FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 27, 1998
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1998.
Common Stock, $.01 par value 11,908,170 Shares
- ---------------------------- --------------------------
Class Outstanding March 31, 1998
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
Form 10-Q For the Quarter Ended February 27, 1998
INDEX
Page(s)
-------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Introduction .......................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Six Months Ended
February 27, 1998 and February 28, 1997 ............................4
Consolidated Balance Sheets - February 27,
1998 (Unaudited) and August 29, 1997 ...............................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Six Months Ended February 27,
1998 and February 28, 1997 .........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended February 27,
1998 and February 28, 1997 .........................................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
PART II. Other Information
Item 1. None
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders ...............16
Item 5. None
Item 6. Exhibits and Reports on Form 8-K ..................................16
Signatures ........................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION Item 1. Financial Statements
- ----------------------------- ----------------------------
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The consolidated balance sheet as of February 27, 1998; the consolidated
statements of shareholders' equity as of February 27, 1998 and February 28,
1997; the consolidated statements of operations for the three and six months
ended February 27, 1998 and February 28, 1997; and the consolidated statements
of cash flows for the six months ended February 27, 1998 and February 28, 1997
have been prepared without audit. The consolidated balance sheet as of August
29, 1997 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 29, 1997, 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
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 10,165,264 $ 4,679,310 $ 16,871,284 $ 11,321,973
- ---------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 6,472,192 3,328,127 11,003,931 7,747,849
Selling, general, and administrative 1,194,904 1,051,331 2,245,214 2,036,983
Research and development 698,390 436,037 1,368,286 1,002,867
- ---------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 8,365,486 4,815,495 14,617,431 10,787,699
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,799,778 (136,185) 2,253,853 534,274
Interest expense (62,893) (143,543) (138,679) (325,225)
Interest income 157,922 -- 235,556 1,429
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 1,894,807 (279,728) 2,350,730 210,478
Income tax expense (benefit) 720,000 (106,000) 893,000 80,000
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,174,807 $ (173,728) $ 1,457,730 $ 130,478
=====================================================================================================================
Net earnings (loss) per share:
Basic $ .10 $ (.02) $ .13 $ .01
Diluted $ .10 $ (.02) $ .12 $ .01
=====================================================================================================================
Shares used in per share calculation
Basic 11,826,964 9,114,008 11,586,234 9,014,755
Diluted 12,003,591 9,114,008 11,967,977 9,325,241
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 27, August 29,
1998 1997
- ----------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 9,707,244 $ 2,242,433
Accounts receivable 3,973,983 4,612,634
Inventories 8,598,789 9,992,672
Deferred income taxes 1,241,000 1,241,000
Other 4,995 21,376
- ----------------------------------------------------------------------------------------------------
Total current assets 23,526,011 18,110,115
Property and equipment 4,728,140 4,979,856
Capitalized software costs 1,551,713 1,701,416
Deferred income taxes -- 553,000
Other assets 111,288 269,566
- ----------------------------------------------------------------------------------------------------
$ 29,917,152 $ 25,613,953
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,222,383 $ 2,128,941
Accrued expenses 1,637,505 1,440,945
Customer deposits 6,953,908 3,458,401
Current maturities of long-term obligations 564,692 599,157
- ----------------------------------------------------------------------------------------------------
Total current liabilities 10,378,488 7,627,444
Long-term obligations, less current maturities 1,532,853 1,782,460
Convertible debentures -- 1,285,195
Deferred income taxes 340,000 --
- ----------------------------------------------------------------------------------------------------
Total liabilities 12,251,341 10,695,099
- ----------------------------------------------------------------------------------------------------
Commitments
Shareholders' equity
Common stock, $.01 par value, 20,000,000 shares
authorized; 12,314,575 and 11,363,917 shares issued 123,146 113,639
Additional paid-in capital 19,343,690 18,084,700
Deficit (1,419,945) (2,877,675)
Less treasury stock, at cost (410,405 and 432,730
shares) (381,080) (401,810)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 17,665,811 14,918,854
- ----------------------------------------------------------------------------------------------------
$ 29,917,152 $ 25,613,953
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------ Paid-in --------------
Shares Amount Capital Deficit Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at August 30, 1996 9,231,930 $ 92,319 $14,369,157 $(1,068,475) (470,397) $(436,785)
Treasury stock reissued through
stock options and 401(k) plan -- -- 35,479 -- 12,979 12,051
Issuance of common stock for
convertible debentures 549,328 5,494 1,703,773 --
Net earnings for the
six months -- -- -- 130,478 -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, at February 28, 1997 9,781,258 $ 97,813 $16,108,409 $ (937,997) (457,418) $(424,734)
==============================================================================================================================
BALANCE, at August 29, 1997 11,363,917 $113,639 $18,084,700 $(2,877,675) (432,730) $(401,810)
Treasury stock reissued through
stock options and 401(k) plan -- -- 20,670 -- 22,325 20,730
Issuance of common stock for
convertible debentures 950,658 9,507 1,238,320 -- -- --
Net earnings for the six months -- -- -- 1,457,730 -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, AT FEBRUARY 27, 1998 12,314,575 $123,146 $19,343,690 $(1,419,945) (410,405) $(381,080)
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
FEBRUARY 27, February 28,
1998 1997
- ----------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 1,457,730 $ 130,478
Adjustments to reconcile net earnings to
cash provided (used) by operating activities
Depreciation and amortization 966,135 641,035
Issuance of treasury stock for
compensation expenses 38,682 43,031
Issuance of convertible debt for interest
expense -- 33,918
Inventory reserves 350,000 --
Deferred income taxes 893,000 72,000
Changes in assets and liabilities
Accounts receivable 638,651 1,633,154
Inventories 1,043,883 1,125,880
Other assets 16,381 20,478
Accounts payable and accrued expenses (709,998) (1,622,749)
Customer deposits 3,495,507 561,486
- ----------------------------------------------------------------------------------------
8,189,971 2,638,711
- ----------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY INVESTMENT ACTIVITIES
Property and equipment expenditures (246,460) (400,782)
Capitalized software additions (197,347) (473,052)
- ----------------------------------------------------------------------------------------
(443,807) (873,834)
- ----------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in borrowings under
revolving line-of-credit -- (1,530,332)
Repayment of long-term debt and capitalized
lease obligations (284,072) (270,729)
Proceeds from stock options exercised 2,719 4,500
- ----------------------------------------------------------------------------------------
(281,353) (1,796,561)
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 7,464,811 (31,684)
Cash and cash equivalents, beginning of period 2,242,433 171,687
- ----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,707,244 $ 140,003
========================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 140,806 $ 241,685
Income taxes $ -- $ --
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
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 29, 1997.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". The Statement simplifies the standards for computing earnings
per share and improves their comparability to international standards.
The Company adopted this Standard during the fiscal quarter ended
February 27, 1998 as required and has restated earnings per share for
all prior periods presented to conform to this standard.
Basic net earnings per share is computed by dividing net earnings
available to common shareholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period
and excludes the dilutive effect of stock options and convertible
debentures. Diluted net earnings per share gives effect to all
dilutive potential common shares outstanding during a period. In
computing diluted net earnings per share, the average stock price for
the period is used in determining the number of shares assumed to be
reacquired under the treasury stock method from the exercise of stock
options and the if-converted method to compute the dilutive effect of
convertible debentures. A reconciliation of the numerator and
denominator of the basic and diluted net earnings per share is
presented below (Note 5).
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 1998 and 1997
contain fifty-two weeks.
8
<PAGE>
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2 Accounts Receivable
Accounts receivable are summarized as follows:
FEBRUARY 27, August 29,
1998 1997
------------ ------------
(UNAUDITED)
Accounts receivable - trade $ 4,255,665 $ 4,881,565
Other receivables 79,571 92,812
------------ ------------
4,335,236 4,974,377
Less allowance for
doubtful accounts (361,253) (361,743)
------------ ------------
$ 3,973,983 $ 4,612,634
============ ============
Note 3 Inventories
Inventories are summarized as follows:
FEBRUARY 27, August 29,
1998 1997
------------ ------------
(UNAUDITED)
Raw material $ 4,103,027 $ 4,550,550
Work-in-process 4,061,455 4,051,281
Finished goods 2,650,590 3,256,294
------------ ------------
10,815,072 11,858,125
Less inventory reserves (2,216,283) (1,865,453)
------------ ------------
$ 8,598,789 $ 9,992,672
============ ============
Note 4 Income Taxes
For the six months ended February 27, 1998, income tax expense of
$893,000 was comprised of a federal and state deferred income tax
expense of $799,000 and $94,000, respectively. There was no current
federal or state income tax expense due to utilization of tax net
operating loss carryforwards. Deferred tax assets decreased $893,000
in the first six months of fiscal 1998. At February 27, 1998, the
Company had approximately $662,000 of federal net operating loss
carryforwards which expire in 2008 through 2012; and $137,000 of
alternative minimum tax credits and $159,000 of other federal tax
credits expiring through 2004 available to offset future tax
liabilities.
9
<PAGE>
Note 5 Earnings Per Share
The following tables represent required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net earnings (loss) per
share computations.
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------------------------------------
FEBRUARY 27, 1998 February 28, 1997
------------------------------------------ -----------------------------------------
EARNINGS PER Earnings Per
(LOSS) SHARES SHARE (loss) Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $1,174,807 $(173,728)
========== =========
Basic earnings (loss) per share:
Net earnings (loss) available
to common shareholders $1,174,807 11,826,964 $0.10 $(173,728) 9,114,008 $(0.02)
===== ======
Effect of dilutive potential
common shares:
Stock options -- 128,989 -- --
Convertible debentures 988 47,639 -- --
---------- ---------- --------- ---------
Diluted earnings (loss) per share:
Net earnings (loss) available
to common shareholders
plus assumed conversions $1,175,795 12,003,591 $0.10 $(173,728) 9,114,008 $(0.02)
========== ========== ===== ========= ========= ======
<CAPTION>
Six months ended
-----------------------------------------------------------------------------------------
FEBRUARY 27, 1998 February 28, 1997
------------------------------------------ -----------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $1,457,730 $ 130,478
========== =========
Basic earnings per share:
Net earnings available
to common shareholders $1,457,730 11,586,234 $0.13 $ 130,478 9,014,755 $ 0.01
===== ======
Effect of dilutive potential
common shares:
Stock options -- 155,748 -- 310,486
Convertible debentures 9,156 225,994 -- --
---------- ---------- --------- ---------
Diluted earnings per share:
Net earnings available
to common shareholders
plus assumed conversions $1,466,886 11,967,977 $0.12 $ 130,478 9,325,241 $ 0.01
========== ========== ===== ========= ========= ======
</TABLE>
10
<PAGE>
Stock options and shares calculated under the if-converted method for
convertible debentures which were excluded from the diluted net earnings (loss)
per share calculation due to their anti-dilutive effect are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
1998 1997 1998 1997
-------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Common stock options:
Number of shares 48,500 467,637 48,500 4,000
Range of exercise prices $2.44 TO 12.13 $.75 to 12.13 $2.44 TO 12.13 $ 12.13
Convertible debentures:
Common shares calculated under
the if-converted method -- 1,154,521 -- 864,950
============== ============= ============== ===========
</TABLE>
11
<PAGE>
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 29, 1997 contained in the Company's 1997 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, material availability, new and existing
well-capitalized competitors, and other uncertainties detailed in the Company's
Form 10-K for the year ended August 29, 1997 and from time to time in the
Company's Securities and Exchange Commission filings.
The Company, through Wegener Communications, Inc. (WCI), a wholly-owned
subsidiary, designs and manufactures communications transmission and receiving
equipment for the business broadcast, data communications, cable and broadcast
radio and television industries.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED FEBRUARY 27, 1998 COMPARED TO THREE AND SIX MONTHS
ENDED FEBRUARY 28, 1997
The operating results for the three and six month periods ended February 27,
1998 were net earnings of $1,175,000 or $0.10 per share and net earnings of
$1,458,000 or $0.12 per share, respectively, compared to a net loss of
$(174,000) or $(0.02) per share and net earnings of $130,000 or $0.01 per share,
respectively, for the three and six month periods ended February 28, 1997.
REVENUES - The Company's revenues for the three months ended February 27, 1998
were $10,165,000, up 117.2% from revenues of $4,679,000 for the three months
ended February 28, 1997. Revenues were $16,871,000 for the six months ended
February 27, 1998, up 49.0% from revenues of $11,322,000 for the six months
ended February 28, 1997.
Direct Broadcast Satellite (DBS) revenues increased $4,410,000 or 113.5% in the
second quarter of fiscal 1998 to $8,298,000 from $3,887,000 in the same period
of fiscal 1997. The increase was due to increased shipments of digital video
products, principally to one customer for conversion of their cable television
broadcast network from analog to digital compression technology. Telecom and
Customer Products Group revenues increased $1,014,000 or 155.5% in the second
quarter of fiscal 1998 to $1,666,000 from $652,000 in the same period of fiscal
1997. The increase was mainly due to higher levels of shipments of cue and
control equipment to provide local commercial insertion capabilities
12
<PAGE>
to cable television headend systems. For the three months ended February 27,
1998, one customer accounted for approximately 49.1% of revenues.
For the six months ended February 27, 1998, DBS revenues increased $4,033,000 or
41.9% to $13,652,000 from $9,619,000 for the six months ended February 28, 1997.
The increase was due to increased shipments of digital video products
principally to one cable television broadcast network customer. For the six
months ended February 27, 1998, Telecom and Custom Product Group revenues
increased $1,400,000 or 100.3% to $2,795,000 from $1,395,000 for the six months
ended February 28, 1997. The increase was mainly due to higher levels of
shipments of cue and control equipment. The Company's backlog is comprised of
undelivered, firm customer orders, which are scheduled to ship within eighteen
months. For the six months ended February 27, 1998, one customer accounted for
approximately 30.5% of revenues. WCI's backlog was approximately $16,100,000 at
February 27, 1998, compared to $19,501,000 at August 29, 1997 and $9,400,00 at
February 28, 1997. At February 27, 1998, one customer accounted for
approximately 58.9% of the backlog.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 36.3%
and 34.8% for the three and six month periods ended February 27, 1998 compared
to 28.9% and 31.6% for the three and six month periods ended February 28, 1997.
Gross profit margin dollars increased $2,342,000 and $2,293,000 for the three
and six month periods ended February 27, 1998 from the same periods ended
February 28, 1997. The increases in margin percentages and dollars were due to
the increase in revenues and a mix of higher margin products in the three and
six month periods ended February 27, 1998 compared to the same periods of fiscal
1997. Profit margins were adversely impacted in the three and six month periods
ended February 27, 1998 by inventory reserve charges of $300,000 and $350,000,
respectively, for potentially slow-moving inventories of early generations of
digital video products and a charge of $100,000 for write-offs of capitalized
software associated with these products.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses increased $144,000 or 13.7% to $1,195,000 for the three months ended
February 27, 1998 from $1,051,000 for the three months ended February 28, 1997.
For the six months ended February 27, 1998 SG&A expenses increased $208,000 or
10.2% to $2,245,000 from $2,037,000 for the same period ended February 28, 1997.
The increases for the three and six month periods were mainly due to higher
levels of selling and marketing expenses, incentive compensation, and
professional fees. As a percentage of revenues, SG&A expenses were 11.8% and
13.3% for the three and six month periods ended February 27, 1998 compared to
22.5% and 18.0% for the same periods of fiscal 1997. The decreases in
percentages for the three and six months ended February 27, 1998 compared to the
three and six months ended February 28, 1997 were primarily due to higher
revenues.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $789,000 and $1,566,000 for the
three and six month periods ended February 27, 1998, compared to $795,000 and
$1,473,000 for the same periods of fiscal 1997. Capitalized software development
costs amounted to $90,000 and $197,000 for the second quarter and first six
months of fiscal 1998 compared to $359,000 and $469,000 for the same periods of
fiscal 1997. The increase in expenditures for the six months ended February 27,
1998 was primarily due to an increase in engineering personnel and higher
depreciation and proto-type material expenses. The decreases in capitalized
software development costs for the three and six month periods ended February
27, 1998 were principally due to a decrease in expenditures associated with
digital video products and Compel network control software. Research and
development expenses, excluding capitalized software expenditures, were $698,000
or 6.9% of revenues and $1,368,000 or 8.1% of revenues for the three and six
months ended February 27, 1998 compared to $436,000 or 9.3% of revenues and
$1,003,000 or 8.9% of revenues for the same periods of fiscal 1997.
13
<PAGE>
The Company remains committed to such research and development expenditures as
are required to effectively compete and maintain pace with the rapid
technological changes in the communications industry and to support innovative
engineering and design in its future products. The dollar amount of research and
development expenditures in fiscal 1998 is expected to increase compared to
fiscal 1997 and to decrease as a percentage of revenues due to an expected
increase in fiscal 1998 revenues.
INTEREST EXPENSE - Interest expense decreased $81,000 to $63,000 for the three
months ended February 27, 1998 from $144,000 for the three months ended February
28, 1997. For the six months ended February 27, 1998, interest expense decreased
$186,000 to $139,000 from $325,000 for the same period ended February 28, 1997.
The decreases for the three and six month periods were primarily due to a
decrease in the average outstanding balance of the convertible debentures.
INTEREST INCOME - Interest income was $158,000 and $236,000 for the three and
six months, respectively, ended February 27, 1998, compared to none and $1,400
for the same periods ended February 28, 1997. The increases are due to the
increase in cash equivalent balances at February 27, 1998, primarily as a result
of an increase in customer deposits.
INCOME TAX EXPENSES - For the six months ended February 27, 1998, income tax
expense of $893,000 was comprised of a federal and state deferred income tax
expense of $799,000 and $94,000, respectively. There was no current federal or
state income tax expense due to utilization of tax net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED FEBRUARY 27, 1998
During the first six months of fiscal 1998, operating activities provided cash
of $8,190,000. Increases in customer deposits and net earnings adjusted for
non-cash expenses provided cash of $3,495,000 and $3,706,000, respectively.
Decreases in inventory and accounts receivable provided cash of $1,044,000 and
$639,000 respectively, while decreases in accounts payable and accrued expenses
used cash of $710,000. Cash used by investing activities for property and
equipment expenditures and capitalized software additions was $444,000.
Financing activities used cash of $284,000 for scheduled repayments of long-term
obligations and provided cash of $3,000 from exercise of stock options.
At February 27, 1998, no balances were outstanding under the revolving
line-of-credit, which expires May 4, 1999, or upon demand. Borrowings under the
revolving line of credit are subject to availability advance formulas of 80%
against eligible accounts receivable; 20% of eligible raw material inventories;
20% of eligible work-in-process kit inventories; and 40% to 50% of eligible
finished goods inventories. Advances against inventory are subject to a sublimit
of $2,000,000. Approximately, $4,523,000 was available to borrow at February 27,
1998 under the advance formulas. In addition, at February 27, 1998, the Company
was in compliance with the line-of-credit covenants.
During the first six months of fiscal 1998, $1,285,000 of convertible debentures
were converted into 950,658 shares of common stock. No convertible debentures
remained outstanding at February 27, 1998.
The Company expects that its current cash and cash equivalents combined with
expected cash flows from operating activities and the Company's available
line-of-credit will be sufficient to support the Company's operations during
fiscal 1998.
14
<PAGE>
YEAR 2000
The Company has performed a review of its computer systems and products to
identify modifications required to become year 2000 compliant. The Company does
not believe there is a material cost associated with these modifications, and
currently expects such modifications to be completed by December 31, 1998. The
Company is in the process of reviewing the implications of Year 2000 compliance
issues associated with its suppliers, customers, distributors, banking
institutions, service providers and others. Any Year 2000 compliance problems by
these parties could result in a material adverse effect on the Company's
business, financial condition and results of operations.
15
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On January 27, 1998, the Annual Meeting of Shareholders was held and
the following matters were voted upon:
(1) The shareholders approved the election of the following
nominee to the Board of Directors:
James H. Morgan, Jr.
9,647,759 votes FOR
554,809 votes WITHHELD
The terms of office of C. Troy Woodbury, Jr., Robert A.
Placek and Joe K. Parks continued subsequent to the Annual
Meeting.
(2) The Wegener Corporation 1998 Incentive Plan was approved and
adopted with 5,842,424 votes FOR, 712,184 votes AGAINST, and
26,491 votes ABSTAINING.
(3) The appointment of BDO Seidman, LLP as auditors for the
Company for the fiscal year 1998 was approved with
10,124,597 votes FOR, 36,088 votes AGAINST, and 41,883 votes
ABSTAINING.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27-Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended February 27, 1998.
16
<PAGE>
SIGNATURES
------------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEGENER CORPORATION
-------------------
(Registrant)
Date: April 8, 1998 By: /s/ Robert A. Placek
-------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: April 8, 1998 By: /s/ C. Troy Woodbury, Jr.
-------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
17
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<FISCAL-YEAR-END> AUG-28-1998
<PERIOD-START> AUG-30-1997
<PERIOD-END> FEB-27-1998
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<SECURITIES> 0
<RECEIVABLES> 4,335,236
<ALLOWANCES> (361,253)
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0
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