $5,000,000
with sublimits as defined. The 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 (4.25% at November 29, 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 November 29, 2002, no balances were outstanding on the revolving
line of credit or the equipment term loan portions of the loan facility.
Additionally, at November 29, 2002,
14
approximately $1,847,000 net of outstanding letters of credit in the amount of
$1,458,000 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. At November 29, 2002, the Company was in compliance with all loan
facility covenants. 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 November 29, 2002, remaining
purchase commitments amounted to $241,000. 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 $1,217,000
at November 29, 2002. Subsequent to November 29, 2002, the Company committed to
an additional $1,189,000 of inventory purchases. Pursuant to the above
agreements, at November 29, 2002, the Company had outstanding letters of credit
in the amount of $1,458,000.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future.
A summary of the Company's long-term contractual obligations as of November 29,
2002 consisted of:
OPERATING PURCHASE
DEBT LEASES COMMITMENTS
------ -------- -----------
Fiscal 2003 $6,000 $171,000 $1,458,000
Fiscal 2004 3,000 224,000 --
Fiscal 2005 - 114,000 --
Fiscal 2006 - 2,000 --
------ -------- -----------
Total $9,000 $511,000 $1,458,000
====== ======== ==========
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates relates
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
November 29, 2002 subject to variable interest rate fluctuations.
At November 29, 2002, the Company's cash equivalents consisted of bank
commercial paper in the amount of $3,950,000 and variable rate municipals in the
amount of $2,000,000. 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's CEO
and CFO have concluded that the Company's disclosure controls and procedures (as
defined in Rule 13a-14 of the Securities Exchange Act of 1934, as amended) are
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the completion of this evaluation.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) 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. (StarGuide Digital
Network, Inc., Plaintiff, v. Wegener Communications, Inc., and John
Scaggs, Defendants) alleging that WCI had infringed two United States
patents held by StarGuide. On July 10, 2002, StarGuide filed its First
Amended Complaint and added John Scaggs, an employee of WCI, as a
defendant. StarGuide filed its Second Amended Complaint on July 17,
2002. Counts I and II of the Second Amended Complaint allege claims of
patent infringement against WCI relating to two U.S. Patents. The
remaining counts relate to the employment of John Scaggs by WCI, his
brief decision to become an employee of StarGuide, and alleged acts of
misappropriation of StarGuide's trade secrets by WCI and John Scaggs.
The plaintiff seeks preliminary and permanent injunctions enjoining
WCI from further patent infringement, compensatory damages, enhanced
and punitive damages for any willful infringement or interference with
contract, and costs and attorney's fees. WCI timely answered the
Complaints and denied all liability in full. In addition, WCI filed
counterclaims against StarGuide seeking declaratory judgements that
WCI is not infringing the patents in suit and that the patents in suit
are invalid or otherwise unenforceable. Subsequent to the end of the
first quarter of fiscal 2003, WCI and John Scaggs reached an agreement
with StarGuide settling all disputes between the parties. The terms of
the settlement are confidential but include StarGuide's grant of
limited licenses to Wegener under a number of StarGuide patents. WCI
has agreed to pay StarGuide a running royalty on certain products.
Management of the Company believes that the settlement 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:
99.1 Certification of Chief Executive Officer Regarding Periodic
Report Containing Financial Statements Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Regarding Periodic
Report Containing Financial Statements Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended November 29, 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: January 3, 2003 By: /s/ Robert A. Placek
---------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: January 3, 2003 By: /s/ C. Troy Woodbury, Jr.
---------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
18
CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING PERIODIC REPORT
CONTAINING FINANCIAL STATEMENTS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert A. Placek, the Chief Executive Officer of Wegener Corporation, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q for the quarter ended
November 29, 2002 of Wegener Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the ( registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of our disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely ( affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 3, 2003
/s/ Robert A. Placek
NAME: ROBERT A. PLACEK
TITLE: CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
19
CERTIFICATION OF CHIEF FINANCIAL OFFICER REGARDING PERIODIC REPORT
CONTAINING FINANCIAL STATEMENTS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, C. Troy Woodbury, Jr., the Chief Financial Officer of Wegener Corporation,
certify that:
(1) I have reviewed this quarterly report on Form 10-Q for the period ended
November 29, 2002 of Wegener Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the ( registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of our disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely ( affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 3, 2003
/s/ C. Troy Woodbury, Jr.
NAME: C. TROY WOODBURY, JR.
TITLE: TREASURER AND CHIEF FINANCIAL OFFICER
20