UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 28, 2003
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 12,398,551 Shares
- ---------------------------- -----------------------------
Class Outstanding December 30, 2003
WEGENER CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 28, 2003
INDEX
Page(s)
PART I. Financial Information
Item 1. Financial Statements
Introduction ........................................................3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
November 28, 2003 and November 29, 2002 .............................4
Consolidated Balance Sheets - November 28,
2003 (Unaudited) and August 29, 2003 ................................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Three Months Ended November 28,
2003 and November 29, 2002 ..........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended November 28,
2003 and November 29, 2002 ..........................................7
Notes to Consolidated Financial
Statements (Unaudited) ...........................................8-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................15-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........19
Item 4. Controls and Procedures.............................................19
PART II. Other Information
Item 1. Legal Proceedings...................................................20
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K ...................................20
Signatures .........................................................21
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The consolidated balance sheet as of November 28, 2003; the consolidated
statements of shareholders' equity as of November 28, 2003 and November 29,
2002; the consolidated statements of operations for the three months ended
November 28, 2003 and November 29, 2002; and the consolidated statements of cash
flows for the three months ended November 28, 2003 and November 29, 2002 have
been prepared without audit. The consolidated balance sheet as of August 29,
2003 has been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 29, 2003, File No. 0-11003.
In the opinion of management of the Company, the statements for the
unaudited interim periods presented include all adjustments, which were of a
normal recurring nature, necessary to present a fair statement of the results of
such interim periods. The results of operations for the interim periods
presented are not necessarily indicative of the results of operations for the
entire year.
3
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
NOVEMBER 28, November 29,
2003 2002
- --------------------------------------------------------------------------------
Revenue $ 4,750,205 $ 3,945,118
- --------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 3,475,537 2,643,910
Selling, general, and administrative 1,220,631 1,229,281
Research and development 741,241 655,514
- --------------------------------------------------------------------------------
Operating costs and expenses 5,437,409 4,528,705
- --------------------------------------------------------------------------------
Operating loss (687,204) (583,587)
Interest expense (18,861) (14,667)
Interest income 4,397 19,708
- --------------------------------------------------------------------------------
Loss before income taxes (701,668) (578,546)
Income tax benefit 253,000 209,000
- --------------------------------------------------------------------------------
Net loss $ (448,668) $ (369,546)
================================================================================
Net loss per share:
Basic $ (0.04) $ (0.03)
Diluted $ (0.04) $ (0.03)
================================================================================
Shares used in per share calculation
Basic 12,396,570 12,267,825
Diluted 12,396,570 12,267,825
================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 28, August 29,
2003 2003
- -------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 4,730,429 $ 4,213,252
Accounts receivable 4,023,316 3,560,127
Inventories 1,429,921 2,142,835
Deferred income taxes 2,057,000 2,109,000
Other 55,685 143,397
- -------------------------------------------------------------------------------------
Total current assets 12,296,351 12,168,611
Property and equipment, net 2,790,882 2,913,551
Capitalized software costs, net 1,555,784 1,304,416
Deferred income taxes 1,334,000 1,029,000
Other assets 836,494 752,003
- -------------------------------------------------------------------------------------
$ 18,813,511 $ 18,167,581
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,868,255 $ 1,195,034
Accrued expenses 1,456,959 1,432,749
Customer deposits 484,341 254,667
Current maturities of long-term obligations 2,743 4,320
- -------------------------------------------------------------------------------------
Total current liabilities 3,812,298 2,886,770
Long-term obligations, less current maturities -- --
- -------------------------------------------------------------------------------------
Total liabilities 3,812,298 2,886,770
- -------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,398,551 and 12,381,251 shares
respectively, issued and outstanding 123,986 123,813
Additional paid-in capital 19,639,966 19,471,069
Deficit (4,762,739) (4,314,071)
- -------------------------------------------------------------------------------------
Total shareholders' equity 15,001,213 15,280,811
- -------------------------------------------------------------------------------------
$ 18,813,511 $ 18,167,581
=====================================================================================
See accompanying notes to consolidated financial statements.
5
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Additional Treasury Stock
------------ Paid-in --------------
Shares Amount Capital Deficit Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at August 30, 2002 12,314,575 $ 123,146 $ 19,513,977 $ (4,401,830) 72,977 $ (156,345)
Treasury stock reissued through
stock options and 401(k) plan -- -- (48,671) -- (39,125) 83,821
Net loss for the three months -- -- -- (369,546) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE at November 29, 2002 12,314,575 $ 123,146 $ 19,465,306 $ (4,771,376) 33,852 $ (72,524)
==================================================================================================================================
Balance at August 29, 2003 12,381,251 $ 123,813 $ 19,471,069 $ (4,314,071) -- $ --
Treasury stock reissued through
stock options and 401(k) plan 17,300 173 29,097 -- -- --
Value of stock options granted
for services -- -- 139,800 -- -- --
Net loss for the three months -- -- -- (448,668) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 28, 2003 12,398,551 $ 123,986 $ 19,639,966 $ (4,762,739) -- $ --
==================================================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
NOVEMBER 28, November 29,
2003 2002
- --------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES
Net loss $ (448,668) $ (369,546)
Adjustments to reconcile net loss to
cash provided by operating activities
Depreciation and amortization 504,555 380,747
Issuance of treasury stock for
benefit plan -- 35,150
Value of stock options granted for services 139,800 --
Provision for bad debts 30,000 15,000
Provision for inventory reserves 75,000 --
Provision (benefit) for deferred income taxes (253,000) (209,000)
Changes in assets and liabilities
Accounts receivable (493,189) 1,461,591
Inventories 637,914 146,026
Other assets 87,712 25,598
Accounts payable and accrued expenses 697,431 49,501
Customer deposits 229,674 (116,541)
- --------------------------------------------------------------------------------------
1,207,229 1,418,526
- --------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (43,813) (233,685)
Capitalized software additions (547,110) (193,911)
License agreements, patents, and trademarks
expenditures (126,822) --
- --------------------------------------------------------------------------------------
(717,745) (427,596)
- --------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Repayment of long-term debt (1,577) (1,491)
Proceeds from stock options exercised 29,270 --
- --------------------------------------------------------------------------------------
27,693 (1,491)
- --------------------------------------------------------------------------------------
Increase in cash and cash equivalents 517,177 989,439
Cash and cash equivalents, beginning of period 4,213,252 5,117,756
- --------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,730,429 $ 6,107,195
======================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the three months for:
Interest $ 18,861 $ 14,667
Income taxes -- --
======================================================================================
See accompanying notes to consolidated financial statements.
7
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are set forth in
Note 1 to the Company's audited consolidated financial statements included in
the annual report on Form 10-K for the year ended August 29, 2003.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," as published by the staff of the Securities and Exchange
Commission. Revenue is recognized when persuasive evidence of an agreement with
the customer exists, products are shipped or title passes pursuant to the terms
of the agreement with the customer, the amount due from the customer is fixed or
determinable, collectibility is reasonably assured, and when there are no
significant future performance obligations. Service revenues are recognized at
the time of performance. The Company recognizes 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 months ended November 28, 2003, revenues to one
customer in the amount of $1,263,000 were appropriately recorded prior to
delivery as bill and hold transactions in accordance with the provisions of SAB
101. At November 28, 2003, accounts receivable for these revenues amounted to
$1,263,000.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and if future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history and credit
worthiness of the customer. If management determines that collection is not
reasonably assured or future performance obligations exist, revenue recognition
is deferred until these conditions are satisfied.
The Company's principal sources of revenues are from the sales of various
satellite communications equipment. Embedded in the Company's products is
internally developed software of varying applications. Historically, the Company
has not sold or marketed its software separately or otherwise licensed its
software apart from the related communications equipment. Should the Company
begin to market or sell software whereby it is more than an incidental component
of the hardware, the Company will recognize software license revenue in
accordance with SOP No. 97-2, "Software Revenue Recognition," as amended by SOP
No. 98-9, "Software Revenue Recognition, with Respect to Certain Transactions."
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," the Company included all shipping and handling billings to customers
in revenues, and freight costs incurred for product shipments have been included
in cost of products sold.
EARNINGS PER SHARE
Basic and diluted net earnings per share were computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic
net earnings per share is computed by dividing net earnings available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net earnings per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
earnings per share, the average stock price for the period is used in
determining the number of shares assumed to be reacquired under the treasury
stock method from the exercise of stock options.
STOCK BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standard (SFAS) No 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
8
Transition and Disclosure," but applies Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans. Under APB No. 25, when the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The following table includes disclosures required by SFAS No. 123, as amended by
SFAS No. 148, and illustrates the effect on net earnings (loss) and net earnings
(loss) per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123:
Three months ended
-----------------------------
NOVEMBER 28, November 29,
2003 2002
------------------------------------------------------------
Net loss
As Reported $ (448,668) $ (369,546)
Deduct:
Compensation cost
using the fair value
method, net of tax (5,856) (20,654)
------------------------------------------------------------
Pro Forma $ (454,524) $ (390,200)
============================================================
Loss per share
As Reported
Basic $ (.04) $ (.03)
Diluted (.04) (.03)
Pro Forma
Basic (.04) (.03)
Diluted (.04) (.03)
============================================================
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
-----------------------------
NOVEMBER 28, November 29,
2003 2002
------------------------------------------------------------
Risk free interest rate 4.00% 4.97%
Expected term 3 YEARS 3 years
Volatility 90% 75%
Expected annual dividends NONE none
============================================================
No options were granted to employees or directors during the three months ended
November 28, 2003 and November 29, 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could vary from these estimates.
FISCAL YEAR
The Company uses a fifty-two, fifty-three week year. The fiscal year ends on the
Friday closest to August 31. Fiscal year 2004 contains fifty-three weeks while
fiscal 2003 contained fifty-two weeks.
9
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
NOVEMBER 28, August 29,
2003 2003
------------------------------------------------------------
(UNAUDITED)
Accounts receivable - trade $ 4,345,044 $ 3,838,644
Other receivables 76,043 76,143
------------------------------------------------------------
4,421,087 3,914,787
Less allowance for
doubtful accounts (397,771) (354,660)
------------------------------------------------------------
$ 4,023,316 $ 3,560,127
============================================================
NOTE 3 INVENTORIES
Inventories are summarized as follows:
NOVEMBER 28, August 29,
2003 2003
------------------------------------------------------------
(UNAUDITED)
Raw material $ 2,184,792 $ 2,347,542
Work-in-process 1,013,938 951,078
Finished goods 1,548,680 2,334,578
------------------------------------------------------------
4,747,410 5,633,198
Less inventory reserves (3,317,489) (3,490,363)
------------------------------------------------------------
$ 1,429,921 $ 2,142,835
============================================================
During the first quarter of fiscal 2004 inventory reserves were reduced by
inventory write-offs of $248,000 and increased by provisions of $75,000. The
Company's inventory reserve of approximately $3,317,000 at November 28, 2003 is
to provide for items that are potentially slow moving, excess, or obsolete.
Changes in market conditions, lower than expected customer demand and rapidly
changing technology could result in additional obsolete and slow-moving
inventory that is unsaleable or saleable at reduced prices. No estimate can be
made of a range of amounts of loss from obsolescence that are reasonably
possible should the Company's sales efforts not be successful.
10
NOTE 4 OTHER ASSETS
Other assets consisted of the following:
NOVEMBER 28, 2003
------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------------------------------------------------------
License agreements $ 570,000 $(112,331) $ 457,669
Patents 302,720 -- 302,720
Trademarks 40,049 -- 40,049
Loan facility fees 50,000 (20,833) 29,167
Other 6,889 -- 6,889
------------------------------------------------------------
$ 969,658 $(133,164) $ 836,494
============================================================
August 29, 2003
------------------------------------------------------------
Accumulated
Cost Amortization Net
------------------------------------------------------------
License agreements $ 570,000 $ (82,500) $ 487,500
Patents 174,369 -- 174,369
Trademarks 41,578 -- 41,578
Loan facility fees 50,000 (8,333) 41,667
Other 6,889 -- 6,889
------------------------------------------------------------
$ 842,836 $ (90,833) $ 752,003
============================================================
Amortization expense of other assets for the three months ended November 28,
2003 amounted to $42,000. Amortization expense of other assets for the three
months ended November 29, 2002 amounted to $12,000.
The Company conducts an ongoing review of its intellectual property rights and
potential trademarks. As of November 28, 2003, the Company incurred $303,000 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 or their
estimated useful lives. 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 three months ended November 28, 2003, the income tax benefit of $253,000
was comprised of a deferred federal and state income tax benefit of $239,000 and
$14,000, respectively. Net deferred tax assets increased $253,000 to $3,391,000,
principally due to an increase in net operating loss carryforwards in the first
quarter. Realization of deferred tax assets is dependent on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets will be realized based
on the Company's backlog, financial projections and operating history. The
amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
At November 28, 2003, the Company had a federal net operating loss carryforward
of approximately $3,997,000, which expires beginning fiscal 2020 through fiscal
2024. Additionally, the Company had general business and foreign tax credit
carryforwards of $98,000 expiring in fiscal 2004, 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 table represents required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net earnings (loss) per
share computations. The calculation of earnings per share is subject to rounding
differences.
Three months ended
-----------------------------------------------------------------------------------
NOVEMBER 28, 2003 November 29, 2002
-----------------------------------------------------------------------------------
EARNINGS SHARES PER SHARE Earnings Shares Per share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
-----------------------------------------------------------------------------------
Net earnings (loss) $ (448,668) $ (369,546)
-----------------------------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) available
to common shareholders $ (448,668) 12,396,570 $ (0.04) $ (369,546) 12,267,825 $ (0.03)
===================================================================================
Effect of dilutive potential common shares:
Stock options -- -- -- --
-----------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Net earnings (loss) available
to common shareholders $ (448,668) 12,396,570 $ (0.04) $ (369,546) 12,267,825 $ (0.03)
===================================================================================
Stock options which were excluded from the diluted net earnings (loss) per share
calculation due to their anti-dilutive effect are as follows:
Three months ended
--------------------------------
NOVEMBER 28, November 29,
2003 2002
--------------------------------
Common stock options:
Number of shares 1,411,125 1,435,425
Range of exercise prices $. 63 TO $5.63 $ .75 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.
12
In this single operating segment the Company has three sources of revenues as
follows:
Three months ended
-----------------------------
NOVEMBER 28, November 29,
2003 2002
-----------------------------
Product Line
Direct Broadcast Satellite $ 4,140,242 $ 3,482,568
Telecom and Custom Products 411,681 351,375
Service 198,282 111,175
-----------------------------
$ 4,750,205 $ 3,945,118
=============================
Revenues by geographic areas are as follows:
Three months ended
-----------------------------
NOVEMBER 28, November 29,
2003 2002
-----------------------------
Geographic Area
United States $ 4,560,230 $ 3,755,166
Latin America 56,136 56,400
Canada 75,205 66,730
Europe 17,892 52,274
Other 40,742 14,548
-----------------------------
$ 4,750,205 $ 3,945,118
=============================
All of the Company's long-lived assets are located in the United States.
Customers representing 10% or more of the respective periods' revenues are as
follows:
Three months ended
-----------------------------
NOVEMBER 28, November 29,
2003 2002
-----------------------------
Customer 1 37.0% 50.3%
Customer 2 15.3% (a)
Customer 3 11.8% (a)
=============================
(a) Revenues for the period were less than 10% of total revenues.
NOTE 8 COMMITMENTS
During the second quarter of fiscal 2003, the Company entered into two
manufacturing and purchasing agreements for certain finished goods inventories.
The agreements committed the Company to purchase $2,116,000 over an
eighteen-month period, beginning in the third quarter of fiscal 2003. During the
first quarter of fiscal 2004, purchase commitments were increased by $459,000.
At November 28, 2003, outstanding purchase commitments under these two
agreements amounted to $2,262,000. In addition, the Company maintains a
cancelable manufacturing and purchasing agreement of finished goods inventories
for which the Company has firm customer order commitments. The Company had
outstanding purchase commitments under this agreement of $1,717,000 at November
28, 2003. Pursuant to the above agreements, at November 28, 2003, the Company
had outstanding letters of credit in the amount of $3,287,000.
13
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 November 28, 2003, the outstanding commitment under the agreement
was $798,000.
NOTE 9 GUARANTEES
Warranty
The Company warrants its 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. The
Company expenses costs for routine warranty repairs as incurred. Additional
provisions are made for non-routine warranty repairs based on estimated costs to
repair at the point in time in which the warranty claim is identified. Accrued
warranty provisions amounted to $66,000 at November 28, 2003. For the three
month period ended November 28, 2003, no changes were made to the accrual.
Letters of Credit
Wegener Communications Inc., the Company's wholly owned subsidiary (WCI),
provides standby letters of credit in the ordinary course of business to certain
suppliers pursuant to manufacturing and purchasing agreements. At November 28,
2003, outstanding letters of credit amounted to $3,287,000.
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 November 28, 2003, no
balances were outstanding on the loan facility.
NOTE 10 STOCK OPTIONS
During the first three months of fiscal 2004, options for 100,000 shares of
common stock, exercisable at $2.39, were granted pursuant to a consulting
agreement to provide software development services. The fair value of the
options was measured on the grant date using the Black-Scholes option pricing
model. As the options were fully vested and non-forfeitable, the fair value of
$139,800 was charged to research and development expenses during the three
months ended November 28, 2003, in accordance with EITF 96-18 "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." At November 28, 2003, options for
1,411,125 shares of common stock were outstanding with a weighted average
exercise price of $1.76 and with exercise prices ranging from $.63 to $5.63. At
November 28, 2003, options for 872,575 shares of common stock were available for
issuance under the 1998 Incentive Plan. Additionally, during the first three
months of fiscal 2004, options for 17,300 shares with exercise prices ranging
from $ .84 to $ 2.31 were exercised. Subsequent to November 28, 2003, options
for 367,000 shares of common stock, exercisable at $2.21, were granted to
employees.
14
WEGENER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended August 29, 2003 contained in the Company's 2003 Annual Report on Form
10-K.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results, future business or product
development plans, research and development activities, capital spending,
financing sources or capital structure, the effects of regulation and
competition, and are thus prospective. Such forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, economic conditions, customer plans and commitments, product
demand, government regulation, rapid technological developments and changes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, material availability, new and existing
well-capitalized competitors, and other uncertainties detailed in the Company's
Form 10-K for the year ended August 29, 2003 and from time to time in the
Company's periodic United States Securities and Exchange Commission filings.
The Company manufactures satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI designs and
manufactures communications transmission and receiving equipment for the
business broadcast, data communications, cable and broadcast radio and
television industries.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 28, 2003 COMPARED TO THREE MONTHS ENDED NOVEMBER 29,
2002
The operating results for the three month period ended November 28, 2003, were a
net loss of $(449,000) or $(0.04) per share compared to a net loss of $(370,000)
or $(0.03) per share for the three month period ended November 29, 2002.
REVENUES - The Company's revenues for the first quarter of fiscal 2004 increased
$805,000 or 20.4% to $4,750,000 from $3,945,000 for the same period in fiscal
2003.
Direct Broadcast Satellite (DBS) revenues (including service revenues) increased
$745,000 or 20.7%, in the first quarter of fiscal 2004 to $4,339,000 from
$3,594,000 for the same period in fiscal 2003. The increase in revenues was a
result of a higher backlog of orders at the beginning of fiscal 2004 compared to
the beginning of fiscal 2003. Revenues and order backlog are subject to the
timing of significant orders from customers, and as a result revenue levels may
fluctuate from quarter to quarter. The first quarter of fiscal 2004 included
shipments of UNITY4600 digital receivers to FOX Sports Net for digital cable
network distribution upgrades and new high-definition cable television network
applications. Telecom and Custom Products Group revenues increased $61,000 or
17.2% to $412,000 in the first quarter of fiscal 2004 from $351,000 in the first
quarter of fiscal 2003. The increase was mainly due to increased shipments of
cue and control equipment to provide local commercial insertion capabilities to
cable television operators. For the three months ended November 28, 2003, three
customers accounted for 37.0%, 15.3% and 11.8% of revenues, respectively. For
the three months ended November 29, 2002, one customer accounted for 50.3% of
revenues. Sales to a relatively small number of major customers have typically
comprised a majority of the Company's revenues and that trend is expected to
continue throughout fiscal 2004. The Company's backlog is comprised of
undelivered, firm customer orders, which are scheduled to ship within eighteen
months. WCI's backlog was approximately $15.0 million at November 28, 2003,
compared to $12.7 million at August 29, 2003, and $12.8 million at November 29,
2002. One customer accounted for approximately 66.1% of the backlog at November
28, 2003. The total multi-year backlog at November 28, 2003 was approximately
$25.3 million.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 26.8%
for the three month period ended November 28, 2003, compared to 33.0% for the
three month period ended November 29, 2002. Gross margin percentages were
unfavorably impacted by a product mix with higher variable cost components and
increases in capitalized software amortization expenses and inventory reserve
provisions. Gross profit margin dollars decreased $27,000 for the three month
period ended November 28, 2003 compared to the same period ended November 29,
2002. The decrease in margin dollars
15
was mainly due to product sales mix and higher fixed overhead expenses. Profit
margins in the first quarter of fiscal 2004 included inventory reserve charges
of $75,000 compared to none for the same period of fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses decreased $8,000 or less than 1.0% to $1,221,000 in the first quarter
of fiscal 2004 from $1,229,000 in the first quarter of fiscal 2003. SG&A
professional fees decreased $171,000 mainly due to lower legal expenses as a
result of settlement in fiscal 2003 of a complaint filed by StarGuide Digital
Networks, Inc. against WCI primarily alleging patent infringement. The decrease
in professional fees was offset by increases in selling and administrative
overhead expenses and increases in selling compensation expenses due to an
increase in personnel. As a percentage of revenues, SG&A expenses were 25.7% for
the three month period ended November 28, 2003 compared to 31.2% for the same
period ended November 29, 2002.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $1,288,000 or 27.1% of revenues in
the first quarter of fiscal 2004 compared to $850,000 or 21.5% of revenues for
the same period of fiscal 2003. Capitalized software development costs amounted
to $547,000 in the first quarter of fiscal 2004 compared to $194,000 in the
first quarter of fiscal 2003. The increases in capitalized software costs during
the first quarter of fiscal 2004 compared to 2003 were due to increased
expenditures on COMPEL network control software, the iPump Media Server,
UNITY4600 and DTV series 700 products. Research and development expenses,
excluding capitalized software development costs, were $741,000 or 15.6% of
revenues in the first quarter of fiscal 2004 compared to $656,000 or 16.6% of
revenues in the same period of fiscal 2003. The increase in expenses in the
first quarter of fiscal 2004 compared to the same period of fiscal 2003 was
mainly due to increased engineering consulting costs.
INTEREST EXPENSE - Interest expense increased $4,000 to $19,000 in the first
quarter of fiscal 2004 from $15,000 in the same period in fiscal 2003. The
increase was primarily due to an increase in average outstanding letter of
credit commitment balances.
INTEREST INCOME - Interest income was $4,000 for the three months ended November
28, 2003 compared to $20,000 for the same period ended November 29, 2002. The
decrease was primarily due to lower average cash equivalent balances and lower
investment yields.
INCOME TAX EXPENSE - For the three months ended November 28, 2003, income tax
benefit of $253,000 was comprised of a deferred federal and state income tax
benefit of $239,000 and $14,000, respectively.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are very important to the portrayal of the Company's
financial condition and results of operations and require management's most
subjective or difficult judgements. These policies are as follows:
REVENUE RECOGNITION - The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," as published by the staff of the
Securities and Exchange Commission. Revenue is recognized when persuasive
evidence of an agreement with the customer exists, products are shipped or title
passes pursuant to the terms of the agreement with the customer, the amount due
from the customer is fixed or determinable, collectibility is reasonably
assured, and when there are no significant future performance obligations.
Service revenues are recognized at the time of performance. The Company
recognizes 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 months
ended November 28, 2003, revenues to one customer in the amount of $1,263,000
were appropriately recorded prior to delivery as bill and hold transactions in
accordance with the provisions of SAB 101. At November 28, 2003, accounts
receivable for these revenues amounted to $1,263,000.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and if future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history and credit
worthiness of the customer. If management determines that collection is not
reasonably assured or future performance obligations exist, revenue recognition
is deferred until these conditions are satisfied.
16
The Company's principal sources of revenues are from the sales of various
satellite communications equipment. Embedded in the Company's products is
internally developed software of varying applications. Historically, the Company
has not sold or marketed its software separately or otherwise licensed its
software apart from the related communications equipment. Should the Company
begin to market or sell software whereby it is more than an incidental component
of the hardware, the Company will recognize software license revenue in
accordance with SOP No. 97-2, "Software Revenue Recognition," as amended by SOP
No. 98-9, "Software Revenue Recognition, with Respect to Certain Transactions."
INVENTORY RESERVES - Inventories are valued at the lower of cost (at standard,
which approximates actual cost on a first-in, first-out basis) or market.
Inventories include the cost of raw materials, labor and manufacturing overhead.
The Company makes inventory reserve provisions for obsolete or slow-moving
inventories as necessary to properly reflect inventory value. These reserves are
to provide for items that are potentially slow moving, excess, or obsolete.
Changes in market conditions, lower than expected customer demand and rapidly
changing technology could result in additional obsolete and slow-moving
inventory that is unsaleable or saleable at reduced prices, which could require
additional inventory reserve provisions. At November 28, 2003, inventories, net
of reserve provisions, amounted to $1,430,000.
CAPITALIZED SOFTWARE COSTS - Software development costs are capitalized
subsequent to establishing technological feasibility. Capitalized costs are
amortized based on the larger of the amounts computed using (a) the ratio that
current gross revenues for each product bears to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product. Expected
future revenues and estimated economic lives are subject to revisions due to
market conditions, technology changes and other factors resulting in shortfalls
of expected revenues or reduced economic lives, which could result in additional
amortization expense or write-offs. At November 28, 2003, capitalized software
costs, net of accumulated amortization, amounted to $1,556,000.
DEFERRED TAX ASSET VALUATION ALLOWANCE - Deferred tax assets are recognized for
deductible temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits will be
realized. Realization of the Company's deferred tax assets is dependent on
generating sufficient future taxable income prior to the expiration of the loss
and credit carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized based on the Company's backlog, financial projections and operating
history. The amount of the deferred tax assets considered realizable, however,
could be reduced if estimates of future taxable income during the carryforward
period are reduced. Any reduction in the realizable value of deferred tax assets
would result in a charge to income tax expense in the period such determination
was made. At November 28, 2003, deferred tax assets amount to $3,391,000, of
which approximately $1,438,000 relates to net operating loss carryforwards which
expire in fiscal 2020 through 2024, $98,000 of general business and foreign tax
credits expiring in fiscal 2004, an alternative minimum tax credit of $138,000
and state income tax credits of $199,000 expiring in fiscal 2009.
ACCOUNTS RECEIVABLE VALUATION - The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. At November 28, 2003, accounts
receivable, net of allowances for doubtful accounts, amounted to $4,023,000.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED NOVEMBER 28, 2003
At November 28, 2003, the Company's primary sources of liquidity were cash and
cash equivalents of $4,730,000 and a $5,000,000 bank loan facility. Cash and
cash equivalents increased $517,000 during the first quarter of fiscal 2004.
During the first quarter of fiscal 2004, operating activities provided
$1,207,000 of cash. Net loss adjusted for non-cash expenses provided $48,000 of
cash, while changes in accounts receivable and customer deposit balances used
$264,000 of cash. Changes in accounts payable and accrued expenses, inventories
and other assets provided $1,423,000 of cash. Cash used by investing activities
was $44,000 for property and equipment expenditures, $547,000 for capitalized
software additions and $127,000 for legal expenses related to the filing of
applications for various patents and trademarks. Financing activities used cash
of $1,600 for scheduled repayments of long-term debt and provided $29,000 of
cash from the exercise of stock options.
17
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, 2004, or upon
demand and requires an annual facility fee of 1% of the maximum credit limit.
The loan facility consists of a term loan and a revolving line of credit with a
combined borrowing limit of $5,000,000, bearing interest at the bank's prime
rate (4.00% at November 28, 2003).
The term loan facility provides for a maximum of $1,000,000 for advances of up
to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over sixty months with a balloon payment due at maturity. The revolving
line of credit is subject to availability advance formulas of 80% against
eligible accounts receivable; 20% of eligible raw materials inventories; 20% of
eligible work-in-process kit inventories; and 40% to 50% of eligible finished
goods inventories. Advances against inventory are subject to a sublimit of
$2,000,000. At November 28, 2003, no balances were outstanding on the revolving
line of credit or the equipment term loan portions of the loan facility.
Additionally, at November 28, 2003, approximately $1,644,000 net of outstanding
letters of credit in the amount of $3,287,000 was available to borrow under the
advance formulas.
The Company is required to maintain a minimum tangible net worth with annual
increases at each fiscal year end commencing with fiscal year 2003, retain
certain key employees, limit expenditures of Wegener Corporation to $600,000 per
fiscal year, maintain certain financial ratios, and is precluded from paying
dividends. At November 28, 2003, the Company was in compliance with all loan
facility covenants. The Company believes that the loan facility along with cash
and cash equivalent balances will be sufficient to support operations through
fiscal 2004. While no assurances may be given, WCI believes the existing loan
facility will be renewed upon maturity on substantially similar terms.
During the second quarter of fiscal 2003, the Company entered into two
manufacturing and purchasing agreements for certain finished goods inventories.
The agreements committed the Company to purchase $2,116,000 over an 18 month
period, beginning in the third quarter of fiscal 2003. During the first quarter
of fiscal 2004, purchase commitments were increased by $459,000. At November 28,
2003, outstanding purchase commitments under these two agreements amounted to
$2,262,000. In addition, the Company maintains a cancelable manufacturing and
purchasing agreement of finished goods inventories for which the Company has
firm customer order commitments. The Company had outstanding purchase
commitments under this agreement of $1,717,000 at November 28, 2003. Pursuant to
the above agreements, at November 28, 2003, the Company had outstanding letters
of credit in the amount of $3,287,000.
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 November 28, 2003, the outstanding commitment under the agreement
was $798,000.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future.
A summary of the Company's long-term contractual obligations as of November 28,
2003 consisted of:
OPERATING PURCHASE
DEBT LEASES COMMITMENTS TOTAL
---------- ---------- ---------- ----------
Fiscal 2004 $ 3,000 $ 166,000 $4,341,000 $4,510,000
Fiscal 2005 -- 114,000 435,000 549,000
Fiscal 2006 -- 4,000 -- 4,000
Fiscal 2007 -- 2,000 -- 2,000
Fiscal 2008 -- 2,000 -- 2,000
Thereafter -- 2,000 -- 2,000
---------- ---------- ---------- ----------
Total $ 3,000 $ 290,000 $4,776,000 $5,069,000
========== ========== ========== ==========
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to its revolving line of credit and cash equivalents. The interest
rate on certain advances under the line of credit and term loan facility
fluctuates with the bank's prime rate. There were no borrowings outstanding at
November 28, 2003 subject to variable interest rate fluctuations.
At November 28, 2003, the Company's cash equivalents consisted of bank
commercial paper in the amount of $1,200,000. The cash equivalents have
maturities of less than three months and therefore are subject to minimal market
risk.
The Company does not enter into derivative financial instruments. All sales and
purchases are denominated in U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of the end
of the period covered by this report. Based upon that evaluation, the Company's
CEO and CFO have concluded that the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) are effective. There has been no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
Jerry Leuch, Plaintiff, v. Robert A. Placek, Thomas G. Elliot, Joe K.
Parks, C. Troy Woodbury, Jr., Wendell Bailey, Ned Mountain and Wegener
Corporation, Civil Action No.20361-NC On June 20, 2003, Jerry Leuch
commenced an action styled as a direct class action and a derivative
action against Robert A. Placek, Thomas G. Elliot, Joe K. Parks, C.
Troy Woodbury, Jr., Wendell Bailey, Ned Mountain and Wegener
Corporation in the Court of Chancery of the State of Delaware, In and
For New Castle County. The Plaintiff alleges that the individual
defendants violated their fiduciary duties due to him and other
shareholders, the members of the alleged class, as well as Wegener.
The relief Plaintiff seeks is as follows: a declaration that the
Defendants must consider and evaluate all bona fide offers to purchase
all of the outstanding shares of Wegener consistent with their
fiduciary duties; a declaration that this action is properly styled as
a class action; an injunction against proceeding with any business
combination which benefited the individual defendants and an
injunction requiring that any conflicts of interest be resolved in
favor of the Wegener shareholders; and a declaration removing the
anti-takeover measures enacted by Wegener's Board of Directors. The
Complaint also seeks an award of Plaintiff's costs and attorneys' and
other fees. An answer has been filed by Wegener, denying all
substantive allegations in the complaint. On January 8, 2004, the
Company was informed that the Plaintiff intends to file a dismissal of
the Complaint without prejudice. As a result, management does not
believe that the ultimate outcome of this litigation will have a
material adverse effect on its financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer Regarding Periodic
Report Containing Financial Statements Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Regarding Periodic
Report Containing Financial Statements Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Regarding Periodic
Report Containing Financial Statements Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Regarding Periodic
Report Containing Financial Statements Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K :
Current Report on Form 8-K dated November 25, 2003, furnishing its
press release regarding its results for the fourth fiscal quarter and
year ended August 29, 2003.
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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: January 12, 2004 By: /s/ Robert A. Placek
---------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: January 12, 2004 By: /s/ C. Troy Woodbury, Jr.
---------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
21