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 February 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to______________________
Commission file No. 0-11003
WEGENER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0371341
(State of incorporation) (I.R.S. Employer
Identification No.)
11350 TECHNOLOGY CIRCLE, DULUTH, GEORGIA 30097-1502
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 623-0096
REGISTRANT'S WEB SITE: HTTP://WWW.WEGENER.COM
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the ExchangeAct).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value 12,447,051 Shares
- ---------------------------- --------------------------
Class Outstanding March 29, 2004
WEGENER CORPORATION
FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 27, 2004
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction ...................................................3
Consolidated Statements of Operations
(Unaudited) - Three and Six Months Ended
February 27, 2004 and February 28, 2003 ........................4
Consolidated Balance Sheets - February 27,
2004 (Unaudited) and August 29, 2003 ...........................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Six Months Ended February 27,
2004 and February 28, 2003 .....................................6
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended February 27,
2004 and February 28, 2003 .....................................7
Notes to Consolidated Financial
Statements (Unaudited) ......................................8-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................15-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....21
Item 4. Controls and Procedures........................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................22
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders ...........22
Item 5. None
Item 6. Exhibits and Reports on Form 8-K ..............................23
Signatures.....................................................24
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 February 27, 2004; the consolidated
statements of shareholders' equity as of February 27, 2004, and February 28,
2003; the consolidated statements of operations for the three and six months
ended February 27, 2004, and February 28, 2003; and the consolidated statements
of cash flows for the six months ended February 27, 2004, and February 28, 2003,
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 the Company, the statements for the unaudited interim periods
presented include all adjustments, which were of a normal recurring nature,
necessary to present a fair statement of the results of such interim periods.
The results of operations for the interim periods presented are not necessarily
indicative of the results of operations for the entire year.
3
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------
Revenue $ 4,712,923 $ 5,219,152 $ 9,463,128 $ 9,164,270
- ----------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 3,514,612 3,344,855 6,990,149 5,988,765
Selling, general and administrative 1,278,832 932,396 2,499,463 2,161,677
Research and development 774,196 754,146 1,515,437 1,409,660
- ----------------------------------------------------------------------------------------------------------
Operating costs and expenses 5,567,640 5,031,397 11,005,049 9,560,102
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) (854,717) 187,755 (1,541,921) (395,832)
Interest expense (23,714) (17,302) (42,575) (31,969)
Interest income 9,167 13,204 13,564 32,912
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (869,264) 183,657 (1,570,932) (394,889)
Income tax expense (benefit) (214,000) 67,000 (467,000) (142,000)
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (655,264) $ 116,657 $ (1,103,932) $ (252,889)
==========================================================================================================
Net earnings (loss) per share:
Basic $ (.05) $ .01 $ (.09) $ (.02)
Diluted $ (.05) $ .01 $ (.09) $ (.02)
==========================================================================================================
Shares used in per share calculation
Basic 12,416,820 12,320,961 12,406,695 12,294,393
Diluted 12,416,820 12,355,692 12,406,695 12,294,393
==========================================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 27, August 29,
2004 2003
- -------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 3,756,510 $ 4,213,252
Accounts receivable 2,850,872 3,560,127
Inventories 1,686,496 2,142,835
Deferred income taxes 2,095,000 2,109,000
Other 162,605 143,397
- -------------------------------------------------------------------------------------
Total current assets 10,551,483 12,168,611
Property and equipment, net 2,772,673 2,913,551
Capitalized software costs, net 1,650,172 1,304,416
Deferred income taxes 1,510,000 1,029,000
Other assets, net 840,304 752,003
- -------------------------------------------------------------------------------------
$ 17,324,632 $ 18,167,581
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 959,049 $ 1,195,034
Accrued expenses 1,570,921 1,432,749
Customer deposits 378,774 254,667
Current maturities of long-term obligations 1,151 4,320
- -------------------------------------------------------------------------------------
Total current liabilities 2,909,895 2,886,770
- -------------------------------------------------------------------------------------
Total liabilities 2,909,895 2,886,770
- -------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,445,051 and 12,381,251 shares
respectively, issued and outstanding 124,451 123,813
Additional paid-in capital 19,708,289 19,471,069
Deficit (5,418,003) (4,314,071)
- -------------------------------------------------------------------------------------
Total shareholders' equity 14,414,737 15,280,811
- -------------------------------------------------------------------------------------
$ 17,324,632 $ 18,167,581
=====================================================================================
See accompanying notes to consolidated financial statements.
5
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Retained Treasury Stock
------------ Paid-in Earnings --------------
Shares Amount Capital (Deficit) Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 30, 2002 12,314,575 $ 123,146 $ 19,513,977 $ (4,401,830) 72,977 $ (156,345)
Treasury stock reissued and
common stock issued through
stock options and 401(k) plan 27,176 272 (74,208) -- (72,977) 156,345
Net loss for the six months -- -- -- (252,889) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE at February 28, 2003 12,341,751 $ 123,418 $ 19,439,769 $ (4,654,719) -- $ --
===================================================================================================================================
Balance at August 29, 2003 12,381,251 $ 123,813 $ 19,471,069 $ (4,314,071) -- $ --
Common stock issued through
stock options 63,800 638 97,420 -- -- --
Value of stock options granted
for services -- -- 139,800 -- -- --
Net loss for the six months -- -- -- (1,103,932) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 27, 2004 12,445,051 $ 124,451 $ 19,708,289 $ (5,418,003) -- $ --
===================================================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
FEBRUARY 27, February 28,
2004 2003
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES
Net loss $ (1,103,932) $ (252,889)
Adjustments to reconcile net loss to
cash provided by operating activities
Depreciation and amortization 1,042,501 769,927
Issuance of treasury and common stock for
benefit plan -- 82,409
Value of stock options granted
for services 139,800 --
Provision for bad debts 60,000 35,000
Provision for inventory reserves 150,000 100,000
Provision (benefit)for deferred income taxes (467,000) (142,000)
Changes in assets and liabilities
Accounts receivable 649,255 (85,429)
Inventories 306,339 347,962
Other assets (19,208) (29,384)
Accounts payable and accrued expenses (97,813) 270,578
Customer deposits 124,107 (140,983)
- ------------------------------------------------------------------------------------------
784,049 955,191
- ------------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (185,236) (368,987)
Capitalized software additions (978,584) (419,269)
License agreement, patent, and trademark expenditures (171,860) (496,006)
- ------------------------------------------------------------------------------------------
(1,335,680) (1,284,262)
- ------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES
Repayment of long-term debt (3,169) (2,988)
Proceeds from stock options exercised 98,058 --
- ------------------------------------------------------------------------------------------
94,889 (2,988)
- ------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (456,742) (332,059)
Cash and cash equivalents, beginning of period 4,213,252 5,117,756
- ------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,756,510 $ 4,785,697
==========================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 42,575 $ 31,969
Income taxes $ -- $ --
==========================================================================================
See accompanying notes to consolidated financial statements.
7
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are set forth in
Note 1 to the Company's audited consolidated financial statements included in
the annual report on Form 10-K for the year ended August 29, 2003.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," as published by the staff of the Securities and Exchange
Commission. Revenue is recognized when persuasive evidence of an agreement with
the customer exists, products are shipped or title passes pursuant to the terms
of the agreement with the customer, the amount due from the customer is fixed or
determinable, collectibility is reasonably assured, and when there are no
significant future performance obligations. Service revenues are recognized at
the time of performance. The Company recognizes revenues in certain
circumstances before delivery has occurred (commonly referred to as "bill and
hold" transactions). In such circumstances, among other things, risk of
ownership has passed to the buyer, the buyer has made a written fixed commitment
to purchase the finished goods, the buyer has requested the finished goods be
held for future delivery as scheduled and designated by them, and no additional
performance obligations exist by the Company. For these transactions, the
finished goods are segregated from inventory and normal billing and credit terms
are granted. For the three and six months ended February 27, 2004, revenues to
one customer in the amount of $1,481,000 and $2,743,000, respectively, were
appropriately recorded prior to delivery as bill and hold transactions in
accordance with the provisions of SAB 101. At February 27, 2004, accounts
receivable for these revenues amounted to $1,481,000.
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 - Transition
8
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 Six months ended
--------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------
Net loss
As Reported $ (655,264) $ 116,657 $(1,103,932) $ (252,889)
Deduct:
Compensation cost
using the fair value
method, net of tax (56,455) (27,009) (62,311) (47,663)
- -----------------------------------------------------------------------------------------
Pro Forma $ (711,719) $ 89,648 $(1,166,243) $ (300,552)
=========================================================================================
Loss per share
As Reported
Basic $ (.05) $ .01 $ (.09) $ (.02)
Diluted (.05) .01 (.09) (.02)
Pro Forma
Basic (.06) .01 (.09) (.02)
Diluted (.06) .01 (.09) (.02)
=========================================================================================
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Three months ended Six months ended
------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Risk free interest rate 4.00% 4.00% 4.00% 4.00%
Expected term 3 YEARS 3 years 2.8 YEARS 3 years
Volatility 90% 90% 90% 90%
Expected annual dividends NONE none NONE none
================================================================================
The weighted average fair value of options granted was as follows:
Three months ended Six months ended
------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Per share option value $ 1.23 $ .52 $ 1.23 $ .52
Aggregate total $ 474,230 $ 9,930 $ 474,230 $ 9,930
================================================================================
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could vary from these estimates.
9
FISCAL YEAR
The Company uses a fifty-two, fifty-three week year. The fiscal year ends on the
Friday closest to August 31. Fiscal year 2004 contains fifty-three weeks while
fiscal 2003 contained fifty-two weeks.
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
FEBRUARY 27, August 29,
2004 2003
------------------------------------------------------------
(UNAUDITED)
Accounts receivable - trade $ 3,199,764 $ 3,838,644
Other receivables 76,843 76,143
------------------------------------------------------------
3,276,607 3,914,787
Less allowance for
doubtful accounts (425,735) (354,660)
------------------------------------------------------------
$ 2,850,872 $ 3,560,127
============================================================
NOTE 3 INVENTORIES
Inventories are summarized as follows:
FEBRUARY 27, August 29,
2004 2003
(UNAUDITED)
-------------------------------------------------------------
Raw material $ 2,271,792 $ 2,347,542
Work-in-process 990,048 951,078
Finished goods 1,817,145 2,334,578
-------------------------------------------------------------
5,078,985 5,633,198
-------------------------------------------------------------
Less inventory reserves (3,392,489) (3,490,363)
-------------------------------------------------------------
$ 1,686,496 $ 2,142,835
=============================================================
During the first six months of fiscal 2004 inventory reserves were reduced by
inventory write-offs of $248,000 and increased by provisions of $150,000. The
Company's inventory reserve of approximately $3,392,000 at February 27, 2004 is
to provide for items that are potentially slow-moving, excess, or obsolete.
Changes in market conditions, lower than expected customer demand and rapidly
changing technology could result in additional obsolete and slow-moving
inventory that is unsaleable or saleable at reduced prices. No estimate can be
made of a range of amounts of loss from obsolescence that is reasonably possible
should the Company's sales efforts not be successful.
10
NOTE 4 OTHER ASSETS
Other assets consisted of the following:
FEBRUARY 27, 2004
--------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
--------------------------------------------------------------------
License agreements $ 570,000 $ (140,830) $ 429,170
Patents 329,387 -- 329,387
Trademarks 58,420 (229) 58,191
Loan facility fees 50,000 (33,333) 16,667
Other 6,889 -- 6,889
--------------------------------------------------------------------
$ 1,014,696 $ (174,392) $ 840,304
====================================================================
August 29, 2003
--------------------------------------------------------------------
Accumulated
Cost Amortization Net
--------------------------------------------------------------------
Loan facility fees $ 570,000 $ (82,500) $ 487,500
Patents 174,369 -- 174,369
Trademarks 41,578 -- 41,578
Loan facility fees 50,000 (8,333) 41,667
Other 6,889 -- 6,889
--------------------------------------------------------------------
$ 842,836 $ (90,833) $ 752,003
====================================================================
Amortization expense of other assets for the three and six months ended February
27, 2004, amounted to $41,000 and $84,000, respectively. Amortization expense of
other assets for the three and six months ended February 28, 2003, amounted to
$40,000 and $53,000, respectively.
The Company conducts an ongoing review of its intellectual property rights and
potential trademarks. As of February 27, 2004, the Company incurred $329,000 and
$47,000 of legal expenses related to the filing of applications for various
patents and trademarks, respectively. Upon issuance, these costs will be
amortized on a straight-line basis over the lesser of the legal life or their
estimated useful lives. At February 27, 2004, the cost of registered trademarks
amounted to $11,000. License agreements are amortized over their estimated
useful life of five years. Loan facility fees are amortized over twelve months.
NOTE 5 INCOME TAXES
For the six months ended February 27, 2004, the income tax benefit of $467,000
was comprised of deferred federal and state income tax benefits of $436,000 and
$31,000, respectively. Net deferred tax assets increased $467,000 to $3,605,000,
principally due to an increase in net operating loss carryforwards in the first
six months. At February 27, 2004, a valuation allowance of $98,000 was recorded
related to general business and foreign tax credits of $98,000, which expire
September 3, 2004. Realization of deferred tax assets is dependent on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, management believes it is
more likely than not that deferred tax assets net of valuation allowances will
be realized based on the Company's backlog, financial projections and operating
history. The amount of the deferred tax assets considered realizable, however,
could be further reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
At February 27, 2004, the Company had a federal net operating loss carryforward
of approximately $4,855,000, which expires beginning fiscal 2020 through fiscal
2024. Additionally, the Company had general business and foreign tax credit
carryforwards of $98,000, expiring in fiscal 2004, which are fully offset by a
valuation allowance, an alternative minimum tax credit of $138,000 and state
income tax credits of $199,000 expiring in fiscal 2009.
11
NOTE 6 EARNINGS PER SHARE (UNAUDITED)
The following tables represent required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net earnings per share
computations.
Three months ended
----------------------------------------------------------------------------
FEBRUARY 27, 2004 February 28, 2003
------------------------------------ ------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
Net earnings (loss) $ (655,264) $ 116,657
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ (655,264) 12,416,820 $( .05) $ 116,657 12,320,961 $ .01
Effect of dilutive potential
common shares:
Stock options -- -- -- 34,731
-------------------------- --------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $ (655,264) 12,416,820 $( .05) $ 116,657 12,355,692 $ .01
========================== ====== ========================== ======
Six months ended
----------------------------------------------------------------------------
FEBRUARY 27, 2004 February 28, 2003
------------------------------------ ------------------------------------
PER Per
EARNINGS SHARES SHARE Earnings Shares share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) amount
----------- ------------- ------ ----------- ------------- ------
Net earnings (loss) $(1,103,932) $ (252,889)
=========== ===========
BASIC EARNINGS(LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $(1,103,932) 12,406,695 $( .09) $ (252,889) 12,294,393 $( .02)
Effect of dilutive potential
common shares:
Stock options -- -- -- --
-------------------------- --------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) available
to common shareholders $(1,103,932) 12,406,695 $( .09) $ (252,889) 12,294,393 $( .02)
========================== ====== ========================== ======
12
Stock options excluded from the diluted net earnings (loss) per share
calculation due to their anti-dilutive effect are as follows:
Three months ended Six months ended
--------------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
--------------------------------------------------------------
Common stock options:
Number of shares 1,750,625 975,365 1,750,625 1,006,903
Exercise price $ .63 TO $5.63 $ .91 to $5.63 $ .63 TO $5.63 $ .91 to $5.63
==============================================================
NOTE 7 SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS (UNAUDITED)
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," the
Company operates within a single reportable segment, the manufacture and sale of
satellite communications equipment.
In this single operating segment the Company has three sources of revenues as
follows:
Three months ended Six months ended
-------------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
-------------------------------------------------------------
Product Line
Direct Broadcast Satellite $ 4,389,719 $ 4,692,143 $ 8,529,962 $ 8,174,711
Telecom and Custom Products 193,974 379,284 605,655 730,659
Service 129,230 147,725 327,511 258,900
-------------------------------------------------------------
$ 4,712,923 $ 5,219,152 $ 9,463,128 $ 9,164,270
=============================================================
Revenues by geographic area are as follows:
Three months ended Six months ended
-------------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
-------------------------------------------------------------
Geographic Area
United States $ 4,626,996 $ 5,005,811 $ 9,187,226 $ 8,760,977
Latin America 1,669 95,359 57,805 151,759
Canada 37,912 52,985 113,117 119,715
Europe 45,280 53,777 63,172 106,051
Other 1,066 11,220 41,808 25,768
-------------------------------------------------------------
$ 4,712,923 $ 5,219,152 $ 9,463,128 $ 9,164,270
=============================================================
All of the Company's long-lived assets are located in the United States.
Customers representing 10% or more of the respective periods' revenues are as
follows:
Three months ended Six months ended
---------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
---------------------------------------------------------
Customer 1 40.1% 39.5% 38.7% 44.2%
Customer 2 15.5% 21.5% (A) 16.0%
==========================================================
(a) Revenues for the period were less than 10% of total revenues.
13
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 agreement committed the Company to purchase $2,116,000, over an eighteen
month period, beginning in the third quarter of fiscal 2003. During the first
six months of fiscal 2004, purchase commitments were increased by $1,552,000. At
February 27, 2004, outstanding purchase commitments under these two agreements
amounted to $2,812,000. 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 $1,964,000 at February 27, 2004.
Pursuant to the above agreements, at February 27, 2004, the Company had
outstanding letters of credit in the amount of $4,776,000.
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 February 27, 2004, the outstanding commitment under the agreement
was $689,000.
NOTE 9 GUARANTEES AND WARRANTY LIABILITY
Warranty
The Company warrants its products for a twelve-month period beginning at the
date of shipment. The warranty provides for repair or replacement of defective
products returned during the warranty period at no cost to the customer. The
Company expenses costs for routine warranty repairs as incurred. Additional
provisions are made for non-routine warranty repairs based on estimated costs to
repair at the point in time in which the warranty claim is identified. Accrued
warranty provisions amounted to $66,000 at February 27, 2004. There were no
changes to the warranty accrual for the three and six month periods ended
February 27, 2004.
Letters of Credit
Wegener Communications Inc., the Company's wholly owned subsidiary (WCI),
provides standby letters of credit to certain suppliers in the ordinary course
of business pursuant to manufacturing and purchasing agreements. At February 27,
2004, outstanding letters of credit, amounted to $4,776,000.
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 February 27, 2004, no
balances were outstanding on the loan facility.
NOTE 10 STOCK OPTIONS
During the first six months of fiscal 2004, options for 100,000 shares of common
stock, exercisable at $2.39, were granted pursuant to a consulting agreement to
provide software development services. The fair value of the options was
measured on the grant date using the Black-Scholes option pricing model. As the
options were fully vested and nonforfeitable, the fair value of $139,800 was
charged to research and development expenses during the six months ended
February 27, 2004, in accordance with EITF 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Additionally, during the first six
months of fiscal 2004 options for 367,000 shares of common stock, exercisable at
$2.21, were granted to employees. At February 27, 2004, options for 1,750,625
shares of common stock were outstanding with a weighted average exercise price
of $1.87 and with exercise prices ranging from $.63 to $5.63. At February 27,
2004, options for 486,575 shares of common stock were available for issuance
under the 1998 Incentive Plan. Additionally, during the first six months of
fiscal 2004, options for 63,800 shares with exercise prices ranging from $.84 to
$2.31 were exercised.
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, governmental regulation, rapid technological developments and changes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, availability of materials, new and existing
well-capitalized competitors, and other uncertainties detailed in the Company's
Form 10-K for the year ended August 29, 2003, and from time to time in the
Company's periodic Securities and Exchange Commission filings.
The Company, through Wegener Communications, Inc. (WCI), a wholly-owned
subsidiary, designs and manufactures communications transmission and receiving
equipment for the business broadcast, data communications, cable and broadcast
radio and television industries.
OVERVIEW
STRATEGY
Our current focus is to increase bookings and revenues and return to
profitability. We have two pilot programs in process with strategic customers
for anticipated large iPump(TM) Media Server orders. Resources are being
expended to ensure that the pilot programs are successful and are converted to
significant orders for the product. Discussions for product acceptance of the
DTV700 series product line are underway with major cable MSOs. Overseas
manufacturing is still being used for high volume products, such as Unity 4600
and iPump, to secure competitive product pricing. Additionally, key partnerships
are being developed with complimentary companies in our market space to meet
customer demands for complete network solutions.
We are rebranding our image to capitalize on our corporate twenty-five year
history of developing reliable, innovative products. The intent is to focus
marketing efforts on the Wegener name and reduce product sub-brands, in an
effort to lower marketing expenses and increase the brand equity of our name.
The image change and supporting marketing documentation will be unveiled at the
National Association of Broadcasters (NAB) tradeshow in April 2004.
Internally, we have changed leadership within the sales department during the
first half of the fiscal year to improve results. Additionally, we have focused
on refining our processes to build a strong framework for quality product
development to create a competitive advantage within the market. The process
improvement is within the confines of the ISO processes and we continue to focus
on maintaining ISO 9001:2000 certification.
CURRENT DEVELOPMENTS
During the first six months of fiscal 2004, we completed development of the next
generation of products in the following four product lines. We anticipate the
new product introductions will drive renewed interest from enterprise, cable and
broadcast customers.
1) iPump Media Servers were deployed to the field during the first half
of the fiscal year. Ascent Media and another enterprise customer
purchased pilot systems to test-market iPump technology during the
first half of fiscal 2004. Significant numbers of quotes for the iPump
products are outstanding and we anticipate increased sales of iPump
Media Servers during the second half of the fiscal year. Within the
next two years, we expect iPump sales
15
to overtake the more traditional Unity Integrated Receiver Decoder
(IRD) products (which do not contain store and forward capabilities)
in generating revenue in the enterprise market segment. The cable
programmer and broadcast market spaces appear to be lagging behind the
enterprise market in adopting the store and forward technology,
although we expect all three market spaces to eventually adopt the new
technology.
2) MediaPlan i/o and MediaPlan CM products, as modules to our patented
Compel Control System, were introduced to the market during the first
half of the fiscal year. The first purchaser of MediaPlan i/o Media
Ingest Station was Globecomm, a major system integrator. MediaPlan CM
Content Management System was released from engineering and a field
test was initiated with a potential customer. The MediaPlan products
are crucial for customers in controlling iPump Media Servers and will
help increase sales of iPump Media Servers. The MediaPlan products are
a competitive advantage for us in sales of the iPump product, since it
allows customers to fully utilize the iPump Media Server technology.
3) The Unity4600 Professional Receiver Decoder began shipping in volume
during the first half of the fiscal year. Fox Cable used the Unity4600
in deploying new standard definition and high definition television
networks throughout the first half of fiscal 2004 and is expected to
continue using the Unity4600 throughout the remainder of the fiscal
year and beyond. We anticipate that additional existing customers will
transition to using the Unity4600 from legacy Unity receivers during
the second half of the fiscal year.
4) The DTV744 products were introduced to the market during the first
half of fiscal year 2004. The predecessors of the DTV744 are the
DTV700 and DTV701 and were well received in the market, including an
OEM version being sold by Scientific Atlanta. The DTV products are a
new product line for us and have revived our product offerings in the
cable MSO market. The additional product line diversifies our revenue
potential. Other new additions to this product line will begin
shipping during the second half of fiscal year 2004.
FINANCIAL POSITION AND LIQUIDITY
We have no long-term debt or line of credit borrowings outstanding at February
27, 2004. Our cash and cash equivalents were $ 3,757,000 at February 27, 2004.
Our $5,000,000 bank loan facility, which is subject to availability advance
formulas based on eligible accounts receivable and inventories, is currently
being used to support import letters of credit issued to our offshore
manufacturers, which at February 27, 2004 amounted to $4,157,000. At February
27, 2004, approximately $65,000 net of the outstanding letters of credit, was
available to borrow under the advance formulas. We are currently in discussions
with the bank to increase the availability advance formulas as well as the
maximum limit of the credit facility to accommodate an expected increase in our
outstanding import letters of credit balances.
16
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED FEBRUARY 27, 2004 COMPARED TO THREE AND SIX MONTHS
ENDED FEBRUARY 28, 2003
The following table sets forth, for the periods indicated, the components of the
results of operations as a percentage of sales:
Three months ended Six months ended
------------------------------------------------------------
FEBRUARY 27, February 28, FEBRUARY 27, February 28,
2004 2003 2004 2003
------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 74.6 64.1 73.9 65.3
Gross margin 25.4 35.9 26.1 34.7
Selling, general, and administrative 27.1 17.9 26.4 23.6
Research & development 16.4 14.5 16.0 15.4
Operating income (loss) (18.1) 3.6 (16.3) (4.3)
Interest expense (.5) (.3) (.5) (.3)
Interest income .2 .3 .1 .4
Earnings (loss) before income taxes (18.4) 3.5 (16.6) (4.3)
Income tax expense (benefit) (4.5) 1.3 (4.9) (1.6)
Net earnings (loss) (13.9)% 2.2% (11.7)% (2.8)%
============================================================
The operating results for the three and six month periods ended February 27,
2004 were a net loss of $(655,000) or $ (0.05) per share and a net loss of
$(1,104,000) or $(0.09) per share, respectively, compared to net earnings of
$117,000 or $0.01 per share and a net loss of $(253,000) or $(0.02) per share,
respectively, for the three and six month periods ended February 28, 2003.
REVENUES - The Company's revenues for the three months ended February 27, 2004
decreased $506,000 or 9.7% to $4,713,000 from $5,219,000. Revenues for the six
months ended February 27, 2004 increased $299,000 or 3.3% to $9,463,000 from
$9,164,000.
Direct Broadcast Satellite (DBS) revenues (including service revenues) decreased
$321,000 or 6.6% in the second quarter of fiscal 2004 to $4,519,000 from
$4,840,000 in the same period of fiscal 2003. For the six months ended February
27, 2004, DBS revenues increased $424,000 or 5.0% to $8,857,000 from $8,434,000
for the six months ended February 28, 2003. Revenues and order backlog are
subject to the timing of significant orders from customers and are difficult to
forecast. As a result, revenue levels may fluctuate from quarter to quarter. DBS
revenues were adversely impacted by delayed purchasing decisions in the digital
satellite transmission market and delayed product introductions by the Company.
The second quarter and first six months of fiscal 2004 included shipments of
equipment to Autotote Communications for network upgrades and expansion and to
Ascent Media for new cable network applications and expansion of private video
networks. Ascent Media shipments included initial deliveries of iPUMP Media
Servers for the cable network application. Additional customer shipments of the
iPUMP were delayed due to final software testing requirements. Additionally, the
first six months 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 decreased $185,000 or 48.9% in the
second quarter of fiscal 2004 to $194,000 from $379,000 in the same period of
fiscal 2003. For the six months ended February 27, 2004, Telecom and Custom
Products Group revenues decreased $125,000 or 17.1% to $606,000 from $731,000
for the six months ended February 28, 2003. The decrease in revenues for the
three and six month periods was mainly due to decreased shipments of cue and
control equipment to provide local commercial insertion capabilities to cable
television operators.
For the three months ended February 27, 2004, two customers accounted for 40.1%
and 15.5% of revenues, respectively. For the three months ended February 28,
2003, the same two customers accounted for 39.5% and 21.5% of revenues,
respectively. For the six months ended February 27, 2004, one of the customers
accounted for 38.7% of revenues. For the six months ended February 28, 2003,
these two customers accounted for 44.2% and 16.0% of revenues, respectively.
Sales to a relatively small number of major customers have typically comprised a
majority of the Company's revenues and that trend is expected to continue
throughout fiscal 2004 and beyond. The Company's backlog is comprised of
undelivered, firm customer orders
17
which are scheduled to ship within eighteen months. The backlog was
approximately $13,900,000 at February 27, 2004, compared to $12,700,000 at
August 29, 2003, and $13,200,000 at February 28, 2003. Two customers accounted
for 74.0 % and 17.9%, respectively, of the backlog at February 27, 2004. The
total multi-year backlog at February 27, 2004, was approximately $22,800,000.
GROSS PROFIT MARGINS - The Company's gross profit margin percentages were 25.4%
and 26.1% for the three and six month periods ended February 27, 2004, compared
to 35.9% and 34.7% for the three and six month periods ended February 28, 2003.
Gross profit margin dollars decreased $676,000 and $703,000 for the three and
six month periods ended February 27, 2004, compared to the same periods ended
February 28, 2003. For the three and six months ended February 27, 2004, gross
margin dollars and percentages were unfavorably impacted by a product mix with
lower variable cost components and increases in capitalized software
amortization expenses. The product mix for the three and six months ended
February 27, 2004 included increased amounts of lower margin reseller uplink
equipment compared to the same periods of fiscal 2003. For the three and six
months ended February 28, 2004, reseller equipment comprised approximately 15.1%
and 9.1% of sales, respectively, compared to less than 1.0% for the same periods
of fiscal 2003. Capitalized software amortization expense increased $154,000 and
$250,000 in the second quarter and first six months of fiscal 2004 compared to
the same periods of fiscal 2003. Profit margins in the three and six month
periods of fiscal 2004 included inventory reserve charges of $75,000 and
$150,000 compared to $100,000 and $100,000 for the same periods of fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative (SG&A)
expenses increased $346,000 or 37.2% to $1,279,000 for the three months ended
February 27, 2004, from $932,000 for the three months ended February 28, 2003.
For the six months ended February 27, 2004, SG&A expenses increased $338,000 or
15.6% to $2,499,000 from $2,162,000 for the same period ended February 28, 2003.
The increase in SG&A expenses in the second quarter of fiscal 2004 was mainly
due to increases in corporate and WCI professional fees of $133,000 and $84,000,
higher compensation and relocation costs of $72,000 and $21,000 due to the
addition of three people in WCI's sales and marketing departments. In the first
six months of fiscal 2004, WCI professional fees decreased $203,000 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 WCI professional fees was offset by an increase in
corporate professional fees of $249,000, higher compensation and relocation
costs of $155,000 and $29,000 due to the addition of three people in WCI's sales
and marketing departments and higher selling and administrative overhead
expenses at WCI of $79,000. As a percentage of revenues, SG&A expenses were
27.1% and 26.4% for the three and six month periods ended February 27, 2004,
compared to 17.9% and 23.6% for the same periods of fiscal 2003.
RESEARCH AND DEVELOPMENT - Research and development expenditures, including
capitalized software development costs, were $1,206,000, or 25.6% of revenues,
and $2,494,000, or 26.4% of revenues, for the three and six month periods ended
February 27, 2004, compared to $979,000, or 18.8% of revenues, and $1,829,000,
or 20.0% of revenues, for the same periods of fiscal 2003. Capitalized software
development costs amounted to $431,000 and $979,000 for the second quarter and
first six months of fiscal 2004 compared to $225,000 and $419,000 for the same
periods of fiscal 2003. The increases in capitalized software costs are 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 expenditures, were $774,000, or 16.4%
of revenues, and $1,515,000, or 16.0% of revenues, for the three and six months
ended February 27, 2004, compared to $754,000, or 14.4% of revenues, and
$1,410,000, or 15.4% of revenues, for the same periods of fiscal 2003. The
increase in expenses for the three and six months ended February 27, 2004 was
primarily due to increased engineering consulting expenses, net of amounts
capitalized as software development costs. The expenditures for research and
development for the second half of fiscal 2004 are expected to continue at a
rate similar to that of the first half of fiscal 2004.
INTEREST EXPENSE - Interest expense increased $7,000 to $24,000 for the three
months ended February 27, 2004, from $17,000 for the three months ended February
28, 2003. For the six months ended February 27, 2004, interest expense increased
$11,000 to $43,000 from $32,000 for the same period ended February 28, 2003. The
increases for the three and six month periods in fiscal 2004 were primarily due
to an increase in the average outstanding letter of credit commitment balances.
INTEREST INCOME - Interest income was $9,000 and $14,000 for the three and six
month periods ended February 27, 2004, compared to $13,000 and $33,000 for the
same periods ended February 28, 2003. The decreases for the three and six months
ended February 27, 2004 were mainly due to lower average cash equivalent
balances and lower investment yields.
INCOME TAX EXPENSES - For the six months ended February 27, 2004, the income tax
benefit of $467,000 was comprised of deferred federal and state tax benefits of
$436,000 and $31,000, respectively. For the six months ended February 27, 2004,
the federal deferred tax benefit was offset by a valuation allowance of $98,000
related to general business and foreign tax credits of $98,000, which expire
September 3, 2004. Net deferred tax assets increased $467,000 in the first six
months of fiscal 2004
18
to $3,605,000, 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, net of valuation
allowances, will be realized. The amount of the tax assets considered
realizable, however, could be further reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
CRITICAL ACCOUNTING POLICIES
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 revenues in certain circumstances before delivery has occurred
(commonly referred to as "bill and hold" transactions). In such circumstances,
among other things, risk of ownership has passed to the buyer, the buyer has
made a written fixed commitment to purchase the finished goods, the buyer has
requested the finished goods be held for future delivery as scheduled and
designated by them, and no additional performance obligations exist by the
Company. For these transactions, the finished goods are segregated from
inventory and normal billing and credit terms are granted. For the three and six
months ended February 27, 2004, revenues to one customer in the amount of
$1,481,000 and $2,743,000, respectively, were appropriately recorded prior to
delivery as bill and hold transactions in accordance with the provisions of SAB
101. At February 27, 2004, accounts receivable for these revenues amounted to
$1,481,000.
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."
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 February 27, 2004, inventories, net
of reserve provisions, amounted to $1,686,000.
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 February 27, 2004, capitalized software
costs, net of accumulated amortization, amounted to $1,650,000.
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.
19
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. At February 27, 2004, a valuation allowance of $98,000 was
recorded related to general business and foreign tax credits of $98,000, which
expire September 3, 2004. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets, net of
valuation allowances, will be realized based on the Company's backlog, financial
projections and operating history. The amount of the deferred tax assets
considered realizable, however, could be further reduced 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 February 27, 2004,
deferred tax assets, net of valuation allowances, amounted to $3,605,000, of
which approximately $1,746,000 relates to net operating loss carryforwards which
expire beginning in fiscal 2020 through 2024, an alternative minimum tax credit
of $138,000 and state income tax credits of $199,000 expiring in fiscal 2009.
ACCOUNTS RECEIVABLE VALUATION - The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of 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 February 27, 2004, accounts
receivable, net of allowances for doubtful accounts, amounted to $2,851,000.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED FEBRUARY 27, 2004
At February 27, 2004, the Company's primary sources of liquidity were cash and
cash equivalents of $3,757,000 and a $5,000,000 bank loan facility, which is
subject to availability advance formulas based on eligible accounts receivable
and inventories. At February 27, 2004, approximately $65,000, net of outstanding
letters of credit in the amount of $4,157,000, was available to borrow under the
advance formulas. Cash and cash equivalents decreased $457,000 during the first
six months of fiscal 2004.
During the first six months of fiscal 2004, operating activities provided
$784,000 of cash. Net loss adjusted for noncash expenses used $179,000 of cash,
while changes in accounts receivable, inventories and customer deposit balances
provided $1,080,000 of cash. Changes in accounts payable and accrued expenses,
and other assets used $117,000 of cash. Cash used by investing activities was
$185,000 for property and equipment expenditures, $979,000 for capitalized
software additions and $172,000 for legal expenses related to the filing of
applications for various patents and trademarks. Financing activities used cash
of $3,200 for scheduled repayments of long-term debt and provided $98,000 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, 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 February 27, 2004).
The term loan facility provides for a maximum of $1,000,000 for advances of up
to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over sixty months with a balloon payment due at maturity. The revolving
line of credit is subject to availability advance formulas of 80% against
eligible accounts receivable, 20% of eligible raw materials inventories, 20% of
eligible work-in-process kit inventories, and 40% to 50% of eligible finished
goods inventories. Advances against inventory are subject to a sublimit of
$2,000,000. At February 27, 2004, no balances were outstanding on the revolving
line of credit or the equipment term loan portions of the loan facility. The
loan facility is currently being used to support import letters of credit issued
to our offshore manufacturers, which at February 27,2004 amounted to $4,157,000.
At February 27, 2004, approximately $65,000 net of outstanding letters of
credit, was available to borrow under the advance formulas. We are currently in
discussions with the bank to increase the availability advance formulas as well
as the maximum limit of the credit facility. The Company believes that an
increase in the loan facility and the availability advance formulas will be
needed to support outstanding import letters of credit and operations over the
next twelve months. While no assurances may be given, WCI believes the existing
loan facility will be amended and renewed upon maturity to support import
letters of credit requirements, as well as any operational borrowing
requirements, over the next twelve months .
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 February 27, 2004, the Company was in compliance with all loan
facility covenants.
20
During the second quarter of fiscal 2003, the Company entered into two
manufacturing and purchasing agreements for certain finished goods inventories.
The agreement committed the Company to purchase $2,116,000 over an eighteen
month period, beginning in the third quarter of fiscal 2003. During the first
six months of fiscal 2004, purchase commitments were increased by $1,552,000. At
February 27, 2004, outstanding purchase commitments under these two agreements
amounted to $2,812,000. 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 $1,964,000 at February 27, 2004.
Pursuant to the above agreements, at February 27, 2004, the Company has
outstanding letters of credit in the amount of $4,157,000.
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 February 27, 2004, the outstanding commitment under the agreement
was $689,000.
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 February 27,
2004 consisted of:
Payments Due by Period
------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal
Contractual Obligations Total 2004 2005-2006 2007-2008 2009
----------------------- ------------------------------------------------------------------
Debt $ 1,000 $ 1,000 $ -- $ -- $ --
Operating leases 239,000 112,000 121,000 4,000 2,000
Purchase commitments 5,646,000 5,175,000 471,000 -- --
------------------------------------------------------------------
Total $5,886,000 $5,288,000 $ 592,000 $ 4,000 $ 2,000
==================================================================
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
February 27, 2004 subject to variable interest rate fluctuations.
At February 27, 2004, the Company's cash equivalents consisted of bank
commercial paper in the amount of $3,250,000. 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
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 20, 2004, the Annual Meeting of Shareholders was held and the shares
present voted on the following matters:
(1.) The shareholders approved the election of the following nominees to
the Board of Directors:
Thomas G. Elliott (Class III Director)
11,280,956 votes FOR
749,166 votes WITHHELD
Ned L. Mountain (Class III Director)
11,237,205 votes FOR
792,917 votes WITHHELD
Wendell H. Bailey (Class II Director)
11,260,879 votes FOR
769,243 votes WITHHELD
The terms of office of Joe K. Parks and C. Troy Woodbury, Jr. as Class
I directors and Robert A. Placek as Class II director, continued
subsequent to the Annual Meeting.
(2.) The appointment of BDO Seidman, LLP as auditors for the Company for
the fiscal year 2004 was approved with 11,341,805 votes FOR, 345,485
votes AGAINST, and 342,833 votes ABSTAINING.
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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 January 23, 2004, furnishing its
press release regarding its results for the first fiscal quarter ended
November 28, 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: April 12, 2004 By: /s/ Robert A. Placek
-----------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: April 12, 2004 By: /s/ C. Troy Woodbury, Jr.
-----------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
24