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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 28, 1998
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
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 [ ]
As of November 2, 1998, 11,980,575 shares of registrant's Common Stock were
outstanding and the aggregate market value of the Common Stock held by
nonaffiliates was $16,452,472 based on the last sale price of the Common Stock
as quoted on the NASDAQ Small-Cap Market on such date. (The officers and
directors of the registrant, and owners of over 10% of the registrant's common
stock, are considered affiliates for purposes of this calculation.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement pertaining to the January 28,
1999 Annual Meeting of Stockholders, only to the extent expressly so stated
herein, are incorporated herein by reference into Part III.
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WEGENER CORPORATION
FORM 10-K
YEAR ENDED AUGUST 28, 1998
INDEX
PART I
Page
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings.............................................. 9
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.................................... 9
Item 6. Selected Financial Data........................................ 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..... 20
Item 8. Financial Statements and Supplementary Data.................... 20
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures........................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant............. 37
Item 11. Executive Compensation......................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 37
Item 13. Certain Relationships and Related Transactions................. 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................ 38
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PART I
ITEM 1. BUSINESS
Wegener Corporation, the Registrant, together with its subsidiaries, is
referred to herein as the "Company" or "WGNR".
(a) General development of business.
Wegener Corporation was formed in 1977 and is a Delaware corporation. The
Company conducts its continuing business through Wegener Communications, Inc.
(WCI), its wholly-owned subsidiary, and Wegener Communications International,
Inc., a wholly-owned subsidiary of WCI.
WCI was formed in April 1978 and is a Georgia corporation. Its wholly-owned
subsidiary, Wegener Communications International, Inc., is a Small Foreign Sales
Corporation. WCI, a market leader in digital and analog compression technology,
designs and manufactures communications transmission and receiving equipment for
the business broadcast, data communications, cable and broadcast radio and
television industries for worldwide markets.
(b) Financial information about industry segments.
Segment information contained in Note 11 to the consolidated financial
statements on page 34 of this document is incorporated herein by reference in
response to this item.
(c) Narrative description of business.
(i) Principal products produced and services rendered, and
(ii) Status of a product or segment.
Satellite Communications Electronics.
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WCI is an international provider of digital solutions for video, audio and
broadcast data networks. Applications include broadcast television, cable
television, radio network, business television, distance education, business
music, satellite paging and financial information distribution. WCI services the
products that it sells. The Company warrants its products for a period of one
year. There were no significant warranty claims outstanding as of August 28,
1998.
Throughout fiscal 1998 and fiscal 1997, WCI continued to produce and develop
digital compression products. During fiscal 1997 WCI introduced COMPEL network
control software and the UNITY Digital Broadcast product family. COMPEL provides
networks with unparalleled ability to regionalize programming and commercials
through total receiver control. COMPEL also allows network operators to remote
control uplinks providing bandwidth on demand. COMPEL control
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capability is integrated into the UNITY digital satellite receivers. Wegener's
digital products are in use worldwide in distance learning, radio, cable
television, and private business networks. In terms of new orders, compressed
digital products are the fastest growing product segment for the Company. As
expected, demand for the Company's analog products has continued to decline
following market demand for, and the Company's emphasis on, digital technology.
DIGITAL COMMUNICATIONS. The demand for digital products is being driven by the
high cost of satellite capacity. Satellite capacity is scarce due to pressures
on both the supply and demand side of the market. On the supply side, satellites
are extremely expensive to launch, build, and maintain. The useful life of a
satellite is limited by the amount of positioning fuel that can be carried.
Also, the placement of satellites is regulated by the Federal Communications
Commission (FCC) and therefore the number of satellites within range of any
given location is limited. On the demand side, the cost of receive hardware is
being steadily reduced through advancing technology. The reduction in the cost
of network hardware increases the economic feasibility of a greater number of
networks. This is evidenced by the trend in both television and radio towards
narrow-casting to well-defined market segments as opposed to broadcasting to the
general population. Digital compression technology allows a four to ten-fold, or
more, increase in the throughput of a satellite channel. For the network, this
compression represents an opportunity to reduce the cost of satellite use. For
the satellite operator it represents an opportunity to increase the revenues
generated by an expensive asset. Due to existing satellite transponder contracts
and the cost of replacing existing analog hardware, the digital conversion of
major networks is taking longer than anticipated. These network conversions are
expected to occur in the near future, but it is impossible to predict the
precise timing of customer internal decision processes. Management believes the
market as a whole has considerable built up demand for digital technology.
With ongoing breakthroughs in digital compression, digitized audio and video
products have become increasingly important. WCI manufactures MPEG-2 broadcast
quality digital video products for commercial program distribution. During the
second quarter of fiscal 1998, WCI received an additional order for cable
products from FOX/Liberty Networks, L.L.C. for its UNITY4000 MPEG2 digital video
satellite receivers. Part of Wegener's UNITY digital product family, the
UNITY4000 is utilized by FOX Sports Net, FX Networks and fxM: Movies from FOX.
In the television market, Ascent Network Services placed orders for DVT digital
video encoders, UNITY receivers and COMPEL for use by NBC News Channel's digital
satellite news gathering (DSNG) operations. The DVT encoders and UNITY receivers
are used at both NBC affiliate stations and in remote DSNG vehicles. Turner
Broadcasting purchased UNITY receivers to convert Turner's satellite news
gathering trucks to digital. Turner also uses WCI's digital products for various
network feeds from around the world.
BUSINESS TELEVISION/DISTANCE LEARNING. The Company's analog and digital products
are used by businesses and educational institutions to transmit programming to
remote locations.
GE Medical Systems chose WCI digital video products for a network comprised of
thousands of hospitals. The network will be used for staff training and
information programming. Oregon Ed-Net is a growing network that reaches
hundreds of sites throughout Oregon. The network furnishes the
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citizens of Oregon with direct student instruction, statewide conferences and
general audio/video teleconferencing. The use of Wegener's COMPEL network
control system allows Ed-Net comprehensive addressable control of receive IRDs
and downlink authorization.
During the fourth quarter of fiscal 1998, a new order was also received for
analog video receivers for use in Channel One. Channel One, a pioneer distance
learning network, broadcasts educational programming to over 12,000 schools
throughout the United States. WCI's ANCS network control system, a predecessor
to COMPEL, allows programming to be transmitted and automatically recorded on
VCRs at night for subsequent use.
CABLE TELEVISION PRODUCTS. The single most significant event for WCI in fiscal
1998 was the successful deployment of UNITY4000 digital video receivers. WCI
completed the rollout of FX Networks and continues to ship receivers for use in
Fox's regional sports networks. With thousands of receivers in-service and more
coming on-line every day, the network's conversion to digital has proceeded
smoothly. The rollout is expected to continue into fiscal 1999.
Additionally, during the fourth quarter of fiscal 1998, Paxson Communications
Corporation chose WCI's UNITY4000 digital video receivers to launch its family
programming network PAX NET. Paxson will deploy UNITY4000 digital video
receivers in both broadcast television stations and cable headends and is the
latest broadcast network to select COMPEL, WCI's patented network control
system. Paxson will broadcast via a total of 78 television stations in markets
that contain more than 72 million U.S. television households, including stations
in each of the top 20 U.S. television markets as well as 43 of the nation's top
50 markets. Paxson Communications owns and operates the nation's largest group
of television stations.
WCI's cue and control equipment for cable television networks is used on
advertising supported networks to permit affiliated cable systems to insert
local commercials at appropriate times. Control equipment delivers switching
commands from the network to provide program routing and blackouts.
An additional product family of the cable television segment is graphic
generators. These products deliver custom data by satellite that is graphically
displayed on a subscriber's television. The Weather Channel placed an add-on
order for Wegener Weatherstar Jrs. The Weatherstar Jr is a data receiver and
display unit used to display local weather information at cable television
systems.
RADIO AND TELEVISION BROADCASTING. Broadcasters use WCI equipment to distribute
digital audio, analog audio, video, and cue/network control signals. Television
networks, such as NBC and Turner Broadcasting, use WCI products to distribute
programming from remote locations and between affiliates. Satellite based radio
networks distribute programming and network control signals to network
affiliates.
JACOR, a group radio station owner and provider of radio network programming,
operates a satellite delivered contribution network linking JACOR's major market
radio properties. Each major market is equipped with its own satellite uplink,
featuring WCI transmission equipment and COMPEL network control system. WCI
digital receivers receive the programming at affiliate stations.
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OPTICAL FIBER AND TERRESTRIAL MICROWAVE. Most of WCI's products used on
satellite communications links are easily used on existing microwave or fiber
circuits. Typical applications are digital video links, plus voice and data
circuits that accompany a video signal.
BUSINESS MUSIC. This market consists of suppliers of business music to
restaurants, offices and various retail establishments. WCI manufactures the
equipment required to transmit audio and data from the business music supplier
to the end user via satellite. The equipment is controlled by the business music
supplier using WCI's network control technology. Potential users include any
business purchasing background music, foreground music and broadcast data.
During the fourth quarter of fiscal 1998, WCI received an order in excess of $1
million for digital audio receivers from Music Technologies International (MTI)
to provide in-store programming and commercials to thousands of retail locations
across the United States.
(iii) Sources and availability of raw materials.
Raw materials consist of passive electronic components, electronic circuit
boards and fabricated sheet metal. WCI purchases approximately one-half of its
raw materials from direct suppliers and the other half is purchased from
distributors. Passive and active components include parts such as resistors,
integrated circuits and diodes. WCI uses approximately ten distributors and one
subcontractor to supply its electronic components. WCI often uses a single
distributor or subcontractor to supply a total subassembly or turnkey solution
for higher volume products. Direct sources provide sheet metal, electronic
circuit boards and other materials built to specifications. WCI maintains
relationships with approximately twenty direct suppliers. Most of the Company's
materials are available from a number of different suppliers; however, certain
components used in existing and future products are currently available from
single or limited sources. Although the Company believes that all single-source
components currently are available in adequate quantities, there can be no
assurance that shortages or unanticipated delivery interruptions will not
develop in the future. Any disruption or termination of supply of certain
single-source components could have an adverse effect on the Company's business
and results of operations.
(iv) Patents, trademarks, licenses, franchises and concessions held.
The Company holds certain patents with respect to some of its products and
markets its services and products under various trademarks and tradenames.
Additionally, the Company licenses certain analog audio processing technology to
several manufacturing companies which generated royalty revenues of
approximately $184,000, $121,000 and $112,000 in fiscal 1998, 1997, and 1996,
respectively. Although the Company believes that the patents and trademarks
owned are of value, the Company believes that success in its industry will be
dependent upon new product introductions, frequent product enhancements, and
customer support and service. However, the Company intends to protect its rights
when, in its view, these rights are infringed upon.
(v) Seasonal variations in business.
There does not appear to be any seasonal variations in the Company's
business.
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(vi) Working capital practices.
Information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (MD&A) on pages 11-19
of this document is incorporated herein by reference in response to this item.
(vii) Dependence upon a limited number of customers.
The Company sells to a variety of domestic and international customers on
an open-unsecured account basis. These customers principally operate in the
cable television, broadcast business music, private network, and data
communications industries. Sales to FOX/Liberty Networks, L.L.C. accounted for
approximately 34.2% of revenues in fiscal 1998. Sales to The Church of Jesus
Christ of Latter-Day Saints accounted for approximately 11.0% of revenues in
fiscal 1997. Sales to Ascent Network Services accounted for approximately 14.2%
of revenues in fiscal 1996. At August 28, 1998, three customers accounted for
23.7%, 13.6% and 13.2%, respectively of the Company's accounts receivable. At
August 29, 1997, one customer accounted for 27.7% of the Company's accounts
receivable. Sales to a relatively small number of major customers have typically
comprised a majority of the Company's revenues. This trend is expected to
continue in fiscal 1999. There can be no assurance that the loss of one or more
of these customers would not have a material adverse effect on the Company's
operations.
(viii) Backlog of orders.
The Company's backlog is comprised of undelivered, firm customer orders,
which are scheduled to ship within eighteen months. The Company's backlog was
approximately $12,596,000 at August 28, 1998 and $19,501,000 at August 29, 1997.
Reference is hereby made to MD&A, page 12, of this document, which is
incorporated herein by reference in response to this item.
The August 28, 1998 backlog is expected to ship during fiscal 1999.
(ix) Government contracts.
Not applicable.
(x) Competitive Conditions.
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The Company competes with companies which have substantially greater
resources and a larger number of products than the Company, as well as with
small specialized companies. Through relationships with satellite service
providers, the Company has positioned itself to provide end-to-end solutions to
its customers. Competition in the market for the Company's MPEG-2 broadcast
television electronics products, including digital video equipment, is driven by
timeliness, performance, and price. The Company's broadcast digital video
products are in production and are competitively priced, with unique, desirable
features. Due to the large number of potential end users, both small and large
competitors continue to emerge. The Company believes it has positioned itself to
capitalize on the market trends in this business through careful development of
its product and market strategies, which have proven successful in increasing
revenues from this sector. In the cable television market the Company believes
that the competitive position for many of its products is dominant. However, the
UNITY product family is potentially competing with significant and established
firms. WCI believes that it maintains a competitive advantage in the market for
advertising-supported networks through its ability to provide regionalized
programming and control. Other products for cable television include proprietary
cueing and network control devices. Competition for radio network products,
including the Company's digital audio products, is very aggressive and pricing
is very competitive. The Company believes that its continued success in all of
its markets will depend on aggressive marketing and product development.
(xi) Research and development activities.
The Company's research and development is designed to strengthen and
broaden its existing products and systems and to develop new products and
systems. A major portion of the fiscal 1998 research and development expenses
were spent in the digital video product area. WCI's research and development
expenses totaled $2,644,000 in fiscal 1998, $1,999,000 in fiscal 1997, and
$2,286,000 in fiscal 1996. Additional information contained in MDA on pages
11-19 of this document is incorporated herein by reference in response to this
item.
(xii) Environmental Regulation.
Federal, state and local pollution control requirements have no material
effect upon the capital expenditures, earnings or the competitive position of
the Company.
(xiii) Number of employees.
As of August 28, 1998, the Company had 137 employees employed by the WCI
manufacturing subsidiary, and no employees employed by Wegener Corporation. No
employees are parties to a collective bargaining agreement and the Company
believes that its relationships with its employees are good.
(d) Financial information about foreign and domestic operations and
export sales.
Information contained in Note 11 on page 34 of this document is
incorporated herein by reference in response to this item.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, for purposes of section 401(b) of
Regulation S-K, are as follows:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
ROBERT A. PLACEK 60 President,
President and Chief Executive Officer Chief Executive Officer
of the Company since August 1987 and and Chairman of the Board
Director since July 1987. Chairman of of the Company
the Board since 1995. Chairman and Chief
Executive Officer and Director of WCI
since 1979. President of WCI from
October 1979 to June 1998.
KEITH N. SMITH 40 President of WCI
President of WCI since June 1998. Vice
President, Business Development of WCI
from March 1997 to June 1998. Co-founder
and Vice President/General Manager of
Microspace Communications Corporation
from April 1989 through May 1995. From
June 1995 until February 1997, Mr. Smith
and his wife pursued a sailing
sabbatical.
C. TROY WOODBURY, JR. 51 Treasurer and
Treasurer and Chief Financial Officer of Chief Financial Officer
the Company since June 1988 and Director of the Company and WCI
since 1989. Treasurer and Chief
Financial Officer of WCI since 1992.
Executive Vice President of WCI from
July 1995 to June 1998. Chief Operating
Officer of WCI from September 1992 to
June 1998. Group Controller for
Scientific-Atlanta, Inc. from March 1975
to June 1988.
JAMES T. TRAICOFF 48 Controller of the Company
Controller of the Company since November and WCI
1991; Controller of WCI since July 1988;
Controller for BBL Industries, Inc. from
April 1985 to July 1988.
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ITEM 2. PROPERTIES
The executive offices of the Company are located at 11350 Technology
Circle, Duluth, Georgia 30097-1502. This 40,000 square foot facility, which is
located on a 4.7 acre site, was purchased by WCI in February 1987. During August
1989, WCI purchased an additional 4.4 acres of adjacent property. WCI also
leases approximately 11,300 square feet under a lease expiring during fiscal
1999, at an annual rental of approximately $87,000. WCI, expects to either renew
the current lease or be able to locate and lease other suitable facilities. This
space is for additional warehouse and manufacturing capacity. WCI's
manufacturing facility is subject to a mortgage note securing the indebtedness.
WCI's 4.4 acres of adjacent land is pledged as collateral under the Company's
line of credit facility.
ITEM 3. LEGAL PROCEEDINGS
No significant legal proceedings involving the Company or its subsidiaries
were pending as of August 28, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Small-Cap Market (NASDAQ
symbol WGNR). As of November 2, 1998 there were approximately 426* holders of
record of Common Stock. *(This number does not reflect beneficial ownership of
shares held in nominee names).
The quarterly ranges of high and low closing sale prices for fiscal 1998
and 1997 were as follows:
FISCAL 98 Fiscal 97
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HIGH LOW High Low
First Quarter $2 3/4 $1 7/16 $6 $3 7/8
Second Quarter 2 11/32 1 3/8 4 1/8 2 5/8
Third Quarter 3 19/32 2 1/32 3 7/8 1 7/16
Fourth Quarter 3 5/32 1 5/8 3 1/2 1 13/16
The Company has not paid any cash dividends on its Common Stock. For the
foreseeable future, the Company's Board of Directors does not intend to pay cash
dividends, but rather plans to retain earnings to support the Company's
operations and growth.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended
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AUGUST 28, August 29, August 30, September 1, September 2,
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Revenue $ 34,255 $ 21,812 $ 23,195 $ 19,488 $ 16,521
Net earnings (loss) 2,760 (1,809) 1,456 385 (69)
Net earnings (loss) per share
Basic $ .24 $ (.19) $ .17 $ .05 $ (.01)
Diluted $ .23 $ (.19) $ .17 $ .05 $ (.01)
Cash dividends paid per share (1) -- -- -- -- --
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Total assets $ 25,905 $ 25,614 $ 27,737 $ 22,018 $ 11,893
Long-term obligations inclusive
of current maturities 1,829 3,667 7,935 2,796 2,979
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</TABLE>
(1) The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 from time to time
in the Company's periodic Securities and Exchange Commission filings.
The Company manufactures satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI manufactures products
for transmission of audio, data, and video via satellite.
RESULTS OF OPERATIONS
Earnings for the year ended August 28, 1998 were $2,760,000 or $0.23 per
share, compared to a net loss of $(1,809,000) or $(0.19) per share for the year
ended August 29, 1997 and earnings of $1,456,000 or $0.17 per share for the year
ended August 30, 1996.
Revenues for fiscal 1998 increased $12,443,000 or 57.0% to $34,255,000,
from $21,812,000 in fiscal 1997, which compared to revenues of $23,195,000 in
fiscal 1996. During fiscal 1998, the Company continued to focus on improved
product quality and the development of new products. Direct Broadcast Satellite
(DBS) revenues in fiscal 1998 increased $11,770,000 or 64.6% to $29,977,000 from
$18,207,000 in fiscal 1997. Telecom and Custom Product revenues increased
$673,000 in fiscal 1998 to $4,278,000 from $3,605,000 in fiscal 1997.
The increase in DBS revenues was due to continued strength in digital video
products for both the cable and broadcast TV industries and also in products for
the radio network business. Specifically, significant shipments were made to
FOX/Liberty Networks, L.L.C., and FX Networks to support their conversion to
digital distribution of their cable networks. Furthermore, Paxson Communications
Corporation chose the Wegener UNITY4000 receiver and the COMPEL network control
software to distribute PAX TV. Paxson Communications owns and operates the
nation's largest group of television stations and launched PAX TV, the national
family entertainment network, on August 31, 1998 to both broadcast and cable
television. Wegener's UNITY4000 receivers and COMPEL Software were also utilized
to enable NSN Network Services to provide JACOR a satellite delivered
contribution network linking JACOR's major market radio properties. JACOR is a
group station owner and provider of radio network programming. Orders were
received for Wegener's UNITY private network receivers, digital satellite news
gathering products, analog video receivers and digital video receivers for
distance learning, receivers used in paging networks,
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and data receivers. The Telecom and Custom Product Group revenue increase was
primarily due to a higher level of shipments in fiscal 1998 of cue and control
equipment to provide local commercial insertion capabilities to cable television
headend systems.
WCI's backlog of orders scheduled to ship within eighteen months decreased
$6,905,000 or 35.4% to $12,596,000 at August 28, 1998 from $19,501,000 at August
29, 1997 which compares to $13,807,000 at August 30, 1996. The August 28, 1998
backlog is expected to ship during fiscal 1999. The Company expects to book
sufficient new orders in fiscal 1999 to achieve profitability, although there
can be fluctuations in quarter to quarter operating results due to the timing of
orders received.
International sales are generated through a direct sales organization and
through foreign distributors. International sales were $2,712,000 or 7.9% of
revenues in fiscal 1998, compared to $2,964,000 or 13.6% of revenues in fiscal
1997, and $2,549,000 or 11.0% of revenues in fiscal 1996. Management believes
that international sales could increase as more business opportunities become
available for WCI products in the future. All international sales are
denominated in U.S. dollars.
Gross profit increased $6,893,000 or 139.9% in fiscal 1998 compared to
fiscal 1997. Gross profit as a percent of sales was 34.5% in fiscal 1998,
compared to 22.6% in fiscal 1997 and 32.2% in fiscal 1996. The increases in
profit margin dollars and percentages in fiscal 1998 compared to fiscal 1997
were mainly due to (1) an increase in contribution margin percentage of
approximately 7.5% due to an increase in revenues and lower variable costs, and
(2) higher revenues which resulted in the spreading of fixed costs over a larger
revenue base. Gross profit was adversely impacted by a net increase in fixed
manufacturing overhead expenses of $319,000 or .9% of revenue, due primarily to
charges for reserves for slow-moving and obsolete inventory of $1,150,000 as
compared to $825,000 in fiscal 1997 and $775,000 in fiscal 1996.
Selling, general and administrative expenses decreased $231,000 or 4.5% to
$4,930,000 in fiscal 1998 from $5,161,000 in fiscal 1997. As a percentage of
revenues, selling, general and administrative expenses were 14.4% of revenues in
fiscal 1998 and 23.7% in fiscal 1997. The dollar decrease of expenses in fiscal
1998 from fiscal 1997 includes decreases in (1) bad debt expense of $282,000,
(2) restructuring expense of $100,000, and (3) depreciation and amortization
expense of $35,000, principally for loan origination fees and convertible bond
issuance costs. These decreases were partially offset by increases of
approximately $311,000 due to higher levels of selling and marketing expenses
and compensation expenses. Selling, general and administrative expenses
increased $1,210,000 or 30.6% to $5,161,000 in fiscal 1997 from $3,951,000 in
fiscal 1996. The increase of expenses in fiscal 1997 from fiscal 1996 includes
increases in (1) bad debt expense of $297,000, (2) restructuring expense of
$100,000, (3) depreciation and amortization expense of $111,000, principally for
loan origination fees and convertible bond issuance costs, and (4) professional
fees of $98,000. Other increases of approximately $398,000 were due to higher
levels of selling and marketing expenses and compensation expenses.
Research and development expenditures, including capitalized software
development costs, were $3,080,000 or 9.0% of revenues in fiscal 1998,
$3,089,000 or 14.2% of revenues in fiscal 1997, and $3,180,000 or 13.7% of
revenues in fiscal 1996. Software development costs
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totaling $436,000, $1,090,000 and $894,000 were capitalized during fiscal 1998,
1997, and 1996, respectively. The decrease in capitalized software development
costs for the twelve months ended August 28, 1998 was principally due to a
decrease in expenditures associated with digital video products and the COMPEL
network control software. Research and development expenses, excluding
capitalized software development costs, were $2,644,000 or 7.7% of revenues in
fiscal 1998, $1,999,000 or 9.2% of revenues in fiscal 1997, and $2,286,000 or
9.9% of revenues in fiscal 1996.
Interest expense decreased 55.2% in fiscal 1998 compared to fiscal 1997,
and decreased 21.6% in fiscal 1997 compared to fiscal 1996. The decrease during
fiscal 1998 was primarily due to a decrease in the average outstanding balance
of the convertible debentures. The decrease during fiscal 1997 was primarily due
to a decrease in the weighted average interest rate of total indebtedness
including the convertible debentures. The Company believes that interest expense
in fiscal 1999 will decrease as a result of a reduction in outstanding debt and
lower interest rates.
Interest income was $465,000 in fiscal 1998 compared to $24,000 in fiscal
1997 and $68,000 in fiscal 1996. The increase in fiscal 1998 was due to an
increase in the average balance of cash and cash equivalents primarily as a
result of an increase in customer deposits received during fiscal 1998 and cash
provided from operations. Interest income is expected to decrease in fiscal 1999
due to lower average balances of cash and cash equivalents and a decrease in
investment yields.
Fiscal 1998 income tax expense was comprised of a current federal and state
income tax provision of $93,000 and $221,000, respectively, and a deferred
federal and state tax provision of $1,335,000 and $56,000, respectively. Fiscal
1997 income tax benefit was comprised of a deferred income tax benefit of
$946,000, principally the result of an increase in the Company's net operating
loss carryforward and increases in temporary differences of inventory and
accounts receivable reserves. The Company recognized an income tax benefit in
fiscal 1996 of $848,000 primarily due to a reversal of the valuation allowance
on the deferred tax assets.
The Company operates on a 52-53 week fiscal year. The fiscal year ends on
the Friday nearest to August 31. Fiscal 1998, 1997 and 1996 contained 52 weeks.
All references herein to 1998, 1997 and 1996 refer to the fiscal years ending
August 28, 1998, August 29, 1997, and August 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in fiscal 1998 was $5,787,000 and
$6,325,000 in fiscal 1997 compared to cash used in operating activities of
$6,041,000 in fiscal 1996. Fiscal 1998 net earnings adjusted for non-cash
expenses and a decrease in inventories provided cash of $7,485,000 and
$1,722,000, respectively. Changes in accounts receivable and customer deposit
balances used cash of $3,451,000.
13
<PAGE>
Cash used by investment activities was $959,000 in fiscal 1998 compared to
$2,128,000 in 1997 and $1,472,000 in 1996. Cash used in 1998 includes property
and equipment expenditures of $522,000 and capitalized software additions of
$437,000.
Cash used by financing activities was $578,000 in fiscal 1998 and
$2,126,000 in fiscal 1997 compared to cash provided by financing activities of
$2,771,000 in fiscal 1996. In fiscal 1998, financing activities used cash of
$553,000 for scheduled repayments of long-term obligations.
Net accounts receivable increased 15.2% to $5,315,000 at August 28, 1998,
from $4,613,000 at August 29, 1997, compared to $7,106,000 at August 30, 1996.
The increase in fiscal 1998 was primarily due to a $907,000 increase in revenues
during the fourth quarter of fiscal 1998 compared to fiscal 1997. The allowance
for doubtful accounts was $257,000 at August 28, 1998, $362,000 at August 29,
1997, and $58,000 at August 30, 1996. Write-offs in fiscal 1998, 1997 and 1996
were $180,000, $53,000 and $70,000, respectively. Increases to the allowance and
charges to general and administrative expense were $75,000 in fiscal 1998,
$357,000 in fiscal 1997 and $60,000 in fiscal 1996.
During fiscal 1998, inventory reserves were increased by provisions charged
to cost of sales of $1,150,000 and were reduced by write-offs of $1,577,000. The
increase in the provision was to provide additional reserves for (1) slower
moving analog Telecom products, (2) excess digital audio inventories, and (3)
potentially slow-moving inventories of earlier generations of other digital
products. These products continue to sell but at reduced quantities. During
fiscal 1998 and 1997, decreases in inventories provided cash of $1,722,000 and
$1,877,000, respectively, while in fiscal 1996 increases in inventories used
cash of $6,237,000. During fiscal 1997 inventory reserves were increased by
provisions charged to cost of sales of $825,000 and reduced by write-offs of
$481,000. During fiscal 1996 inventory reserves were increased by provisions
charged to cost of sales of $775,000.
On May 31, 1996, the Company issued $5,000,000 of 8% Convertible
debentures, due May 31, 1999, in a private placement to various accredited
investors for net proceeds to the Company of $4,700,000. The proceeds were used
for working capital and reduction of the line-of-credit note payable. These
debentures were convertible at the option of the holders at any time through
maturity, into a number of shares of common stock at a price equal to the lesser
of (i) $12.25 per share or (ii) a percentage, based on the holding period,
ranging from 95% to 82.5% (82.5% at August 30, 1996 and thereafter) of the
average of the lowest sale price on each of the five trading days immediately
preceding the conversion date. Interest at the rate of 8% per annum was payable
quarterly in cash or, at the option of the Company, by adding the amount of such
interest to the outstanding principal amount due under the debenture. During
fiscal 1997 and 1996 debentures in the amount of $101,222 and $33,973
respectively, were issued for payment of accrued interest. During fiscal 1998,
the balance of the debentures of $1,285,000 was converted into 950,658 shares of
common stock. The conversion was complete as of December 30, 1997. During fiscal
1997, $3,850,000 principal amount of debentures was converted into 2,131,987
shares of common stock. No debentures were converted in fiscal 1996.
On August 4, 1998, WCI amended its secured revolving line of credit and
term loan facility (loan facility) with a bank to provide a maximum available
credit limit of $10,000,000 (previously
14
<PAGE>
$8,500,000). The credit limit increase provides for advances of up to 70% of the
appraised value of certain real property subject to a sublimit of $1,500,000.
The loan facility was also amended to extend the term through June 21, 2000 or
upon demand, to reduce the interest rate to the bank's prime rate (8.5% at
August 28, 1998) (previously prime plus 1/2% on the revolving line and prime
plus 1 1/2% on the term line) and to amend the annual facility fee to $55,000
plus an additional .75% of $3,000,000, if borrowings exceed $5,500,000
(previously $85,000). Advances for real property are payable over 35 months and
bear interest at a fixed annual rate of 250 basis points over the five year U.S.
Treasury rate in effect at the time of disbursement. Subsequent to August 28,
1998, $1,360,000 was advanced to pay off the existing mortgage note balances. At
the time of disbursement the annual interest rate was set at 6.519%.
The term loan portion 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 material 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. Revolving line of credit advances plus equipment term loan advances
are subject to a sublimit of $8,500,000. At August 28, 1998, the loans were
secured by a first lien on substantially all of WCI's assets except assets
secured under an existing mortgage note and equipment note on which the bank had
a second lien. Subsequent to year end, the mortgage note was paid off with
proceeds from the loan facility. The Company is required to maintain a minimum
tangible net worth with annual increases at each fiscal year-end commencing with
fiscal year 1997, retain certain key employees, limit expenditures of Wegener
Corporation to $600,000 per fiscal year, and is precluded from paying dividends.
At August 28, 1998 the Company was in compliance with the covenants. The
revolving line-of-credit and term loan had no outstanding balances as of August
28, 1998 and August 29, 1997. At August 28, 1998, $4,788,000 was available to
borrow under the advance formulas. Additionally, Wegener Corporation guarantees
the revolving line of credit and term loan.
The Company does not have any material scheduled commitments for capital
expenditures during fiscal 1999. The Company expects that its current cash and
cash equivalents combined with expected cash flows from operating activities and
the Company's available line of credit will be sufficient to support the
Company's operations during fiscal 1999.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on
revenues or expenses during its last three fiscal years.
15
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income" (SFAS No. 130) which addresses standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Company will be required to adopt this statement when it reports
its operating results for the quarter ending November 27, 1998. The adoption is
not expected to have a material impact on the presentation of the Company's
consolidated financial statements.
Additionally, in June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
companies to report certain information about operating segments, products and
services, geographical areas in which they operate, and major customers. The
statement is effective for fiscal years beginning after December 15, 1997. The
Company will be required to retroactively adopt this statement when it reports
its operating results for the quarter and year ended September 3, 1999. The
adoption is not expected to have a material impact on the Company's consolidated
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirements Benefits." SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefits plans but
does not change measurement or recognition of those plans. Also, SFAS No. 132
requires additional information on changes in the benefit obligations and fair
values of plan assets. Presently, the Company does not offer pensions or
postretirement benefits. Adoption of SFAS No. 132 will not have an effect on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that adoption of
SFAS No. 133 will have no impact on its financial position or results of
operations.
OUTLOOK: ISSUES AND UNCERTAINTIES
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions.
Product introductions are generally characterized by increased functionality and
better quality, sometimes at reduced prices. The introduction of products
embodying new technology may render existing products obsolete and unmarketable
or marketable at substantially reduced prices. The Company's ability to
successfully develop and introduce on a timely basis new and enhanced products
that embody new technology, and achieve levels of functionality and price
acceptable to the market will be a significant factor in the Company's ability
to grow and to remain competitive. If the Company is
16
<PAGE>
unable, for technological or other reasons, to develop competitive products in a
timely manner in response to changes in the industry, the Company's business and
operating results will be materially and adversely affected.
The Company competes with companies which have substantially greater
resources and a larger number of products than the Company, as well as with
small specialized companies. Through relationships with satellite service
providers, the Company has positioned itself to provide end-to-end solutions to
its customers. Competition in the market for the Company's MPEG-2 broadcast
television electronics products, including digital video equipment, is driven by
timeliness, performance, and price. The Company's broadcast digital video
products are in production and competitively priced, with unique, desirable
features. Due to the large number of potential end users, both small and large
competitors continue to emerge. The Company believes it has positioned itself to
capitalize on the market trends in this business through careful development of
its product and market strategies, which have proven successful in increasing
revenues from this sector. In the cable television market the Company believes
that the competitive position for many of its products is dominant. However, the
UNITY product family is potentially competing with significant and established
firms. WCI believes that it maintains a competitive advantage in the market for
advertising-supported networks through its ability to provide regionalized
programming and control. Other products for cable television include proprietary
cueing and network control devices. Competition for radio network products,
including the Company's digital audio products, is very aggressive and pricing
is very competitive. The Company believes that its continued success in all of
its markets will depend on aggressive marketing and product development.
The demand for digital products is being driven by the high cost of
satellite capacity. Satellite capacity is scarce due to pressures on both the
supply and demand side of the market. On the supply side, satellites are
extremely expensive to launch, build, and maintain. The useful life of a
satellite is limited by the amount of positioning fuel that can be carried.
Also, the placement of satellites is regulated by the Federal Communications
Commission (FCC) and therefore the number of satellites within range of any
given location is limited. On the demand side, the cost of receive hardware is
being steadily reduced through advancing technology. The reduction in the cost
of network hardware increases the economic feasibility of a greater number of
networks. This is evidenced by the trend in both television and radio towards
narrow-casting to well-defined market segments as opposed to broadcasting to the
general population. Digital compression technology allows a four to ten-fold, or
more, increase in the throughput of a satellite channel. For the network, this
compression represents an opportunity to reduce the cost of satellite use. For
the satellite operator it represents an opportunity to increase the revenues
generated by an expensive asset. Due to existing satellite transponder contracts
and the cost of replacing existing analog hardware, the digital conversion of
major networks is taking longer than anticipated. These network conversions are
expected to occur in the near future, but it is impossible to predict the
precise timing of customers' internal decision processes. Management believes
the market as a whole has considerable built up demand for digital technology.
Although no assurances can be given, the Company expects to directly benefit
from this increase in demand. There may be fluctuations in the Company's
revenues and operating results from quarter to quarter due to several factors,
including the timing of significant orders from customers and the timing of new
product introductions by the Company.
The Company has invested a significant amount of financial resources to
acquire certain raw materials, to incur direct labor and to contract to have
specific outplant procedures performed
17
<PAGE>
on inventory in process. The Company purchased this inventory based upon
previously known backlog and anticipated future sales given existing knowledge
of the marketplace. The Company's inventory reserve of $1,440,000 at August 28,
1998, 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 might occur should the
Company's sales efforts not be successful.
The Company's gross margin percentage is subject to variations based on the
product mix sold in any period and on sales volumes. Start-up costs associated
with new product introductions could adversely impact costs and future margins.
Certain raw materials, video sub-components, and licensed video processing
technologies used in existing and future products are currently available from
single or limited sources. Although the Company believes that all single-source
components currently are available in adequate quantities, there can be no
assurance that shortages or unanticipated delivery interruptions will not
develop in the future. Any disruption or termination of supply of certain
single-source components or technologies could have an adverse effect on the
Company's business and results of operations.
The Company has made significant investments in capitalized software costs
principally related to the digital audio and video products. At August 28, 1998
capitalized software costs were $1,212,000. These costs are being amortized over
anticipated future gross revenues for the product or the 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.
During fiscal 1998, $200,000 of capitalized software costs were written-off to
cost of sales due to a reduction of expected revenues on certain slow-moving
products.
The industry in which the Company operates is subject to rapid technology
changes and frequent product introductions. The Company expects to remain
committed to such research and development expenditures as are required to
effectively compete and maintain pace with the rapid technological changes in
the communications industry and to support innovative engineering and design in
its future products.
The Company had an accumulated deficit of $117,000 at August 28, 1998. The
Company is very focused on controlling both direct and indirect manufacturing
costs and other operating expenses. These costs will be adjusted as necessary if
the revenues of the Company do not increase as planned. Management believes that
digital compression technology may be profitably employed to create increased
demand for its satellite receiving equipment if those products are manufactured
in a high volume standardized production environment.
18
<PAGE>
YEAR 2000
State of Readiness
- ------------------
Management of the Company has reviewed the Company's current information
systems and has found them, with a few minor exceptions, to be Year 2000
compliant. However, the Company is currently in the process of replacing their
older information systems with new systems that offer easier access to more data
and are certified to be able to handle the Year 2000 transition.
Management of the Company has reviewed and tested the Company's phone,
voice mail, e-mail, and security systems and all are believed to be Year 2000
compliant. Utility companies have been contacted and have reported to the
Company that only minor problems have been noted in regards to their billing
software as a result of their Year 2000 testing completed to date.
The Company has requested Year 2000 compliance statements from all major
vendors. There have been no indications that major vendors will not be Year 2000
compliant. However, there can be no absolute assurances in this regard and their
failure to be compliant remains a possibility. If vendors are not Year 2000
compliant, there can be no assurance that the Company will be able to find
suitable alternate suppliers and contract with them on reasonable terms, or at
all, and such inability could have a material and adverse impact on the
Company's business and results of operations.
All test equipment used in engineering, service, and manufacturing
departments has been reviewed and all are Year 2000 compliant.
All of the Company's products have been reviewed for Year 2000 compliance.
All are compliant with the exception of certain minor problems in the schedule
and repetitive scheduler programs of an older version of uplink software. All
customers affected by this are being offered a migration path to newer software
which is Year 2000 compliant.
Costs to Address the Year 2000 Issues
- -------------------------------------
Management of the Company believes that although the evaluation of internal
systems is still in process, the impact of the Year 2000 transition on the
Company's internal systems will not result in material costs to the Company or
have a material adverse impact on future results.
Risks of the Year 2000 Issues
- -----------------------------
The main risk to the Company with respect to Year 2000 is the failure of
major vendors and service providers to be Year 2000 compliant. Failure on their
part could result in delays in obtaining parts, increased cost of parts, and
overall inability to manufacture product in the event of a shutdown of major
utility providers. Major vendors and service providers have reported to the
Company that they will be Year 2000 compliant. The Company cannot estimate the
financial impact of any failure to be Year 2000 compliant by such third party
vendors and service providers.
19
<PAGE>
Contingency Plans
- -----------------
The Company does not have a contingency plan for Year 2000 compliance
because it does not anticipate that it will fail to be Year 2000 compliant,
particularly in relation to those systems, software programs, and hardware that
are under its control. However, there can be no assurances that all measures
being taken to avoid Year 2000 problems will be effective and as such,
unforeseen issues could arise that could lead to a material adverse effect upon
the Company's business, operating results and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No response to this item is required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
20
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
----------------------------------------------
AUGUST 28, August 29, August 30,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 34,254,673 $ 21,811,870 $ 23,195,052
- --------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 22,435,716 16,885,840 15,721,320
Selling, general and administrative 4,929,999 5,160,975 3,951,086
Research and development 2,644,353 1,999,106 2,286,378
- --------------------------------------------------------------------------------------------------------
Operating costs and expenses 30,010,068 24,045,921 21,958,784
- --------------------------------------------------------------------------------------------------------
Operating income (loss) 4,244,605 (2,234,051) 1,236,268
Interest expense (244,607) (545,914) (696,513)
Interest income 465,185 24,160 67,606
Other income, net -- 605 717
- --------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 4,465,183 (2,755,200) 608,078
Income tax expense (benefit) 1,705,000 (946,000) (848,000)
- --------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 2,760,183 $ (1,809,200) $ 1,456,078
- --------------------------------------------------------------------------------------------------------
Net earnings (loss) per share
Basic $ .24 $ (.19) $ .17
Diluted $ .23 $ (.19) $ .17
- --------------------------------------------------------------------------------------------------------
Shares used in per share calculation
Basic 11,727,447 9,640,127 8,723,590
Diluted 12,090,911 9,640,127 9,210,470
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 28, August 29,
1998 1997
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 6,492,760 $ 2,242,433
Accounts receivable 5,314,938 4,612,634
Inventories 7,120,393 9,992,672
Deferred income taxes 1,011,000 1,241,000
Other 23,710 21,376
- --------------------------------------------------------------------------------------------------
Total current assets 19,962,801 18,110,115
Property and equipment 4,523,297 4,979,856
Capitalized software costs 1,211,914 1,701,416
Deferred income taxes -- 553,000
Other assets 207,002 269,566
- --------------------------------------------------------------------------------------------------
$ 25,905,014 $ 25,613,953
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,113,205 $ 2,128,941
Accrued expenses 1,490,041 1,440,945
Customer deposits 784,621 3,458,401
Current maturities of long-term obligations 597,664 599,157
- --------------------------------------------------------------------------------------------------
Total current liabilities 4,985,531 7,627,444
Long-term obligations, less current maturities 1,231,338 1,782,460
Convertible debentures -- 1,285,195
Deferred income taxes 608,000 --
- --------------------------------------------------------------------------------------------------
Total liabilities 6,824,869 10,695,099
- --------------------------------------------------------------------------------------------------
Commitments
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,314,575 and 11,363,917 shares issued 123,146 113,639
Additional paid-in capital 19,407,417 18,084,700
Deficit (117,492) (2,877,675)
Less treasury stock, at cost (332,926) (401,810)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 19,080,145 14,918,854
- --------------------------------------------------------------------------------------------------
$ 25,905,014 $ 25,613,953
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------ Paid-in --------------
Shares Amount Capital Deficit Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at September 1, 1995 9,193,680 $ 91,937 $14,131,187 $(2,524,553) (515,354) $ (478,530)
Treasury stock reissued through
stock options, commissions
and 401(k) plan -- -- 126,134 -- 44,957 41,745
Issuance of common stock for
exercise of warrants and options 38,250 382 111,836 -- -- --
Net earnings for the year -- -- -- 1,456,078 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, at August 30, 1996 9,231,930 $ 92,319 $14,369,157 $(1,068,475) (470,397) $ (436,785)
Treasury stock reissued through
stock options and 401(k) plan -- -- 61,474 -- 37,667 34,975
Issuance of common stock for
convertible debentures 2,131,987 21,320 3,654,069 -- -- --
Net (loss) for the year -- -- -- (1,809,200) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, at August 29, 1997 11,363,917 $ 113,639 $18,084,700 $(2,877,675) (432,730) $ (401,810)
Treasury stock reissued through
stock options and 401(k) plan -- -- 84,398 -- 74,184 68,884
Issuance of common stock for
convertible debentures 950,658 9,507 1,238,319 -- -- --
Net earnings for the year -- -- -- 2,760,183 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AT AUGUST 28, 1998 12,314,575 $ 123,146 $19,407,417 $ (117,492) (358,546) $ (332,926)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED Year ended Year ended
AUGUST 28, August 29, August 30,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings (loss) $ 2,760,183 $(1,809,200) $ 1,456,078
Adjustments to reconcile net earnings (loss) to
cash provided (used) by operating activities
Depreciation and amortization 1,784,787 1,471,201 1,050,964
Write-down of capitalized software 200,000 241,841 --
Issuance of treasury stock for
compensation expenses 124,079 90,263 142,333
Issuance of convertible debt for interest
expense -- 101,222 33,973
Bad debt allowance 75,000 356,555 60,000
Inventory reserves 1,150,000 825,000 775,000
Deferred income taxes 1,391,000 (946,000) (848,000)
Warranty provisions -- 146,000 --
Changes in assets and liabilities
Accounts receivable (777,304) 2,136,795 (2,594,395)
Inventories 1,722,279 1,877,151 (6,237,302)
Other assets (2,334) (8,115) 2,932
Accounts payable and accrued expenses 33,360 (970,989) (11,101)
Customer deposits (2,673,780) 2,813,166 128,175
- -------------------------------------------------------------------------------------------------------
5,787,270 6,324,890 (6,041,343)
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY INVESTMENT ACTIVITIES
Property and equipment expenditures (522,066) (1,038,413) (578,801)
Capitalized software additions (436,465) (1,089,931) (893,532)
- -------------------------------------------------------------------------------------------------------
(958,531) (2,128,344) (1,472,333)
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in borrowings under
revolving line-of-credit -- (1,530,332) (1,548,633)
Repayment of long-term debt and capitalized
lease obligations (552,615) (539,074) (891,996)
Proceeds from long-term debt -- -- 5,617,037
Proceeds from issuance of common stock -- -- 112,219
Debt issuance costs (55,000) (62,581) (542,771)
Proceeds from stock options exercised 29,203 6,187 25,545
- -------------------------------------------------------------------------------------------------------
(578,412) (2,125,800) 2,771,401
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,250,327 2,070,746 (4,742,275)
Cash and cash equivalents, beginning of year 2,242,433 171,687 4,913,962
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,492,760 $ 2,242,433 $ 171,687
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
Wegener Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION. The financial statements
include the accounts of Wegener Corporation (WGNR) (the "Company") and its
wholly-owned subsidiaries. Wegener Communications, Inc. (WCI) designs,
manufactures and distributes satellite communications electronics equipment in
the U.S., and internationally through Wegener Communications International Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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.
FISCAL YEAR. The Company operates on a 52-53 week fiscal year. The fiscal year
ends on the Friday nearest to August 31. Fiscal 1998, 1997, and 1996 contained
52 weeks. All references herein to 1998, 1997, and 1996 relate to the fiscal
years ending August 28, 1998, August 29, 1997 and August 30, 1996.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with
original maturities of three months or less. At August 28, 1998, cash
equivalents consisted of a $4,000,000 repurchase agreement and a $2,300,000 bank
certificate of deposit. At August 29, 1997 cash equivalents consisted of a
$2,200,000 bank certificate of deposit.
INVENTORIES. Inventories are stated at the lower of cost (standards, which
approximate 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 provisions for obsolete or slow moving inventories as necessary to
properly reflect inventory value.
PROPERTY, EQUIPMENT AND DEPRECIATION. Property and equipment are stated at cost.
Certain assets are financed under lease contracts which have been capitalized.
Aggregate lease payments, discounted at appropriate rates, have been recorded as
long-term debt, the related leased assets have been capitalized, and the
amortization of such assets is included in depreciation expense. Depreciation is
computed over the estimated useful lives of the assets on the straight-line
method for financial reporting and accelerated methods for income tax purposes.
Substantial betterments to property and equipment are capitalized and repairs
and maintenance are expensed as incurred. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of the asset, a
loss is recognized for the difference between the fair value and carrying value
of the asset.
REVENUE RECOGNITION. Product sales and services are recorded when the product is
shipped or the service is rendered to the customer, all significant contractual
obligations have been satisfied and the collectibility of the resulting
receivable is reasonably assured.
RESEARCH AND DEVELOPMENT. The Company expenses research and development costs,
including expenditures related to development of the Company's software products
that do not qualify for capitalization. Software development costs are
capitalized subsequent to establishing the technological feasibility of a
product. 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. During
fiscal 1998 and 1997, $200,000 and $242,000 respectively of capitalized software
costs were written-off to cost of sales due to a reduction of expected revenues
on certain slow-moving products. Software development costs capitalized during
fiscal 1998, 1997, and 1996 totaled $436,000, $1,090,000, and $894,000,
respectively. Amortization expense, included in cost of goods sold was $726,000,
$415,000, and $252,000 for the same periods. Capitalized software costs, net of
accumulated amortization, were $1,212,000 at August 28, 1998 and $1,701,000 at
August 29, 1997. Accumulated amortization amounted to $1,981,000 at August 28,
1998 and $813,000 at August 29, 1997.
25
<PAGE>
Wegener Corporation and Subsidiaries
STOCK BASED COMPENSATION. Prior to August 31, 1996, the Company accounted for
stock options granted under its stock incentive plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On August 31, 1996, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and has provided the pro forma disclosure provisions of SFAS
No. 123.
INCOME TAXES. Income taxes are based on income (loss) for financial reporting
purposes and reflect a current tax liability (asset) for the estimated taxes
payable (recoverable) in the current-year tax return and changes in deferred
taxes. Deferred tax assets or liabilities are recognized for the estimated tax
effects of temporary differences between financial reporting and taxable income
(loss) and for tax credit and loss carryforwards based on enacted tax laws and
rates.
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, "Earnings per Share". This statement establishes
standards for computing and presenting earnings per share (EPS), and supersedes
APB Opinion No. 15. The Statement replaces primary EPS with basic EPS and
requires a dual presentation of basic and diluted EPS. The Statement is
effective for both interim and annual periods ending after December 15, 1997.
All prior period EPS data has been restated.
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 and convertible debentures. 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 and the if-converted
method to compute the dilutive effect of convertible debentures.
The following tables represent required disclosure of the reconciliation of the
earnings and shares of the basic and diluted net earnings (loss) per share
computations.
<TABLE>
<CAPTION>
Year ended
------------------------------------------
AUGUST 28, August 29, August 30,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
BASIC
Net earnings (loss) available to
to common shareholders $ 2,760,183 $(1,809,200) $ 1,456,078
----------- ----------- -----------
Weighted average shares
outstanding 11,727,447 9,640,127 8,723,590
----------- ----------- -----------
Net earnings (loss) per share $ .24 $ (.19) $ .17
=========== =========== ===========
DILUTED
Net earnings (loss) available to
common shareholders $ 2,760,183 $(1,809,200) $ 1,456,078
Convertible debenture interest
and amortization of bond
issue cost, net of income
taxes 11,658 -- 83,959
----------- ----------- -----------
Total $ 2,771,841 $(1,809,200) $ 1,540,037
----------- ----------- -----------
Weighted average shares
outstanding 11,727,447 9,640,127 8,723,590
Effect of dilutive potential common shares:
Stock options 250,467 -- 331,761
Convertible debentures 112,997 -- 155,119
----------- ----------- -----------
Total 12,090,911 9,640,127 9,210,470
----------- ----------- -----------
Net earnings (loss) per share $ .23 $ (.19) $ .17
=========== =========== ===========
</TABLE>
26
<PAGE>
Wegener Corporation and Subsidiaries
Options and convertible debentures excluded from the diluted earnings (loss) per
share calculation due to their anti-dilutive effect are as follows:
<TABLE>
<CAPTION>
Year ended
--------------------------------------------------
AUGUST 28, August 29, August 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Common stock options:
Number of shares 48,500 579,000 --
Range of exercise prices $2.44 TO 12.13 $.75 to 12.13 --
============== ============== ==============
Convertible debentures:
Common shares calculated under
the if-converted method -- 653,247 --
============== ============== ==============
</TABLE>
FINANCIAL INSTRUMENTS. The Company's financial instruments consist of cash and
cash equivalents, trade accounts receivable, accounts payable, accrued expenses
and long and short-term bank borrowings and convertible debentures. The fair
value of these instruments approximates their recorded value. The Company does
not have financial instruments with off-balance sheet risk. The fair value
estimates were based on market information available to management as of August
28, 1998.
Financial instruments that potentially subject the Company to concentrations of
credit risk, consist principally of cash and cash equivalents and trade accounts
receivable. The Company invests cash through a high-credit-quality financial
institution and performs periodic evaluations of the relative credit standing of
the financial institution. A concentration of credit risk may exist with respect
to trade receivables, as a substantial portion of the Company's customers are
affiliated with the cable television, business broadcast and telecommunications
industries. The Company performs ongoing credit evaluations of customers
world-wide and generally does not require collateral from its customers.
Historically, the Company has not experienced significant losses related to
receivables from individual customers or groups of customers in any particular
industry or geographic area.
FOREIGN CURRENCY. The U.S. dollar is the Company's functional currency for
financial reporting. International sales are made and remitted in U.S. dollars.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1997 and 1996
financial statements to conform to the 1998 presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
AUGUST 28, August 29,
1998 1997
- --------------------------------------------------------------------------------
Accounts receivable - trade $ 5,139,414 $ 4,881,565
Recoverable income taxes 295,000 --
Other receivables 137,515 92,812
- --------------------------------------------------------------------------------
5,571,929 4,974,377
Less allowance for doubtful accounts (256,991) (361,743)
- --------------------------------------------------------------------------------
$ 5,314,938 $ 4,612,634
- --------------------------------------------------------------------------------
27
<PAGE>
Wegener Corporation and Subsidiaries
3. INVENTORIES
Inventories are summarized as follows:
AUGUST 28, August 29,
1998 1997
- --------------------------------------------------------------------------------
Raw materials $ 2,692,937 $ 4,550,550
Work-in-process 3,139,249 4,051,281
Finished goods 2,727,727 3,256,294
- --------------------------------------------------------------------------------
8,559,913 11,858,125
Less inventory reserves (1,439,520) (1,865,453)
- --------------------------------------------------------------------------------
$ 7,120,393 $ 9,992,672
- --------------------------------------------------------------------------------
The Company has invested a significant amount of financial resources to acquire
certain raw materials, to incur direct labor and to contract to have specific
outplant procedures performed on inventory in process. The Company purchased
this inventory based upon prior backlog and anticipated future sales based upon
existing knowledge of the marketplace. The Company's inventory reserve of
approximately $1,440,000 at August 28, 1998, is to provide for items that are
potentially slow-moving, excess, or obsolete. Changes in market conditions,
lower than expected customer demand, and rapidly changing technology could
result in additional obsolete and slow-moving inventory that is unsaleable or
saleable at reduced prices. No estimate can be made of a range of amounts of
loss from obsolescence that are reasonably possible should the Company's sales
efforts not be successful.
4. PROPERTY AND EQUIPMENT
Major classes of property and equipment consisted of the following:
Estimated
Useful Lives AUGUST 28, August 29,
(Years) 1998 1997
- --------------------------------------------------------------------------------
Land -- $ 707,210 $ 707,210
Buildings and improvements 3-30 3,689,643 3,689,643
Machinery and equipment 3-5 6,544,101 7,369,121
Furniture and fixtures 5 567,672 621,965
Application software 5 734,590 734,590
- --------------------------------------------------------------------------------
12,243,216 13,122,529
Less accumulated depreciation
and amortization (7,719,919) (8,142,673)
- --------------------------------------------------------------------------------
$ 4,523,297 $ 4,979,856
- --------------------------------------------------------------------------------
Depreciation expense for fiscal 1998, 1997 and 1996 totaled approximately
$777,000, $660,000, and $562,000, respectively. Assets recorded under a capital
lease included in property and equipment at August 28, 1998 and August 29, 1997
are machinery and equipment of approximately $613,000 and accumulated
amortization of approximately $345,000 and $216,000, respectively.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
AUGUST 28, August 29,
1998 1997
- --------------------------------------------------------------------------------
Compensation $ 637,333 $ 431,446
Royalties 175,061 333,759
Other 677,647 675,740
- --------------------------------------------------------------------------------
$1,490,041 $1,440,945
- --------------------------------------------------------------------------------
28
<PAGE>
Wegener Corporation and Subsidiaries
6. FINANCING AGREEMENTS
REVOLVING LINE-OF-CREDIT AND TERM LOAN FACILITY
On August 4, 1998, WCI amended its secured revolving line of credit and term
loan facility ("loan facility") with a bank to provide a maximum available
credit limit of $10,000,000 (previously $8,500,000). The credit limit increase
provides for advances of up to 70% of the appraised value of certain real
property subject to a sublimit of $1,500,000. The loan facility was also amended
to extend the term through June 21, 2000 or upon demand, to reduce the interest
rate to the bank's prime rate (8.5% at August 28, 1998) (previously prime plus
1/2% on the revolving line and prime plus 1 1/2% on the term line) and to amend
the annual facility fee to $55,000 plus an additional .75% of $3,000,000, if
borrowings exceed $5,500,000 (previously $85,000). Advances for real property
are payable over 35 months and bear interest at a fixed annual rate of 250 basis
points over the five year U.S. Treasury rate in effect at the time of
disbursement. Subsequent to August 28, 1998, $1,360,000 was advanced to pay off
the existing mortgage note balances. At the time of disbursement the annual
interest rate was set at 6.519%.
The term loan portion 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 material 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. Revolving line of credit advances plus equipment term loan advances
are subject to a sublimit of $8,500,000. At August 28, 1998, the loans were
secured by a first lien on substantially all of WCI's assets except assets
secured under an existing mortgage note and equipment note on which the bank had
a second lien. Subsequent to year end, the mortgage note was paid off with
proceeds from the loan facility. The Company is required to maintain a minimum
tangible net worth with annual increases at each fiscal year-end commencing with
fiscal year 1997, retain certain key employees, limit expenditures of Wegener
Corporation to $600,000 per fiscal year, and is precluded from paying dividends.
At August 28, 1998 the Company was in compliance with the covenants. The
revolving line-of-credit and term loan had no outstanding balances as of August
28, 1998 and August 29, 1997. At August 28, 1998, $4,788,000 was available to
borrow under the advance formulas. Additionally, Wegener Corporation guarantees
the revolving line of credit and term loan. Information relative to the
revolving line-of credit is as follows:
<TABLE>
<CAPTION>
Year ended
AUGUST 28, August 29,
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum amount outstanding at any month-end -- $ 1,758,397
Average amount outstanding during the period -- 201,117
Weighted average interest rate during the period -- 16.3%
- --------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS
Long-term obligations consist of:
AUGUST 28, August 29,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
Mortgage note, payable $36,620 monthly, including interest
through February 2002, collateralized by real estate and
cross collateralized under the loan facility, interest is
charged at the bank's prime rate plus 1%. $ 1,362,933 $ 1,651,200
Capital lease obligations, bearing interest ranging from 11.1%
to 12.0%, principal and interest payable monthly, currently
$13,706, final payments due from January 1999 through
February 2000 121,430 257,259
Other long-term obligations, collateralized by equipment 344,639 473,158
- --------------------------------------------------------------------------------------------------------------
1,829,002 2,381,617
Less current maturities (597,664) (599,157)
- --------------------------------------------------------------------------------------------------------------
$ 1,231,338 $ 1,782,460
- --------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Wegener Corporation and Subsidiaries
Other long-term obligations include a promissory note, bearing interest at 9.6%
per annum, with monthly principal and interest payments of $12,597 through April
2001. The outstanding balance was $344,639 at August 28, 1998 and $465,672 at
August 29, 1997.
A summary of future maturities of long-term debt and minimum capital lease
obligations follows:
Capital
Debt Lease
Fiscal Year Maturities Obligations Total
- --------------------------------------------------------------------------------
1999 $ 495,488 $ 110,237 $ 605,725
2000 490,216 19,905 510,121
2001 477,339 - 477,339
2002 244,529 - 244,529
- --------------------------------------------------------------------------------
1,707,572 130,142 1,837,714
Less interest -- (8,712) (8,712)
- --------------------------------------------------------------------------------
$1,707,572 $ 121,430 $1,829,002
- --------------------------------------------------------------------------------
The Company leases certain office and manufacturing facilities, vehicles and
equipment under long-term noncancelable operating leases which expire through
fiscal 2002. Future minimum lease commitments are approximately as follows:
1999-$133,000; 2000-$102,000; 2001-$96,000; 2002-$89,000; and 2003-$87,000. Rent
expense under all leases was approximately $209,000, $202,000 and $299,000 for
fiscal years 1998, 1997, and 1996, respectively.
7. CONVERTIBLE DEBENTURES
On May 31, 1996, the Company issued $5,000,000 of 8% Convertible debentures, due
May 31, 1999, in a private placement to various accredited investors for net
proceeds to the Company of $4,700,000. The proceeds were used for working
capital and reduction of the line-of-credit note payable. These debentures
converted at the option of the holders at any time through maturity, into a
number of shares of common stock at a price equal to the lesser of (i) $12.25
per share or (ii) a percentage, based on the holding period, ranging from 95% to
82.5% (82.5% at August 30, 1996 and thereafter) of the average of the lowest
sale price on each of the five trading days immediately preceding the conversion
date. Interest at the rate of 8% per annum was paid quarterly beginning July 1,
1996 in cash or, at the option of the Company, by adding the amount of such
interest to the outstanding principal amount due under the debenture. During
fiscal 1997 and 1996 debentures in the amount of $101,222 and $33,973
respectively, were issued for payment of accrued interest. During fiscal 1998
and 1997, $1,285,000 and $3,850,000 principal amount of debentures were
converted into 950,658 and 2,131,987, respectively, shares of common stock. No
convertible debentures remained outstanding at August 28, 1998.
8. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Year ended
------------------------------------------------
AUGUST 28, August 29, August 30,
1998 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $ 93,000 $ -- $ --
State 221,000 -- --
- --------------------------------------------------------------------------------
314,000 -- --
- --------------------------------------------------------------------------------
Deferred
Federal 1,335,000 (862,000) (827,000)
State 56,000 (84,000) (21,000)
- --------------------------------------------------------------------------------
1,391,000 (946,000) (848,000)
- --------------------------------------------------------------------------------
Total $ 1,705,000 $(946,000) $(848,000)
- --------------------------------------------------------------------------------
30
<PAGE>
Wegener Corporation and Subsidiaries
The effective income tax rate differs from the U.S. federal statutory rate of
34% as follows:
Year ended
----------------------------------------
AUGUST 28, August 29, August 30,
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory U.S. income tax rate 34.0% (34.0)% 34.0%
State taxes, net of federal
benefits 4.8 (3.0) 3.4
Change in valuation allowance -- -- (179.1)
Foreign sales corporation benefit (.7) -- --
Non-deductible expenses .3 .6 2.4
Other, net (.2) 2.1 (.2)
- --------------------------------------------------------------------------------
Effective income tax rate 38.2% (34.3)% (139.5)%
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities that arise as a result of temporary
differences are as follows:
AUGUST 28, August 29,
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable and inventory reserves $ 860,000 $ 1,075,000
Accrued expenses 151,000 166,000
Net operating loss carryforwards -- 1,078,000
General business credit carryforwards -- 137,000
AMT credit carryovers -- 159,000
- --------------------------------------------------------------------------------
Total deferred tax assets 1,011,000 2,615,000
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (82,000) (95,000)
Capitalized software costs (460,000) (653,000)
Other (66,000) (73,000)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (608,000) (821,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 403,000 $ 1,794,000
- --------------------------------------------------------------------------------
Consolidated balance sheet classifications:
Current deferred tax asset $ 1,011,000 $ 1,241,000
Noncurrent deferred tax asset -- 553,000
Noncurrent deferred tax liability (608,000) --
- --------------------------------------------------------------------------------
Net deferred tax asset $ 403,000 $ 1,794,000
- --------------------------------------------------------------------------------
Net deferred tax assets decreased $1,391,000 to $403,000 at August 28, 1998 from
$1,794,000 at August 29, 1997. The decrease was principally due to utilization
of net operating loss carryforwards and tax credit carryforwards in fiscal 1998.
Deferred tax assets increased $946,000 at August 29, 1997 from $848,000 at
August 30, 1996. The increase was principally due to an increase in the net
operating loss carryforward and increases in accounts receivable and inventory
reserves.
No provision for deferred tax liability has been made on the undistributed
earnings of the Foreign Sales Corporation as the earnings will not be remitted
in the foreseeable future and are considered permanently invested. The amount of
the unrecognized deferred tax liability for the undistributed earnings of
approximately $552,000 was approximately $188,000.
31
<PAGE>
Wegener Corporation and Subsidiaries
9. COMMON STOCK AND STOCK OPTIONS.
1998 INCENTIVE PLAN. On February 26, 1998, the stockholders approved the 1998
Incentive Plan (the "1998 plan"). The Plan provides for awards of up to an
aggregate of 1,000,000 shares of Common Stock which may be represented by (i)
incentive or non-qualified stock options, (ii) stock appreciation rights (tandem
and free-standing), (iii) restricted stock, (iv) deferred stock, or (v)
performance units entitling the holder, upon satisfaction of certain performance
criteria, to awards of Common Stock or cash. In addition, the 1998 Plan provides
for loans and supplemental cash payments to persons participating in the Plan in
connection with awards granted. Eligible participants include officers and other
key employees, non-employee directors, consultants and advisors of the Company.
The exercise price per share in the case of incentive stock options and any
tandem stock appreciation rights will be not less than 100% of the fair market
value on the date of grant or, in the case of an option granted to a 10% or
greater stockholder, not less than 110% of the fair market value on the date of
grant. The exercise price for any other option and stock appreciation rights
shall be at least 75% of the fair market value on the date of grant. The
exercise period for non-qualified stock options may not exceed ten years and one
day from the date of the grant, and the expiration period for an incentive stock
option or stock appreciation rights shall not exceed ten years from the date of
the grant. The 1998 plan contains an automatic option grant program to
non-employee members of the Board of Directors. Such members will each be
granted an option to purchase 2,000 shares of Common Stock on the last day of
each December on which regular trading occurs on the Nasdaq Stock Market, at an
exercise price equal to the fair market value of such stock on the date of
grant. Such options will be exercisable during the period of ten years and one
day from the date of grant of the option. In addition, upon the exercise of an
option by a non-employee director, the Company will pay a supplemental cash
amount equal to the greater of the Company's minimum federal and state tax
withholding obligation with respect to the exercise of the option and such
supplemental payment, or an amount sufficient to defray the federal and state
tax consequences to the non-employee director attributable to the exercise of
the option and such supplemental payment. The effective date of the 1998 plan is
January 1, 1998 and the plan has a ten year term. No options were granted under
the plan as of August 28, 1998.
1989 DIRECTORS' STOCK OPTION PLAN. On January 9, 1990, the stockholders approved
the Wegener Corporation 1989 Directors' Incentive Plan permitting certain
participating directors of the Company to be eligible to receive incentive
awards consisting of common stock of the Company, performance units or stock
appreciation rights payable in stock or cash, or non-qualified stock options to
purchase such stock, or any combination of the foregoing, together with
supplemental cash payments. During the second quarter of fiscal 1995, the
Company amended the 1989 Directors' Stock Option Plan to increase the aggregate
number of shares of common stock that may be awarded from 100,000 to 300,000
shares; to remove the ineligibility provision for certain directors; and to
grant annually to each non-employee director, options to purchase 2,000 shares
of common stock at an exercise price equal to the fair market value of such
stock on the date of grant. The exercise price per share for non-qualified stock
options or stock appreciation rights shall not be less than 85% of fair market
value on the date the award is made or not more than nine trading days
immediately preceding such date. The expiration period for a non-qualified stock
option shall be ten years and one day from the date of the grant. The expiration
period for stock appreciation rights, including any extension, shall not exceed
ten years from the date of grant. During fiscal 1998 options were granted for
44,000 shares of common stock at exercise prices ranging from $1.44 to $2.00.
Subsequent to August 28, 1998, options for 46,000 shares with exercise prices
ranging from $2.00 to $12.13 were cancelled and reissued at an exercise price of
$1.41. Options for 4,000 shares of common stock were granted in each of fiscal
years 1997 and 1996 at exercise prices of $3.94 and $12.13, respectively.
Additionally, during fiscal 1997, options for 193,000 shares of common stock
with exercise prices ranging from $1.50 to $7.00 were cancelled and reissued at
an exercise price of $1.44 per share. At August 28, 1998, 2,000 common stock
shares remained available for awards under the plan. This plan will terminate
and expire effective December 1, 1999.
1988 INCENTIVE PLAN. On January 10, 1989, the stockholders approved the 1988
Incentive Plan providing to key employees other than directors of the Company,
incentive awards consisting of common stock, performance units or stock
appreciation rights payable in stock or cash; or incentive or non-qualified
stock options to purchase stock; or any combination of the above, together with
supplemental cash payments. The aggregate number of shares issuable under the
1988 plan is 750,000 common shares. The exercise price per share in the case of
incentive stock options and any tandem stock appreciation rights will be equal
to 100% of the fair market value or, in the case of an option granted to a 10%
or greater stockholder, l10% of the fair market value. The exercise price for
any other option and stock appreciation rights shall be at least 85% of the fair
market value on the date the option is granted. The exercise period for
non-qualified stock options shall be ten years and one day from the date of the
grant, and the expiration period for an incentive stock option or stock
appreciation rights shall not exceed ten years from the date of the grant.
During fiscal 1998 options were granted for 150,000 shares of common stock at
exercise prices of $1.44 and $2.00. Subsequent to August 28, 1998, options for
105,000 shares at an exercise price of $2.00 were cancelled and reissued at an
exercise price of $1.41. During fiscal 1997 options for 180,250 shares of common
stock with exercise prices ranging from $1.50 to $7.00 per share were cancelled
and reissued at an exercise price of $1.44 per share. In addition, during fiscal
1997 new options were granted for 150,000
32
<PAGE>
Wegener Corporation and Subsidiaries
shares of common stock at an exercise price of $1.44 per share. At August 28,
1998, 211,465 shares remained available for awards under the plan. This plan
will terminate and expire effective December 1, 1998.
A summary of stock option transactions for the above plans follows:
Weighted
Number Range of Average
of Shares Exercise Prices Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
September 1, 1995 458,644 $ .43 - 7.00 $ 3.34
Granted 4,000 12.13 12.13
Exercised (28,144) .43 - .75 .91
- --------------------------------------------------------------------------------
Outstanding at
August 30, 1996 434,500 $ .75 -12.13 $ 3.58
Granted or reissued 527,250 1.44 - 3.94 1.46
Exercised (5,500) .75 - 1.50 1.13
Forfeited or cancelled (377,250) 1.50 - 7.00 4.28
- --------------------------------------------------------------------------------
Outstanding at
August 29, 1997 579,000 $ .75 -12.13 $ 1.55
Granted 194,000 1.44 - 2.00 1.80
Exercised (26,250) .75 - 1.44 1.12
Forfeited or cancelled (10,750) .75 - 1.44 1.36
- --------------------------------------------------------------------------------
OUTSTANDING AT
AUGUST 28, 1998 736,000 $ .75 -12.13 $ 1.63
- --------------------------------------------------------------------------------
Options exercisable at
AUGUST 28, 1998 386,000 $.75 -12.13 $ 1.63
August 29, 1997 315,500 .75 -12.13 1.65
- --------------------------------------------------------------------------------
Weighted average fair value of options Per Share Aggregate
granted during the year ended Option Value Total
- --------------------------------------------------------------------------------
AUGUST 28, 1998 $ .91 $175,493
August 29, 1997 .76 198,562
August 30, 1996 7.40 29,607
- --------------------------------------------------------------------------------
The weighted average remaining contractual life of options outstanding at August
28, 1998 was 4.6 years.
The Company applies APB Opinion No. 25 in accounting for its stock incentive
plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. If compensation cost had been determined
under SFAS No. 123 based on the fair value of stock options at the grant date,
the Company's net earnings (loss) and earnings (loss) per share for the fiscal
years 1998, 1997 and 1996 would have changed to the pro forma amounts below:
Year ended
------------------------------------------
AUGUST 28, August 29, August 30,
1998 1997 1996
- --------------------------------------------------------------------------------
Net earnings (loss)
As Reported $ 2,760,183 $(1,809,200) $ 1,456,078
Pro Forma 2,676,143 (1,902,485) 1,426,471
- --------------------------------------------------------------------------------
Earnings (loss) per share
As Reported
Basic $ .24 $ (.19) $ .17
Diluted .23 (.19) .17
Pro Forma
Basic .23 (.20) .16
Diluted .22 (.20) .16
- --------------------------------------------------------------------------------
33
<PAGE>
Wegener Corporation and Subsidiaries
Pro forma net earnings (loss) reflects only options granted during fiscal years
1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
earnings (loss) amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options granted prior
to September 2, 1995 is not considered.
The fair value of stock options used to compute pro forma net earnings (loss)
and earnings (loss) per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1998, 1997 and 1996. No dividend yield for all
years; expected volatility of 60% in 1998 and 1997 and 40% in 1996; a risk free
interest rate of 5.6% in 1998, 6.6% in 1997 and 5.6% in 1996; and an expected
option life of 3.9 years in 1998, 4.5 years in 1997 and 10.0 years in 1996.
OTHER OPTIONS, AWARDS AND WARRANTS. At August 28, 1998, options for 22,500
common shares, fully exercisable at a price of $2.44 per share, expiring on
December 8, 1998, were outstanding. During fiscal 1996 options for 4,500 common
shares were exercised. In conjunction with a private placement of common stock
during fiscal 1995 the Company issued warrants for 45,000 shares at an exercise
price of $3.00 per share expiring on June 23, 1997. During fiscal 1997, warrants
for 11,250 common shares expired. During fiscal 1996, warrants for 33,750 common
shares were exercised. In addition, stock awards issued under the 1988 Incentive
Plan of 12,500 shares remained outstanding at August 28, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirements Benefits." SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefits plans but does not
change measurement or recognition of those plans. Also, SFAS No. 132 requires
additional information on changes in the benefit obligations and fair values of
plan assets. Presently, the Company does not offer pensions or postretirement
benefits. Adoption of SFAS No. 132 will not have an effect on the Company's
financial position or results of operations.
10. EMPLOYEE BENEFIT PLANS.
WCI has a profit-sharing plan covering substantially all employees. Amounts to
be contributed to the plan each year are determined at the discretion of the
Board of Directors subject to legal limitations. No contributions were declared
for fiscal years 1998, 1997 and 1996.
Eligible WCI employees are permitted to make contributions, up to certain
regulatory limits, to the plan on a tax deferred basis under Section 401(k) of
the Internal Revenue Code. The plan provides for a minimum company matching
contribution on a quarterly basis at the rate of 25% of employee contributions
with a quarterly discretionary match subject to WCI's profitability. All
matching contributions are in the form of Company stock or cash at the
discretion of the Company's Board of Directors. Matching Company contributions
in the form of common stock were approximately $124,000 in fiscal 1998, $90,000
in fiscal 1997 and $37,000 in fiscal 1996.
11. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
WCI operates in a single industry segment of the manufacture and sale of
satellite communications electronics equipment. General corporate expenses
included in selling, general and administrative expense were approximately
$456,000, $578,000, and $412,000 in 1998, 1997 and 1996 respectively. Net
equipment sales to foreign customers were $2,712,000 for the year ended August
28, 1998, $2,964,000 for the year ended August 29, 1997, and $2,549,000 for the
year ended August 30, 1996. All foreign sales are denominated in U.S. dollars.
Sales to foreign customers in 1998, 1997 and 1996 were primarily to customers
located in Latin America, Canada, Asia and Europe. Profit margins on foreign
sales are approximately the same as on domestic sales.
The Company sells to a variety of domestic and international customers on an
open-unsecured account basis. These customers principally operate in the cable
television, broadcast business music, private network, and data communications
industries. Single customers accounted for 34.2%, 11.0% and 14.2% of revenues in
fiscal years 1998, 1997, and 1996, respectively. At August 28, 1998, three
customers accounted for 23.7%, 13.6% and 13.2%, respectively of the Company's
accounts receivable. At August 29, 1997, one customer accounted for 27.7% of the
Company's accounts receivable. When deemed appropriate, the Company uses
letters-of-credit and credit insurance to mitigate the credit risk associated
with foreign sales.
Additionally, in June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
companies to report certain information about operating segments, products and
34
<PAGE>
services, geographical areas in which they operate, and major customers. The
statement is effective for fiscal years beginning after December 15, 1997. The
Company will be required to retroactively adopt this statement when it reports
its operating results for the quarter and year ended August 27, 1999. The
adoption is not expected to have a material impact on the Company's consolidated
financial statements.
12. STATEMENT OF CASH FLOWS
Interest payments were approximately $247,000, $563,000, and $592,000 for fiscal
years 1998, 1997 and 1996, respectively. Income taxes paid in 1998 were $488,000
and none in 1997 and 1996. Non-cash investing and financing activities in fiscal
1998 were: (1) 48,184 shares of treasury stock reissued for 401(k) matching
Company contributions valued at approximately $124,000, and 950,658 shares of
common stock were issued upon conversion of $1,285,000 principal amount of
convertible debentures. Non-cash investing and financing activities in fiscal
1997 were: (1) equipment acquired under capital leases of approximately $20,000;
(2) 32,167 shares of treasury stock reissued for 401(k) matching Company
contributions valued at approximately $90,000, and (3) 2,131,987 shares of
common stock were issued upon conversion of $3,850,000 principal amount of
convertible debentures. Non-cash investing and financing activities in fiscal
1996 were: (1) equipment acquired under capital leases of approximately
$380,000; (2) 6,517 shares of treasury stock reissued for 401(k) matching
Company contributions valued at approximately $65,000; and (3) 10,296 shares of
treasury stock reissued for compensation valued at approximately $77,000.
13. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended August 29, 1997, the Company
recorded as charges to cost of sales: (1) an increase in the inventory
obsolescence reserve of $825,000; (2) a write-down of capitalized software in
the amount of $242,000; and (3) an increase in the warranty provision of
$70,000. In addition, charges to selling, general, and administrative expenses
were recorded for (1) an increase in the allowance of bad debts of $266,000; and
(2) a restructuring reserve of $100,000.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Wegener Corporation is responsible for the accuracy and
consistency of all the information contained in the annual report, including the
accompanying consolidated financial statements. These statements have been
prepared to conform with generally accepted accounting principles appropriate to
the circumstances of the Company. The statements include amounts based on
estimates and judgments as required.
Wegener Corporation maintains internal accounting controls designed to provide
reasonable assurance that the financial records are accurate, that the assets of
the Company are safeguarded, and that the financial statements present fairly
the consolidated financial position, results of operations and cash flows of the
Company.
The Audit Committee of the Board of Directors reviews the scope of the audits
and the findings of the independent certified public accountants. The auditors
meet regularly with the Audit Committee to discuss audit and financial reporting
issues, with and without management present.
BDO Seidman, LLP the Company's independent certified public accountants, has
audited the financial statements prepared by management. Their opinion on the
statements is presented below.
/s/ Robert A. Placek
Robert A. Placek,
President, Chief Executive Officer
and Chairman of the Board
/s/ C. Troy Woodbury, Jr.
C. Troy Woodbury, Jr.
Treasurer and Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Wegener Corporation
Duluth, Georgia
We have audited the accompanying consolidated balance sheets of Wegener
Corporation and subsidiaries as of August 28, 1998 and August 29, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of three years in the period ended August 28, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Wegener
Corporation and subsidiaries as of August 28, 1998 and August 29, 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 28, 1998 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
October 22, 1998
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "ELECTION OF DIRECTORS" in the
Proxy Statement pertaining to the January 28, 1999 Annual Meeting of
Stockholders ("Proxy Statement") is incorporated herein by reference in partial
response to this item. See also Item 1. "Business - Executive Officers of the
Registrant" on page 8 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "EXECUTIVE COMPENSATION" and
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," respectively, contained in the
Proxy Statement is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the captions "ELECTION OF DIRECTORS" and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" contained in
the Proxy Statement is incorporated herein by reference in response to this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" contained in the Proxy Statement is incorporated herein by
reference in response to this item.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Wegener
Corporation and subsidiaries and the related Report of Independent Certified
Public Accountants thereon are filed as part of this report:
Consolidated Balance Sheets August 28, 1998 and August 29, 1997
Consolidated Statements of Operations Years ended August 28, 1998, August 29,
1997, and August 30, 1996
Consolidated Statements of Shareholders' Equity Years ended August 28, 1998,
August 29, 1997, and August 30, 1996
Consolidated Statements of Cash Flows Years ended August 28, 1998, August 29,
1997, and August 30, 1996
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Separate financial statements of the Registrant have been omitted because
the Registrant is primarily a holding company and all subsidiaries included in
the consolidated financial statements are deemed to be totally held.
(a) (2) The following consolidated financial statements schedule for
Wegener Corporation and subsidiaries, and the related Report of Independent
Certified Public Accountants are included herein, beginning on page 39:
Schedule II Valuation and Qualifying Accounts Years ended August 28, 1998,
August 29, 1997, and August 30, 1996
(a) (3) The exhibits filed in response to Item 601 of Regulation S K are
listed in the Exhibit Index on pages 41 and 42.
(b) There were no reports on Form 8-K filed for the Quarter ended August
28, 1998.
(c) See Part IV, Item 14(a)(3).
(d) Not applicable.
37
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Wegener Corporation
Duluth, Georgia
The audit referred to in our report dated October 22, 1998, relating to the
consolidated financial statements of Wegener Corporation and subsidiaries, which
is contained in Item 8 of this Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
October 22, 1998
38
<PAGE>
SCHEDULE II
WEGENER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Write-offs Recoveries Period
--------- -------- ---------- ---------- ------
Allowance for doubtful
accounts receivable:
<S> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 28, 1998 $ 361,743 $ 75,000 $ (180,018) $ 266 $ 256,991
Year ended August 29, 1997 $ 57,912 $ 356,555 $ (53,279) $ 555 $ 361,743
Year ended August 30, 1996 $ 41,602 $ 60,000 $ (70,190) $ 26,500 $ 57,912
Inventory Reserves:
YEAR ENDED AUGUST 28, 1998 $ 1,865,453 $ 1,150,000 $(1,576,764) $ 831 $ 1,439,520
Year ended August 29, 1997 $ 1,521,926 $ 825,000 $ (481,473) $ -- $ 1,865,453
Year ended August 30, 1996 $ 736,290 $ 775,000 $ -- $ 10,636 $ 1,521,926
</TABLE>
39
<PAGE>
EXHIBIT INDEX
The following documents are filed as exhibits to this report. Those
exhibits previously filed and incorporated herein by reference are identified
below by an asterisk. 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, Exhibit 3.2).
*3.3 Amendment to Certificate of Incorporation (1997 10-Q, filed
June 27, 1997, Exhibit 3.1).
*4.0 See By-Laws and Certificate of Incorporation, Exhibits 3.1
and 3.2. See Articles II and VIII of the By-Laws and Article
IV of the Certificate.
*4.1 Loan and Security Agreement and Demand Note dated June 5,
1996 by and between Wegener Communications, Inc. and LaSalle
National Bank respecting $8,500,000 combined revolving
credit note and term note (1996 10-K, filed November 27,
1996, Exhibit 4.1).
*4.2 Loan Agreement, Promissory Note and Deed to Secure Debt, and
Security Agreement dated February 27, 1987 between Bank
South, N.A. and Wegener Communications, Inc. respecting
$3,500,000 promissory note (1990 10-K, filed November 29,
1990, Exhibit 4.4).
*4.3 Promissory Note dated April 8, 1996 in favor of Lyon Credit
Corporation and Wegener Communications, Inc. in the
principal amount of $600,000 (1996 10Q, filed July 11, 1996,
Exhibit 4.1).
4.5 Loan and Security Agreement - First Amendment dated August
4, 1998 by and between Wegener Communications, Inc. and
LaSalle National Bank respecting $10,000,000 combined
revolving credit note and term note.
No other long-term debt instrument of the Registrant or its
subsidiaries authorizes indebtedness exceeding 10% of the
total assets of the Registrant and its subsidiaries on a
consolidated basis and the Registrant hereby undertakes to
provide the Commission upon request with any long-term debt
instrument not filed herewith.
*10.1 1988 Incentive Plan (1989 10-K, filed November 30, 1989,
Exhibit 10.2).
*10.2 License Agreement, Distributorship and Supply Agreement, and
Purchase Pooling and Warehouse Agreement dated May 28, 1994
by and between Wegener Communications, Inc. and Cross
Technologies, Inc. (1995 10-K, filed December 15, 1994,
Exhibit 10.4).
40
<PAGE>
Exhibit Number Description of Document
- -------------- -----------------------
*10.3 Wegener Communications, Inc. Profit Sharing Plan and Trust
dated January 1, 1982, amended and restated as of January 1,
1984. (1987 10-K, dated and filed November 25, 1987, Exhibit
10.14).
*10.4 1989 Directors' Incentive Plan (1990 10-K, filed November
29, 1990, Exhibit 10.9).
*10.4.1 Amendment to 1989 Directors' Incentive Plan effective
February 1, 1995 (1995 10-K, filed December 13, 1996).
10.5 1998 Incentive Plan (1998 Form S-8, Registration No.
333-51205, filed April 28, 1998, Exhibit 10.1).
*21. Subsidiaries of the Registrant (1990 10-K, filed November
29, 1990, Exhibit 22).
23. Consent of BDO Seidman, LLP.
27. Financial Data Schedule.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
Date: November 9, 1998 By /s/ Robert A. Placek
----------------------------------
Robert A. Placek
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on this 9th day of November, 1998.
Signature Title
/s/ Robert A. Placek President, Chief Executive Officer
- ----------------------------- and Chairman of the Board
Robert A. Placek (Principal Executive Officer)
/s/ C. Troy Woodbury, Jr. Treasurer and Chief Financial
- ----------------------------- Officer, Director (Principal
C. Troy Woodbury, Jr. Accounting Officer)
/s/ James T. Traicoff Controller
- -----------------------------
James T. Traicoff
/s/ James H. Morgan, Jr. Director
- -----------------------------
James H. Morgan, Jr.
/s/ Joe K. Parks Director
- -----------------------------
Joe K. Parks
/s/ Thomas G. Elliot Director
- -----------------------------
Thomas G. Elliot
42
<PAGE>
DIRECTORS
Robert A. Placek
Chairman of the Board,
President and Chief
Executive Officer
Wegener Corporation
James H. Morgan, Jr., Esq.
Partner
Smith, Gambrell & Russell
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
Wegener Corporation
Joe K. Parks
Retired, Served as
Laboratory Director
Systems Development Laboratory
Georgia Tech Research Institute
Georgia Institute of Technology
Thomas G. Elliot
Senior Vice President of
Technical Projects
CableLabs
OFFICERS
Robert A. Placek
Chairman of the Board,
President and Chief
Executive Officer
Keith N. Smith
President, Wegener
Communications, Inc.
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
James T. Traicoff
Controller
INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
BDO Seidman, LLP
285 Peachtree Center Avenue
Suite 800
Atlanta, Georgia 30303-1230
TRANSFER AGENT
Securities Transfer Corporation
16910 Dallas Parkway
Suite 100
Dallas, Texas 75248
CORPORATE
HEADQUARTERS
11350 Technology Circle
Duluth/Atlanta, Georgia 30097-1502
ANNUAL MEETING
The annual meeting of stockholders will be held on January 28, 1999 at 7 p.m. at
the Corporate Headquarters.
COMMON STOCK NASDAQ
NASDAQ Small-Cap Market Symbol:
WGNR
FORM 10-K REPORT
Wegener Corporation's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, is available free of charge by written request to:
Elaine Miller, Secretary
Investor Relations
Wegener Corporation
11350 Technology Circle
Duluth, Georgia 30097-1502
WEB SITE
HTTP://WWW.WEGENER.COM
QUARTERLY COMMON
STOCK PRICES
The Company's common stock is traded on the NASDAQ Small-Cap Market. The
quarterly ranges of high and low closing sale prices for fiscal 1998 and 1997
were as follows:
High Low
- --------------------------------------------
FISCAL YEAR ENDING AUGUST 28, 1998
First Quarter $2 3/4 $1 7/16
Second Quarter 2 11/32 1 3/8
Third Quarter 3 19/32 2 1/32
Fourth Quarter 3 5/32 1 5/8
- --------------------------------------------
Fiscal Year Ending August 29, 1997
First Quarter $ 6 $3 7/8
Second Quarter 4 1/8 2 5/8
Third Quarter 3 7/8 1 7/16
Fourth Quarter 3 1/2 1 13/16
- --------------------------------------------
The Company had approximately 426* shareholders of record at November 2, 1998.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future.
*(This number does not reflect beneficial ownership of shares held in nominee
names).
43
Exhibit 23.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Wegener Corporation
Duluth, Georgia
We hereby consent to the incorporation by reference in the Registration
Statements (File No. 33-45390, No. 33-42007, No. 33-62849, No. 333-08017, No.
333-27527, No. 333-29887, No. 333-51205 and No. 333-29889) of our reports dated
October 22, 1998 relating to the consolidated financial statements and schedule
of Wegener Corporation and Subsidiaries appearing in the Company's Annual Report
on Form 10-K for the year ended August 28, 1998.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
November 10, 1998
Wegener Corporation Exhibit 4.5
August 4, 1998
Wegener Communications, Inc.
11350 Technology Circle
Duluth, Georgia 30155
RE: FIRST AMENDMENT
Gentlemen:
WEGENER COMMUNICATIONS, INC., a Georgia corporation ("Borrower") and
LaSalle National Bank, a national banking association ("Bank") have entered into
that certain Loan and Security Agreement dated June 5, 1996 (the "Security
Agreement"). From time to time thereafter, Borrower and Bank may have executed
various amendments (each an "Amendment" and collectively the "Amendments") to
the Security Agreement (the Security Agreement and the Amendments hereinafter
are referred to, collectively, as the "Agreement"). Borrower and Bank now desire
to further amend the Agreement as provided herein, subject to the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and agreements set forth herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. The Agreement hereby is amended as follows:
(a) Paragraph (1) of Exhibit A of the Agreement is deleted in its entirety
and the following is substituted in its place:
(1) LOAN LIMITS: Bank may, in its sole discretion, advance an amount
up to the sum of the following sublimits (the "Loan Limit"):
(a) Subject to subparagraph (4)(a) of this Exhibit A, up to
eighty percent (80%) of the face amount (less maximum
discounts, credits and allowances which may be taken by or
granted to Account Debtors in connection therewith) of
Borrower's Eligible Accounts; plus
(b) Subject to subparagraph (4)(b) of this Exhibit A, up to
eighty percent (80%) of the face amount (less maximum
discounts, credits and allowances which may be taken
<PAGE>
Wegener Communications, Inc. Wegener Corporation
August 4, 1998 Exhibit 4.5
Page 2
by or granted to Account Debtors in connection therewith) of
Borrower's Eligible Accounts or Five Hundred Thousand and
No/100 Dollars ($500,000.00), whichever is less; plus
(c) Subject to subparagraph (5)(a) of this Exhibit A, up to
twenty percent (20%) of the lower of the cost or market
value of Borrower's Eligible Inventory; plus
(d) Subject to subparagraph (5)(b) of this Exhibit A, up to
twenty percent (20%) of the lower of the cost or market
value of Borrower's Eligible Inventory; plus
(e) Subject to subparagraph (5)(c) of this Exhibit A, up to
forty percent (40%) of the lower of the cost or market value
of Borrower's Eligible Inventory; plus
(f) Subject to subparagraph (5)(d) of this Exhibit A, up to
fifty percent (50%) of the lower of the cost or market value
of Borrower's Eligible Inventory; plus
(g) Subject to subparagraph (2)(a) of this Exhibit A, up to
eighty percent (80%) of the purchase price of the Equipment
purchased with such advances (exclusive of sales taxes,
delivery charges and other "soft" costs related to such
purchases), to be used by Borrower from time to time to
purchase new Equipment, or One Million and No/100 Dollars
($1,000,000.00), whichever is less; provided, that prior to
any advance under this subparagraph, Borrower shall furnish
to Bank an invoice and acceptance letter for the Equipment
being purchased and shall have executed such documents and
taken such other actions as Bank shall require to assure
that Bank has a first perfected security interest in such
Equipment; and further provided, that each advance under
this subparagraph shall equal or exceed One Hundred Thousand
and No/100 Dollars ($100,000.00) and may be made not more
frequently than quarterly; plus
<PAGE>
Wegener Communications, Inc. Wegener Corporation
August 4, 1998 Exhibit 4.5
Page 3
(h) Subject to subparagraph (2)(b) of this Exhibit A, up to
seventy percent (70%) of the fair market value (as
determined by an appraiser acceptable to Bank) of that
certain real property described in subparagraph (14)(a) of
this Exhibit A or One Million Five Hundred Thousand and
No/100 Dollars ($1,500,000.00), whichever is less; minus
(i) Such reserve as Bank elects, in its sole discretion, to
establish from time to time;
provided, that the aggregate amount of Loans made pursuant
to subparagraphs (1)(c), (1)(d), (1)(e) and (1)(f) of this
Exhibit A shall in no event exceed Two Million and No/100
Dollars ($2,000,000.00);
further provided, that the aggregate amount of Loans made
pursuant to subparagraphs (1)(a), (1)(b), (1)(c), (1)(d),
(1)(e), (1)(f) and (1)(g) of this Exhibit A shall in no
event exceed Eight Million Five Hundred Thousand and No/100
Dollars ($8,500,000.00); and
further provided, that the aggregate Loan Limit shall in no
event exceed TEN MILLION AND NO/100 DOLLARS
($10,000,000.00), except as such amount may be increased or
decreased by Bank, in its sole discretion, from time to
time.
(b) Paragraph (2) of Exhibit A of the Agreement is amended to add the
following provision:
(b) The availability described in subparagraph (1)(h) of this Exhibit
A shall be curtailed monthly by an amount sufficient (assuming a
like curtailment each month) to reduce said availability to zero
at the end of thirty-five (35) months. Each such curtailment
shall automatically occur on the thirtieth (30th) day following
the date of disbursement under subparagraph (1)(h) of this
Exhibit A and on the corresponding day of each month thereafter
until the earliest to occur of (i) the date on which said
availability shall be reduced in full; (ii) the date upon which
demand for
<PAGE>
Wegener Communications, Inc. Wegener Corporation
August 4, 1998 Exhibit 4.5
Page 4
repayment is made by Bank; and (iii) the date upon which this
Agreement terminates pursuant to the provisions of Paragraph 9 of
the Agreement.
(c) Paragraph (6) of Exhibit A of the Agreement is deleted in its entirety
and the following is substituted in its place:
(6) INTEREST RATE: (I) All Loans made pursuant to subparagraphs
(1)(a), (1)(b), (1)(c), (1)(d), (1)(e), (1)(f), and (1)(g) of
this Exhibit A shall bear interest at Bank's publicly announced
prime rate (which is not intended to be Bank's lowest or most
favorable rate in effect at any time) (the "Prime Rate") in
effect from time to time. Interest shall be payable on the last
business day of each month, in arrears. Each rate of interest set
forth herein shall increase or decrease with each increase of
decrease in the Prime Rate, effective on the effective date of
each such change in the Prime Rate. Upon the occurrence of an
Event of Default and the continuance thereof, each Loan shall
bear interest at the rate of two percent (2%) per annum in excess
of the interest rate otherwise payable thereon, which interest
shall be payable on demand; and (II) all Loans made pursuant to
subparagraph (1)(h) of this Exhibit A shall bear interest at the
fixed rate of 250 basis points per annum in excess of the five
(5) year Treasury Rate in effect at the time of disbursement of
the Loans under subparagraph (1)(h) of this Exhibit A. All
interest shall be calculated upon the basis of a 360-day year.
(d) Paragraph (7) of Exhibit A of the Agreement is deleted in its entirety
and the following is substituted in its place:
(7) FEES AND CHARGES:
(a) FACILITIES FEES: With respect to the first Five Million Five
Hundred Thousand and No/100 Dollars ($5,500,000.00) of loans
and advances made pursuant to subparagraphs (1)(a), (1)(b),
(1)(c), (1)(d), (1)(e), (1)(f), and (1)(g) of this Exhibit
A, Borrower shall pay to Bank an annual facilities fee equal
to one percent (1%) of Five Million Five Hundred Thousand
and No/100 Dollars ($5,500,000.00), payable and earned as of
<PAGE>
Wegener Communications, Inc. Wegener Corporation
August 4, 1998 Exhibit 4.5
Page 5
June 21, 1998 and on the same date of each year thereafter
during the Original Term and any Renewal Term. At such time
as the loans and advances made pursuant to subparagraphs
(1)(a), (1)(b), (1)(c), (1)(d), (1)(e), (1)(f), and (1)(g)
of Exhibit A exceed Five Million Five Hundred Thousand and
No/100 Dollars ($5,500,000.00), Borrower shall pay to Bank
and Bank shall fully earn at the time of such payment, an
annual facilities fee equal to three-fourths of one percent
(3/4ths of 1%) of Three Million and No/100 Dollars
($3,000,000.00), or a pro-rata amount thereof if paid after
June 21 of any year but before June 21 of the following
year. Thereafter, Borrower shall pay to Bank, and Bank shall
fully earn a fee equal to three-fourths of one percent
(3/4ths of 1%) of Three Million and No/100 Dollars
($3,000,000.00) on June 21st of each year during the
Original Term and any Renewal Term. For purposes of
determining whether Borrower has received any advances
against the availability set forth in subparagraph (1)(h) of
this Exhibit A, advances to Borrower shall first be deemed
to be advanced against the availability set forth in
subparagraphs (1)(h) of this Exhibit A (subject to any
sublimits contained in Paragraph (1) of this Exhibit A)
until the amount so advanced equals the availability under
that paragraph, and then to the availability under
subparagraphs (1)(a), (1)(b), (1)(c), (1)(d), (1)(e), (1)(f)
and (1)(g) of this Exhibit A (subject to any sublimits
contained in Paragraph (1) of this Exhibit A).
(b) REAL ESTATE CLOSING FEE: Borrower shall pay to Bank a real
estate closing fee equal to Seven Thousand Five Hundred and
No/100 Dollars ($7,500.00), which fee shall be fully earned
by Bank and payable on the date of this Amendment.
(e) Paragraph (7) of Exhibit A of the Agreement is amended to add the
following provision:
<PAGE>
Wegener Communications, Inc. Wegener Corporation
August 4, 1998 Exhibit 4.5
Page 6
(7).(1) ORIGINAL TERM: The date of the Original Term set forth in
Paragraph 9 of the Agreement is deleted and the date of June
21, 2000 is substituted in its place.
(f) Paragraph (11) of Exhibit A of the Agreement is amended to add the
following provision:
(11).(1) YEAR 2000: Borrower and its Subsidiaries have reviewed the
areas within their business and operations which could be
adversely affected by, and have developed or are developing
a program to address on a timely basis, the "Year 2000
Problem" (that is, the risk that computer applications used
by Borrower and its Subsidiaries may be unable to recognize
and perform properly date-sensitive functions involving
certain dates prior to and any date on or after December 31,
1999), and have made related appropriate inquiry of material
suppliers and vendors. Based on such review and program,
Borrower believes that the "Year 2000 Problem" will not have
a material adverse effect on its business, assets or
condition, financial or otherwise. From time to time, at the
request of Bank, Borrower and its Subsidiaries shall provide
to Bank such updated information or documentation as is
requested regarding the status of their efforts to address
the "Year 2000 Problem."
2. This Amendment shall not become effective until fully executed by all
parties hereto.
3. Except as expressly amended hereby and by any other supplemental
documents or instruments executed by either party hereto in order to effectuate
the transactions contemplated hereby, the Agreement and Exhibit A thereto hereby
are ratified and confirmed by the parties hereto and remain in full force and
effect in accordance with the terms thereof.
LASALLE NATIONAL BANK,
A NATIONAL BANKING ASSOCIATION
By: /s/ Philip F. Banka
---------------------
Title: Vice President
-----------------
<PAGE>
Wegener Communications, Inc. Wegener Corporation
August 4, 1998 Exhibit 4.5
Page 7
Accepted and agreed to this 26th day of August, 1998.
WEGENER COMMUNICATIONS, INC.
By: /s/ Robert A. Placek
-------------------------
Title: Chairman and CEO
----------------------
Consented and agreed to by the following guarantor of the
obligations of WEGENER COMMUNICATIONS, INC. to LaSalle
National Bank.
WEGENER CORPORATION
By: /s/ Robert A. Placek
-------------------------
Title: Chairman and CEO
----------------------
Date: August 26, 1998
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