UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 4, 2005
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 12,574,051 Shares
- ---------------------------- -------------------------------
Class Outstanding March 28, 2005
WEGENER CORPORATION
Form 10-Q For the Quarter Ended March 4, 2005
INDEX
PART I. Financial Information
Item 1. Consolidated Financial Statements
Introduction..........................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Six Months Ended
March 4, 2005 and February 27, 2004...................................4
Consolidated Balance Sheets - March 4,
2005 (Unaudited) and September 3, 2004................................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Six Months Ended March 4,
2005 and February 27, 2004............................................6
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended March 4,
2005 and February 27, 2004............................................7
Notes to Consolidated Financial
Statements (Unaudited).............................................8-15
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations.............................................16-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........22
Item 4. Controls and Procedures..............................................23
PART II. Other Information
Item 1. None
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders..................24
Item 5. None
Item 6. Exhibits.............................................................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 March 4, 2005; the consolidated statements
of shareholders' equity as of March 4, 2005, and February 27, 2004; the
consolidated statements of operations for the three and six months ended March
4, 2005, and February 27, 2004; and the consolidated statements of cash flows
for the six months ended March 4, 2005, and February 27, 2004, have been
prepared without audit. The consolidated balance sheet as of September 3, 2004
has been audited 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 September 3, 2004, File No. 0-11003.
In the opinion of the Company, the statements for the unaudited interim periods
presented include all adjustments, which were of a normal recurring nature,
necessary to present a fair statement of the results of such interim periods.
The results of operations for the interim periods presented are not necessarily
indicative of the results of operations for the entire year.
3
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------
Revenue $ 6,336,557 $ 4,712,923 $ 12,742,628 $ 9,463,128
- ---------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 3,914,539 3,514,612 7,925,967 6,990,149
Selling, general and administrative 1,442,936 1,278,832 2,848,309 2,499,463
Research and development 771,784 774,196 1,575,014 1,515,437
- ---------------------------------------------------------------------------------------------------------
Operating costs and expenses 6,129,259 5,567,640 12,349,290 11,005,049
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) 207,298 (854,717) 393,338 (1,541,921)
Interest expense (14,692) (23,714) (29,632) (42,575)
Interest income 7,298 9,167 10,083 13,564
- ---------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 199,904 (869,264) 373,789 (1,570,932)
Income tax expense (benefit) 72,000 (214,000) 134,000 (467,000)
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 127,904 $ (655,264) $ 239,789 $ (1,103,932)
=========================================================================================================
Net earnings (loss) per share:
Basic $ .01 $ (.05) $ .02 $ (.09)
Diluted $ .01 $ (.05) $ .02 $ (.09)
=========================================================================================================
Shares used in per share calculation
Basic 12,560,260 12,416,820 12,548,320 12,406,695
Diluted 12,887,099 12,416,820 12,805,503 12,406,695
=========================================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 4, September 3,
2005 2004
- ---------------------------------------------------------------------------------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 1,071,282 $ 1,520,761
Accounts receivable 4,800,090 2,479,712
Inventories 3,378,216 3,839,840
Deferred income taxes 2,111,000 2,199,000
Other 147,361 283,291
- ---------------------------------------------------------------------------------------
Total current assets 11,507,949 10,322,604
Property and equipment, net 2,658,784 2,699,502
Capitalized software costs, net 1,803,779 1,667,632
Deferred income taxes 1,924,000 1,970,000
Other assets 814,120 835,878
- ---------------------------------------------------------------------------------------
$ 18,708,632 $ 17,495,616
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 2,313,253 $ 1,293,564
Accrued expenses 1,969,014 1,719,119
Customer deposits 594,362 960,092
- ---------------------------------------------------------------------------------------
Total current liabilities 4,876,629 3,972,775
- ---------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,574,051 and 12,526,051 shares
respectively, issued and outstanding 125,741 125,261
Additional paid-in capital 19,888,442 19,819,549
Deficit (6,182,180) (6,421,969)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 13,832,003 13,522,841
- ---------------------------------------------------------------------------------------
$ 18,708,632 $ 17,495,616
=======================================================================================
See accompanying notes to consolidated financial statements.
5
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Paid-in
Shares Amount Capital Deficit
- -------------------------------------------------------------------------------------------------
Balance at August 29, 2003 12,381,251 $ 123,813 $19,471,069 $(4,314,071)
Common stock issued through
stock options 63,800 638 97,420 --
Value of stock options granted
for services -- -- 139,800 --
Net loss for the six months -- -- -- (1,103,932)
- -------------------------------------------------------------------------------------------------
BALANCE at February 27, 2004 12,445,051 $ 124,451 $19,708,289 $(5,418,003)
=================================================================================================
Balance at September 3, 2004 12,526,051 $ 125,261 $19,819,549 $(6,421,969)
Common stock issued through
stock options 48,000 480 68,893 --
Net earnings for the six months -- -- -- 239,789
- -------------------------------------------------------------------------------------------------
BALANCE at March 4, 2005 12,574,051 $ 125,741 $19,888,442 $(6,182,180)
=================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
March 4, February 27,
2005 2004
- -----------------------------------------------------------------------------------------
Cash flows from operating activities
Net earnings (loss) $ 239,789 $(1,103,932)
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities
Depreciation and amortization 1,009,826 1,042,501
Value of stock options granted
for services -- 139,800
Provision for bad debts 30,000 60,000
Provision for inventory reserves 25,000 150,000
Provision (benefit) for deferred income taxes 134,000 (467,000)
Changes in assets and liabilities
Accounts receivable (2,350,378) 649,255
Inventories 436,624 306,339
Other assets 135,930 (19,208)
Accounts payable and accrued expenses 1,269,584 (97,813)
Customer deposits (365,730) 124,107
- -----------------------------------------------------------------------------------------
564,645 784,049
- -----------------------------------------------------------------------------------------
Cash flows from investment activities
Property and equipment expenditures (209,057) (185,236)
Capitalized software additions (819,249) (978,584)
License agreement, patent, and trademark expenditures (55,191) (171,860)
- -----------------------------------------------------------------------------------------
(1,083,497) (1,335,680)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities
Repayment of long-term debt -- (3,169)
Proceeds from stock options exercised 69,373 98,058
- -----------------------------------------------------------------------------------------
69,373 94,889
- -----------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (449,479) (456,742)
Cash and cash equivalents, beginning of period 1,520,761 4,213,252
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,071,282 $ 3,756,510
=========================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 29,632 $ 42,575
Income taxes $ -- $ --
=========================================================================================
See accompanying notes to consolidated financial statements.
7
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Significant Accounting Policies
The significant accounting policies followed by the Company are set forth in
Note 1 to the Company's audited consolidated financial statements included in
the annual report on Form 10-K for the year ended September 3, 2004.
Revenue Recognition
Our revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) No. 104, "Revenue Recognition", SAB No. 101, "Revenue Recognition
in Financial Statements" and EITF Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." 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. We recognize revenue in certain
circumstances before delivery has occurred (commonly referred to as "bill and
hold" transactions). In such circumstances, among other things, risk of
ownership has passed to the buyer, the buyer has made a written fixed commitment
to purchase the finished goods, the buyer has requested the finished goods be
held for future delivery as scheduled and designated by them, and no additional
performance obligations exist by the Company. For these transactions, the
finished goods are segregated from inventory and normal billing and credit terms
are granted. For the three and six months ended March 4, 2005, revenues in the
amount of $1,533,000 and $2,878,000, respectively, were appropriately recorded
prior to delivery as bill and hold transactions in accordance with the
provisions of SAB 104. At March 4, 2005, accounts receivable for these revenues
amounted to $1,533,000. Subsequent to March 4, 2005, payments in the amount of
$1,484,000 were received on these accounts receivable.
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.
Our principal sources of revenues are from the sales of various 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. Should we begin to market or sell software whereby it
is more than an incidental component of the hardware, then we 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."
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," we include all shipping and handling billings to customers in
revenues, and freight costs incurred for product shipments are 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.
8
Stock-Based Compensation
We have 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 apply Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations, in
accounting for our stock-based 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 Six months ended
-----------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------
Net earnings (loss)
As Reported $ 127,904 $ (655,264) $ 239,789 $ (1,103,932)
Deduct:
Compensation cost
using the fair value
method, net of tax (20,536) (56,455) (59,274) (62,311)
- -----------------------------------------------------------------------------------------
Pro Forma $ 107,368 $ (711,719) $ 180,515 $ (1,166,243)
=========================================================================================
Net earnings (loss) per share
As Reported
Basic $ .01 $ (.05) $ .02 $ (.09)
Diluted .01 (.05) .02 (.09)
Pro Forma
Basic .01 (.06) .01 (.09)
Diluted .01 (.06) .01 (.09)
=========================================================================================
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 Six months ended
------------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------
Risk free interest rate 4.00% 4.00% 4.00% 4.00%
Expected term 2.8 years 3 years 2.8 years 2.8 years
Volatility 90% 90% 90% 90%
Expected annual dividends none none none none
===========================================================================================
The weighted average fair value of options granted was as follows:
Three months ended Six months ended
------------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------
Per share option value $ -- $ 1.23 $ .81 $ 1.23
Aggregate total $ -- $474,230 $8,140 $474,230
===========================================================================================
9
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.
Examples include provisions for bad debts, inventory obsolescence and
warranties. 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 2005 contains fifty-two weeks while
fiscal 2004 contained fifty-three weeks.
Note 2 Accounts Receivable
Accounts receivable are summarized as follows:
March 4, September 3,
2005 2004
- ---------------------------------------------------------------
(Unaudited)
Accounts receivable - trade $ 5,072,661 $ 2,766,528
Other receivables 77,263 76,473
- ---------------------------------------------------------------
5,149,924 2,843,001
Less allowance for
doubtful accounts (349,834) (363,289)
- ---------------------------------------------------------------
$ 4,800,090 $ 2,479,712
===============================================================
Note 3 Inventories
Inventories are summarized as follows:
March 4, September 3,
2005 2004
- ---------------------------------------------------------------
(Unaudited)
Raw material $ 2,787,908 $ 3,004,350
Work-in-process 931,671 1,073,275
Finished goods 2,850,950 3,229,704
- ---------------------------------------------------------------
6,570,529 7,307,329
Less inventory reserves (3,192,313) (3,467,489)
- ---------------------------------------------------------------
$ 3,378,216 $ 3,839,840
===============================================================
During the first six months of fiscal 2005, inventory reserves were reduced by
inventory write-offs of $300,000 and increased by provisions of $25,000. Our
inventory reserve of approximately $3,192,000 at March 4, 2005 is to provide for
items that are potentially slow-moving, excess or obsolete. Changes in market
conditions, lower than expected customer demand and rapidly changing technology
could result in additional obsolete and slow-moving inventory that is unsaleable
or saleable at reduced prices. No estimate can be made of a range of amounts of
loss from obsolescence that are reasonably possible should our sales efforts not
be successful.
10
Note 4 Other Assets
Other assets consisted of the following:
March 4, 2005 (unaudited)
- --------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
- --------------------------------------------------------------------------------
License agreements $ 570,000 $ (254,826) $ 315,174
Patents 394,065 -- 394,065
Trademarks 87,470 (1,978) 85,492
Loan facility fees 37,500 (25,000) 12,500
Other 6,889 -- 6,889
- --------------------------------------------------------------------------------
$ 1,095,924 $ (281,804) $ 814,120
================================================================================
September 3, 2004
- --------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
- --------------------------------------------------------------------------------
License agreements $ 570,000 $(197,828) $ 372,172
Patent applications 352,406 -- 352,406
Trademarks 73,937 (776) 73,161
Loan facility fees 37,500 (6,250) 31,250
Other 6,889 -- 6,889
- --------------------------------------------------------------------------------
$1,040,732 $(204,854) $ 835,878
================================================================================
Amortization expense of other assets for the three and six months ended March 4,
2005, amounted to $39,000 and $77,000, respectively. Amortization expense of
other assets for the three and six months ended February 27, 2004, amounted to
$41,000 and $84,000, respectively.
We conduct an ongoing review of our intellectual property rights and potential
trademarks. As of March 4, 2005, we incurred $394,000 and $40,000 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. If it becomes more likely than not
that patent application will not be granted, we will write-off the deferred cost
at that time. At March 4, 2005, the cost of registered trademarks amounted to
$47,000. License agreements are amortized over their estimated useful life of
five years. Loan facility fees are amortized over twelve months.
Note 5 Income Taxes
For the six months ended March 4, 2005, income tax expense of $134,000 was
comprised of deferred federal and state income tax expense of $127,000 and
$7,000, respectively. Net deferred tax assets decreased $134,000 to $4,035,000,
principally due to utilization of net operating loss carryforwards in the first
six months. Realization of deferred tax assets depends on generating sufficient
future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, we believe it is more likely
than not that all of the deferred tax assets will be realized based on the
backlog and our financial projections. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At March 4, 2005, we had a federal net operating loss carryforward of
approximately $6,222,000, which expires beginning fiscal 2020 through fiscal
2025. Additionally, we had an alternative minimum tax credit of $138,000 and
state income tax credits of $199,000 expiring in fiscal 2009.
11
Note 6 Earnings Per Share (Unaudited)
The following tables represent required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net earnings per share
computations.
Three months ended
---------------------------------------------------------------------------------------------
March 4, 2005 February 27, 2004
---------------------------------------------------------------------------------------------
Per Per
Earnings Shares share Earnings Shares share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
---------------------------------------------------------------------------------------------
Net earnings (loss) $127,904 $(655,264)
======== =========
Basic earnings (loss) per share:
Net earnings (loss) available
to common shareholders $127,904 12,560,260 $ .01 $(655,264) 12,416,820 $(.05)
Effect of dilutive potential
common shares:
Stock options -- 326,839 -- --
-------------------------- --------------------------
Diluted earnings (loss) per share:
Net earnings (loss) available
to common shareholders $127,904 12,887,099 $ .01 $(655,264) 12,416,820 $(.05)
========================== ===== ========================== =====
Six months ended
---------------------------------------------------------------------------------------------
March 4, 2005 February 27, 2004
---------------------------------------------------------------------------------------------
Per Per
Earnings Shares share Earnings Shares share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
---------------------------------------------------------------------------------------------
Net earnings (loss) $239,789 $(1,103,932)
======== ===========
Basic earnings (loss) per share:
Net earnings (loss) available
to common shareholders $239,789 12,548,320 $ .02 $(1,103,932) 12,406,695 $(.09)
-------------------------- -----------------------------
Effect of dilutive potential
common shares:
Stock options -- 257,183 -- --
Diluted earnings (loss) per share:
Net earnings (loss) available
to common shareholders $239,789 12,805,503 $ .02 $(1,103,932) 12,406,695 $(.09)
========================== ===== ============================= =====
12
Stock options excluded from the diluted net earnings (loss) per share
calculation due to their anti-dilutive effect are as follows:
Three months ended Six months ended
---------------------------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
---------------------------------------------------------------------------
Common stock options:
Number of shares 562,464 1,750,625 584,310 1,750,625
Exercise price $2.08 to $2.72 $ .63 to $5.63 $1.78 to $2.72 $ .63 to $5.63
Note 7 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 Six months ended
-----------------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
-----------------------------------------------------------------
Product Line
Direct Broadcast Satellite $ 6,168,552 $ 4,389,719 $12,282,239 $ 8,529,962
Telecom and Custom Products 30,327 193,974 187,046 605,655
Service 137,678 129,230 273,343 327,511
-----------------------------------------------------------------
$ 6,336,557 $ 4,712,923 $12,742,628 $ 9,463,128
=================================================================
Revenues by geographic area are as follows:
Three months ended Six months ended
-----------------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
-----------------------------------------------------------------
Geographic Area
United States $ 6,258,576 $ 4,626,996 $12,454,813 $ 9,187,226
Latin America 38,325 1,669 123,290 57,805
Canada 33,531 37,912 33,531 113,117
Europe 1,930 45,280 103,815 63,172
Other 4,195 1,066 27,179 41,808
-----------------------------------------------------------------
$ 6,336,557 $ 4,712,923 $12,742,628 $ 9,463,128
=================================================================
13
All of the Company's long-lived assets are located in the United States.
Customers representing 10% or more of the respective periods' revenues are as
follows:
Three months ended Six months ended
-------------------------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
-------------------------------------------------------------------------
Customer 1 24.8% 40.1% 26.5% 38.7%
Customer 2 19.5% (a) 14.2% (a)
Customer 3 14.6% 15.5% 11.7% (a)
Customer 4 (a) (a) 11.2% (a)
(a) Revenues for the period were less than 10% of total revenues.
Note 8 Commitments
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At March 4, 2005, outstanding purchase commitments under these
agreements amounted to $5,878,000. Pursuant to the above agreements, at March 4,
2005, we had outstanding letters of credit in the amount of $2,250,000.
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 March 4, 2005, the outstanding commitment under the agreement was
$290,000.
Note 9 Guarantees and Warranty Liability
Warranty
We warrant our products for a 12-14 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. We expense 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,
which remained outstanding at March 4, 2004, amounted to $106,000. For the six
month period ended March 4, 2005, accrued warranty provisions were reduced by
$46,000 for satisfied warranty claims.
Letters of Credit
We provide standby letters of credit in the ordinary course of business to
certain suppliers pursuant to manufacturing and purchasing agreements. At March
4, 2005, outstanding letters of credit amounted to $2,250,000.
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 March 4, 2005, no balances
were outstanding on the loan facility.
Note 10 Quarterly Adjustments
During the second quarter of fiscal 2005, based on a review of accrued expense
liability balances, we made adjustments to reduce certain accruals to bring
estimates in line with historical experience and expected payout amounts. As a
result of these adjustments, cost of sales was reduced by $86,000, research and
development expenses by $19,000 and selling, general and administrative expenses
by $21,000. Approximately $37,000 (after taxes, $24,000) relates to accruals
made in the first quarter of fiscal 2005 and $89,000 (after taxes, $57,000)
relates to accruals made prior to fiscal 2005.
14
Note 11 Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs-an
amendment of ARB No.43, Chapter 4", which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151
will have a material impact on our financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (Revised 2004), "Share-Based Payment. SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized as compensation expense in the consolidated financial
statements based on their fair values. This standard is effective for public
companies at the beginning of the first interim or annual period beginning after
June 15, 2005 and companies may elect to use either the modified-prospective or
modified-retrospective transition method. Under the modified- prospective
method, awards that are granted, modified, or settled after the date of adoption
should be measured and accounted for in accordance with SFAS No. 123R. Unvested
equity-classified awards that were granted prior to the effective date should
continue to be accounted for in accordance with SFAS No. 123 except that amounts
must be recognized in the income statement. Under the modified-retrospective
approach, the previously reported amounts are restated (either to the beginning
of the year of adoption or for all periods presented) to reflect the SFAS No.
123 amounts in the income statement. We are currently evaluating the impact of
this standard and its transition alternatives, which may materially impact our
results of operations in the first quarter of fiscal 2006 and thereafter.
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 September 3, 2004, contained in the Company's 2004 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 September 3, 2004, and from time to time in the
Company's periodic Securities and Exchange Commission filings.
The Company, through Wegener Communications, Inc. (WCI), a wholly-owned
subsidiary, designs and manufactures communications transmission and receiving
equipment for the business broadcast, data communications, cable and broadcast
radio and television industries.
OVERVIEW
We design and manufacture satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI is a leading provider
of digital solutions for video, audio and IP data networks, primarily via
satellite delivery. Applications include broadcast and cable television,
business television, IP data delivery, distance education, business music and
radio networks. COMPEL, our patented network control system, provides network
flexibility to regionalize programming, commercials and file transfers.
Our fiscal 2005 second quarter and six month revenues and operating results
improved significantly compared to the same periods in fiscal 2004. Additional
bookings continued in the second fiscal quarter which resulted in increased
revenues for the period. We received additional bookings from Ascent Media for
equipment to convert a television distribution network from analog to digital
and upgrade the network's capabilities with the store and forward technology of
our iPump Media Servers, and from Roberts Communications Network to upgrade and
replace primarily uplink equipment in their network. These orders were in
addition to first quarter shipments to Ascent Media for a separate private
network application using the iPump Media Server and to Roberts Communications
Network for network expansion. In addition, the three and six month periods
benefited from our fiscal 2004 fourth quarter booking of a large order from a
new radio broadcast customer. As we have previously indicated, there may be
fluctuations in operating performance from quarter to quarter due to limited
order visibility and the timing of significant orders from customers. However,
our review of the balance of fiscal 2005 indicates, while significant bookings
are required for the remaining two quarters, we are still positioned to
substantially increase revenues over fiscal 2004 and maintain profitability for
this fiscal year. (For further discussion see our Results of Operations
discussion below.)
Current developments
We are continuing to work with potential customers in demonstrating our iPump
product and the many benefits of our store and forward technology. We are in
discussions with a number of customers who we believe are planning to upgrade
their networks by integrating our iPump technology.
We continue to invest in and develop our SMD 515 Streaming Media Decoder Settop
for the telecom market. The SMD 515 Settop enables phone companies to offer
television services, including high definition, to existing DSL consumers. This
is a very large market opportunity and we believe we are well positioned to
capture market share in this new and growing sector. Any significant revenues
from this product line will not be realized, if at all, until fiscal 2006. We
are continuing development of other products, such as our iPump 615 Media
Decoder and the NAVE IIc Nielsen Audio Encoder, which we anticipate will
contribute to increased revenues and profitability for fiscal 2005 and beyond.
16
During the first quarter of fiscal 2005, we booked an order for $9,600,000 from
a business music network customer. This new order extends and amends our
existing multi-year contract into fiscal year 2009. This order is reflected in
the total multi-year backlog as of March 4, 2005.
Financial Position and Liquidity
We have no long-term debt or line of credit borrowings outstanding at March 4,
2005. Our cash and cash equivalents were $1,071,000 at March 4, 2005. Our
$5,000,000 bank loan facility, which is subject to availability advance formulas
based on eligible accounts receivable, import letter of credit commitment
balances and inventories, is currently being used to support import letters of
credit issued to our offshore manufacturers, which at March 4, 2005 amounted to
$2,250,000. At March 4, 2005, approximately $2,750,000 net of the outstanding
letters of credit was available to borrow under the advance formulas. Beginning
in the second half of fiscal 2005, we expect that we will use borrowings on the
line of credit to support operations. We expect bookings for new products to
result in increased revenues beginning in the second half of fiscal 2005, which
could require an increase in the credit limit primarily to support increases in
inventory, accounts receivable and 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 and bookings.
Should the bookings and revenues for the new products not materialize, we are
committed to reducing operating costs to bring them in line with revenue levels.
(See the Liquidity and Capital Resources section on page 20 for further
discussion.)
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED MARCH 4, 2005 COMPARED TO THREE AND SIX MONTHS ENDED
FEBRUARY 27, 2004
The following table sets forth, for the periods indicated, the components of our
results of operations as a percentage of sales:
Three months ended Six months ended
-------------------------------------------------------
March 4, February 27, March 4, February 27,
2005 2004 2005 2004
-------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 61.8 74.6 62.2 73.9
Gross margin 38.2 25.4 37.8 26.1
Selling, general, and administrative 22.8 27.1 22.4 26.4
Research & development 12.2 16.4 12.4 16.0
Operating income (loss) 3.3 (18.1) 3.1 (16.3)
Interest expense (.2) (.5) (.2) (.5)
Interest income .1 .2 .1 .1
Earnings (loss) before income taxes 3.2 (18.4) 2.9 (16.6)
Income tax expense (benefit) 1.1 (4.5) 1.1 (4.9)
Net earnings (loss) 2.0% (13.9)% 1.9% (11.7)%
=======================================================
The operating results for the three and six month periods ended March 4, 2005
were net earnings of $128,000 or $0.01 per share and $240,000 or $0.02 per
share, respectively, compared to a net loss of $(655,000) or $ (0.05) per share
and a net loss of $(1,104,000) or $(0.09) per share, respectively, for the three
and six month periods ended February 27, 2004.
Revenues - Revenues for the three months ended March 4, 2005 increased
$1,624,000 or 34.5% to $6,337,000 from $4,713,000. Revenues for the six months
ended March 4, 2005 increased $3,280,000 or 34.7% to $12,743,000 from
$9,463,000.
17
Direct Broadcast Satellite (DBS) revenues (including service revenues) increased
$1,787,000 or 39.6% in the second quarter of fiscal 2005 to $6,306,000 from
$4,519,000 in the same period of fiscal 2004. For the six months ended March 4,
2005, DBS revenues increased $3,698,000 or 41.8% to $12,555,000 from $8,857,000
for the six months ended February 27, 2004. The second quarter of fiscal 2005
included revenues on the new order from Ascent Media of iPump Media Servers,
digital encoders and Unity receivers to convert a television distribution
network from analog to digital and upgrade the network's capabilities with store
and forward technology. Shipments continued to Roberts Communications Network in
the second quarter on additional orders of uplink equipment and Unity 4600 and
4650 receivers to upgrade their existing network. The second quarter and first
six months of fiscal 2005 included shipments of transmission equipment and our
Compel network control system to a new radio broadcast customer for network
upgrades and expansion. In addition, the six months revenues included first
quarter shipments to Roberts Communications Network for network expansion, to
Ascent Media for a private network application using the iPump Media Server and
to Microspace Communications for delivery of audio programming for the Christian
Radio Consortium.
Telecom and Custom Products Group revenues decreased $164,000 or 84.4% in the
second quarter of fiscal 2005 to $30,000 from $194,000 in the same period of
fiscal 2004. For the six months ended March 4, 2005, Telecom and Custom Products
Group revenues decreased $419,000 or 69.1% to $187,000 from $606,000 for the six
months ended February 27, 2004. The decrease in revenues for the three and six
month periods reflected a decline in orders for older analog and cue and control
equipment.
For the three months ended March 4, 2005, three customers accounted for 24.8%,
19.5% and 14.6% of revenues, respectively. For the three months ended February
27, 2004, two customers accounted for 40.1% and 15.5% of revenues, respectively.
For the six months ended March 4, 2005, four customers accounted for 26.5%,
14.2%, 11.7% and 11.2% of revenues, respectively. For the six months ended
February 27, 2004, one customer accounted for 38.7% of revenues. Sales to a
relatively small number of major customers have typically comprised a majority
of our revenues and that trend is expected to continue throughout fiscal 2005
and beyond. Our backlog is comprised of undelivered, firm customer orders which
are scheduled to ship within eighteen months. The backlog was approximately
$13.1 million at March 4, 2005, compared to $12.0 million at September 3, 2004,
and $13.9 million at February 27, 2004. Four customers accounted for 51.6 %,
20.8%, 10.9% and 10.6%, respectively, of the backlog at March 4, 2005. The total
multi-year backlog at March 4, 2005, was approximately $28.4 million compared to
$21.0 million at September 3, 2004 and $22.8 million at February 27, 2004.
Revenues and order backlog are subject to the timing of significant orders from
customers and are difficult to forecast. As a result, revenue levels may
fluctuate from quarter to quarter.
Gross Profit Margins - The Company's gross profit margin percentages were 38.2%
and 37.8% for the three and six month periods ended March 4, 2005, compared to
25.4% and 26.1% for the three and six month periods ended February 27, 2004.
Gross profit margin dollars increased $1,224,000 and $2,344,000 for the three
and six month periods ended March 4, 2005, compared to the same periods ended
February 27, 2004. The increase in margin percentages and dollars for the three
and six months ended March 4, 2005 was mainly due to increased revenues, which
resulted in lower unit fixed overhead costs and a favorable product sales mix
with lower variable cost components. Profit margins in the three and six month
periods of fiscal 2005 included inventory reserve charges of $25,000 and $25,000
compared to $75,000 and $150,000 for the same periods of fiscal 2004. Profit
margins in the three and six month periods ended March 4, 2005, included
adjustments to reduce cost of sales by $86,000 and $68,000, respectively,
related to reductions of certain accrued expenses (see Note 10 to the
consolidated financial statements).
Selling, General and Administrative - Selling, general and administrative (SG&A)
expenses increased $164,000 or 12.8% to $1,443,000 for the three months ended
March 4, 2005, from $1,279,000 for the three months ended February 27, 2004. For
the six months ended March 4, 2005, SG&A expenses increased $349,000 or 14.0% to
$2,848,000 from $2,499,000 for the same period ended February 27, 2004. The
increase in SG&A expenses in the second quarter of fiscal 2005 was mainly due to
increases in sales salaries of $87,000 due to an increase in personnel, and
increases in selling and marketing expenses of $78,000 due to increased sales
activity and sales commissions. The increase in SG&A expenses in the first six
months of fiscal 2005 was mainly due to increases in sales salaries of $144,000
due to an increase in personnel, increases in selling and marketing expenses of
$138,000 due to increased sales activity and sales commissions, and higher
consulting expenses of $99,000. These expenses were offset by lower professional
fees at WCI of $62,000. As a percentage of revenues, SG&A expenses were 22.8%
and 22.4% for the three and six month periods ended March 4, 2005, compared to
27.1% and 26.4% for the same periods of fiscal 2004. SG&A expenses in the three
and six month periods ended March 4, 2005, included adjustments to reduce
primarily insurance and property tax expenses by $21,000 and $11,000,
respectively, related to reductions of certain accrued expenses (see Note 10 to
the consolidated financial statements).
18
Research and Development - Research and development (R&D) expenditures,
including capitalized software development costs, were $1,185,000, or 18.7% of
revenues, and $2,394,000, or 18.8% of revenues, for the three and six month
periods ended March 4, 2005, compared to $1,206,000, or 25.6% of revenues, and
$2,494,000, or 26.4% of revenues, for the same periods of fiscal 2004.
Capitalized software development costs amounted to $414,000 and $819,000 for the
second quarter and first six months of fiscal 2005 compared to $431,000 and
$979,000 for the same periods of fiscal 2004. The decreases in capitalized
software costs are due to decreased expenditures on the iPump Media Server,
UNITY4600 and DTV series 700 products which were partially offset by increased
expenditures on the SMD 515 product. R&D expenses, excluding capitalized
software expenditures, were $772,000, or 12.2% of revenues, and $1,575,000, or
12.4% of revenues, for the three and six months ended March 4, 2005, compared to
$774,000, or 16.4% of revenues, and $1,515,000, or 16.0% of revenues, for the
same periods of fiscal 2004. R&D expenses in the three and six month periods
ended March 4, 2005, included adjustments to reduce primarily insurance and
property tax expenses by $19,000 and $10,000, respectively, related to
reductions of certain accrued expenses (see Note 10 to the consolidated
financial statements). R&D expenditures for the second half of fiscal 2005 are
expected to continue at a rate similar to that of the first half of fiscal 2005.
Interest Expense - Interest expense decreased $9,000 to $15,000 for the three
months ended March 4, 2005, from $24,000 for the three months ended February 27,
2004. For the six months ended March 4, 2005, interest expense decreased $13,000
to $30,000 from $43,000 for the same period ended February 27, 2004. The
decreases for the three and six month periods in fiscal 2005 were primarily due
to decreases in the average outstanding letter of credit commitment balances.
Interest Income - Interest income was $7,000 and $10,000 for the three and six
month periods ended March 4, 2005, compared to $9,000 and $14,000 for the same
periods ended February 27, 2004. The decreases for the three and six months
ended March 4, 2005 were mainly due to lower average balances of cash and cash
equivalents.
Income Tax Expenses - For the six months ended March 4, 2005, income tax expense
of $134,000 was comprised of deferred federal and state income tax expense of
$127,000 and $7,000, respectively. Net deferred tax assets decreased $134,000 to
$4,035,000, principally due to utilization of net operating loss carryforwards
in the first six months. Realization of deferred tax assets is dependent on
generating sufficient future taxable income prior to the expiration of the loss
and credit carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized based on the backlog and our financial projections. The amount of the
tax assets considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are very important to the portrayal of our financial
condition and results of operations and require management's most subjective or
difficult judgements. These policies are as follows:
Revenue Recognition - Our revenue recognition policies are in compliance with
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", SAB No. 101,
"Revenue Recognition in Financial Statements" and EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." 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 there are no significant future performance obligations. Service
revenues are recognized at the time of performance. Revenues from separate
service maintenance agreements are recognized ratably over the term of the
agreements. We recognize revenue in certain circumstances before delivery has
occurred (commonly referred to as "bill and hold" transactions). In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods be held for future delivery as
scheduled and designated by them, and no additional performance obligations
exist by us. For these transactions, the finished goods are segregated from
inventory and normal billing and credit terms are granted. For the three and six
months ended March 4, 2005, revenues in the amount of $1,533,000 and $2,878,000
respectively, were appropriately recorded prior to delivery as bill and hold
transactions in accordance with the provisions of SAB 104. At March 4, 2005,
accounts receivable for these revenues amounted to $1,533,000. Subsequent to
March 4, 2005, payments in the amount of $1,484,000 were received on these
accounts receivable.
19
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.
Our principal sources of revenues are from the sales of various 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. Should we begin to market or sell software whereby it
is more than an incidental component of the hardware, then we would 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."
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.
We make 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 March 4, 2005, inventories, net of reserve provisions, amounted
to $3,378,000.
Capitalized Software Costs - Software development costs are capitalized
subsequent to establishing technological feasibility. Capitalized costs are
amortized based on the larger of the amounts computed using (a) the ratio that
current gross revenues for each product bears to the total of current and
anticipated future gross revenues for that product, or (b) the straight-line
method over the remaining estimated economic life of the product. Expected
future revenues and estimated economic lives are subject to revisions due to
market conditions, technology changes and other factors resulting in shortfalls
of expected revenues or reduced economic lives, which could result in additional
amortization expense or write-offs. At March 4, 2005, capitalized software
costs, net of accumulated amortization, amounted to $1,803,000.
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 depends on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, we believe it is more likely
than not that all of the deferred tax assets will be realized based on the
backlog and our financial projections. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. 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. In
addition, any reductions in corporate federal tax rates would reduce the
carrying value of deferred tax assets. Each 1% reduction in corporate federal
tax rates would reduce deferred tax assets by approximately $35,000 based on the
deferred tax asset balances at March 4, 2005. At March 4, 2005, deferred tax
assets, net of valuation allowances, amounted to $4,035,000, of which
approximately $2,260,000 relates to net operating loss carryforwards which
expire beginning in fiscal 2020 through 2025, and $199,000 relates to state
income tax credits expiring in fiscal 2009.
Accounts Receivable Valuation - We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required. At March 4, 2005, accounts receivable, net of
allowances for doubtful accounts, amounted to $4,800,000.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED MARCH 4, 2005
At March 4, 2005, our primary sources of liquidity were cash and cash
equivalents of $1,071,000 and a $5,000,000 bank loan facility, which is subject
to availability advance formulas based on eligible accounts receivable, import
letter of commitment balances and inventories. At March 4, 2005, approximately
$2,750,000, net of outstanding letters of credit in the amount of $2,250,000,
was available to borrow under the advance formulas. Cash and cash equivalents
decreased $449,000 during the first six months of fiscal 2005.
20
During the first six months of fiscal 2005, operating activities provided
$564,000 of cash. Net earnings adjusted for noncash expenses provided $1,438,000
of cash, while changes in accounts receivable and customer deposit balances used
$2,716,000 of cash. Changes in inventories, accounts payable and accrued
expenses, and other assets provided $1,842,000 of cash. Cash used by investing
activities was $209,000 for property and equipment expenditures, $819,000 for
capitalized software additions and $55,000 for legal expenses related to the
filing of applications for various patents and trademarks. Financing activities
provided $69,000 of cash from the exercise of stock options.
WCI's bank loan facility provides a maximum available credit limit of $5,000,000
with sublimits as defined. The loan facility matures on June 30, 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 (5.50% at March 4, 2005).
The term loan facility provides for a maximum of $1,000,000 for advances of up
to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over sixty months with a balloon payment due at maturity. The revolving
line of credit is subject to availability advance formulas of 80% against
eligible accounts receivable; 20% of eligible raw materials inventories; 20% of
eligible work-in-process kit inventories; and 40% to 50% of eligible finished
goods inventories and 50% of import letter of credit commitment balances. The
loan is secured by a first lien on substantially all of WCI's assets and
guaranteed by Wegener Corporation. At March 4, 2005, 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 March 4,
2005 amounted to $2,250,000. At March 4, 2005, approximately $2,750,000, net of
outstanding letters of credit, was available to borrow under the advance
formulas.
We are 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, maintain certain financial ratios, and are precluded from paying
dividends. At March 4, 2005, we were in compliance with all loan facility
covenants.
In addition, at March 4, 2005, we had land and buildings and improvements with a
cost basis of $4,454,000 which had no mortgage balances outstanding. Land and
buildings are not currently used in the existing loan facility's availability
advance formulas, however, we believe these assets could be used to support
additional borrowing capacities either with our existing bank or from other
sources.
Beginning in the second half of fiscal 2005, we expect that we will use
borrowings on the line of credit to support operations. We expect bookings for
new products to result in increased revenues beginning in the second half of
fiscal 2005, which could require an increase in the credit limit primarily to
support increases in inventory, accounts receivable and 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 and bookings. Should
the bookings and revenues for the new products not materialize, we are committed
to reducing operating costs to bring them in line with revenue levels.
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At March 4, 2005, outstanding purchase commitments under these
agreements amounted to $5,878,000. Pursuant to the above agreements, at March 4,
2005, we had outstanding letters of credit in the amount of $2,250,000.
During the first quarter of fiscal 2004, we entered into a two-year agreement
aggregating $870,000 for engineering design and software development services.
At March 4, 2005, the remaining outstanding commitment under the agreement was
$290,000.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future.
21
A summary of our long-term contractual obligations as of March 4, 2005 consisted
of:
Payments Due by Period
-----------------------------------------------------
Fiscal Fiscal Fiscal
Contractual Obligations Total 2005 2006-2007 2008-2009
- ----------------------- -----------------------------------------------------
Operating leases $ 316,000 $ 93,000 $ 219,000 $ 4,000
Purchase commitments 6,168,000 4,567,000 1,601,000 --
-----------------------------------------------------
Total $6,484,000 $4,660,000 $1,820,000 $ 4,000
=====================================================
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates primarily
to our revolving line of credit and cash equivalents. The interest rate on
certain advances under the line of credit and term loan facility fluctuates with
the bank's prime rate. There were no borrowings outstanding at March 4, 2005
subject to variable interest rate fluctuations.
At March 4, 2005, our cash equivalents consisted of bank commercial paper in the
amount of $980,000. The cash equivalents have maturities of less than three
months and therefore are subject to minimal market risk.
We do not enter into derivative financial instruments. All sales and purchases
are denominated in U.S. dollars.
22
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 defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) 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 are effective.
During the second quarter of fiscal 2005, we reviewed certain accounting matters
and practices in connection with our Sarbanes-Oxley compliance program. As a
result of this review, we have modified our procedures to review more frequently
the estimates and assumptions used in determining our accrued expense liability
balances. We also made adjustments to reduce certain accruals to bring estimates
in line with historical experience and expected payout amounts. As a result of
these adjustments, cost of sales was reduced by $86,000, research and
development expenses by $19,000 and selling, general and administrative expenses
by $21,000. Approximately $37,000 (after taxes, $24,000) relates to accruals
made in the first quarter of fiscal 2005 and $89,000 (after taxes, $57,000)
relates to accruals made prior to fiscal 2005.
We intend to continue to diligently review our system of internal control over
financial reporting, and to revise and improve our controls as other
deficiencies may be identified.
There have been no other changes in the Company's internal control over
financial reporting during its most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 25, 2005, the Annual Meeting of Shareholders was held and the shares
present voted on the following matters:
(1.) The shareholders approved the election of the following
nominees to the Board of Directors:
Phylis A. Eagle-Oldson (Class I Director)
11,987,194 votes FOR
186,124 votes WITHHELD
C. Troy Woodbury (Class I Director)
11,943,025 votes FOR
230,293 votes WITHHELD
Joe K. Parks (Class I Director)
11,943,005 votes FOR
230,293 votes WITHHELD
The terms of office of Thomas G. Elliott and Ned L.
Mountain as Class III directors and Robert A. Placek and
Wendell H. Bailey as Class II directors, continued
subsequent to the Annual Meeting.
(2.) The appointment of BDO Seidman, LLP as auditors for the
Company for the fiscal year 2005 was approved with
12,052,294 votes FOR, 106,439 votes AGAINST, and 14,585
votes ABSTAINING.
24
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report. An asterisk
identifies those exhibits previously filed and incorporated herein by reference
below. For each such exhibit there is shown the description of the actual
filing. Exhibits which are not required for this report are omitted.
Exhibit Number Description of Document
-------------- -----------------------
*3.1 Certificate of Incorporation as amended through
May 4, 1989, (1989 10-K, filed November 30,
1989, SEC file No. 0-11003, Exhibit 3.2).
*3.2 Amendment to Certificate of Incorporation
(1997 10-Q, filed June 27, 1997, SEC file
No. 0-11003, Exhibit 3.1).
*3.3 Amended and Restated By-laws (Form 8-K,
dated as of May 1, 2003 and filed May 6,
2003, SEC file No. 0-11003 Exhibit 3.1).
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.
25
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 18, 2005 By: /s/ Robert A. Placek
------------------------------------------
Robert A. Placek
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: April 18, 2005 By: /s/ C. Troy Woodbury, Jr.
------------------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
26