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 June 3, 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 12,575,051 Shares
- ---------------------------- -----------------------------
Class Outstanding at June 30, 2005
WEGENER CORPORATION
Form 10-Q For the Quarter Ended June 3, 2005
INDEX
PART I. Financial Information
Item 1. Financial Statements
Introduction .....................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Nine Months Ended
June 3, 2005 and May 28, 2004 ....................................4
Consolidated Balance Sheets - June 3,
2005 (Unaudited) and September 3, 2004 ...........................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Nine Months Ended June 3,
2005 and May 28, 2004 ............................................6
Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended June 3,
2005 and May 28, 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. None
Item 5. None
Item 6. Exhibits ........................................................24
Signatures.......................................................25
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 June 3, 2005; the consolidated statements
of shareholders' equity as of June 3, 2005, and May 28, 2004; the consolidated
statements of operations for the three and nine months ended June 3, 2005, and
May 28, 2004; and the consolidated statements of cash flows for the nine months
ended June 3, 2005, and May 28, 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,
except those adjustment as discussed in note 11 to the consolidated financial
statements, 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
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 4,252,879 $ 4,777,394 $ 16,995,507 $ 14,240,522
- ------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 2,785,289 3,385,022 10,711,256 10,375,171
Selling, general and administrative 1,595,302 1,150,988 4,443,611 3,650,451
Research and development 835,890 792,087 2,410,904 2,307,524
- ------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 5,216,481 5,328,097 17,565,771 16,333,146
- ------------------------------------------------------------------------------------------------------------------
Operating loss (963,602) (550,703) (570,264) (2,092,624)
Interest expense (16,213) (31,374) (45,845) (73,949)
Interest income 12,272 24,436 22,355 38,000
- ------------------------------------------------------------------------------------------------------------------
Loss before income taxes (967,543) (557,641) (593,754) (2,128,573)
Income tax benefit 348,000 201,000 214,000 668,000
- ------------------------------------------------------------------------------------------------------------------
Net loss $ (619,543) $ (356,641) $ (379,754) $ (1,460,573)
==================================================================================================================
Net loss per share:
Basic $ (.05) $ (.03) $ (.03) $ (.12)
Diluted $ (.05) $ (.03) $ (.03) $ (.12)
==================================================================================================================
Shares used in per share calculation
Basic 12,574,447 12,483,348 12,557,029 12,432,246
Diluted 12,574,447 12,483,348 12,557,029 12,432,246
==================================================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 3, September 3,
2005 2004
- ------------------------------------------------------------------------------------------------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 1,670,825 $ 1,520,761
Accounts receivable 2,387,867 2,479,712
Inventories 3,704,738 3,839,840
Deferred income taxes 2,135,000 2,199,000
Other 323,367 283,291
- ------------------------------------------------------------------------------------------------------
Total current assets 10,221,797 10,322,604
Property and equipment, net 2,626,925 2,699,502
Capitalized software costs, net 1,812,448 1,667,632
Deferred income taxes 2,248,000 1,970,000
Other assets 836,886 835,878
- ------------------------------------------------------------------------------------------------------
$ 17,746,056 $ 17,495,616
======================================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 1,186,665 $ 1,293,564
Accrued expenses 2,048,533 1,719,119
Customer deposits 1,297,558 960,092
- ------------------------------------------------------------------------------------------------------
Total current liabilities 4,532,756 3,972,775
- ------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,575,051 and 12,526,051 shares
respectively, issued and outstanding 125,751 125,261
Additional paid-in capital 19,889,272 19,819,549
Deficit (6,801,723) (6,421,969)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,213,300 13,522,841
- ------------------------------------------------------------------------------------------------------
$ 17,746,056 $ 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 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)
==========================================================================================================
Balance at September 3, 2004 12,526,051 $125,261 $19,819,549 $(6,421,969)
Common stock issued through
stock options 49,000 490 69,723 --
Net loss for the nine months -- -- -- (379,754)
----------------------------------------------------------------------------------------------------------
BALANCE at June 3, 2005 12,575,051 $125,751 $19,889,272 $(6,801,723)
==========================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
June 3, May 28,
2005 2004
- --------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (379,754) $(1,460,573)
Adjustments to reconcile net loss to
cash provided by operating activities
Depreciation and amortization 1,567,824 1,601,187
Value of stock options granted
for services -- 139,800
Provision for bad debts 50,000 30,000
Provision for inventory reserves 75,000 225,000
Benefit from change in deferred income taxes (214,000) (668,000)
Provision for warranty reserves 70,000 --
Changes in assets and liabilities
Accounts receivable 41,845 575,603
Inventories 60,102 (354,086)
Other assets (40,076) 4,284
Accounts payable and accrued expenses 152,515 140,814
Customer deposits 337,466 40,655
- --------------------------------------------------------------------------------------------
1,720,922 274,684
- --------------------------------------------------------------------------------------------
Cash flows from investment activities
Property and equipment expenditures (315,491) (241,750)
Capitalized software additions (1,206,124) (1,360,239)
License agreement, patent, and trademark expenditures (119,456) (199,771)
- --------------------------------------------------------------------------------------------
(1,641,071) (1,801,760)
- --------------------------------------------------------------------------------------------
Cash flows from financing activities
Repayment of long-term debt -- (4,320)
Proceeds from stock options exercised 70,213 207,608
- --------------------------------------------------------------------------------------------
70,213 203,288
- --------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 150,064 (1,323,788)
Cash and cash equivalents, beginning of period 1,520,761 4,213,252
- --------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,670,825 $ 2,889,464
============================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 45,845 $ 73,949
============================================================================================
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 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 the buyer, 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 June 3, 2005, revenues in
the amount of $534,000 and $3,412,000, respectively, were appropriately recorded
prior to delivery as bill and hold transactions in accordance with the
provisions of SAB 104. At June 3, 2005, accounts receivable for these revenues
amounted to $534,000. Subsequent to June 3, 2005, payments in the amount of
$534,000 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.
8
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.
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 we had applied the fair value recognition provisions of
SFAS No. 123:
Three months ended Nine months ended
-------------------------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------
Net loss
As Reported $ (619,543) $ (356,641) $ (379,754) $ (1,460,573)
Deduct:
Compensation cost
using the fair value
method, net of tax (20,536) (39,384) (79,810) (101,695)
- ------------------------------------------------------------------------------------------------
Pro Forma $ (640,079) $ (396,025) $ (459,564) $ (1,562,268)
================================================================================================
Loss per share
As Reported
Basic $ (.05) $ (.03) $ (.03) $ (.12)
Diluted (.05) (.03) (.03) (.12)
Pro Forma
Basic (.05) (.03) (.04) (.13)
Diluted (.05) (.03) (.04) (.13)
================================================================================================
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
------------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
-------------------------------------------------------------------------------------
Risk free interest rate 4.00% 4.00% 4.00% 4.00%
Expected term 2.8 years 2.8 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 Nine months ended
----------------------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------
Per share option value $ -- $ -- $ .81 $ 1.22
Aggregate total $ -- $ -- $ 8,140 $ 458,600
=================================================================================================
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 2005 contains fifty-two weeks while
fiscal 2004 contained fifty-three weeks.
Note 3 Accounts Receivable
Accounts receivable are summarized as follows:
June 3, September 3,
2005 2004
--------------------------------------------------------------------------
(Unaudited)
Accounts receivable - trade $ 2,649,448 $ 2,766,528
Other receivables 75,528 76,473
--------------------------------------------------------------------------
2,724,976 2,843,001
Less allowance for
doubtful accounts (337,109) (363,289)
--------------------------------------------------------------------------
$ 2,387,867 $ 2,479,712
==========================================================================
10
Note 4 Inventories
Inventories are summarized as follows:
June 3 September 3,
2005 2004
(Unaudited)
--------------------------------------------------------------------------
Raw material $ 3,049,893 $ 3,004,350
Work-in-process 1,093,815 1,073,275
Finished goods 2,803,343 3,229,704
--------------------------------------------------------------------------
6,947,051 7,307,329
Less inventory reserves (3,242,313) (3,467,489)
--------------------------------------------------------------------------
$ 3,704,738 $ 3,839,840
==========================================================================
During the first nine months of fiscal 2005 inventory reserves were reduced by
inventory write-offs of $300,000 and increased by provisions of $75,000. Our
inventory reserve of approximately $3,242,000 at June 3, 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 is reasonably possible should our sales efforts not
be successful.
Note 5 Other Assets
Other assets consisted of the following:
June 3, 2005 (unaudited)
--------------------------------------------------------------------------
Accumulated
Cost Amortization Net
--------------------------------------------------------------------------
License agreements $ 620,000 $ (284,714) $ 335,286
Patent applications 406,064 -- 406,064
Trademarks 89,735 (4,213) 85,522
Loan facility fees 37,500 (34,375) 3,125
Other 6,889 -- 6,889
--------------------------------------------------------------------------
$ 1,160,188 $ (323,302) $ 836,886
==========================================================================
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
==========================================================================
11
Amortization expense of other assets for the three and nine months ended June 3,
2005, amounted to $41,000 and $118,000, respectively. Amortization expense of
other assets for the three and nine months ended May 28, 2004, amounted to
$41,000 and $125,000, respectively.
We conduct an ongoing review of our intellectual property rights and potential
trademarks. As of June 3, 2005, we incurred $406,000 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 a patent application will not be granted, we will write-off the deferred
cost at that time. At June 3, 2005, the cost of registered trademarks amounted
to $49,000. 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 June 3, 2005, the income tax benefit of $214,000 was
comprised of deferred federal and state income tax benefits of $202,000 and
$12,000, respectively. Net deferred tax assets increased $214,000 to $4,383,000,
principally due to an increase in net operating loss carryforwards in the first
nine 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, 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 June 3, 2005, we had a federal net operating loss carryforward of
approximately $6,303,000, 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.
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
------------------------------------------------------------------------------
June 3, 2005 May 28, 2004
------------------------------------ -------------------------------------
Per Per
Earnings Shares share Earnings Shares share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
Net loss $(619,543) $(356,641)
========= =========
Basic earnings (loss) per share:
Net loss available
to common shareholders $(619,543) 12,574,447 $(.05) $(356,641) 12,483,348 $(.03)
Effect of dilutive potential common shares:
Stock options -- -- -- --
------------------------- -------------------------
Diluted earnings (loss) per share:
Net loss available $(619,543) 12,574,447 $(.05) $(356,641) 12,483,348 $(.03)
to common shareholders ========================= ===== ========================= =====
12
Nine months ended
------------------------------------------------------------------------------------
June 3, 2005 May 28, 2004
--------------------------------------- ----------------------------------------
Per Per
Earnings Shares share Earnings Shares share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
Net loss $(379,754) $(1,460,573)
========= ===========
Basic earnings (loss) per share:
Net loss available
to common shareholders $(379,754) 12,557,029 $(.03) $(1,460,573) 12,432,246 $(.12)
Effect of dilutive potential
common shares:
Stock options -- -- -- --
-------------------------- ----------------------------
Diluted earnings (loss) per share:
Net loss available
to common shareholders $(379,754) 12,557,029 $(.03) $(1,460,573) 12,432,246 $(.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 Nine months ended
-----------------------------------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
-----------------------------------------------------------------------------
Common stock options:
Number of shares 1,195,531 1,640,781 1,195,531 1,640,781
Exercise price $ .63 to $2.72 $ .63 to $5.63 $ .63 to $2.72 $ .63 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," we operate
within a single reportable segment, the manufacture and sale of satellite
communications equipment.
In this single operating segment we have three sources of revenues as follows:
Three months ended Nine months ended
------------------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
------------------------------------------------------------
Product Line
Direct Broadcast Satellite $ 4,027,104 $ 4,348,494 $16,309,343 $12,878,456
Telecom and Custom Products 50,875 301,535 237,922 907,190
Service 174,900 127,365 448,242 454,876
------------------------------------------------------------
$ 4,252,879 $ 4,777,394 $16,995,507 $14,240,522
============================================================
13
Revenues by geographic area are as follows:
Three months ended Nine months ended
-------------------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
-------------------------------------------------------------
Geographic Area
United States $ 4,139,116 $ 4,627,143 $16,593,929 $13,814,369
Latin America 12,813 3,407 136,103 61,212
Canada 27,977 117,341 61,508 230,459
Europe 62,948 9,864 166,763 73,035
Other 10,025 19,639 37,204 61,447
-------------------------------------------------------------
$ 4,252,879 $ 4,777,394 $16,995,507 $14,240,522
=============================================================
All of our 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 Nine months ended
---------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
---------------------------------------
Customer 1 24.0% 11.3% 16.7% (a)
Customer 2 19.0% 37.0% 24.6% 38.1%
Customer 3 17.6% 11.9% 13.2% 10.2%
Customer 4 (a) (a) 10.0% (a)
(a) Revenues for the period were less than 10% of total revenues.
Note 9 Commitments
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At June 3, 2005, outstanding purchase commitments under these
agreements amounted to $5,507,000. Pursuant to the above agreements, at June 3,
2005, we had outstanding letters of credit in the amount of $1,345,000.
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 June 3, 2005, the outstanding commitment under the agreement was
$181,000.
Note 10 Guarantees and Warranty Liability
Warranty
We warrant our products for a 12 to 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 June 3, 2005 amounted to $175,000. For the nine
month period ended June 3, 2005, accrued warranty provisions were reduced by
$47,000 for satisfied warranty claims and increased by $70,000 for additional
estimated 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 June
3, 2005, outstanding letters of credit amounted to $1,345,000.
14
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 June 3, 2005, no balances
were outstanding on the loan facility.
Note 11 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. For the three and nine months
ended June 3, 2005, gross margin dollars and percentages were favorably impacted
by a one-time adjustment of accrued expenses of $218,000.
Note 12 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(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
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 nine month revenues and operating results improved significantly
compared to the same period in fiscal 2004. However, our fiscal 2005 third
quarter revenues and operating results were below our internal forecasts due to
lower than expected shippable bookings for the period. (For further discussion
see Current Developments section below.) During the first nine months of fiscal
2005, we received bookings from Ascent Media for iPump Media Servers and Unity
receivers for a private network application, and for equipment to convert a
television distribution network from analog to digital and upgrade the network's
capabilities with our iPump store and forward technology. Orders were received
and shipments made to Roberts Communications Network for upgrades and expansion
of its network. In addition, the nine month period benefited from our fiscal
2004 fourth quarter booking of a large order from a new radio broadcast customer
and from shipments to Microspace Communications for delivery of audio
programming for the Christian Radio Consortium. 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.
Due to the lower than expected bookings in the third quarter and additional
shippable bookings in the fourth quarter that are required to meet our revenue
goals, we do not believe that adequate revenue will be generated in the near
term to result in a profitable fourth quarter or fiscal 2005 as previously
planned. Should the bookings and revenues not materialize, we are committed to
reducing operating costs to bring them in line with revenue levels. In addition,
the carrying values of deferred tax assets and long-lived assets could be
reduced if the current carrying values became impaired. (For further discussion
see Results of Operations and Critical Accounting Policies sections below.)
Current Developments
Sales into the private network market have been unexpectedly slow. Customers
that we expected to place orders in the second half of fiscal 2005 had their
projects slip into our next fiscal year. The slow sales in the private network
market have caused us to reevaluate our organization and product focus. We have
made major changes in our sales force and have expanded our development efforts
toward iPump applications for additional markets. We expect to book orders in
the fourth quarter that will start driving higher revenues in fiscal 2006.
However, as indicated above, we do not believe that these new markets will
generate adequate revenue in the near term to result in a profitable fourth
quarter or fiscal 2005.
16
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. Our first generation SMD
515, utilizing MPEG-2 streams, was used by key technology partners to display
high definition video at the June Supercomm 2005 exhibition. We are currently
working on the MPEG-4 / h.264 version of the SMD 515. MPEG-4 is a key focus for
next generation video distribution network architectures in satellite, telecom
and cable markets. However, due to industry delays in development of the latest
generation chips, we do not anticipate being able to have settop products
available for shipment in this fiscal year. We believe we are well poised to
begin product acceptance with strategic partners and potential customers when
production chips are available. We are continuing development of other products,
such as our iPump 615 Media Decoder, iPump 622 Enterprise Media Server and the
NAVE IIc Nielsen Audio Encoder, which we anticipate will contribute to increased
revenues in fiscal 2006.
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 June 3, 2005.
Financial Position and Liquidity
We have no long-term debt or line of credit borrowings outstanding at June 3,
2005. Our cash and cash equivalents were $1,671,000 at June 3, 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 June 3, 2005 amounted to
$1,345,000. At June 3, 2005, approximately $2,386,000 net of the outstanding
letters of credit was available to borrow under the advance formulas.
(See the Liquidity and Capital Resources section for further discussion.)
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 3, 2005 COMPARED TO THREE AND NINE MONTHS ENDED
MAY 28, 2004
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
------------------------------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 65.5 70.9 63.0 72.9
Gross margin 34.5 29.1 37.0 27.1
Selling, general, and administrative 37.5 24.1 26.1 25.6
Research & development 19.7 16.6 14.2 16.2
Operating income (loss) (22.7) (11.5) (3.4) (14.7)
Interest expense (0.4) (0.7) (0.3) (0.5)
Interest income 0.3 0.5 0.1 0.3
Earnings (loss) before income taxes (22.8) (11.7) (3.5) (14.9)
Income tax expense (benefit) (8.2) (4.2) (1.3) (4.7)
Net earnings (loss) (14.6) (7.5)% (2.2) (10.3)%
================================================
The operating results for the three and nine month periods ended June 3, 2005,
were net losses of $(620,000) or $(.05) per share and $(380,000) or $(.03) per
share, respectively, compared to net losses of $(357,000) or $(.03) per share
and $(1,461,000) or $(.12) per share for the same periods ended May 28, 2004.
17
Revenues - Revenues for the three months ended June 3, 2005 decreased $524,000
or 11.0% to $4,253,000 from $4,777,000 for the three months ended May 28, 2004.
Revenues for the nine months ended June 3, 2005 increased $2,755,000 or 19.3% to
$16,996,000 from $14,241,000 for the nine months ended May 28, 2004.
Direct Broadcast Satellite (DBS) revenues (including service revenues) decreased
$274,000 or 6.1% in the third quarter of fiscal 2005 to $4,202,000 from
$4,476,000 in the same period of fiscal 2004. For the nine months ended June 3,
2005, DBS revenues increased $3,424,000 or 25.7% to $16,757,000 from $13,333,000
for the nine months ended May 28, 2004. The decrease in fiscal 2005 third
quarter revenues was mainly due to a decrease in revenues to a business music
network customer as a result of the first quarter amendment and extension of
their multi-year contract. The fiscal 2005 nine month revenues included two new
orders from Ascent Media of iPump Media Servers, digital encoders and Unity
receivers for a private network application and 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 on additional orders of uplink equipment and Unity
receivers to upgrade its existing network. The first nine months of fiscal 2005
included shipments of transmission equipment, receivers and our Compel network
control system to a new radio broadcast customer for network upgrades and
expansion and to Microspace Communications for delivery of audio programming for
the Christian Radio Consortium.
Telecom and Custom Products Group revenues decreased $251,000 or 83.1% in the
third quarter of fiscal 2005 to $51,000 from $302,000 for the comparable period
of fiscal 2004. For the nine months ended June 3, 2005, Telecom and Custom
Products Group revenues decreased $669,000 or 73.8% to $238,000 from $907,000
for the nine months ended May 28, 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 June 3, 2005, three customers accounted for 24.0%,
19.0%, and 17.6% of revenues, respectively. For the three months ended May 28,
2004, three customers accounted for 37.0%, 11.9%, and 11.3% of revenues,
respectively. For the nine months ended June 3, 2005, four customers accounted
for 24.6%, 16.7%,13.2% and 10.0% of revenues, respectively. For the nine months
ended May 28, 2004, two customers accounted for 38.1% and 10.2% of revenues,
respectively. 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. WCI's backlog was approximately $12.8 million at June 3, 2005, compared
to $12.0 million at September 3, 2004, and $12.9 million at May 28, 2004. Three
customers accounted for 58.6%, 12.9% and 11.3%, respectively, of the backlog at
June 3, 2005. The total multi-year backlog at June 3, 2005, was approximately
$26.4 million compared to $21.0 million at September 3, 2004 and $20.3 million
at May 28, 2004.
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.
Gross Profit Margins - The Company's gross profit margin percentages were 34.5%
and 37.0% for the three and nine month periods ended June 3, 2005, compared to
29.1% and 27.1% for the three and nine month periods ended May 28, 2004. Gross
profit margin dollars increased $75,000 or 5.4% and $2,419,000 or 62.6% for the
three and nine month periods ended June 3, 2005, respectively, from the same
periods ended May 28, 2004. For the three and nine months ended June 3, 2005,
gross margin dollars and percentages were favorably impacted by a one-time
adjustment of accrued expenses of $218,000. Additionally, the first nine months
of fiscal 2005 benefited from 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 nine month periods of fiscal 2005
included inventory reserve charges of $50,000 and $75,000 compared to $75,000
and $225,000 for the same periods of fiscal 2004. Profit margins in the nine
month period ended June 3, 2005, included adjustments to reduce cost of sales by
$68,000 related to reductions of certain accrued expenses (see Note 11 to the
consolidated financial statements).
Selling, General and Administrative - Selling, general and administrative (SG&A)
expenses increased $444,000 or 38.6% to $1,595,000 for the three months ended
June 3, 2005, from $1,151,000 for the same period of fiscal 2004. For the nine
months ended June 3, 2005, SG&A expenses increased $794,000 or 21.7% to
$4,444,000 from $3,650,000 for the same period of fiscal 2004. Corporate SG&A
expenses in the third quarter and first nine months of fiscal 2005 increased
$197,000 and $192,000, respectively. Corporate 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. Sarbanes-Oxley compliance costs for the three
and nine months ended June 3, 2005 were $42,000 and $192,000, respectively,
compared to none in fiscal 2004. WCI's SG&A expense increases in the third
18
quarter of fiscal 2005 included higher sales salaries of $87,000 due to an
increase in personnel, increases in selling and marketing expenses of $95,000
due to increased sales activity and sales commissions, increases in bad debt
provisions of $50,000 and increases in relocation expenses and placement fees of
$43,000. The increase in WCI's SG&A expenses in the first nine months of fiscal
2005 was mainly due to higher sales salaries of $262,000 due to an increase in
personnel, increases in selling and marketing expenses of $156,000 due to
increased sales activity and sales commissions, higher consulting expenses of
$164,000 and increases in relocation expenses and placement fees of $36,000.
These expenses were offset by lower professional fees at WCI of $60,000. As a
percentage of revenues, SG&A expenses were 37.5% and 26.1% for the three and
nine month periods ended June 3, 2005, respectively, compared to 24.1% and 25.6%
for the same periods of fiscal 2004. SG&A expenses in the nine month period
ended June 3, 2005, included adjustments to reduce primarily insurance and
property tax expenses by $11,000 related to reductions of certain accrued
expenses (see Note 11 to the consolidated financial statements).
Research and Development - Research and development (R&D) expenditures,
including capitalized software development costs, were $1,223,000 or 28.8% of
revenues, and $3,617,000 or 21.3% of revenues, for the three and nine month
periods ended June 3, 2005, compared to $1,174,000 or 24.6% of revenues, and
$3,668,000 or 25.8% of revenues, for the same periods of fiscal 2004.
Capitalized software development costs amounted to $387,000 and $1,206,000 for
the third quarter and first nine months of fiscal 2005 compared to $382,000 and
$1,360,000 for the same periods of fiscal 2004. The decreases in capitalized
software costs in the first nine months of fiscal 2005 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.
Research and development expenses, excluding capitalized software expenditures,
were $836,000 or 19.7% of revenues, and $2,411,000 or 14.2% of revenues, for the
three and nine months ended June 3, 2005, respectively, compared to $792,000 or
16.6% of revenues, and $2,308,000 or 16.2% of revenues, for the same periods of
fiscal 2004, respectively. The increases in R&D expenses for the three and nine
months ended June 3, 2005, are mainly due to increased placement fees and
prototype part costs. R&D expenses in the nine month period ended June 3, 2005,
included adjustments to reduce primarily insurance and property tax expenses by
$10,000 related to reductions of certain accrued expenses (see Note 11 to the
consolidated financial statements). The expenditures for research and
development for the fourth quarter of fiscal 2005 are expected to be comparable
to those of the third quarter.
Interest Expense - Interest expense decreased $15,000 to $16,000 for the three
months ended June 3, 2005 as compared to fiscal 2004. For the nine months ended
June 3, 2005, interest expense decreased $28,000 to $46,000 as compared to the
same period in fiscal 2004. The decreases for the three and nine month periods
in fiscal 2005 were primarily due to a decrease in the average outstanding
letter of credit commitment balances.
Interest Income - Interest income was $12,000 and $22,000 for the three and nine
month periods ended June 3, 2005, compared to $24,000 and $38,000 for the same
periods ended May 28, 2004. The decreases for the three and nine months ended
June 3, 2005 were mainly due to lower average balances of cash and cash
equivalents.
Income Tax Expenses - For the nine months ended June 3, 2005, income tax benefit
of $214,000 was comprised of a deferred federal and state tax benefit of
$202,000 and $12,000, respectively. Net deferred tax assets increased $214,000
in the first nine months of fiscal 2005 to $4,383,000, 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 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
19
scheduled and designated by the buyer, 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
nine months ended June 3, 2005, revenues in the amount of $534,000 and
$3,412,000, respectively, were appropriately recorded prior to delivery as bill
and hold transactions in accordance with the provisions of SAB 104. At June 3,
2005, accounts receivable for these revenues amounted to $534,000. Subsequent to
June 3, 2005, payments in the amount of $534,000 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 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 June 3, 2005, inventories, net of reserve provisions, amounted to
$3,242,000.
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 June 3, 2005, capitalized software costs,
net of accumulated amortization, amounted to $1,812,000.
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 June 3, 2005. At June 3, 2005, deferred tax
assets, net of valuation allowances, amounted to $4,383,000, of which
approximately $2,588,000 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 June 3, 2005, accounts receivable, net of
allowances for doubtful accounts, amounted to $2,388,000.
20
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED JUNE 3, 2005
At June 3, 2005, our primary sources of liquidity were cash and cash equivalents
of $1,671,000 and a $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. At June 3, 2005,
approximately $2,386,000, net of outstanding letters of credit in the amount of
$1,345,000, was available to borrow under the advance formulas. Cash and cash
equivalents increased $150,000 during the first nine months of fiscal 2005.
During the first nine months of fiscal 2005, operating activities provided
$1,721,000 of cash. Net earnings adjusted for noncash expenses provided
$1,170,000 of cash. Changes in accounts receivable and customer deposit balances
provided $379,000 of cash and changes in inventories, accounts payable and
accrued expenses, and other assets provided $172,000 of cash. Cash used by
investing activities was $315,000 for property and equipment expenditures,
$1,206,000 for capitalized software additions and $119,000 for legal expenses
related to the filing of applications for various patents and trademarks.
Financing activities provided $70,000 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 (6.00% at June 3, 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 is
guaranteed by Wegener Corporation. At June 3, 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 June 3, 2005 amounted to
$1,345,000. At June 3, 2005, approximately $2,386,000, 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 June 3, 2005, we were in compliance with all loan facility
covenants.
In addition, at June 3, 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.
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At June 3, 2005, outstanding purchase commitments under these
agreements amounted to $5,507,000. Pursuant to the above agreements, at June 3,
2005, we had outstanding letters of credit in the amount of $1,345,000.
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 June 3, 2005, the outstanding commitment under the agreement was
$181,000.
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 June 3, 2005 consisted
of:
Payments Due by Period
----------------------------------------------------------------
Fiscal Fiscal Fiscal
Contractual Obligations Total 2005 2006-2007 2008-2009
----------------------- ----------------------------------------------------------------
Operating leases $ 261,000 $ 38,000 $ 219,000 $ 4,000
Purchase commitments 5,688,000 3,144,000 2,544,000 --
----------------------------------------------------------------
Total $5,949,000 $3,182,000 $2,763,000 $ 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 June 3, 2005
subject to variable interest rate fluctuations.
At June 3, 2005, our cash equivalents consisted of bank commercial paper in the
amount of $1,625,000. 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.
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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 (June 3, 2005). 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 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.
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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 15, 2005 By: /s/ Robert A. Placek
--------------------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: July 15, 2005 By: /s/ C. Troy Woodbury, Jr.
--------------------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
25