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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 December 3, 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 12,549,051 Shares
- ---------------------------- -------------------------------
Class Outstanding December 30, 2004
WEGENER CORPORATION AND SUBSIDIARIES
Form 10-Q For the Quarter Ended December 3, 2004
INDEX
Page(s)
-------
PART I. Financial Information
Item 1. Financial Statements
Introduction .....................................................3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
December 3, 2004 and November 28, 2003 ............................4
Consolidated Balance Sheets - December 3,
2004 (Unaudited) and September 3, 2004 ............................5
Consolidated Statements of Shareholders' Equity
(Unaudited) - Three Months Ended December 3,
2004 and November 28, 2003.........................................6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended December 3,
2004 and November 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............................15-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk........21
Item 4. Controls and Procedures...........................................21
PART II. Other Information
Item 1. None ............................................................22
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits.........................................................22
Signatures ......................................................23
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 December 3, 2004; the consolidated
statements of shareholders' equity as of December 3, 2004 and November 28, 2003
and; the consolidated statements of operations for the three months ended
December 3, 2004 and November 28, 2003; and the consolidated statements of cash
flows for the three months ended December 3, 2004 and November 28, 2003 have
been prepared without audit. The consolidated balance sheet as of September 3,
2004 has been audited by independent registered public accountants. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 3, 2004, File No. 0-11003.
In the opinion of 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
December 3, November 28,
2004 2003
- -------------------------------------------------------------------------------
Revenue $ 6,406,071 $ 4,750,205
- -------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 4,011,428 3,475,537
Selling, general, and administrative 1,405,373 1,220,631
Research and development 803,230 741,241
- -------------------------------------------------------------------------------
Operating costs and expenses 6,220,031 5,437,409
- -------------------------------------------------------------------------------
Operating income (loss) 186,040 (687,204)
Interest expense (14,940) (18,861)
Interest income 2,785 4,397
- -------------------------------------------------------------------------------
Earnings (loss) before income taxes 173,885 (701,668)
Income tax expense (benefit) 62,000 (253,000)
- -------------------------------------------------------------------------------
Net earnings (loss) $ 111,885 $ (448,668)
================================================================================
Net earnings (loss) per share:
Basic $ 0.01 $ (0.04)
Diluted $ 0.01 $ (0.04)
================================================================================
Shares used in per share calculation
Basic 12,536,381 12,396,570
Diluted 12,703,306 12,396,570
================================================================================
See accompanying notes to consolidated financial statements.
4
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 3, September 3,
2004 2004
- ------------------------------------------------------------------------------------------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 956,217 $ 1,520,761
Accounts receivable 4,389,883 2,479,712
Inventories 3,784,097 3,839,840
Deferred income taxes 2,091,000 2,199,000
Other 260,258 283,291
- ------------------------------------------------------------------------------------------------
Total current assets 11,481,455 10,322,604
Property and equipment, net 2,597,538 2,699,502
Capitalized software costs, net 1,748,041 1,667,632
Deferred income taxes 2,016,000 1,970,000
Other assets 838,952 835,878
- ------------------------------------------------------------------------------------------------
$ 18,681,986 $ 17,495,616
================================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 1,991,700 $ 1,293,564
Accrued expenses 2,160,400 1,719,119
Customer deposits 866,410 960,092
- ------------------------------------------------------------------------------------------------
Total current liabilities 5,018,510 3,972,775
- ------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,546,051 and 12,526,051 shares
respectively, issued and outstanding 125,461 125,261
Additional paid-in capital 19,848,099 19,819,549
Deficit (6,310,084) (6,421,969)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 13,663,476 13,522,841
- ------------------------------------------------------------------------------------------------
$ 18,681,986 $ 17,495,616
================================================================================================
See accompanying notes to consolidated financial statements.
5
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Paid-in
Shares Amount Capital Deficit
- -----------------------------------------------------------------------------------------------------
Balance at August 29, 2003 12,381,251 $ 123,813 $ 19,471,069 $ (4,314,071)
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)
======================================================================================================
Balance at September 3, 2004 12,526,051 $ 125,261 $ 19,819,549 $ (6,421,969)
Common stock issued through
stock options 20,000 200 28,550 --
Net earnings for the three months -- -- -- 111,885
- ------------------------------------------------------------------------------------------------------
BALANCE at December 3, 2004 12,546,051 $ 125,461 $ 19,848,099 $ (6,310,084)
======================================================================================================
See accompanying notes to consolidated financial statements.
6
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended
December 3, November 28,
2004 2003
- -----------------------------------------------------------------------------------------
Cash (used for) provided by operating activities
Net earnings (loss) $ 111,885 $ (448,668)
Adjustments to reconcile net earnings (loss) to
cash (used for) provided by operating activities
Depreciation and amortization 486,287 504,555
Value of stock options granted for services -- 139,800
Provision for bad debts -- 30,000
Provision for inventory reserves -- 75,000
Provision (benefit) for deferred income taxes 62,000 (253,000)
Changes in assets and liabilities
Accounts receivable (1,910,171) (493,189)
Inventories 55,743 637,914
Other assets 23,033 87,712
Accounts payable and accrued expenses 1,139,417 697,431
Customer deposits (93,682) 229,674
- -----------------------------------------------------------------------------------------
(125,488) 1,207,229
- -----------------------------------------------------------------------------------------
Cash used for investment activities
Property and equipment expenditures (21,016) (43,813)
Capitalized software additions (405,568) (547,110)
License agreement, patent, and trademark
expenditures (41,222) (126,822)
- -----------------------------------------------------------------------------------------
(467,806) (717,745)
- -----------------------------------------------------------------------------------------
Cash provided by financing activities
Repayment of long-term debt -- (1,577)
Proceeds from stock options exercised 28,750 29,270
- -----------------------------------------------------------------------------------------
28,750 27,693
- -----------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (564,544) 517,177
Cash and cash equivalents, beginning of period 1,520,761 4,213,252
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 956,217 $ 4,730,429
=========================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the three months for:
Interest $ 14,940 $ 18,861
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 our audited consolidated financial statements included in the annual
report on Form 10-K for the year ended September 3, 2004.
Revenue Recognition
Our revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) No. 104, "Revenue Recognition", SAB No. 101, "Revenue Recognition
in Financial Statements" and EITF Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." Revenue is recognized when persuasive evidence of an
agreement with the customer exists, products are shipped or title passes
pursuant to the terms of the agreement with the customer, the amount due from
the customer is fixed or determinable, collectibility is reasonably assured, and
there are no significant future performance obligations. Service revenues are
recognized at the time of performance. Revenues from separate service
maintenance agreements are recognized ratably over the term of the agreements.
We recognize revenue in certain circumstances before delivery has occurred
(commonly referred to as "bill and hold" transactions). In such circumstances,
among other things, risk of ownership has passed to the buyer, the buyer has
made a written fixed commitment to purchase the finished goods, the buyer has
requested the finished goods be held for future delivery as scheduled and
designated by them, and no additional performance obligations exist by 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 December 3, 2004, revenues to one customer in the amount of $1,345,000
were appropriately recorded prior to delivery as bill and hold transactions in
accordance with the provisions of SAB 104. At December 3, 2004, accounts
receivable for these revenues amounted to $1,345,000 and were paid in full
subsequent to December 3, 2004.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and if future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history and credit
worthiness of the customer. If management determines that collection is not
reasonably assured or future performance obligations exist, revenue recognition
is deferred until these conditions are satisfied.
Our principal sources of revenues are from the sales of various satellite
communications equipment. Embedded in our products is internally developed
software of varying applications. Historically, we have not sold or marketed our
software separately or otherwise licensed our software apart from the related
communications equipment. Should we begin to market or sell software whereby it
is more than an incidental component of the hardware, then we would recognize
software license revenue in accordance with SOP No. 97-2, "Software Revenue
Recognition," as amended by SOP No. 98-9,
"Software Revenue Recognition, with Respect to Certain Transactions."
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," we 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.
8
Stock Based Compensation
We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standard (SFAS) No 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," but apply Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for our plans. Under APB No. 25, when the exercise price of employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The following table includes disclosures required by SFAS No. 123, as amended by
SFAS No. 148, and illustrates the effect on net earnings (loss) and net earnings
(loss) per share as if we had applied the fair value recognition provisions of
SFAS No. 123:
Three months ended
------------------------------
December 3, November 28,
2004 2003
- -------------------------------------------------------------------------------
Net earnings (loss)
As Reported $ 111,885 $ (448,668)
Deduct:
Compensation cost
using the fair value
method, net of tax (38,737) (5,856)
- -------------------------------------------------------------------------------
Pro Forma $ 73,148 $ (454,524)
===============================================================================
Earnings (loss) per share
As Reported
Basic $ .01 $ (.04)
Diluted .01 (.04)
Pro Forma
Basic .01 (.04)
Diluted .01 (.04)
===============================================================================
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
---------------------------------
December 3, November 28,
2004 2003
- -----------------------------------------------------------------------------
Risk free interest rate 4.00% 4.00%
Expected term 2.8 years 3 years
Volatility 90% 90%
Expected annual dividends none none
=============================================================================
The weighted average fair value of options granted during the three months ended
December 3, 2004 was $ .81 with an aggregate total value of $8,140. No options
were granted during the three months ended November 28, 2003.
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.
Examples include provisions for bad debts, inventory obsolescence and
warranties. Actual results could vary from these estimates.
9
Fiscal Year
We use a fifty-two, fifty-three week year. The fiscal year ends on the Friday
closest to August 31. Fiscal year 2005 contains fifty-two weeks while fiscal
2004 contained fifty-three weeks.
Note 2 Accounts Receivable
Accounts receivable are summarized as follows:
December 3, September 3,
2004 2004
- --------------------------------------------------------------------------------
(Unaudited)
Accounts receivable - trade $ 4,633,585 $ 2,766,528
Other receivables 77,074 76,473
- --------------------------------------------------------------------------------
4,710,659 2,843,001
Less allowance for
doubtful accounts (320,776) (363,289)
- --------------------------------------------------------------------------------
$ 4,389,883 $ 2,479,712
================================================================================
Note 3 Inventories
Inventories are summarized as follows:
December 3, September 3,
2004 2004
- --------------------------------------------------------------------------------
(Unaudited)
Raw material $ 3,044,249 $ 3,004,350
Work-in-process 965,874 1,073,275
Finished goods 2,941,287 3,229,704
- --------------------------------------------------------------------------------
6,951,410 7,307,329
Less inventory reserves (3,167,313) (3,467,489)
- --------------------------------------------------------------------------------
$ 3,784,097 $ 3,839,840
================================================================================
During the first quarter of fiscal 2005 inventory reserves were reduced by
inventory write-offs of $300,000. Our inventory reserve of approximately
$3,167,000 at December 3, 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 are reasonably possible should our sales efforts not be successful.
10
Note 4 Other Assets
Other assets consisted of the following:
December 3, 2004 (unaudited)
- -----------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
- -----------------------------------------------------------------------------------
License agreements $ 570,000 $ (226,327) $ 343,673
Patent applications 383,359 -- 383,359
Trademarks 84,206 (1,050) 83,156
Loan facility fees 37,500 (15,625) 21,875
Other 6,889 -- 6,889
- -----------------------------------------------------------------------------------
$ 1,081,954 $ (243,002) $ 838,952
===================================================================================
September 3, 2004
- -----------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
- -----------------------------------------------------------------------------------
License agreements $ 570,000 $ (197,828) $ 372,172
Patent applications 352,406 -- 352,406
Trademarks 73,937 (776) 73,161
Loan facility fees 37,500 (6,250) 31,250
Other 6,889 -- 6,889
- -----------------------------------------------------------------------------------
$ 1,040,732 $ (204,854) $ 835,878
===================================================================================
Amortization expense of other assets for the three months ended December 3, 2004
amounted to $38,000. Amortization expense of other assets for the three months
ended November 28, 2003 amounted to $42,000.
We conduct an ongoing review of our intellectual property rights and potential
trademarks. As of December 3, 2004, we incurred $383,000 and $73,000 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. If it becomes more likely than not that the patent application will not
be granted, we will write-off the deferred cost at that time. At December 3,
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 (unaudited)
For the three months ended December 3, 2004, income tax expense of $62,000 was
comprised of a deferred federal and state income tax expense of $59,000 and
$3,000, respectively. Net deferred tax assets decreased $62,000 to $4,107,000,
principally due to utilization of 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, we believe it is more likely
than not that all of the deferred tax assets will be realized based on our
backlog and financial projections. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At December 3, 2004, we had a federal net operating loss carryforward of
approximately $6,502,000, which expires beginning fiscal 2020 through fiscal
2025. Additionally, we had an alternative minimum tax credit of $138,000 and
state income tax credits of $199,000 expiring in fiscal 2009.
11
Note 6 Earnings Per Share (Unaudited)
The following 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
--------------------------------------------------------------------------------------
December 3, 2004 November 28, 2003
--------------------------------------------------------------------------------------
Earnings Shares Per share Earnings Shares Per share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
--------------------------------------------------------------------------------------
Net earnings (loss) $ 111,885 $ (448,668)
--------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) available
to common shareholders $ 111,885 12,536,381 $ 0.01 $ (448,668) 12,396,570 $ (0.04)
======================================================================================
Effect of dilutive potential common shares:
Stock options -- 166,925 -- --
--------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Net earnings (loss) available
to common shareholders $ 111,885 12,703,306 $ 0.01 $ (448,668) 12,396,570 $ (0.04)
======================================================================================
Stock options which were excluded from the diluted net earnings (loss) per share
calculation due to their antidilutive effect are as follows:
Three months ended
-------------------------------------------------
December 3, 2004 November 28, 2003
-------------------------------------------------
Common stock options:
Number of shares 1,117,406 1,411,125
Range of exercise prices $1.41 to $5.63 $ .63 to $5.63
=================================================
Note 7 Segment Information and Significant Customers (Unaudited)
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," we operate
within a single reportable segment, the manufacture and sale of satellite
communications equipment.
12
In this single operating segment we have three sources of revenues as follows:
Three months ended
--------------------------------------
December 3, November 28,
2004 2003
--------------------------------------
Product Line
Direct Broadcast Satellite $6,113,687 $4,140,242
Telecom and Custom Products 156,719 411,681
Service 135,665 198,282
--------------------------------------
$6,406,071 $4,750,205
=======================================
Revenues by geographic areas are as follows:
Three months ended
--------------------------------------
December 3, November 28,
2004 2003
--------------------------------------
Geographic Area
United States $6,196,236 $4,560,230
Latin America 25,645 56,136
Canada 59,320 75,205
Europe 101,885 17,892
Other 22,985 40,742
--------------------------------------
$6,406,071 $4,750,205
=======================================
All of our long-lived assets are located in the United States.
Customers representing 10% or more of the respective periods' revenues are as
follows:
Three months ended
--------------------------------------
December 3, November 28,
2004 2003
--------------------------------------
Customer 1 28.3% 37.0%
Customer 2 13.4% (a)
Customer 3 (a) 15.3%
Customer 4 (a) 11.8%
======================================
(a) Revenues for the period were less than 10% of total
revenues.
Note 8 Commitments
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At December 3, 2004, outstanding purchase commitments under these
agreements amounted to $6,270,000. Pursuant to the above agreements, at December
3, 2004, we had outstanding letters of credit in the amount of $1,934,000.
During the first quarter of fiscal 2004, we entered into a two-year agreement
aggregating $870,000 for engineering design and software development services.
At December 3, 2004, the remaining outstanding commitment under the agreement
was $399,000.
13
Note 9 Guarantees
Warranty
We warrant our products for a 12 to 14 month period beginning at the date of
shipment. The warranty provides for repair or replacement of defective products
returned during the warranty period at no cost to the customer. We expense costs
for routine warranty repairs as incurred. Additional provisions are made for
non-routine warranty repairs based on estimated costs to repair at the point in
time in which the warranty claim is identified. Accrued warranty provisions,
which remained outstanding at December 3, 2004, amounted to $151,000. For the
three month period ended December 3, 2004, no changes were made to the accrual.
Letters of Credit
We provide standby letters of credit in the ordinary course of business to
certain suppliers pursuant to manufacturing and purchasing agreements. At
December 3, 2004, outstanding letters of credit amounted to $1,934,000.
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 December 3, 2004, no balances
were outstanding on the loan facility.
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 September 3, 2004 contained in the Company's 2004 Annual Report on
Form 10-K.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results, future business or product
development plans, research and development activities, capital spending,
financing sources or capital structure, the effects of regulation and
competition, and are thus prospective. Such forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, economic conditions, customer plans and commitments, product
demand, 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 our Form 10-K
for the year ended September 3, 2004, and from time to time in our periodic
United States Securities and Exchange Commission filings.
OVERVIEW
We design and manufacture satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI is a leading provider
of digital solutions for video, audio and IP data networks, primarily via
satellite delivery. Applications include broadcast and cable television,
business television, IP data delivery, distance education, business music and
radio networks. COMPEL, our patented network control system, provides network
flexibility to regionalize programming, commercials and file transfers.
Our fiscal 2005 first quarter revenues and operating results improved
significantly compared to the same period in fiscal 2004 and compared to the
fourth quarter of fiscal 2004. This improvement resulted from our fiscal 2004
fourth quarter booking of a large order from a new radio broadcast customer as
well as from increased order activity from existing customers for expansion and
upgrades to their networks. As we have previously indicated, there may be
fluctuations in operating performance from quarter to quarter due to limited
order visibility. Due to an expected shortfall in revenue, we currently believe
the operating results for our second fiscal 2005 quarter will be a net loss.
However, our review of the balance of fiscal 2005 indicates, while significant
bookings are required for each quarter, we are still positioned to increase
revenues over fiscal 2004 and return to profitability in this fiscal year. (For
further discussion see our Results of Operations discussion below.)
Current developments
We are continuing to work with potential customers in demonstrating our iPump
product and the many benefits of our store and forward technology. We are in
discussions with a number of customers who we believe are planning to upgrade
their networks by integrating our iPump technology.
We continue to invest in and make progress on our SMD 515 Streaming Media
Decoder Settop for the telecom market. The SMD 515 Settop enables phone
companies to offer television services, including high definition, to existing
DSL consumers. This is a very large market opportunity and we believe we are
well positioned to capture market share in this new and growing sector. Any
significant revenues from this product line will not be realized, if at all,
until fiscal 2006.
During the first quarter of fiscal 2005, we booked an order for $9,600,000 from
a business music network customer. This new order extends and amends our
existing multi-year contract into fiscal year 2009. This order is reflected in
the total multi-year backlog as of December 3, 2004.
15
Financial Position and Liquidity
We have no long-term debt or line of credit borrowings outstanding at December
3, 2004. Our cash and cash equivalents were $956,000 at December 3, 2004. Our
$5,000,000 bank loan facility, which is subject to availability advance formulas
based on eligible accounts receivable, import letter of credit commitment
balances and inventories, is currently being used to support import letters of
credit issued to our offshore manufacturers, which at December 3, 2004 amounted
to $1,934,000. At December 3, 2004, approximately $3,066,000 net of the
outstanding letters of credit was available to borrow under the advance
formulas. Beginning in the second quarter of fiscal 2005, we expect that we will
use borrowings on the line of credit to support operations. We expect bookings
for new products to result in increased revenues beginning in the second half of
fiscal 2005, which could require an increase in the credit limit primarily to
support increases in inventory, accounts receivable and import letter of credit
balances. While no assurances may be given, WCI believes additional credit
limits would be made available under the existing line of credit to support
borrowing requirements resulting from increased revenues and bookings.
Should the bookings and revenues for the new products not materialize, we are
committed to reducing operating costs to bring them in line with revenue levels.
(See the Liquidity and Capital Resources section on page 19 for further
discussion.)
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 3, 2004 COMPARED TO THREE MONTHS ENDED NOVEMBER 28,
2003
The following table sets forth, for the periods indicated, the components of our
results of operations as a percentage of sales:
Three months ended (unaudited)
------------------------------
December 3, November 28,
2004 2003
------------------------------
Revenue 100.0% 100.0%
Cost of products sold 62.6 73.2
Gross margin 37.4 26.8
Selling, general, and administrative 21.9 25.7
Research & development 12.5 15.6
Operating income (loss) 2.9 (14.5)
Interest expense ( .2) ( .4)
Interest income - .1
Earnings (loss) before income taxes 2.7 (14.8)
Income tax expense (benefit) 1.0 (5.3)
Net earnings (loss) 1.7% (9.4)%
==============================
The operating results for the three month period ended December 3, 2004, were
net earnings of $112,000 or $0.01 per share compared to a net loss of $(449,000)
or $(0.04) per share for the three month period ended November 28, 2003.
Revenues - Revenues for the first quarter of fiscal 2005 increased $1,656,000 or
34.9% to $6,406,000 from $4,750,000 for the same period in fiscal 2004.
16
Direct Broadcast Satellite (DBS) revenues (including service revenues) increased
$1,911,000 or 44.0% in the first quarter of fiscal 2005 to $6,249,000 from
$4,338,000 for the same period in fiscal 2004. DBS revenues in the first quarter
of fiscal 2005 benefited from our fiscal 2004 fourth quarter order from a new
radio broadcast customer in the amount of $2,900,000, as well as from increased
order activity from existing customers. The first quarter of fiscal 2005
included initial shipments of transmission equipment and our Compel network
control system to the new radio broadcast customer for network upgrades and
expansion. Shipments continued to Roberts Communications Network for its network
expansion and to Ascent Media for a private network application using the ipump
Media Server. In addition, we shipped uplink equipment to Microspace
Communications for delivery of audio programming for the Christian Radio
Consortium. Telecom and Custom Products Group revenues decreased $255,000 or
61.9% to $157,000 in the first quarter of fiscal 2005 from $412,000 in the first
quarter of fiscal 2004. The decrease was mainly due to decreased shipments of
cue and control equipment to provide local commercial insertion capabilities to
cable television operators. 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. For the three months ended December 3, 2004,
two customers accounted for 28.3% and 13.4% of revenues, respectively. For the
three months ended November 28, 2003, three customers accounted for 37.0%, 15.3%
and 11.8% of revenues, respectively. Sales to a relatively small number of major
customers have typically comprised a majority of our revenues and that trend is
expected to continue throughout fiscal 2005.
Our backlog is comprised of undelivered, firm customer orders, which are
scheduled to ship within eighteen months. WCI's backlog scheduled to ship within
eighteen months was approximately $13.2 million at December 3, 2004, compared to
$12.0 million at September 3, 2004, and $15.0 million at November 28, 2003. One
customer accounted for approximately 51.5% of the backlog at December 3, 2004.
The total multi-year backlog at December 3, 2004 was approximately $30.4
million, compared to $21.0 million at September 3, 2004 and $25.3 million at
November 28, 2003.
Gross Profit Margins - The Company's gross profit margin percentages were 37.4%
for the three month period ended December 3, 2004, compared to 26.8% for the
three month period ended November 28, 2003. Gross profit margin dollars
increased $1,120,000 for the three month period ended December 3, 2004 compared
to the same period ended November 28, 2003. The increase in margin percentages
and dollars was mainly due to increased revenues which resulted in lower fixed
overhead costs per unit and a favorable product sales mix with lower variable
cost components. 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 2005.
Selling, General and Administrative - Selling, general and administrative (SG&A)
expenses increased $185,000 or 15.1% to $1,405,000 in the first quarter of
fiscal 2005 from $1,221,000 in the first quarter of fiscal 2004. The increase in
SG&A expenses in the first quarter of fiscal 2005 was mainly due to increases in
sales salaries of $77,000 due to an increase in personnel, and increases in
selling and marketing expenses of $54,000 due to increased sales activity and
related sales commissions. As a percentage of revenues, SG&A expenses were 21.9%
for the three month period ended December 3, 2004 compared to 25.7% for the same
period ended November 28, 2003.
Research and Development - Research and development expenditures, including
capitalized software development costs, were $1,209,000 or 18.9% of revenues in
the first quarter of fiscal 2005 compared to $1,288,000 or 27.1% of revenues for
the same period of fiscal 2004. The decrease in expenditures in the first
quarter of fiscal 2005 compared to the same period of fiscal 2004 was mainly due
to lower engineering consulting expenses resulting from completed projects.
Capitalized software development costs amounted to $406,000 in the first quarter
of fiscal 2005 compared to $547,000 in the first quarter of fiscal 2004. The
decrease in capitalized software costs during the first quarter of fiscal 2005
compared to 2004 were due to decreased 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 $803,000 or 12.5% of revenues in the first quarter of fiscal 2005
compared to $741,000 or 15.6% of revenues in the same period of fiscal 2004. The
increase in expenses in the first quarter of fiscal 2005 compared to the same
period of fiscal 2004 was mainly due to the decrease in amounts that were
capitalized as software development costs.
Interest Expense - Interest expense decreased $4,000 to $15,000 in the first
quarter of fiscal 2005 from $19,000 in the same period in fiscal 2004. The
decrease was primarily due to a decrease in average outstanding letter of credit
commitment balances.
Interest Income - Interest income was $3,000 for the three months ended December
3, 2004 compared to $4,000 for the same period ended November 28, 2003. The
decrease was primarily due to lower average balances of cash and cash
equivalents.
17
Income Tax Expense - For the three months ended December 3, 2004, income tax
expense of $62,000 was comprised of a deferred federal and state income tax
expense of $59,000 and $3,000, respectively.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are very important to the portrayal of our financial
condition and results of operations and require management's most subjective or
difficult judgements. These policies are as follows:
Revenue Recognition - Our revenue recognition policies are in compliance with
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", SAB No. 101,
"Revenue Recognition in Financial Statements" and EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue is recognized when persuasive
evidence of an agreement with the customer exists, products are shipped or title
passes pursuant to the terms of the agreement with the customer, the amount due
from the customer is fixed or determinable, collectibility is reasonably
assured, and there are no significant future performance obligations. Service
revenues are recognized at the time of performance. Revenues from separate
service maintenance agreements are recognized ratably over the term of the
agreements. We recognize revenue in certain circumstances before delivery has
occurred (commonly referred to as "bill and hold" transactions). In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods be held for future delivery as
scheduled and designated by them, and no additional performance obligations
exist by us. For these transactions, the finished goods are segregated from
inventory and normal billing and credit terms are granted. For the three months
ended December 3, 2004, revenues to one customer in the amount of $1,345,000
were appropriately recorded prior to delivery as bill and hold transactions. At
December 3, 2004, accounts receivable for these revenues amounted to $1,345,000
and were paid in full subsequent to December 3, 2004.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and if future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history and credit
worthiness of the customer. If management determines that collection is not
reasonably assured or future performance obligations exist, revenue recognition
is deferred until these conditions are satisfied.
Our principal sources of revenues are from the sales of various satellite
communications equipment. Embedded in our products is internally developed
software of varying applications. Historically, we have not sold or marketed our
software separately or otherwise licensed our software apart from the related
communications equipment. Should we begin to market or sell software whereby it
is more than an incidental component of the hardware, then we would recognize
software license revenue in accordance with SOP No. 97-2, "Software Revenue
Recognition" as amended by SOP No. 98-9,
"Software Revenue Recognition, with Respect to Certain Transactions."
Inventory Reserves - Inventories are valued at the lower of cost (at standard,
which approximates actual cost on a first-in, first-out basis) or market.
Inventories include the cost of raw materials, labor and manufacturing overhead.
We make inventory reserve provisions for obsolete or slow-moving inventories as
necessary to properly reflect inventory value. These reserves are to provide for
items that are potentially slow-moving, excess or obsolete. Changes in market
conditions, lower than expected customer demand and rapidly changing technology
could result in additional obsolete and slow-moving inventory that is unsaleable
or saleable at reduced prices, which could require additional inventory reserve
provisions. At December 3, 2004, inventories, net of reserve provisions,
amounted to $3,784,000.
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 December 3, 2004, capitalized software
costs, net of accumulated amortization, amounted to $1,748,000.
18
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 our deferred tax assets depends on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, we believe it is more likely
than not that all of the deferred tax assets will be realized based on our
backlog and financial projections. 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. In addition, any reductions
in corporate federal tax rates would reduce the carrying value of deferred tax
assets. Each 1% reduction in corporate federal tax rates would reduce deferred
tax assets by approximately $35,000 based on the deferred tax asset balances at
December 3, 2004. At December 3, 2004, deferred tax assets amount to $4,107,000,
of which approximately $2,334,000 relates to net operating loss carryforwards
which expire in fiscal 2020 through 2025 and state income tax credits of
$199,000 expiring in fiscal 2009.
Accounts Receivable Valuation - We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required. At December 3, 2004, accounts receivable, net of
allowances for doubtful accounts, amounted to $4,390,000.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED DECEMBER 3, 2004
At December 3, 2004, our primary sources of liquidity were cash and cash
equivalents of $956,000 and a $5,000,000 bank loan facility. Cash and cash
equivalents decreased $565,000 during the first quarter of fiscal 2005.
During the first quarter of fiscal 2005, operating activities used $125,000 of
cash. Net earnings adjusted for non-cash expenses provided $660,000 of cash,
while changes in accounts receivable and customer deposit balances used
$2,004,000 of cash. Changes in accounts payable and accrued expenses,
inventories and other assets provided $1,218,000 of cash. Cash used by investing
activities was $21,000 for property and equipment expenditures, $406,000 for
capitalized software additions and $41,000 for legal expenses related to the
filing of applications for various patents and trademarks. Financing activities
provided $29,000 of cash from the exercise of stock options.
WCI's bank loan facility provides a maximum available credit limit of $5,000,000
subject to availability advance formulas. The loan facility matures on June 30,
2006, or upon demand and requires an annual facility fee of .75% of the maximum
credit limit. The loan facility consists of a term loan and a revolving line of
credit with a combined borrowing limit of $5,000,000, bearing interest at the
bank's prime rate (5.00% at December 3, 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 and 50% of import letter of credit commitment balances. The
loan is secured by a first lien on substantially all of WCI's assets and
guaranteed by Wegener Corporation. At December 3, 2004, no balances were
outstanding on the revolving line of credit or the equipment term loan portions
of the loan facility. The loan facility is currently being used to support
import letters of credit issued to offshore manufacturers, which at December 3,
2004 amounted to $1,934,000. At December 3, 2004, approximately $3,066,000, net
of outstanding letters of credit, was available to borrow under the advance
formulas.
In addition, at December 3, 2004, we had land and buildings and improvements
with a cost basis of $4,454,000 which had no mortgage balances outstanding. Land
and buildings are not currently used in the existing loan facility's
availability advance formulas, however, we believe these assets could be used to
support additional borrowing capacities either with our existing bank or from
other sources.
Beginning in the second quarter of fiscal 2005, we expect that we will use
borrowings on the line of credit to support operations. We expect bookings for
new products to result in increased revenues beginning in the second half of
fiscal 2005, which could require an increase in the credit limit primarily to
support increases in inventory, accounts receivable and import letter of credit
19
balances. While no assurances may be given, WCI believes additional credit
limits would be made available under the existing line of credit to support
borrowing requirements resulting from increased revenues and bookings. Should
the bookings and revenues for the new products not materialize, we are committed
to reducing operating costs to bring them in line with revenue levels.
We are required to maintain a minimum tangible net worth with annual increases
at each fiscal year end commencing with fiscal year 2005, retain certain key
employees, maintain certain financial ratios, and are precluded from paying
dividends. At December 3, 2004, we were in compliance with all loan facility
covenants.
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At December 3, 2004, outstanding purchase commitments under these
agreements amounted to $6,270,000. Pursuant to the above agreements, at December
3, 2004, we had outstanding letters of credit in the amount of $1,934,000.
During the first quarter of fiscal 2004, we entered into a two-year agreement
aggregating $870,000 for engineering design and software development services.
At December 3, 2004, the remaining outstanding commitment under the agreement
was $399,000.
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 December 3,
2004 consisted of:
Payments Due by Period
------------------------------------------------------------
Fiscal Fiscal Fiscal
Contractual Obligations Total 2005 2006-2007 2008-2009
- ------------------------ ------------------------------------------------------------
Operating leases $ 372,000 $ 149,000 $ 219,000 $4,000
Purchase commitments 6,669,000 5,307,000 1,362,000 --
------------------------------------------------------------
Total $ 7,041,000 $5,456,000 $1,581,000 $4,000
============================================================
20
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
December 3, 2004 subject to variable interest rate fluctuations.
At December 3, 2004, the Company's cash equivalents consisted of bank commercial
paper in the amount of $750,000. 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.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report. An asterisk
identifies those exhibits previously filed and incorporated herein by reference
below. For each such asterisked exhibit there is shown below the description of
the previous filing. Exhibits which are not required for this report are
omitted.
Exhibit Number Description of Document
- -------------- -----------------------
*3.1 By-Laws (Reg. No. 2-81795, Exhibits 3(a) and 3(b)).
*3.2 Certificate of Incorporation as amended through May 4, 1989, (1989
10-K, filed November 30, 1989, SEC file No. 0-11003, Exhibit 3.2).
*3.3 Amendment to Certificate of Incorporation (1997 10-Q, filed June 27,
1997, SEC file No. 0-11003, Exhibit 3.1).
*3.4 Amended and Restated By-laws (Form 8-K, dated as of May 1, 2003 and
filed May 6, 2003, Exhibit 3.1).
31.1 Certification of Chief Executive Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22
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 18, 2005 By: /s/ Robert A. Placek
---------------------------------------
Robert A. Placek
President
(Principal Executive Officer)
Date: January 18, 2005 By: /s/ C. Troy Woodbury, Jr.
---------------------------------------
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
23