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 28, 2004
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 12,523,051 Shares
- ---------------------------- -------------------------
Class Outstanding June 30, 2004
WEGENER CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MAY 28, 2004
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction .....................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Nine Months Ended
May 28, 2004 and May 30, 2003 ....................................4
Consolidated Balance Sheets - May 28,
2004 (Unaudited) and August 29, 2003 .............................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Nine Months Ended May 28,
2004 and May 30, 2003 ............................................6
Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended May 28,
2004 and May 30, 2003 ............................................7
Notes to Consolidated Financial
Statements (Unaudited) ........................................8-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..........................16-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......24
Item 4. Controls and Procedures..........................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................25
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K ...............................25
Signatures.......................................................26
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 28, 2004; the consolidated statements
of shareholders' equity as of May 28, 2004, and May 30, 2003; the consolidated
statements of operations for the three and nine months ended May 28, 2004, and
May 30, 2003; and the consolidated statements of cash flows for the nine months
ended May 28, 2004, and May 30, 2003, have been prepared without audit. The
consolidated balance sheet as of August 29, 2003, has been examined by
independent registered 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,
2003, 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 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Revenue $ 4,777,394 $ 6,254,459 $ 14,240,522 $ 15,418,729
- ------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 3,385,022 3,812,723 10,375,171 9,801,488
Selling, general and administrative 1,150,988 1,592,032 3,650,451 3,753,709
Research and development 792,087 654,545 2,307,524 2,064,205
- ------------------------------------------------------------------------------------------------------
Operating costs and expenses 5,328,097 6,059,300 16,333,146 15,619,402
- ------------------------------------------------------------------------------------------------------
Operating income (loss) (550,703) 195,159 (2,092,624) (200,673)
Interest expense (31,374) (17,996) (73,949) (49,965)
Interest income 24,436 14,805 38,000 47,717
- ------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (557,641) 191,968 (2,128,573) (202,921)
Income tax expense (benefit) (201,000) 69,000 (668,000) (73,000)
- ------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (356,641) $ 122,968 $ (1,460,573) $ (129,921)
- ------------------------------------------------------------------------------------------------------
Net earnings (loss) per share:
Basic $ (.03) $ .01 $ (.12) $ (.01)
Diluted $ (.03) $ .01 $ (.12) $ (.01)
- ------------------------------------------------------------------------------------------------------
Shares used in per share calculation
Basic 12,483,348 12,351,158 12,432,246 12,313,314
Diluted 12,483,348 12,488,212 12,432,246 12,313,314
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 28, August 29,
2004 2003
- --------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 2,889,464 $ 4,213,252
Accounts receivable 2,954,524 3,560,127
Inventories 2,271,921 2,142,835
Deferred income taxes 2,111,000 2,109,000
Other 139,113 143,397
- --------------------------------------------------------------------------------
Total current assets 10,366,022 12,168,611
Property and equipment, net 2,679,913 2,913,551
Capitalized software costs, net 1,663,688 1,304,416
Deferred income taxes 1,695,000 1,029,000
Other assets, net 826,942 752,003
- --------------------------------------------------------------------------------
$ 17,231,565 $ 18,167,581
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,216,321 $ 1,195,034
Accrued expenses 1,552,276 1,432,749
Customer deposits 295,322 254,667
Current maturities of long-term obligations -- 4,320
- --------------------------------------------------------------------------------
Total current liabilities 3,063,919 2,886,770
- --------------------------------------------------------------------------------
Total liabilities 3,063,919 2,886,770
- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000
shares authorized; 12,523,051 and
12,381,251 shares respectively,
issued and outstanding 125,231 123,813
Additional paid-in capital 19,817,059 19,471,069
Deficit (5,774,644) (4,314,071)
- --------------------------------------------------------------------------------
Total shareholders' equity 14,167,646 15,280,811
- --------------------------------------------------------------------------------
$ 17,231,565 $ 18,167,581
================================================================================
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 August 30, 2002 12,314,575 $ 123,146 $ 19,513,977 $ (4,401,830) 72,977 $ (156,345)
Issuance of shares through
stock options and 401(k) plan 56,676 567 (51,208) -- (72,977) 156,345
Net loss for the nine months -- -- -- (129,921) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE at May 30, 2003 12,371,251 $ 123,713 $ 19,462,769 $ (4,531,751) -- $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at August 29, 2003 12,381,251 $ 123,813 $ 19,471,069 $ (4,314,071) -- $ --
Common stock issued through
stock options 141,800 1,418 206,190 -- -- --
Value of stock options granted
for services -- -- 139,800 -- -- --
Net loss for the nine months -- -- -- (1,460,573) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 28, 2004 12,523,051 $ 125,231 $ 19,817,059 $ (5,774,644) -- $ --
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
MAY 28, May 30,
2004 2003
- --------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES
Net loss $(1,460,573) $ (129,921)
Adjustments to reconcile net loss to
cash provided by operating activities
Depreciation and amortization 1,601,187 1,201,085
Issuance of treasury and common stock for
benefit plan -- 82,409
Value of stock options granted
for services 139,800 --
Provision for bad debts 30,000 65,000
Provision for inventory reserves 225,000 100,000
Provision (benefit) for deferred income taxes (668,000) (73,000)
Warranty reserves -- (20,000)
Changes in assets and liabilities
Accounts receivable 575,603 (1,261,072)
Inventories (354,086) 1,160,172
Other assets 4,284 (102,758)
Accounts payable and accrued expenses 140,814 1,128,748
Customer deposits 40,655 (297,873)
- --------------------------------------------------------------------------------
274,684 1,852,790
- --------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (241,750) (504,222)
Capitalized software additions (1,360,239) (861,467)
License agreement,
patent, and trademark expenditures (199,771) (526,670)
- --------------------------------------------------------------------------------
(1,801,760) (1,892,359)
- --------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES
Repayment of long-term debt (4,320) (4,538)
Proceeds from stock options exercised 207,608 23,295
- --------------------------------------------------------------------------------
203,288 18,757
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,323,788) (20,812)
Cash and cash equivalents, beginning of period 4,213,252 5,117,756
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,889,464 $ 5,096,944
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 73,949 $ 49,965
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS
We design and manufacture equipment for receiving and transmitting of video,
audio and data programming over satellite, cable, broadcast and terrestrial
networks. Applications for our equipment include cable and broadcast television,
high-definition television, business television, IP data delivery, business
music, distance education, radio networks and financial information
distribution.
The equipment we provide enables our customers to implement complex networks
involving real time switching and control to help them achieve their business
plans. Using our technologies, our customers can provide targeted programming
and advertising capabilities to their clients.
We also make a complete line of signal processing equipment used by the cable
television industry to provide off-air digital and high definition signals to
their subscribers. This equipment receives the signals from local terrestrial
broadcasters and processes them in ways that make these signals compatible with
existing cable plant infrastructure in wide use today.
Our primary customers are major broadcast networks, operators of large private
satellite broadcast networks, and major cable television systems operators.
Our principal sources of revenues are from the sales of satellite communications
equipment. Embedded in our products is internally developed software of varying
applications. Historically, we have not sold or marketed our software separately
or otherwise licensed our software apart from the related communications
equipment. We operate in one business segment, the manufacture and sale of
satellite communications equipment.
NOTE 2 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, 2003.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101 (SAB 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 revenues 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. For the three and nine months ended May 28, 2004, revenues to one
customer in the amount of $1,246,000 and $3,911,000 respectively, were
appropriately recorded prior to delivery as bill and hold transactions in
accordance with the provisions of SAB 101. At May 28, 2004, accounts receivable
for these revenues amounted to $1,246,000 and were paid in full subsequent to
May 28, 2004.
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.
The Company's principal sources of revenues are from the sales of various
satellite communications equipment. Embedded in the Company's products is
internally developed software of varying applications. Historically, the Company
has not sold or marketed its software separately or otherwise licensed its
software apart from the related communications equipment. Should the Company
begin to market or sell software whereby it is more than an incidental component
of the hardware, the Company will recognize software license revenue in
accordance with SOP No. 97-2, "Software Revenue Recognition," as amended by SOP
No. 98-9, "Software Revenue Recognition, with Respect to Certain Transactions."
8
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," the Company included all shipping and handling billings to customers
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.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standard (SFAS) No 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," but applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations, in
accounting for its plans. Under APB No. 25, when the exercise price of employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The following table includes disclosures required by SFAS No. 123, as amended by
SFAS No. 148, and illustrates the effect on net earnings (loss) and net earnings
(loss) per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123:
Three months ended Nine months ended
--------------------------------------------------------
MAY 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Net loss
As Reported $(356,641) $122,968 $(1,460,573) $(129,921)
Deduct:
Compensation cost
using the fair value
method, net of tax (39,384) - (101,695) (47,663)
- --------------------------------------------------------------------------------
Pro Forma $(396,025) $122,968 $(1,562,268) $(177,584)
- --------------------------------------------------------------------------------
Loss per share
As Reported
Basic $ (.03) $ .01 $ (.12) $ (.01)
Diluted (.03) .01 (.12) (.01)
Pro Forma
Basic (.03) .01 (.13) (.01)
Diluted (.03) .01 (.13) (.01)
- --------------------------------------------------------------------------------
9
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Three months ended Nine months ended
-----------------------------------------------------
MAY 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Risk free interest rate - - 4.00% 4.84%
Expected term - - 2.8 YEARS 3 years
Volatility - - 90% 75%
Expected annual dividends - - NONE none
- --------------------------------------------------------------------------------
The weighted average fair value of options granted was as follows:
Three months ended Nine months ended
-----------------------------------------------------
MAY 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Per share option value - - $ 1.23 $ .52
Aggregate total - - $474,230 $9,930
- --------------------------------------------------------------------------------
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 revenues 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 year 2004 contains fifty-three weeks while
fiscal 2003 contained fifty-two weeks.
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
MAY 28, August 29,
2004 2003
- --------------------------------------------------------------------------------
(UNAUDITED)
Accounts receivable - trade $3,272,366 $3,838,644
Other receivables 76,843 76,143
- --------------------------------------------------------------------------------
3,349,209 3,914,787
Less allowance for
doubtful accounts (394,685) (354,660)
- --------------------------------------------------------------------------------
$2,954,524 $3,560,127
- --------------------------------------------------------------------------------
10
NOTE 4 INVENTORIES
Inventories are summarized as follows:
MAY 28, August 29,
2004 2003
- --------------------------------------------------------------------------------
(UNAUDITED)
Raw material $2,329,613 $2,347,542
Work-in-process 1,199,133 951,078
Finished goods 2,210,664 2,334,578
- --------------------------------------------------------------------------------
5,739,410 5,633,198
- --------------------------------------------------------------------------------
Less inventory reserves (3,467,489) (3,490,363)
- --------------------------------------------------------------------------------
$2,271,921 $2,142,835
- --------------------------------------------------------------------------------
During the first nine months of fiscal 2004 inventory reserves were reduced by
inventory write-offs of $248,000 and increased by provisions of $225,000. The
Company's inventory reserve of approximately $3,467,000 at May 28, 2004 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 is reasonably possible should the
Company's sales efforts not be successful.
NOTE 5 OTHER ASSETS
Other assets consisted of the following:
MAY 28, 2004
- -----------------------------------------------------------------------------
COST ACCUMULATED NET
AMORTIZATION
- -----------------------------------------------------------------------------
License agreements $ 570,000 $(169,329) $400,671
Patents 344,609 - 344,609
Trademarks 71,109 (503) 70,606
Loan facility fees 50,000 (45,833) 4,167
Other 6,889 - 6,889
$1,042,607 $(215,665) $826,942
August 29, 2003
- -----------------------------------------------------------------------------
Cost Accumulated Net
Amortization
- -----------------------------------------------------------------------------
Loan facility fees $ 570,000 $ (82,500) $487,500
Patents 174,369 - 174,369
Trademarks 41,578 - 41,578
Loan facility fees 50,000 (8,333) 41,667
Other 6,889 - 6,889
- -----------------------------------------------------------------------------
$ 842,836 $ (90,833) $752,003
- -----------------------------------------------------------------------------
Amortization expense of other assets for the three and nine months ended May 28,
2004, amounted to $41,000 and $125,000, respectively. Amortization expense of
other assets for the three and nine months ended May 30, 2003, amounted to
$40,000 and $92,500, respectively.
11
The Company conducts an ongoing review of its intellectual property rights and
potential trademarks. As of May 28, 2004, the Company incurred $329,000 and
$47,000 of legal expenses related to the filing of applications for various
patents and trademarks, respectively. Upon issuance, these costs will be
amortized on a straight-line basis over the lesser of the legal life of the
patents and trademarks or their estimated useful lives. At May 28, 2004, the
cost of registered trademarks amounted to $11,000. License agreements are
amortized over their estimated useful life of five years. Loan facility fees are
amortized over twelve months.
NOTE 6 INCOME TAXES
For the nine months ended May 28, 2004, the income tax benefit of $668,000 was
comprised of deferred federal and state income tax benefits of $626,000 and
$42,000, respectively. Net deferred tax assets increased $668,000 to $3,806,000,
principally due to an increase in net operating loss carryforwards in the first
nine months. At May 28, 2004, a valuation allowance of $98,000 was recorded
related to general business and foreign tax credits of $98,000, which expire
September 3, 2004. 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 deferred tax assets net of valuation allowances 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 further reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
At May 28, 2004, the Company had a federal net operating loss carryforward of
approximately $5,382,000, which expires beginning fiscal 2020 through fiscal
2024. Additionally, the Company had general business and foreign tax credit
carryforwards of $98,000, expiring in fiscal 2004, which are fully offset by a
valuation allowance, an alternative minimum tax credit of $138,000 and state
income tax credits of $199,000 expiring in fiscal 2009.
NOTE 7 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 28, 2004 May 30, 2003
---------------------------------------------------------------------------------------------
Per
EARNINGS SHARES PER SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
------------- ------------ --------- ----------- ------------ -------
Net earnings (loss) $(356,641) $122,968
========= ========
BASIC EARNINGS PER SHARE:
Net earnings (loss) available
to common shareholders $(356,641) 12,483,348 $(.03) $122,968 12,351,158 $ .01
Effect of dilutive
potential common shares:
Stock options - - - 137,054
---------------------------- ---------------------------
DILUTED EARNINGS PER SHARE:
Net earnings available
to common shareholders $(356,641) 12,483,348 $(.03) $122,968 12,488,212 $ .01
============================ ===========================
12
Nine months ended
--------------------------------------------------------------------------------------------
MAY 28, 2004 May 30, 2003
----------------------------------------- ------------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------ ------- ---------- ----------- --------
Net earnings (loss) $(1,460,573) $(129,921)
=========== =========
BASIC EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $(1,460,573) 12,432,246 $(.12) $(129,921) 12,313,314 $( .01)
Effect of dilutive potential
common shares:
Stock options - - - -
----------------------------- ---------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $(1,460,573) 12,432,246 $(.12) $(129,921) 12,313,314 $( .01)
============================= ====== =========================== =======
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 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
-------------------------------------------------------------------
Common stock options:
Number of shares 1,640,781 761,050 1,640,781 1,303,425
Exercise price $ .63 TO $5.63 $1.41 to $5.63 $ .63 TO $5.63 $ .84 to $5.63
===================================================================
NOTE 8 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 revenues as
follows:
Three months ended Nine months ended
------------------------------- --------------------------------
MAY 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
----------------------------------------------------------------------
Product Line
Direct Broadcast Satellite $4,348,494 $5,826,093 $12,878,456 $14,000,804
Telecom and Custom Products 301,535 282,334 907,190 1,012,994
Service 127,365 146,032 454,876 404,931
----------------------------------------------------------------------
$4,777,394 $6,254,459 $14,240,522 $15,418,729
======================================================================
13
Revenues by geographic area are as follows:
Three months ended Nine months ended
------------------------------------------------------------------------
MAY 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
------------------------------------------------------------------------
Geographic Area
United States $4,627,143 $6,028,665 $13,814,369 $14,789,642
Latin America 3,407 44,807 61,212 196,566
Canada 117,341 88,120 230,459 207,835
Europe 9,864 21,893 73,035 127,943
Other 19,639 70,974 61,447 96,743
------------------------------------------------------------------------
$4,777,394 $6,254,459 $14,240,522 $15,418,729
========================================================================
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 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
---------------------------------------------------------------------
Customer 1 37.0% 31.6% 38.1% 39.1%
Customer 2 11.9% 26.8% 10.2% 20.4%
Customer 3 11.3% (A) (A) (A)
Customer 4 (A) 12.2% (A) (A)
(a) Revenues for the period were less than 10% of total revenues.
NOTE 9 COMMITMENTS
During the second quarter of fiscal 2003, the Company entered into two
manufacturing and purchasing agreements for certain finished goods inventories.
The agreement committed the Company to purchase $2,116,000 over an eighteen
month period, beginning in the third quarter of fiscal 2003. During the first
nine months of fiscal 2004, purchase commitments were increased by $1,552,000.
At May 28, 2004, outstanding purchase commitments under these two agreements
amounted to $2,441,000. In addition, the Company maintains 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 $1,599,000 at May 28, 2004.
Pursuant to the above agreements, at May 28, 2004, the Company had outstanding
letters of credit in the amount of $3,678,000.
During the first quarter of fiscal 2004, the Company entered into a two-year
agreement aggregating $870,000 for engineering design and software development
services. At May 28, 2004, the outstanding commitment under the agreement was
$616,000.
NOTE 10 GUARANTEES AND WARRANTY LIABILITY
Warranty
The Company warrants its products for a twelve-month period beginning at the
date of shipment. The warranty provides for repair or replacement of defective
products returned during the warranty period at no cost to the customer. The
Company expenses costs for routine warranty repairs as incurred. Additional
provisions are made for non-routine warranty repairs based on estimated costs to
repair at the point in time in which the warranty claim is identified. Accrued
warranty provisions amounted to $66,000 at May 28, 2004. There were no changes
to the warranty accrual for the three and nine month periods ended May 28, 2004.
14
Letters of Credit
Wegener Communications Inc., the Company's wholly owned subsidiary (WCI),
provides standby letters of credit to certain suppliers in the ordinary course
of business pursuant to manufacturing and purchasing agreements. At May 28,
2004, outstanding letters of credit amounted to $3,678,000.
Financing Agreements
The Company guarantees the bank loan facility of WCI. The bank facility provides
a maximum available credit limit of $5,000,000. At May 28, 2004, no balances
were outstanding on the loan facility.
NOTE 11 STOCK OPTIONS
During the first nine months of fiscal 2004, options for 100,000 shares of
common stock, exercisable at $2.39, were granted pursuant to a consulting
agreement to provide software development services. The fair value of the
options was measured on the grant date using the Black-Scholes option pricing
model. As the options were fully vested and nonforfeitable, the fair value of
$139,800 was charged to research and development expenses during the nine months
ended May 28, 2004, in accordance with EITF 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Additionally, during the first
nine months of fiscal 2004, other stock option activity included grants of
options to employees to purchase 368,156 shares at a weighted average exercise
price of $2.21, and grants of options to outside directors to purchase 19,000
shares at a weighted average exercise price of $2.38. Options for 141,800 shares
with exercise prices ranging from $.84 to $2.31 were exercised and options for
33,000 shares were forfeited. At May 28, 2004, options for 1,640,781 shares of
common stock were outstanding with a weighted average exercise price of $1.90
and with exercise prices ranging from $.63 to $5.63. At May 28, 2004, options
for 485,419 shares of common stock were available for issuance under the 1998
Incentive Plan.
15
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, 2003, contained in the Company's 2003 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 29, 2003, and from time to time in the
Company's periodic Securities and Exchange Commission filings.
The Company, through Wegener(TM) 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.
OVERVIEW
STRATEGY
We believe that we have the right products for growth in our target markets,
particularly the iPump(TM) Media Server product line. However, to date our new
order bookings and operational performance have not met our expectations due
primarily to a longer than anticipated sales cycle for our new products. While
customer interest in our new products remains high, it is difficult to predict
with certainty the timing of orders and realization of revenues. Due to this
current lack of visibility, it does not appear that our fourth quarter revenues
will reach a level sufficient to avoid an operating loss in the fourth quarter
of this fiscal year.
Our current focus is to increase new order bookings and revenues with respect to
the new products we have released to the market. Based on high levels of
customer interest in the iPump Media Server product line, significant numbers of
quotes for the product are outstanding. However, the conversion of quotes to
orders has been slower than we anticipated. We continue to believe that the
iPump Media Server and supporting systems are the best solutions for our
customers and anticipate that orders will increase as the customers convert to
the new technology. Product acceptance of the DTV 700 series product line is
underway with major cable Multiple System Operators (MSOs).
Third party offshore contract manufacturers are being used for high volume
products, such as the Unity(R) 4600, iPump and other products to secure
competitive product pricing. Additionally, key partnerships continue to develop
with complementary companies in our market space to meet customer demands for
complete network solutions. Internally, we continue to focus on maintaining ISO
9001:2000 certification.
The rebranding of our corporate image was unveiled at the National Association
of Broadcasters (NAB) tradeshow in April 2004. We have received a very positive
response from our customers and are now marketing our products under the new
Wegener brand.
16
CURRENT DEVELOPMENTS
During the third quarter of fiscal 2004, we continued development and
introduction of our new generation of products in the following four product
lines. We anticipate the new product introductions will drive renewed interest
from enterprise, cable and broadcast customers.
1) iPump Media Servers began shipping during the first half of the fiscal
year. During the third quarter of fiscal 2004, we introduced new versions
of iPump products to support the many needs we see for the product family.
Ascent Media has accepted the iPump platform based on their field tests
and third quarter shipments included additional iPump Servers beyond the
field test pilot units.
WEGENER iPump is a digital media server that combines the features of a
professional satellite television receiver and decoder with the advantages
of a video server. Network operators can reduce their satellite space
segment by storing programming in the WEGENER iPump and scheduling play
times for it. Utilizing this method, the operator can utilize limited
satellite time to refresh the programming and play-out schedules without
the necessity to maintain a constant signal on the satellite.
Simultaneously, content can be transmitted as files, recorded real-time to
disk, or input via digital video decoder (DVD) reader with the iPump Media
Server. File delivery can be slower or faster than real-time delivery
depending upon the transfer available bandwidth.
Spot segments can be played back and switched into a live program
providing local and customized content insertion. Spot playback may be
confirmed with an Internet Protocol (IP) connection to the content
management system to validate that a spot has been played on time and at
the right schedule. Advanced error detection techniques are combined with
an IP terrestrial return path to ensure file delivery to an iPump network.
Customers are assured that files are delivered to targeted iPump media
servers. iPump supports streaming video and audio services via routing,
recording or direct playback from the iPump. Streaming video and audio can
be provided to a local area network directly from an iPump. Streaming
services can be delivered to multiple end users simultaneously.
The potential applications for the iPump are:
Broadcasting
o Regional Advertising
o Time-Shifted Programming
o News Distribution
Cable Programming
o Regional Ad Insertion
o Segment Spot Distribution by Group or Region
o Video on Demand
Business Television
o Distance Learning, Educational Purposes
o Customized Training by Site
o Retail Point-of-Sale Displays or Kiosks
o Corporate Communications
Internet and File Delivery
o Streaming Media On-Demand
o IP Data Distribution
o Multi-Format File Distribution
The recently introduced WEGENER iPump 615 Streaming Media Decoder is a
peripheral decoder for the iPump 6400 Professional Media Server. It
receives an Internet Protocol stream from the iPump 6400 and outputs audio
and video. Utilizing the iPump 6400 and adding iPump 615 units as needed,
networks can serve multiple media programs simultaneously to their
customers.
The iPump 615 is ideally suited for retail point-of-sale kiosks and
corporate communications.
17
2) MediaPlan(R) i/o and MediaPlan(R) CM products, modules to our patented
Compel Control(R) System, were introduced during the first half of the
fiscal year. The MediaPlan products are crucial for customers in
controlling iPump Media Servers and are a competitive advantage for us in
sales of iPump Media Servers. Two iPump customers are currently field
testing the MediaPlan products, and we anticipate the field tests will
convert to MediaPlan orders in the coming months.
MediaPlan i/o is a desktop system to encode, store, edit and add files
with associated data (metadata) to media content. MediaPlan i/o teams a
professional video/audio encoder with a user-friendly system for adding
metadata. It also converts analog audio/video to media files.
MediaPlan CM is a powerful content management system used for managing
assets and delivering them to clients. Operators can actively track
content throughout the iPump network. Its flexible metadata authoring
tools allow seamless integration to any existing metadata formats.
WEGENER's new MediaPlan System provides:
o Tracking of content and other digital files when stored in the iPump
Media Servers at the edge of the network, so network operators
maintain control of the content throughout their networks.
o Local management and advanced search of digital files to allow quick
access to huge libraries of content and digital files.
o Attachment of metadata to files, including matching of existing
metadata templates, to allow descriptive and control parameters to
be added to the digital files.
o Delivery of the digital files to the iPump Media Servers utilizing
patented Compel Network Control grouping functions for delivery to
targeted users.
o Advanced user permissioning to allow multiple users simultaneous
access to the system with different views per client.
3) The Unity 4600 Professional Receiver Decoder began shipping in volume
during the first half of the fiscal year. Fox Cable Networks continued to
use the Unity 4600 for new standard definition and high definition
television networks throughout the third quarter of fiscal 2004 and is
expected to use the product during the remainder of the fiscal year. HDNet
and HDNet Movies have transitioned new shipments of receivers to the Unity
4600 from legacy Unity 4422 receivers. The third quarter Unity 4600
shipments did not contribute significantly to revenues for the quarter.
4) The DTV 742 product was introduced to the market during the third quarter
of fiscal 2004. Both the DTV 742 and DTV 744 began shipping to customers
during the quarter. Charter, Time Warner and Adelphia have all approved
the DTV 744 for purchase by their affiliates.
Our DTV products allow cable operators to use less rack space by
processing four off-air television signals in a single rack unit. It makes
local high definition content readily available for insertion into digital
cable plants.
FINANCIAL POSITION AND LIQUIDITY
We have no long-term debt or line of credit borrowings outstanding at May
28, 2004. Our cash and cash equivalents were $2,889,000 at May 28, 2004.
Our $5,000,000 bank loan facility, which is subject to availability
advance formulas based on eligible accounts receivable and inventories, is
currently being used to support import letters of credit issued to our
offshore manufacturers, which at May 28, 2004 amounted to $3,678,000. At
May 28, 2004, approximately $661,000 net of the outstanding letters of
credit was available to borrow under the advance formulas. The Company
believes that the loan facility along with cash and cash equivalent
balances will be sufficient to support operations over the next twelve
months. The Company expects bookings for new products to result in
increased revenues during fiscal 2005, which could require an increase in
the credit limit primarily to support increases in import letter of credit
balances. While no assurances may be given, WCI believes additional credit
limits would be made available under the existing line of credit to
support borrowing requirements resulting from increased revenues.
18
Should the bookings and revenue for the new products not materialize, the
Company is committed to reducing operating costs to bring them in line with
revenue levels.
(See the Liquidity and Capital Resources section on page 22 for further
discussion.)
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MAY 28, 2004 COMPARED TO THREE AND NINE MONTHS ENDED
MAY 30, 2003
The following table sets forth, for the periods indicated, the components of the
results of operations as a percentage of sales:
Three months ended Nine months ended
-------------------------------------------------------------------
MAY 28, May 30, MAY 28, May 30,
2004 2003 2004 2003
-------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 70.9 61.0 72.9 63.6
Gross margin 29.1 39.0 27.1 36.4
Selling, general, and administrative 24.1 25.5 25.6 24.3
Research & development 16.6 10.5 16.2 13.4
Operating income (loss) (11.5) 3.1 (14.7) (1.3)
Interest expense (0.7) ( .3) (0.5) ( .3)
Interest income 0.5 .2 0.3 .3
Earnings (loss) before income taxes (11.7) 3.1 (14.9) (1.3)
Income tax expense (benefit) (4.2) 1.1 (4.7) ( .5)
Net earnings (loss) (7.5)% 2.0% (10.3)% ( .8)%
===================================================================
The operating results for the three and nine month periods ended May 28, 2004,
were a net loss of $(357,000) or $(.03) per share and a net loss of $(1,461,000)
or $(.12) per share, compared to net earnings of $123,000 or $ .01 per share and
a net loss of $(130,000) or $(.01) per share for the same periods ended May 30,
2003.
While we believe that we have the right products for growth in the markets we
serve, to date our bookings and operational performance have not met our
expectations primarily due to a longer than anticipated sales cycle for our new
products. While customer interest in our new products remains high, it is
difficult to predict with certainty the timing of orders and revenues. Based on
the current level of orders for shipment in the fourth quarter of fiscal 2004,
it does not appear that our revenues in that period will reach a level
sufficient to avoid an operating loss.
REVENUES - The Company's revenues for the three months ended May 28, 2004 were
$4,777,000, down 23.6% from revenues of $6,254,000 for the three months ended
May 30, 2003. Revenues for the nine months ended May 28, 2004 were $14,241,000,
down 7.6% from revenues of $15,419,000 for the nine months ended May 30, 2003.
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.
Direct Broadcast Satellite (DBS) revenues (including service revenues) decreased
$1,496,000 or 25.1% in the third quarter of fiscal 2004 to $4,476,000 from
$5,972,000 in the same period of fiscal 2003. For the nine months ended May 28,
2004 DBS revenues decreased $1,072,000 or 7.4% to $13,333,000 from $14,406,000
for the nine months ended May 30, 2003. DBS revenues and bookings were adversely
impacted by delayed purchasing decisions in the digital satellite transmission
market and particularly by a longer than expected sales cycle for the iPump
Media Server and DTV 700 series products. The third quarter of fiscal 2004
included continued shipments of equipment to Autotote Communications for network
upgrades and expansion and to Ascent Media for new cable network applications
and expansion of private video networks. Both customers' shipments included
deliveries of iPump Media Servers for their network applications.
Telecom and Custom Products Group revenues increased $19,000 or 6.8% in the
third quarter of fiscal 2004 to $302,000 from $282,000 for the comparable period
of fiscal 2003. For the nine months ended May 28, 2004, Telecom and Custom
Products Group revenues decreased $106,000 or 10.4% to $907,000 from $1,013,000
for the nine months ended May 30, 2003.
19
For the three months ended May 28, 2004, three customers accounted for 37.0%,
11.9%, and 11.3% of revenues, respectively. For the three months ended May 30,
2003, three customers accounted for 31.6%, 26.8%, and 12.2% of revenues,
respectively. For the nine months ended May 28, 2004, two customers accounted
for 38.1% and 10.2% of revenues, respectively. For the nine months ended May 30,
2003, two customers accounted for 39.1% and 20.4% 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 2004 and beyond. The Company's backlog is comprised of
undelivered, firm customer orders, which are scheduled to ship within eighteen
months. WCI's backlog was approximately $12,900,000 at May 28, 2004, compared to
$12,700,000 at August 29, 2003, and $12,300,000 at May 30, 2003. Two customers
accounted for 74.0 % and 21.2%, respectively, of the backlog at May 28, 2004.
The total multi-year backlog at May 28, 2004, was approximately $20,300,000.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 29.1%
and 27.1% for the three and nine month periods ended May 28, 2004, compared to
39.0% and 36.4% for the three and nine month periods ended May 30, 2003. Gross
profit margin dollars decreased $1,049,000 and decreased $1,752,000 for the
three and nine month periods ended May 28, 2004, respectively, from the same
periods ended May 30, 2003. For the three and nine months ended May 28, 2004,
gross margin dollars and percentages were unfavorably impacted primarily by
lower revenues, an increase of $390,000 in capitalized software amortization
expense and an increase of $125,000 in inventory reserve expenses. The product
mix for the nine months ended May 28, 2004 included increased amounts of lower
margin reseller uplink equipment compared to the same period of fiscal 2003. For
the nine months ended May 28, 2004, reseller equipment comprised approximately
7.2% of sales compared to 3.4% for the same period of fiscal 2003. Capitalized
software amortization expense increased $140,000 or 61.6% and $390,000 or 63.8%
in the third quarter and first nine months of fiscal 2004 compared to the same
periods of fiscal 2003. Profit margins in the three and nine month periods of
fiscal 2004 included inventory reserve charges of $75,000 and $225,000 compared
to none and $100,000 for the same periods of fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses decreased $441,000 or 27.7% to $1,151,000 for the three months ended
May 28, 2004, from $1,592,000 for the same period of fiscal 2003. For the nine
months ended May 28, 2004, SG&A expenses decreased $103,000 or 2.8% to
$3,650,000 from $3,754,000 for the same period of fiscal 2003. SG&A expenses in
the third quarter and first nine months of fiscal 2004 included an insurance
reimbursement of $191,000 for a portion of corporate legal costs expensed in
fiscal 2003 related to defending the Company against an unsolicited, hostile
takeover attempt by Radyne ComStream, Inc. SG&A expenses in the third quarter
and first nine months of fiscal 2003 included $809,000 in corporate legal and
professional fees related to defending the Company against the unsolicited,
hostile takeover attempt by Radyne ComStream, Inc. and an insurance
reimbursement of $265,000 for a portion of WCI legal costs related to a lawsuit
alleging patent infringement. For the three months ended May 28, 2004, sales and
marketing salary expenses increased $82,000 due to the addition of three people,
marketing expenses increased $106,000 due to increased sales activity related to
new products, and SG&A overhead expenses increased $59,000. For the nine months
ended May 28, 2004, sales and marketing salary expenses increased $241,000,
marketing expenses increased $110,000, and SG&A overhead expenses increased
$138,000. For the three and nine months ended May 28, 2004, corporate
professional fees, excluding the $191,000 insurance reimbursement, increased
$86,000 and $335,000 compared to the same periods of fiscal 2003 (excluding the
2003 takeover defense costs of $809,000). As a percentage of revenues, SG&A
expenses were 24.1% and 25.6% for the three and nine month periods ended May 28,
2004, respectively, compared to 25.5% and 24.3% for the same periods of fiscal
2003.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $1,174,000 or 24.6% of revenues,
and $3,668,000 or 25.8% of revenues, for the three and nine month periods ended
May 28, 2004, compared to $1,097,000 or 17.5% of revenues, and $2,926,000 or
19.0% of revenues, for the same periods of fiscal 2003. Capitalized software
development costs amounted to $382,000 and $1,360,000 for the third quarter and
first nine months of fiscal 2004 compared to $442,000 and $861,000 for the same
periods of fiscal 2003. The increases in capitalized software costs in the first
nine months of fiscal 2004 are due to increased expenditures on COMPEL network
control software, the iPump Media Server, UNITY4600 and DTV700 series products.
Research and development expenses, excluding capitalized software expenditures,
were $792,000 or 16.6% of revenues, and $2,308,000 or 16.2% of revenues, for the
three and nine months ended May 28, 2004, respectively, compared to $655,000 or
10.5% of revenues, and $2,064,000 or 13.4% of revenues for the same periods of
fiscal 2003, respectively. The increases in expenses for the three and nine
months ended May 28, 2004, are mainly due to increased engineering consulting
expenses, net of amounts capitalized as software development costs. The
expenditures for research and development for the fourth quarter of fiscal 2004
are expected to be comparable to those of the third quarter.
20
INTEREST EXPENSE - Interest expense increased $13,000 to $31,000 for the three
months ended May 28, 2004 as compared to fiscal 2003. For the nine months ended
May 28, 2004, interest expense increased $24,000 to $74,000 as compared to the
same period in fiscal 2003. The increases for the three and nine month periods
in fiscal 2004 were primarily due to an increase in the average outstanding
letter of credit commitment balances.
INTEREST INCOME - Interest income was $24,000 and $38,000 for the three and nine
month periods ended May 28, 2004, compared to $15,000 and $48,000 for the same
periods ended May 30, 2003. The three and nine month periods ended May 28, 2004,
included a one time benefit of $19,000 related to the collection of a trade
accounts receivable.
INCOME TAX EXPENSES - For the nine months ended May 28, 2004, income tax benefit
of $668,000 was comprised of a deferred federal and state tax benefit of
$626,000 and $42,000, respectively. For the nine months ended May 28, 2004, the
federal deferred tax benefit was offset by a valuation allowance of $98,000
related to general business and foreign tax credits of $98,000, which expire
September 3, 2004. Net deferred tax assets increased $668,000 in the first nine
months of fiscal 2004 to $3,806,000, principally due to increases in net
operating loss carryforwards during the period. Realization of deferred tax
assets is dependent on generating sufficient future taxable income prior to the
expiration of the loss and credit carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax assets will be realized. The amount of the tax assets considered realizable,
however, could be further reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America which
require management to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures of
contingent assets and liabilities at the date of the financial statements. These
estimates are reviewed on an ongoing basis and are based on historical
experience and various other assumptions and factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgements about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or future conditions.
We believe the following critical accounting policies affect our more
significant judgements and estimates used in the preparation of our consolidated
financial statements.
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 revenues 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. For the three and nine months ended May 28, 2004, revenues to one
customer in the amount of $1,246,000 and $3,911,000 respectively, were
appropriately recorded prior to delivery as bill and hold transactions in
accordance with the provisions of SAB 101. At May 28, 2004, accounts receivable
for these revenues amounted to $1,246,000 and were paid in full subsequent to
May 28, 2004.
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.
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 28, 2004, inventories, net of
reserve provisions, amounted to $2,272,000.
21
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 May 28, 2004, capitalized software costs,
net of accumulated amortization, amounted to $1,664,000.
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 May 28, 2004, deferred tax assets amounted to $3,806,000, of which
approximately $1,936,000 relates to net operating loss carryforwards which
expire in fiscal 2020 through 2024, an alternative minimum tax credit of
$138,000 and state income tax credits of $199,000 expiring in fiscal 2009.
ACCOUNTS RECEIVABLE VALUATION - The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required. At May 28, 2004, accounts
receivable net of allowances for doubtful accounts amounted to $2,955,000.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED MAY 28, 2004
At May 28, 2004, the Company's primary sources of liquidity were cash and cash
equivalents of $2,889,000 and a $5,000,000 bank loan facility, which is subject
to availability advance formulas based on eligible accounts receivable and
inventories. At May 28, 2004, approximately $661,000, net of outstanding letters
of credit in the amount of $3,678,000, was available to borrow under the advance
formulas. Cash and cash equivalents decreased $1,324,000 during the first nine
months of fiscal 2004.
During the first nine months of fiscal 2004, operating activities provided
$275,000 of cash. Net loss adjusted for non-cash expenses used $132,000 of cash,
while changes in accounts receivable and customer deposit balances provided
$616,000 of cash. Changes in accounts payable and accrued expenses, inventories
and other assets used $209,000 of cash. Cash used by investing activities was
$242,000 for property and equipment expenditures, $1,360,000 for capitalized
software additions and $200,000 for legal expenses related to the filing of
applications for various patents and trademarks. Financing activities used cash
of $4,300 for scheduled repayments of long-term debt. Proceeds from stock
options exercised provided $208,000 of cash.
WCI's bank loan facility was renewed subsequent to May 28, 2004, and provides a
maximum available credit limit of $5,000,000 subject to availability advance
formulas. The loan facility matures on June 30, 2006, or upon demand, and
requires an annual facility fee of .75% 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 (4.00%
at May 28, 2004).
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, 40% to 50% of eligible finished goods
inventories and 50% of import letter of credit commitment balances. The loan
facility is secured by a first lien on substantially all of WCI's assets and is
guaranteed by Wegener Corporation. At May 28, 2004, no balances were outstanding
on the revolving line of credit or the equipment term loan portions of the loan
facility. The loan facility is currently being used to support import letters of
credit issued to offshore manufacturers, which at May 28, 2004 amounted to
$3,678,000. At May 28, 2004, approximately $661,000, net of outstanding letters
of credit, was available to borrow under the advance formulas.
22
The Company is required to maintain a minimum tangible net worth with annual
increases at each fiscal year end commencing with fiscal year 2005, retain
certain key employees, limit expenditures of the Company to $1,250,000 per
fiscal year, maintain certain financial ratios, and is precluded from paying
dividends. At May 28, 2004, the Company was in compliance with all loan facility
covenants. The Company believes that the loan facility along with cash and cash
equivalent balances will be sufficient to support operations over the next
twelve months. The Company expects bookings for new products to result in
increased revenues during fiscal 2005, which could require an increase in the
credit limit primarily to support increases in import letter of credit balances.
While no assurances may be given, WCI believes additional credit limits would be
made available under the existing line of credit to support borrowing
requirements resulting from increased revenues. Should the bookings and revenue
for the new products not materialize, the Company is committed to reducing
operating costs to bring them in line with revenue levels.
During the second quarter of fiscal 2003, the Company entered into a
manufacturing and purchasing agreement for certain finished goods inventories.
The agreement committed the Company to purchase $2,116,000 over an
eighteen-month period, beginning in the third quarter of fiscal 2003. During the
first nine months of fiscal 2004, purchase commitments were increased by
$1,552,000. At May 28, 2004, outstanding purchase commitments under these two
agreements amounted to $4,799,000. In addition, the Company maintains 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 $1,599,000 at May 28,
2004. Pursuant to the above agreements, at May 30, 2003, the Company had
outstanding letters of credit in the amount of $3,678,000.
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 May 28, 2004 consisted of:
Payments Due by Period
Fiscal Fiscal Fiscal Fiscal
Contractual Obligations Total 2004 2005-2006 2007-2008 2009
- ------------------------ -----------------------------------------------------------------------
Operating leases $ 183,000 $ 56,000 $121,000 $4,000 $2,000
Purchase commitments 7,015,000 6,507,000 508,000 - -
-----------------------------------------------------------------------
Total $ 7,198,000 $6,563,000 $629,000 $4,000 $2,000
=======================================================================
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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
May 28, 2004 subject to variable interest rate fluctuations.
At May 28, 2004, the Company's cash equivalents consisted of bank commercial
paper in the amount of $2,889,000. 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
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 as of the end
of the period covered by this report. Based upon that evaluation, the Company's
CEO and CFO have concluded that the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) are effective. There has been no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jerry Leuch, Plaintiff, v. Robert A. Placek, Thomas G. Elliot, Joe K.
Parks, C. Troy Woodbury, Jr., Wendell Bailey, Ned Mountain and Wegener
Corporation, Civil Action No.20361-NC On June 20, 2003, Jerry Leuch
commenced an action styled as a direct class action and a derivative
action against Robert A. Placek, Thomas G. Elliot, Joe K. Parks, C. Troy
Woodbury, Jr., Wendell Bailey, Ned Mountain and Wegener Corporation in the
Court of Chancery of the State of Delaware, In and For New Castle County.
The Plaintiff alleged that the individual defendants violated their
fiduciary duties due to him and other shareholders, the members of the
alleged class, as well as Wegener. The relief sought by Plaintiff
included: a declaration that the Defendants must consider and evaluate all
bona fide offers to purchase all of the outstanding shares of Wegener
consistent with their fiduciary duties; a declaration that this action is
properly styled as a class action; an injunction against proceeding with
any business combination which benefited the individual defendants and an
injunction requiring that any conflicts of interest be resolved in favor
of the Wegener shareholders; and a declaration removing the anti-takeover
measures enacted by Wegener's Board of Directors. The Complaint sought an
award of Plaintiff's costs and attorneys' and other fees. An answer was
filed by Wegener, denying all substantive allegations in the complaint. On
January 9, 2004, the Complaint was dismissed without prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 Loan and Security Agreement - Sixth Amendment dated July 9, 2004,
by and between Wegener Communications, Inc. and LaSalle National
Bank respecting $5,000,000 combined revolving credit note and term
note.
31.1 Certification of Chief Executive Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 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 :
Current Report on Form 8-K dated April 13, 2004, furnishing its press
release regarding its results for the second fiscal quarter ended February
27, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEGENER CORPORATION
------------------------
(Registrant)
Date: July 9, 2004 By: /s/ Robert A. Placek
----------------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: July 9, 2004 By: /s/ C. Troy Woodbury, Jr.
----------------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
26