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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 September 3, 1999
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 12, 1999, 11,771,016 shares of registrant's Common Stock
were outstanding and the aggregate market value of the Common Stock held by
nonaffiliates was $28,060,624 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 25,
2000 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 SEPTEMBER 3, 1999
INDEX
PART I
Page
Item 1. Business.............................................................2
Item 2. Properties..........................................................10
Item 3. Legal Proceedings...................................................10
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.........................................10
Item 6. Selected Financial Data.............................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........21
Item 8. Financial Statements and Supplementary Data.........................21
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures...............................................38
PART III
Item 10. Directors and Executive Officers of the Registrant..................38
Item 11. Executive Compensation..............................................38
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................................38
Item 13. Certain Relationships and Related Transactions......................38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................................39
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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, internet, cable and broadcast radio
and television industries for worldwide markets.
(b) Financial information about segments.
Segment information contained in Note 11 to the consolidated financial
statements 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 September 3,
1999.
Throughout fiscal 1999 and fiscal 1998, 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. During fiscal
1998 and 1999 WCI shipped these products against purchase orders it received.
COMPEL provides networks with unparalleled ability to regionalize programming
and commercials through total receiver control. COMPEL also allows network
operators to remotely control uplinks providing bandwidth on demand. COMPEL
control capability is integrated into the UNITY digital satellite receivers.
Wegener's digital products are in use worldwide
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in broadcast television, distance learning, radio, cable television, and private
business networks. In terms of new orders, digital technology 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 and consumer demand for more channels. 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.
Major products introduced by WCI during fiscal 1999 were:
o UNITY401 receiver for private business network distribution. The UNITY401
provides DVB compliant MPEG-2 digital video operating in either SCPC or
MCPC modes from 2.5 to 50 MB, as well as audio and data in one unit.
o ENVOY, a new standard for satellite and terrestrial news and event
gathering. ENVOY is an integrated digital video encoder/modulator that
includes the latest technologies available for both video quality and
modulation.
o UNITY-IP, a complete end-to-end solution for the transmission of high
bandwidth internet data. UNITY-IP allows programmers and IP service
providers to transmit data up to 50 MBPS.
o COMPEL Web Access, Internet Connectivity for Wegener's Advanced Network
Control System. Users can create multiple virtual networks from one master
COMPEL Control system, enabling total control over a defined sub network,
yet preserve a central network control authority.
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
fiscal 1999, WCI received additional orders for cable products from
FOX/SportsNet for its Unity 4000 MPEG2 digital video satellite receivers. The
Company received an order for approximately $6 million from FOX Digital, a Unit
of FOX Television in fiscal 1999. The order consists of UNITY5000 IRD's
(Integrated Receiver Decoders) plus COMPEL Network Control. The UNITY5000 will
allow for the delivery of high quality standard
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definition and high definition digital video feeds from the FOX Network to its
affiliates. These units will replace the Wegener analog system that has been in
use since 1993.
Ascent Network Services placed additional orders for digital video equipment,
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 UNITY4422
contribution quality 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.
Autotote placed orders in fiscal 1999 totaling approximately $4 million
consisting of UNITY401 receivers, DiviCom MPEG-2 video encoders plus COMPEL
control for transmitting live pari-mutuel racing signals via satellite from
racetracks to off-track facilities in North America.
Novanet Communications Limited placed an order in excess of $1.4 million (U.S.)
for UNITY digital products and COMPEL network control. The order included a
complete UNITY transmission system plus UNITY4000 and UNITY401 receivers.
Novanet is converting its FM(2) services to the Wegener UNITY Digital Broadcast
Platform, a DVB compliant technology. The UNITY products will be used in this
conversion to provide multimedia services including high speed broadcast data,
audio and business television solutions to Novanet customers.
CABLE TELEVISION PRODUCTS. During fiscal 1999, WCI continued rollout of the
UNITY 4000 digital video receivers to FX Networks and Fox's regional sports
networks.
Additionally, during fiscal 1999, Paxson Communications Corporation continued
its rollout of WCI's UNITY4000 digital video receivers to launch its family
programming network PAX NET. Paxson deployed UNITY4000 digital video receivers
in both broadcast television stations and cable headends. Paxson broadcasts 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 continued to deliver cue and control equipment for cable television networks
through its channel affiliate, MegaHertz. Cue and control card equipment is used
on advertising supported networks to permit cable systems to insert local
commercials at appropriate times. Control equipment delivers switching commands
from the network to provide program routing and blackouts.
RADIO AND TELEVISION BROADCASTING. Broadcasters use WCI equipment to distribute
digital audio, analog audio, video, and cue/network control signals. Television
networks such as FOX, NBC and Turner Broadcasting, use WCI products to
distribute high quality programming from remote locations and between
affiliates. Satellite based radio networks distribute programming and network
control signals to network affiliates.
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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 the COMPEL network control system. WCI
digital receivers are used to receive the programming at affiliate stations.
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 fiscal 1999, Broadcast International (BI) placed add-on orders for
Wegener digital audio receivers. BI utilizes Wegener's digital audio products
for the distribution of music and advertising for their retail customers,
primarily supermarkets and drug stores throughout the United States.
AEI Soundcom selected Wegener digital audio equipment in fiscal 1999 for
satellite delivered business music in Australia. AEI Soundcom, recently acquired
by AEI Music Network of Seattle, WA, is utilizing Wegener DT96 and DR95 MPEG-2
digital audio products for upgrading its tape-delivered business music services
to satellite delivery in Australia. Wegener has now become the selected vendor
for all AEI Soundcom music distribution within Australia.
(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
three subcontractors 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
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certain analog audio processing technology to several manufacturing companies
which generated royalty revenues of approximately $73,000, $184,000 and $121,000
in fiscal 1999, 1998, and 1997, 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.
(vi) Working capital practices.
Information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (MD&A) 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 19.2% and 34.2% of revenues in fiscal 1999 and 1998 respectively.
Sales to The Church of Jesus Christ of Latter-Day Saints accounted for
approximately 11.0% of revenues in fiscal 1997. At September 3, 1999, no
customer accounted for more than 10% of the Company's accounts receivable. At
August 28, 1998, three customers accounted for 23.7%, 13.6% and 13.2%,
respectively 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 2000. 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 $15,691,000 at September 3, 1999 and $12,596,000 at August 28,
1998. Reference is hereby made to MD&A of this document, which is incorporated
herein by reference in response to this item.
Approximately $10,100,000 of the September 3, 1999 backlog is expected to
ship during fiscal 2000.
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(ix) Government contracts.
Not applicable.
(x) Competitive Conditions.
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 digital video
and audio 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 cable and broadcast video markets 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 1999 research and development expenses
were spent in the digital video product area. WCI's research and development
expenses totaled $2,924,000 in fiscal 1999, $2,644,000 in fiscal 1998, and
$1,999,000 in fiscal 1997. Additional information contained on page 3 and in
MD&A 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 September 3, 1999, the Company had 131 employees employed by the WCI
manufacturing subsidiary, and no employees employed by Wegener Corporation. No
employees are
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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 to the consolidated financial statements
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
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ROBERT A. PLACEK 61 President, Chief Executive
President and Chief Executive Officer of Officer and Chairman of the
the Company since August 1987 and Board of the Company
Director of the Company since July 1987.
Chairman of 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 41 President of WCI
Director of the Company since March,
1999. 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. 52 Treasurer and Chief Financial
Treasurer and Chief Financial Officer of Officer of the Company and WCI
the Company since June 1988 and Director
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 49 Controller of the Company and
Controller of the Company since November 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 the second
quarter of fiscal 2000, at an annual rental of approximately $87,000. During
February 2000, the Company will move its production department into a new leased
facility located nearby, and during the following sixty (60) days the materials
management and service departments will also be relocated to the new facility.
This new 21,000 square foot facility is covered by a lease expiring during the
second quarter of fiscal 2005. The annual rent is approximately $136,000 for the
first three (3) years and $143,000 for the fourth and fifth years. WCI's 40,000
square foot 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 September 3, 1999.
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 12, 1999 there were approximately 408* 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 1999
and 1998 were as follows:
FISCAL 99 Fiscal 98
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HIGH LOW High Low
First Quarter $1 27/32 $1 3/8 $2 3/4 $1 7/16
Second Quarter 2 9/32 1 1/2 2 11/32 1 3/8
Third Quarter 2 1/2 1 15/32 3 19/32 2 1/32
Fourth Quarter 2 3/16 1 3/8 3 5/32 1 5/8
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. Furthermore, the Company is prohibited from paying
dividends in accordance with its financing agreement.
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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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September 3, August 28, August 29, August 30, September 1,
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Revenue $ 25,259 $ 34,255 $ 21,812 $ 23,195 $ 19,488
Net earnings (loss) 213 2,760 (1,809) 1,456 385
Net earnings (loss) per share
Basic $ .02 $ .24 $ (.19) $ .17 $ .05
Diluted $ .02 $ .23 $ (.19) $ .17 $ .05
Cash dividends paid per share (1) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total assets $ 24,954 $ 25,905 $ 25,614 $ 27,737 $ 22,018
Long-term obligations inclusive
of current maturities 1,205 1,829 3,667 7,935 2,796
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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 September 3, 1999 were $213,000 or $0.02 per
share diluted, compared to earnings of $2,760,000 or $0.23 per share diluted for
the year ended August 28, 1998 and a net loss of $(1,809,000) or $(0.19) per
share diluted for the year ended August 29, 1997.
Revenues for fiscal 1999 decreased $8,996,000 or 26.3% to $25,259,000, from
$34,255,000 in fiscal 1998. During fiscal 1999, the Company continued to focus
on improved product quality and the development of new products. Direct
Broadcast Satellite (DBS) revenues in fiscal 1999 decreased $7,720,000 or 26.4%
to $21,501,000 from $29,221,000 in fiscal 1998. Telecom and Custom Product
revenues decreased $1,271,000 or 29.7% in fiscal 1999 to $3,007,000 from
$4,278,000 in fiscal 1998. Revenues were $4,717,000 for the fourth fiscal
quarter of 1999, compared to revenues of $7,527,000 for the final three months
of fiscal 1998. The decrease in DBS revenues in the fourth quarter and fiscal
1999 was due to a slowdown in the pace of digital video product orders for both
the cable and broadcast TV industries and also in products for the radio network
business. The Telecom and Custom Product Group revenue decrease in the fourth
quarter and fiscal 1999 was primarily due to a lower level of shipments in
fiscal 1999 of cue and control equipment to provide local commercial insertion
capabilities to cable television headend systems.
Fiscal 1998 revenues increased $12,443,000 or 57.0% from fiscal 1997
revenues of $21,812,000. 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 increased shipments of
digital video products to the cable and broadcast television industries and to
radio networks. Significant shipments were made in fiscal 1998 to 1) FOX/Liberty
Networks, L.L.C. and FX Networks for conversion of their cable networks to
digital distribution, 2) Paxson Communications Corporation for distribution of
PAX TV to broadcast and cable television, and 3)
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NSN Network Services for use in JACOR's Radio network distribution. The Telecom
and Custom product revenue increase reflected higher shipments of cue and
control equipment.
WCI's backlog of orders scheduled to ship within eighteen months increased
$3,095,000 or 24.6% to $15,691,000 at September 3, 1999 from $12,596,000 at
August 28, 1998. The August 28, 1998 backlog decreased $6,905,000 or 35.4% from
$19,501,000 at August 29, 1997. Approximately $10,100,000 of the September 3,
1999 backlog is expected to ship during fiscal 2000. The Company expects to book
sufficient new orders in fiscal 2000 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 $3,494,000 or 13.8% of
revenues in fiscal 1999, compared to $3,311,000 or 9.7% of revenues in fiscal
1998, and $3,143,000 or 14.4% of revenues in fiscal 1997. 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. Additional financial information on geographical
areas is provided in Note 11 of the consolidated financial statements.
Gross profit decreased $3,615,000 or 30.6% in fiscal 1999 compared to
fiscal 1998. Gross profit as a percent of sales was 32.5% in fiscal 1999,
compared to 34.5% in fiscal 1998 and 22.6% in fiscal 1997. The decreases in
margin dollars and percentages were mainly due to lower sales during the
periods. Gross profit margin percentages were favorably impacted in fiscal 1999
by a product mix of lower variable cost components which was offset by higher
unit fixed costs due to the decrease in sales volumes. Profit margins in fiscal
1999 included: 1) inventory reserve charges of $750,000 compared to $1,150,000
in fiscal 1998, 2) warranty provisions of $150,000 compared to no provisions in
fiscal 1998, and 3) no charges for write-offs of capitalized software compared
to $200,000 in fiscal 1998. Gross profit increased $6,893,000 or 139.9% in
fiscal 1998 compared to fiscal 1997. 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 revenues, due primarily to charges for reserves
for slow-moving and obsolete inventory of $1,150,000 in fiscal 1998 as compared
to $825,000 in fiscal 1997.
Selling, general and administrative expenses increased $217,000 or 4.4% to
$5,147,000 in fiscal 1999 from $4,930,000 in fiscal 1998. As a percentage of
revenues, selling, general and administrative expenses were 20.4% of revenues in
fiscal 1999 and 14.4% in fiscal 1998. The dollar increase of expenses in fiscal
1999 from fiscal 1998 includes increases in (1) advertising expense of $82,000,
(2) repairs and maintenance expense of $112,000, and (3) consulting expense of
$102,000. These increases were partially offset by a decrease of approximately
$143,000 in incentive costs due to lower levels of revenues. 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. The 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. Other increases of approximately $311,000 were due to higher levels of
selling and marketing expenses and compensation expenses. General corporate
expenses included in selling, general and administrative
13
<PAGE>
expense were approximately $467,000, $456,000, and $578,000 in 1999, 1998 and
1997, respectively.
Research and development expenditures, including capitalized software
development costs, were $3,331,000 or 13.2% of revenues in fiscal 1999,
$3,080,000 or 9.0% of revenues in fiscal 1998, and $3,089,000 or 14.2% of
revenues in fiscal 1997. The increase in expenditures in fiscal 1999 compared to
fiscal 1998 was primarily due to increases in engineering consulting and group
medical insurance expenses. Software development costs totaling $407,000,
$436,000, and $1,090,000 were capitalized during fiscal 1999, 1998, and 1997,
respectively. The decrease in software development costs in fiscal 1998 compared
to fiscal 1997 was principally due to a decrease in expenditures associated with
digital video products and COMPEL network control software. Research and
development expenses, excluding capitalized software development costs, were
$2,924,000 or 11.6% of revenues in fiscal 1999, $2,644,000 or 7.7% of revenues
in fiscal 1998, and $1,999,000 or 9.2% of revenues in fiscal 1997.
Interest expense decreased 39% in fiscal 1999 compared to fiscal 1998, and
decreased 55.2% in fiscal 1998 compared to fiscal 1997. The decrease during
fiscal 1999 was due primarily to a decrease in total indebtedness and a decrease
in the interest rate on the mortgage debt. The decrease during fiscal 1998 was
primarily due to a decrease in the average outstanding balance of the
convertible debentures. The Company believes that interest expense in fiscal
2000 will decrease as a result of an expected reduction in outstanding debt and
a reduction in the interest rate on the mortgage debt.
Interest income was $355,000 in fiscal 1999 compared to $465,000 in fiscal
1998 and $25,000 in fiscal 1997. The decrease in fiscal 1999 was due to a
decrease in the average outstanding balance of cash and cash equivalents
primarily as a result of a decrease in customer deposits received during fiscal
1999. Interest income is expected to increase in fiscal 2000 due to expected
higher average outstanding balances of cash and cash equivalents.
Fiscal 1999 income tax expense was comprised of a current federal and state
income tax expense of $480,000 and $55,000, respectively, and a deferred federal
and state tax benefit of $366,000 and $44,000, respectively. Fiscal 1998 income
tax expense was comprised of a current federal and state income tax expense of
$93,000 and $221,000, respectively, and a deferred federal and state tax expense
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. A
reconciliation of the Company's effective income tax rate as compared to the
statutory U.S. income tax rate is provided in Note 8 of the consolidated
financial statements.
The Company operates on a 52-53 week fiscal year. The fiscal year ends on
the Friday nearest to August 31. Fiscal 1999 contained 53 weeks. Fiscal 1998 and
1997 each contained 52 weeks. All references herein to 1999, 1998 and 1997 refer
to the fiscal years ending September 3, 1999, August 28, 1998 , and August 29,
1997, respectively.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in fiscal 1999 was $4,787,000,
$5,787,000 in fiscal 1998, and $6,325,000 in fiscal 1997. Fiscal 1999 net
earnings adjusted for non-cash expenses provided cash of $2,569,000 while
changes in accounts receivable and customer deposit balances provided cash of
$2,756,000. Changes in inventories, accounts payable and accrued expenses, and
other assets used cash of $538,000.
Cash used by investment activities was $1,041,000 in fiscal 1999 compared
to $959,000 in 1998 and $2,128,000 in 1997. Cash used in 1999 includes property
and equipment expenditures of $634,000 and capitalized software additions of
$407,000.
Cash used by financing activities was $1,380,000 in fiscal 1999 and
$578,000 in fiscal 1998 and $2,126,000 in fiscal 1997. In fiscal 1999, financing
activities used cash of $640,000 for scheduled repayments of long-term
obligations, $703,000 for repurchase of common stock and $67,000 for debt
issuance costs. Proceeds from real property advances under the loan facility
provided cash of $1,360,000 which was used to pay off the existing mortgage note
balance of $1,343,000. Proceeds from stock options exercised provided cash of
$13,000.
On January 28, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to one million shares of its common
stock over the following twelve months. As of September 3, 1999, the Company had
repurchased 386,500 shares of its common stock in open market transactions at an
average price of $1.82.
Net accounts receivable decreased 50.7% to $2,618,000 at September 3, 1999,
from $5,315,000 at August 28, 1998, compared to $4,613,000 at August 29, 1997 .
The decrease in fiscal 1999 was primarily due to a $2,810,000 decrease in
revenues during the fourth quarter of fiscal 1999 and an overall decrease in
annual revenues of $8,996,000 in fiscal 1999 compared to fiscal 1998. The
allowance for doubtful accounts was $173,000 at September 3, 1999, $257,000 at
August 28, 1998, and $362,000 at August 29, 1997. Write-offs, net of recoveries,
in fiscal 1999, 1998 and 1997 were $124,000, $180,000 and $53,000, respectively.
Increases to the allowance and charges to general and administrative expense
were $40,000 in fiscal 1999, $75,000 in fiscal 1998 and $357,000 in fiscal 1997.
During fiscal 1999, inventory reserves were increased by provisions charged
to cost of sales of $750,000. 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. In fiscal 1999 increases in inventory used cash of
$118,000. During fiscal 1998 and 1997, decreases in inventories provided cash of
$1,722,000 and $1,877,000, respectively. During fiscal 1998 inventory reserves
were increased by provisions charged to cost of sales of $1,150,000 and reduced
by write-offs of $1,577,000. 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.
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
15
<PAGE>
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 debentures in the amount of $101,222 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.
During fiscal 1997, $3,850,000 principal amount of debentures was converted into
2,131,987 shares of common stock. The conversion was complete as of December 30,
1997.
WCI maintains a loan facility with a bank which provides a maximum
available credit limit of $10,000,000 with sublimits as defined. The loan
facility matures on June 21, 2000 or upon demand and requires an annual facility
fee of $55,000 plus an additional .75% of $3,000,000 if borrowings, at any time,
exceed $5,500,000. The loan facility consists of 1) a term loan and a revolving
line of credit with a combined borrowing limit of $8,500,000, bearing interest
at the bank's prime rate (8.25% at September 3, 1999) and 2) a real estate
advance facility with a maximum borrowing limit of $1,500,000 bearing interest
at a fixed rate of 250 basis points over the five year U.S. Treasury rate.
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. The real estate advance portion of the loan facility provides for
advances of up to 70% of the appraised value of certain real property. Advances
for real property are payable in 35 equal principal payments with a balloon
payment due at maturity.
During the first quarter of fiscal 1999, $1,360,000 was advanced to pay off
the existing mortgage note balance. At the time of disbursement, the annual
interest rate was set at 6.519%. At September 3, 1999, the loans were secured by
a first lien on substantially all of WCI's assets except assets secured under an
existing equipment note on which the bank had a second lien. 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 September 3, 1999 the Company was in
compliance with the covenants. The loan facility's outstanding balance under
real property advances was $971,000 at September 3, 1999. No balances were
outstanding on the loan facility at August 28, 1998. At September 3, 1999,
$2,505,000 was available to borrow under the accounts receivable and inventory
advance formulas. Additionally, Wegener Corporation guarantees the loan
facility.
The Company does not have any material scheduled commitments for capital
expenditures during fiscal 2000. The Company's loan facility matures on June 21,
2000 along with a balloon payment due on the mortgage note. The Company believes
that the existing line of credit and term loan facility will be renewed in June
2000, or that a suitable replacement line will be available from other financing
sources. The Company expects that its current cash and cash equivalents combined
with expected cash flows from operating activities and an available line of
credit will be sufficient to support the Company's operations during fiscal
2000.
16
<PAGE>
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. SFAS No. 137 delayed the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company expects that the
adoption of SFAS No. 133 will not have a material 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 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, as well as with small specialized
companies. Through relationships with technology partners and original equipment
manufacturer (OEM) suppliers, 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 in production are competitively priced, with
unique, desirable features. The COMPEL Network Control System meets these needs
by providing regionalization of receiver control and spot advertisement. 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
17
<PAGE>
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 strong. However, the UNITY product family
competes with significant and established firms. 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 and increasing demand for video and multi-media content.
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. The digital conversion of major networks is expected to continue, but it
remains difficult to predict the precise timing and number of customers
converting to digital. 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 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 $2,198,000 at September 3, 1999, 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
18
<PAGE>
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
principally related to the digital audio and video products. At September 3,
1999 capitalized software costs were $1,101,000. These 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.
The industry in which the Company operates is subject to rapid
technological advances and frequent product introductions. The Company expects
to remain committed to research and development expenditures as 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 retained earnings of $96,000 at September 3, 1999. 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.
YEAR 2000
As is the case with other companies utilizing computers in their
operations, the Company has been faced with the task of addressing the Year 2000
issue. The Year 2000 issue arises from the widespread use of computer programs
that rely on two-digit codes to perform computations or decision-making
functions. The Company has done a comprehensive review of its computer programs
to identify systems which would be affected by the Year 2000 issue.
State of Readiness
- ------------------
Management of the Company has reviewed the Company's current information
systems and has found them to be Year 2000 compliant. However, the Company is
currently in the process of replacing 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. Conversions to the new systems are expected to be
completed prior to December 31, 1999.
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. Although
there can be no guarantee, no major interruption in service is anticipated.
19
<PAGE>
The Company has requested and received Year 2000 compliance statements from
major vendors. There are 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. The Company has and is expected to
continue to have material sales to a relatively small number of customers.
Although the Company is not aware of any specific Year 2000 issues in regards to
these customers, a loss of one or more of these customers could have a material
adverse effect 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 have been 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 has not and should 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 design and manufacture products in the event of a shutdown
of major utility providers. Major vendors and service providers have reported to
the Company that they believe 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, although such failure could have
a material and adverse impact on the Company's business and results of
operations. This risk is particularly acute with respect to non-U.S. third
parties, as it is widely reported that many non-U.S. businesses and governments
are not addressing their Year 2000 issues on a timely basis.
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.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to its revolving line of credit and cash equivalents. The
interest rate on certain advances under the line of credit and term loan
facility fluctuates with the bank's prime rate. There were no borrowings
outstanding at September 3, 1999 subject to variable interest rate fluctuations.
The Company's cash equivalents consists of a repurchase agreement and a
bank certificate of deposit. The cash equivalents have maturities of less than
three months and therefore are subject to minimal market risk.
The Company does not enter into derivative financial instruments. All sales
and purchases are denominated in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
21
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
----------------------------------------------
SEPTEMBER 3, August 28, August 29,
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 25,259,155 $ 34,254,673 $ 21,811,870
- -----------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 17,055,600 22,435,716 16,885,840
Selling, general and administrative 5,147,117 4,929,999 5,160,975
Research and development 2,924,097 2,644,353 1,999,106
- -----------------------------------------------------------------------------------------
Operating costs and expenses 25,126,814 30,010,068 24,045,921
- -----------------------------------------------------------------------------------------
Operating income (loss) 132,341 4,244,605 (2,234,051)
Interest expense (149,288) (244,607) (545,914)
Interest income 355,220 465,185 24,765
- -----------------------------------------------------------------------------------------
Earnings (loss) before income taxes 338,273 4,465,183 (2,755,200)
Income tax expense (benefit) 125,000 1,705,000 (946,000)
- -----------------------------------------------------------------------------------------
Net earnings (loss) $ 213,273 $ 2,760,183 $ (1,809,200)
=========================================================================================
Net earnings (loss) per share
Basic $ .02 $ .24 $ (.19)
Diluted $ .02 $ .23 $ (.19)
=========================================================================================
Shares used in per share calculation
Basic 11,849,383 11,727,447 9,640,127
Diluted 12,007,270 12,090,911 9,640,127
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 3, August 28,
1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 8,858,591 $ 6,492,760
Accounts receivable 2,618,296 5,314,938
Inventories 6,488,813 7,120,393
Deferred income taxes 1,325,000 1,011,000
Other 263,090 23,710
- --------------------------------------------------------------------------------
Total current assets 19,553,790 19,962,801
Property and equipment 4,242,588 4,523,297
Capitalized software costs 1,100,747 1,211,914
Other assets 56,690 207,002
- --------------------------------------------------------------------------------
$ 24,953,815 $ 25,905,014
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,018,149 $ 2,113,205
Accrued expenses 1,554,572 1,490,041
Customer deposits 884,066 784,621
Current maturities of long-term obligations 1,119,835 597,664
- --------------------------------------------------------------------------------
Total current liabilities 5,576,622 4,985,531
Long-term obligations, less current maturities 85,424 1,231,338
Deferred income taxes 512,000 608,000
- --------------------------------------------------------------------------------
Total liabilities 6,174,046 6,824,869
- --------------------------------------------------------------------------------
Commitments
Shareholders' equity
Common stock, $.01 par value; 20,000,000
shares authorized; 12,314,575 shares issued 123,146 123,146
Additional paid-in capital 19,492,570 19,407,417
Retained earnings (deficit) 95,781 (117,492)
Less treasury stock, at cost (931,728) (332,926)
- --------------------------------------------------------------------------------
Total shareholders' equity 18,779,769 19,080,145
- --------------------------------------------------------------------------------
$ 24,953,815 $ 25,905,014
================================================================================
See accompanying notes to consolidated financial statements.
23
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
------------ Paid-in Earnings --------------
Shares Amount Capital (Deficit) Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Treasury stock reissued through
stock options and 401(k) plan -- -- 85,153 -- 112,587 104,542
Treasury stock purchased -- -- -- -- (386,500) (703,344)
Net earnings for the year -- -- -- 213,273 -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, at September 3, 1999 12,314,575 $ 123,146 $19,492,570 $ 95,781 (632,459) $ (931,728)
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED Year ended Year ended
SEPTEMBER 3, August 28, August 29,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities
<S> <C> <C> <C>
Net earnings (loss) $ 213,273 $ 2,760,183 $ (1,809,200)
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities
Depreciation and amortization 1,649,546 1,784,787 1,471,201
Write-down of capitalized software -- 200,000 241,841
Issuance of treasury stock for
compensation expenses 176,398 124,079 90,263
Issuance of convertible debt for interest
expense -- -- 101,222
Bad debt allowance 40,000 75,000 356,555
Inventory reserves 750,000 1,150,000 825,000
Deferred income taxes (410,000) 1,391,000 (946,000)
Warranty provisions 150,000 -- 146,000
Changes in assets and liabilities
Accounts receivable 2,656,642 (777,304) 2,136,795
Inventories (118,420) 1,722,279 1,877,151
Other assets (239,380) (2,334) (8,115)
Accounts payable and accrued expenses (180,525) 33,360 (970,989)
Customer deposits 99,445 (2,673,780) 2,813,166
- ---------------------------------------------------------------------------------------------------
4,786,979 5,787,270 6,324,890
- ---------------------------------------------------------------------------------------------------
Cash used for investment activities
Property and equipment expenditures (634,239) (522,066) (1,038,413)
Capitalized software additions (406,486) (436,465) (1,089,931)
- ---------------------------------------------------------------------------------------------------
(1,040,725) (958,531) (2,128,344)
- ---------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities
Net change in borrowings under
revolving line-of-credit -- -- (1,530,332)
Repayment of long-term debt and capitalized
lease obligations (1,983,251) (552,615) (539,074)
Proceeds from long-term debt 1,359,508 -- --
Purchase of treasury stock (703,344) -- --
Debt issuance costs (66,633) (55,000) (62,581)
Proceeds from stock options exercised 13,297 29,203 6,187
- ---------------------------------------------------------------------------------------------------
(1,380,423) (578,412) (2,125,800)
- ---------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 2,365,831 4,250,327 2,070,746
Cash and cash equivalents, beginning of year 6,492,760 2,242,433 171,687
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 8,858,591 $ 6,492,760 $ 2,242,433
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<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 1999 contained 53 weeks while
fiscal 1998 and 1997 each contained 52 weeks. All references herein to 1999,
1998, and 1997 relate to the fiscal years ending September 3, 1999, August 28,
1998 and August 29, 1997, respectively.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with
original maturities of three months or less. At September 3, 1999, cash
equivalents consisted of a $7,000,000 repurchase agreement and a $1,500,000 bank
certificate of deposit. At August 28, 1998 cash equivalents consisted of a
$4,000,000 repurchase agreement and $2,300,000 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 1999, 1998, and 1997 totaled $406,000, $436,000, and $1,090,000,
respectively. Amortization expense, included in cost of goods sold was $518,000,
$726,000, and $415,000 for the same periods. Capitalized software costs, net of
accumulated amortization, were $1,101,000 at September 3, 1999 and $1,212,000 at
August 28, 1998. Accumulated amortization amounted to $2,498,000 at September 3,
1999 and $1,981,000 at August 28, 1998.
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
26
<PAGE>
Wegener Corporation and Subsidiaries
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 1997 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. Basic and diluted net earnings (loss) per share were
computed in accordance with SFAS No. 128, "Earnings per Share". Basic net
earnings per share is computed by dividing net earnings available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options 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.
Year ended
------------------------------------------
September 3, August 28, August 29,
1999 1998 1997
------------------------------------------
Basic
Net earnings (loss) $ 213,273 $ 2,760,183 $(1,809,200)
------------ ----------- -----------
Weighted average shares
outstanding 11,849,383 11,727,447 9,640,127
------------ ----------- -----------
Net earnings (loss) per share $ .02 $ .24 $ (.19)
============ =========== ===========
Diluted
Net earnings (loss) $ 213,273 $ 2,760,183 $(1,809,200)
Convertible debenture interest
and amortization of bond
issue cost, net of income
taxes -- 11,658 --
------------ ----------- -----------
Total $ 213,273 $ 2,771,841 $(1,809,200)
------------ ----------- -----------
Weighted average shares
outstanding 11,849,383 11,727,447 9,640,127
Effect of dilutive potential
common shares:
Stock options 157,887 250,467 --
Convertible debentures -- 112,997 --
------------ ----------- -----------
Total 12,007,270 12,090,911 9,640,127
------------ ----------- -----------
Net earnings (loss) per share $ .02 $ .23 $ (.19)
============ =========== ===========
27
<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
----------------------------------------------------------
SEPTEMBER 3, 1999 August 28, 1998 August 29, 1997
------------------ ---------------- ----------------
Common stock options:
<S> <C> <C> <C>
Number of shares 6,000 48,500 579,000
Range of exercise prices $ 1.78 $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. 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 September 3, 1999.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS No. 137 delayed the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company expects that the adoption of SFAS No. 133 will not have a material
impact on its financial position or results of operations.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1998 and 1997
financial statements to conform to the 1999 presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
SEPTEMBER 3, August 28,
1999 1998
- --------------------------------------------------------------------------------
Accounts receivable - trade $ 2,675,022 $ 5,139,414
Other receivables 115,859 137,515
- --------------------------------------------------------------------------------
2,790,881 5,571,929
Less allowance for doubtful accounts (172,585) (256,991)
- --------------------------------------------------------------------------------
$ 2,618,296 $ 5,314,938
================================================================================
28
<PAGE>
Wegener Corporation and Subsidiaries
3. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 3, August 28,
1999 1998
- --------------------------------------------------------------------------------
Raw materials $ 2,845,784 $ 2,692,937
Work-in-process 3,146,479 3,139,249
Finished goods 2,695,044 2,727,727
- --------------------------------------------------------------------------------
8,687,307 8,559,913
Less inventory reserves (2,198,494) (1,439,520)
- --------------------------------------------------------------------------------
$ 6,488,813 $ 7,120,393
================================================================================
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 $2,198,000 at September 3, 1999, 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:
<TABLE>
<CAPTION>
Estimated
Useful Lives September 3, August 28,
(Years) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land -- $ 707,210 $ 707,210
Buildings and improvements 3-30 3,689,643 3,689,643
Machinery and equipment 3-5 7,191,332 6,544,101
Furniture and fixtures 5 592,782 567,672
Application software 5 777,568 734,590
- ------------------------------------------------------------------------------------
12,958,535 12,243,216
Less accumulated depreciation (8,715,947) (7,719,919)
- ------------------------------------------------------------------------------------
$ 4,242,588 $ 4,523,297
====================================================================================
</TABLE>
Depreciation expense for fiscal 1999, 1998 and 1997 totaled approximately
$888,000, $777,000, and $660,000, respectively. Assets recorded under a capital
lease included in property and equipment at September 3, 1999 and August 28,
1998 are machinery and equipment of approximately $613,000 and accumulated
amortization of approximately $474,000 and $345,000, respectively.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
SEPTEMBER 3, 1999 August 28, 1998
- --------------------------------------------------------------------------------
Compensation $ 464,833 $ 637,333
Royalties 364,676 175,061
Other 725,063 677,647
- --------------------------------------------------------------------------------
$1,554,572 $1,490,041
================================================================================
29
<PAGE>
Wegener Corporation and Subsidiaries
6. FINANCING AGREEMENTS
REVOLVING LINE-OF-CREDIT AND TERM LOAN FACILITY
WCI maintains a loan facility with a bank which provides a maximum available
credit limit of $10,000,000 with sublimits as defined. The loan facility matures
on June 21, 2000 or upon demand and requires an annual facility fee of $55,000
plus an additional .75% of $3,000,000 if borrowings, at any time, exceed
$5,500,000. The loan facility consists of 1) a term loan and a revolving line of
credit with a combined borrowing limit of $8,500,000, bearing interest at the
banks prime rate (8.25% at September 3, 1999) and 2) a real estate advance
facility with a maximum borrowing limit of $1,500,000 bearing interest at a
fixed rate of 250 basis points over the five year U.S. Treasury rate.
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. The real estate advance portion of the loan facility provides for
advances of up to 70% of the appraised value of certain real property. Advances
for real property are payable in 35 equal principal payments with a balloon
payment due at maturity.
During the first quarter of fiscal 1999, $1,360,000 was advanced to pay off the
existing mortgage note balance. At the time of disbursement, the annual interest
rate was set at 6.519%. At September 3, 1999, the loans were secured by a first
lien on substantially all of WCI's assets except assets secured under an
existing equipment note on which the bank had a second lien. 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 September 3, 1999 the Company was in
compliance with the covenants. The loan facility's outstanding balance under
real property advances was $971,000 at September 3, 1999. No balances were
outstanding on the loan facility at August 28, 1998. At September 3, 1999,
$2,505,000 was available to borrow under the accounts receivable and inventory
advance formulas. Additionally, Wegener Corporation guarantees the loan
facility.
<TABLE>
<CAPTION>
LONG-TERM OBLIGATIONS
Long-term obligations consist of:
SEPTEMBER 3, August 28,
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage note, monthly principal $38,843 plus interest at 6.519%
balance due June 2000, collateralized by real estate and cross
collateralized under the loan facility $ 971,077 $ --
Mortgage note, (interest at the bank's prime rate plus 1%) paid in
full in fiscal 1999 -- 1,362,933
Other long-term obligations, collateralized by equipment 234,182 466,069
- ----------------------------------------------------------------------------------------------------
1,205,259 1,829,002
Less current maturities (1,119,835) (597,664)
- ----------------------------------------------------------------------------------------------------
$ 85,424 $ 1,231,338
====================================================================================================
</TABLE>
30
<PAGE>
Wegener Corporation and Subsidiaries
At September 3, 1999, 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 and a capital lease obligation bearing interest at
11.5% per annum, with monthly principal and interest payments of $3,318 through
February 2000.
A summary of future maturities of long-term debt and minimum capital lease
obligations follows:
Debt Capital Lease
Fiscal Year Maturities Obligations Total
- --------------------------------------------------------------------------------
2000 $ 1,106,877 $ 13,270 $ 1,120,147
2001 85,424 -- 85,424
- --------------------------------------------------------------------------------
Less interest -- (312) (312)
- --------------------------------------------------------------------------------
$ 1,192,301 $ 12,958 $ 1,205,259
================================================================================
The Company leases certain office and manufacturing facilities, vehicles and
equipment under long-term noncancelable operating leases which expire through
fiscal 2005. Future minimum lease commitments are approximately as follows:
2000-$232,000; 2001-$238,000; 2002-$229,000; 2003-$228,000; and 2004 and
thererafter-$202,000. Rent expense under all leases was approximately $225,000,
$209,000 and $202,000 for fiscal years 1999, 1998, and 1997, 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 debentures in the amount of $101,222 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 September 3, 1999 and August 28, 1998.
8. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Year ended
---------------------------------------------------
SEPTEMBER 3, August 28, August 29,
1999 1998 1997
- --------------------------------------------------------------------------------
Current
Federal $ 480,000 $ 93,000 $ --
State 55,000 221,000 --
- --------------------------------------------------------------------------------
535,000 314,000 --
- --------------------------------------------------------------------------------
Deferred
Federal (366,000) 1,335,000 (862,000)
State (44,000) 56,000 (84,000)
- --------------------------------------------------------------------------------
(410,000) 1,391,000 (946,000)
- --------------------------------------------------------------------------------
Total $ 125,000 $ 1,705,000 $(946,000)
================================================================================
31
<PAGE>
Wegener Corporation and Subsidiaries
The effective income tax rate differs from the U.S. federal statutory rate as
follows:
Year ended
-------------------------------------
September 3, August 28, August 29,
1999 1998 1997
--------------------------------------------------------------------------
Statutory U.S. income tax rate 34.0% (34.0)% (34.0)%
State taxes, net of federal
benefits 2.0 4.8 (3.0)
Foreign sales corporation benefit (5.0) (.7) --
Non-deductible expenses 4.3 .3 .6
Other, net 1.7 (.2) 2.1
--------------------------------------------------------------------------
Effective income tax rate 37.0% 38.2% (34.3)%
==========================================================================
Deferred tax assets and liabilities that arise as a result of temporary
differences are as follows:
SEPTEMBER 3, August 28,
1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable and inventory reserves $ 1,098,000 $ 860,000
Accrued expenses 227,000 151,000
- -------------------------------------------------------------------------------
Total deferred tax assets 1,325,000 1,011,000
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (28,000) (82,000)
Capitalized software costs (418,000) (460,000)
Other (66,000) (66,000)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (512,000) (608,000)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 813,000 $ 403,000
===============================================================================
Consolidated balance sheet classifications:
Current deferred tax asset $ 1,325,000 $ 1,011,000
Noncurrent deferred tax liability (512,000) (608,000)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 813,000 $ 403,000
===============================================================================
Net deferred tax assets increased $410,000 to $813,000 at September 3, 1999 from
$403,000 at August 28, 1998. The increase was principally due to increases in
inventory reserves and warranty provisions. 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.
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 $627,000 was approximately $213,000.
32
<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. During fiscal 1999 options for
212,000 shares of common stock were granted with exercise prices ranging from
$1.41 to $1.78.
1989 DIRECTORS' INCENTIVE 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 1999, options for 2,000 shares
of common stock were granted at an exercise price of $1.78. Additionally, during
fiscal 1999 options for 50,000 shares of common stock with exercise prices
ranging from $1.53 to $12.13 were cancelled and reissued at an exercise price of
$1.41. During fiscal 1998 options were granted for 44,000 shares of common stock
at exercise prices ranging from $1.44 to $2.00. Options for 4,000 shares of
common stock were granted in each of fiscal years 1998 and 1997 at exercise
prices of $1.53 and $3.94, respectively. 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 September 3,
1999, no 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 1999, options for 105,000 shares of common stock with an exercise
price of $2.00 were cancelled and reissued at an exercise price of $1.41. During
fiscal 1998 options were granted for 150,000 shares of common stock at exercise
prices of $1.44 and $2.00. 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 shares of common stock
at an exercise price of $1.44 per share. This plan terminated and expired
December 1, 1998.
33
<PAGE>
Wegener Corporation and Subsidiaries
A summary of stock option transactions for the above plans follows:
Weighted
Number. of Range of Average
Shares Exercise Prices Exercise Price
- --------------------------------------------------------------------------------
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
Granted or reissued 369,000 1.41 - 1.78 1.45
Exercised (9,000) 1.44 1.44
Forfeited or cancelled (175,250) 1.44 - 12.13 2.33
- --------------------------------------------------------------------------------
OUTSTANDING AT
SEPTEMBER 3, 1999 920,750 $.75 - 1.78 $ 1.43
================================================================================
Options exercisable at
SEPTEMBER 3, 1999 494,250 $.75 - 1.78 $ 1.41
August 28, 1998 386,000 .75 - 12.13 1.63
================================================================================
Weighted average fair value of options Per Share Aggregate
granted during the year ended Option Value Total
- --------------------------------------------------------------------------------
SEPTEMBER 3, 1999 $.68 $140,535
August 28, 1998 .91 175,493
August 29, 1997 .76 198,562
================================================================================
The weighted average remaining contractual life of options outstanding at
September 3, 1999 was 4.2 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 the Company had elected to recognize
compensation cost based on the fair value at grant dates for options issued
under the plans described above, consistent with the method prescribed by SFAS
No. 123, net earnings (loss) and earnings (loss) per share would have changed to
the pro forma amounts indicated below:
Year ended
---------------------------------------------
SEPTEMBER 3, August 28, August 29,
1999 1998 1997
- --------------------------------------------------------------------------------
Net earnings (loss)
As Reported $ 213,273 $ 2,760,183 $ (1,809,200)
Pro Forma 46,662 2,676,143 (1,902,485)
- --------------------------------------------------------------------------------
Earnings (loss) per share
As Reported
Basic $ .02 $ .24 $ (.19)
Diluted .02 .23 (.19)
Pro Forma
Basic .00 .23 (.20)
Diluted .00 .22 (.20)
================================================================================
34
<PAGE>
Wegener Corporation and Subsidiaries
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 1999, 1998 and 1997. No dividend yield for all
years; expected volatility of 50% in 1999 and 60% in 1998 and 1997; a risk free
interest rate of 5.0% in 1999, 5.6% in 1998, and 6.6% in 1997; and an expected
option life of 3.3 years in 1999, 3.9 years in 1998, and 4.5 years in 1997.
OTHER OPTIONS, AWARDS AND WARRANTS. During fiscal 1999, options for 22,500
common shares, with an exercise price of $2.44 per share expired. 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. In
addition, stock awards issued under the 1988 Incentive Plan of 12,500 shares
remained outstanding at September 3, 1999.
STOCK REPURCHASE PROGRAM. On January 28, 1999, the Board of Directors approved a
stock repurchase program authorizing the repurchase of up to one million shares
of its common stock over the following twelve months. As of September 3, 1999,
the Company had repurchased 386,500 shares of its common stock in open market
transactions at an average price of $1.82.
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 1999, 1998 and 1997.
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. During
fiscal 1999, an additional discretionary matching contribution of 25% of
employee contributions was made for all quarters. During fiscal 1998, an
additional 25% matching contribution was made for the third and fourth quarters.
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 $176,000 in fiscal 1999, $124,000
in fiscal 1998 and $90,000 in fiscal 1997.
11. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
During 1999, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report information about operating segments in their
financial statements. The standard defines operating segments as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Based on these standards the
Company has determined that it operates in a single operating segment: the
manufacture and sale of satellite communications equipment.
In this single operating segment the Company has three distinct product lines.
Revenues from customers in each of these product lines are as follows:
Year ended
---------------------------------------------
SEPTEMBER 3, August 28, August 29,
1999 1998 1997
- --------------------------------------------------------------------------------
Product Line
Direct Broadcast Satellite $21,500,769 $29,220,638 $17,511,242
Telecom and Custom Products 3,007,288 4,277,727 3,604,794
Service 751,098 756,308 695,834
- --------------------------------------------------------------------------------
$25,259,155 $34,254,673 $21,811,870
================================================================================
35
<PAGE>
Wegener Corporation and Subsidiaries
Revenues by geographic areas are as follows:
Year ended
---------------------------------------------
SEPTEMBER 3, August 28, August 29,
1999 1998 1997
- --------------------------------------------------------------------------------
Geographic Area
United States $21,765,145 $30,943,573 $18,669,030
Canada 1,585,004 57,090 34,603
Europe 1,136,041 881,595 1,707,177
Asia 66,420 1,852,677 75,275
Latin America 617,146 488,517 875,033
Other 89,399 31,221 450,752
- --------------------------------------------------------------------------------
$25,259,155 $34,254,673 $21,811,870
================================================================================
Revenue attributed to geographic areas is based on the location of the customer.
All of the Company's long-lived assets are located in the United States.
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 19.2%, 34.2% and 11.0% of revenues in
fiscal years 1999, 1998, and 1997, respectively, and represent revenues
principally within the Direct Broadcast Satellite product line. At September 3,
1999, no customers accounted for more than 10% of the Company's accounts
receivable. At August 28, 1998, three customers accounted for 23.7%, 13.6% and
13.2%, respectively 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.
12. STATEMENT OF CASH FLOWS
Interest payments were approximately $159,000, $247,000, and $563,000 for fiscal
years 1999, 1998 and 1997, respectively. Income taxes paid in 1999 and 1998 were
$253,000 and $488,000, respectively. No income taxes were paid in 1997. Non-cash
investing and financing activities in fiscal 1999 were: (1) 103,337 shares of
treasury stock reissued for 401(k) matching Company contributions valued at
approximately $176,000. 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 (2) 950,658 shares
of common stock 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 issued upon conversion of $3,850,000 principal amount of
convertible debentures.
13. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended September 3, 1999, the Company
recorded as a charge to cost of sales a $500,000 increase in the inventory
obsolescence reserve.
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.
36
<PAGE>
Wegener Corporation and Subsidiaries
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 September 3, 1999 and August 28, 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of three years in the period ended September 3, 1999. 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 September 3, 1999 and August 28, 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 3, 1999 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
October 27, 1999
37
<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 25, 2000 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 caption "EXECUTIVE COMPENSATION" 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.
38
<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 September 3, 1999 and August 28, 1998
Consolidated Statements of Operations Years ended September 3, 1999, August 28,
1998, and August 29, 1997
Consolidated Statements of Shareholders' Equity Years ended September 3, 1999,
August 28, 1998, and August 29, 1997
Consolidated Statements of Cash Flows Years ended September 3, 1999, August 28,
1998, and August 29, 1997
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 September 3,
1999, August 28, 1998, and August 29, 1997
(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 September
3, 1999.
(c) See Part IV, Item 14(a)(3).
(d) Not applicable.
39
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Wegener Corporation
Duluth, Georgia
The audits referred to in our report dated October 27, 1999, 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 27, 1999
40
<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 SEPTEMBER 3, 1999 $ 256,991 $ 40,000 $ (124,406) $ -- $ 172,585
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
Inventory Reserves:
YEAR ENDED SEPTEMBER 3, 1999 $ 1,439,520 $ 750,000 $ -- $ 8,974 $ 2,198,494
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
</TABLE>
41
<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).
42
<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.
43
<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 22, 1999 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 22nd day of November, 1999.
Signature Title
/s/ Robert A. Placek President, Chief Executive Officer and Chairman
- --------------------------- of the Board (Principal Executive Officer)
Robert A. Placek
/s/ C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer, Director
- --------------------------- (Principal Financial and Accounting Officer)
C. Troy Woodbury, Jr.
/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
44
<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, LLP
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
Wegener Corporation
Keith N. Smith
President, Wegener
Communications, Inc.
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 25, 2000 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 1999 and 1998
were as follows:
High Low
- ---------------------------------------------
FISCAL YEAR ENDING SEPTEMBER 3, 1999
First Quarter $1 27/32 $1 3/8
Second Quarter 2 9/32 1 1/2
Third Quarter 2 1/2 1 15/32
Fourth Quarter 2 3/16 1 3/8
- ---------------------------------------------
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
- ---------------------------------------------
The Company had approximately 408* shareholders of record at November 12, 1999.
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).
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. 333-08017, No. 33-27527, No.
333-29887, No. 33-51205 and No. 333-29889) of our reports dated October 27, 1999
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 September 3, 1999.
Atlanta, Georgia BDO Seidman, LLP
November 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-03-1999
<PERIOD-START> AUG-29-1998
<PERIOD-END> SEP-03-1999
<CASH> 8,858,591
<SECURITIES> 0
<RECEIVABLES> 2,790,881
<ALLOWANCES> (172,585)
<INVENTORY> 6,488,813
<CURRENT-ASSETS> 19,553,790
<PP&E> 12,958,535
<DEPRECIATION> (8,715,947)
<TOTAL-ASSETS> 24,953,815
<CURRENT-LIABILITIES> 5,576,622
<BONDS> 85,424
0
0
<COMMON> 123,146
<OTHER-SE> 18,656,623
<TOTAL-LIABILITY-AND-EQUITY> 24,953,815
<SALES> 25,259,155
<TOTAL-REVENUES> 25,259,155
<CGS> 17,055,600
<TOTAL-COSTS> 25,126,814
<OTHER-EXPENSES> (355,220)
<LOSS-PROVISION> 40,000
<INTEREST-EXPENSE> 149,288
<INCOME-PRETAX> 338,273
<INCOME-TAX> 125,000
<INCOME-CONTINUING> 213,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 213,273
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
