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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 [FEE REQUIRED]
For the fiscal year ended August 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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 December 2, 1997, 11,598,453 shares of registrant's Common Stock were
outstanding and the aggregate market value of the Common Stock held by
nonaffiliates was $14,225,408 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 27,
1998 Annual Meeting of Stockholders, only to the extent expressly so stated
herein, are incorporated herein by reference into Part III.
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WEGENER CORPORATION
FORM 10-K
YEAR ENDED AUGUST 29, 1997
INDEX
PART I
Page
Item 1. Business...........................................................2
Item 2. Properties.........................................................9
Item 3. Legal Proceedings.................................................9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..........................................................9
Item 6. Selected Financial Data.........................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................11
Item 8. Financial Statements and Supplementary Data.....................18
PART III
Item 10. Directors and Executive Officers of the Registrant..............33
Item 11. Executive Compensation..........................................33
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................33
Item 13. Certain Relationships and Related Transactions..................33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................34
1
PART I
ITEM 1. BUSINESS
Wegener Corporation, the Registrant, together with its subsidiaries, is
referred to herein as the "Company".
(a) General development of business.
Wegener Corporation was formed in 1977 and is a Delaware corporation. The
Company conducts its continuing business through Wegener Communications, Inc.
(WCI), its wholly-owned subsidiary, and Wegener Communications International,
Inc., a wholly-owned subsidiary of WCI.
WCI was formed in April 1978 and is a Georgia corporation. Its
wholly-owned subsidiary, Wegener Communications International, Inc., is a Small
Foreign Sales Corporation. WCI, a market leader in digital and analog
compression technology, designs and manufactures communications transmission and
receiving equipment for the business broadcast, data communications, cable and
broadcast radio and television industries for worldwide markets.
(b) Financial information about industry segments.
Segment information contained in Note 11 to the consolidated financial
statements on page 30 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.
- -------------------------------------
WCI manufacturers electronics for the distance learning, broadcast television
and radio, cable television, business music, private network and data
communications industries. WCI services all of the products that it sells. The
Company warrants its products for a period of one year. There were no
significant warranty claims outstanding as of August 29, 1997.
Throughout fiscal 1996 and fiscal 1997, WCI continued to produce and develop
digital compression products. During 1997 WCI introduced COMPEL Control software
and the UNITY Digital Broadcast product family. Wegener's digital products are
in use worldwide in distance learning, radio, cable television, and private
business networks. In terms of new orders, compressed digital products are the
fastest growing product segment for the Company. As expected, demand for the
Company's analog products has begun to decline following market demand for, and
the Company's emphasis on, digital technology.
2
DIGITAL COMMUNICATIONS. The demand for digital products is being driven by the
high cost of satellite capacity. Satellite capacity is scarce due to pressures
on both the supply and demand side of the market. On the supply side, satellites
are extremely expensive to launch, build, and maintain. The useful life of a
satellite is limited by the amount of positioning fuel that can be carried.
Also, the placement of satellites is regulated by the 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 revenue generated by an expensive
asset. Due to existing satellite transponder contracts and the cost of replacing
existing analog hardware, the digital conversion of major networks is taking
longer than anticipated. These network conversions are expected to occur in the
near future, but it is impossible to predict the precise timing of customer
internal decision processes. Management believes the market as a whole has
considerable built up demand for digital technology.
With ongoing breakthroughs in digital compression, digitized audio and video
products have become increasingly important. WCI manufactures MPEG-2 broadcast
quality digital video products for commercial program distribution. During the
first quarter of fiscal 1997 WCI completed deliveries of its MPEG-2 products for
use by NBC in the MSNBC network. The order comprised over 450 satellite
receivers and over 80 transmit systems. Turner Broadcasting also expanded its
usage of WCI's digital broadcast products. Remote feeds from London, Jerusalem,
Moscow, and Hong Kong are now transmitted using Wegener's DV2000 products. Most
significant, in fiscal 1997 an order was placed by FOX/Liberty Networks, L.L.C.
to convert existing analog cable networks to digital transmission.
WCI's lower data rate products are in use by Eli Lilly and Company for their
global business network. Ongoing projects include shipments of digital video
products to Dow Jones Investor Network and Reuters Financial Television for use
in terrestrial and satellite business information networks which deliver
compressed video to subscribers' desktops.
The Company's digital audio products employ MPEG digital audio compression
technology and are used to distribute radio and business music programming to
network affiliates. During fiscal 1997, ABC Radio Network, Jones Satellite
Networks, Moody Broadcasting and a variety of smaller networks throughout the
world chose WCI digital audio products to upgrade their networks.
The Company also manufacturers specialized data communications products used in
satellite broadcast data applications. Bookings for these products remained
strong in fiscal 1997. WCI manufactures satellite data receivers for Glenayre
Technologies which are being used to expand Glenayre's paging network. Reuters
also uses WCI data equipment to expand distribution for its international news
feed.
3
CABLE TELEVISION PRODUCTS. Cable television product bookings experienced the
greatest growth of any of WCI's markets. In the third quarter of fiscal 1997,
WCI received an $11.8 million order for WCI's new UNITY digital broadcast
receiver and COMPEL network control software for use by FOX Sports Net, FX
Networks, and fXM: Movies for FOX. Subsequent to fiscal year end, FOX placed an
additional order for $2.8 million of UNITY receivers bringing the total order to
$14.6 million. The UNITY receivers will provide automated program delivery for
FOX's cable affiliates and regional networks. Shipments are scheduled to begin
in the second quarter of fiscal 1998 and continue throughout fiscal 1998 and
into the first quarter of fiscal 1999. Other WCI's products are widely employed
in the cable industry to provide a variety of audio, data, network control and
video services to cable subscribers.
WCI cue and control equipment for cable television networks are used on
advertising supported networks to permit affiliated cable systems to insert
local commercials at appropriate times. Control equipment delivers switching
commands from the network to provide program routing and blackouts.
A wide variety of data transmission products are used to deliver specialized
data services to cable headends and subscribers. These applications range from
data to feed news services, weather and program guide graphics, delivery to
personal computers, and control of cable subscribers' addressable converters.
An additional product family of the cable television segment is graphic
generators. These products deliver custom data by satellite that is graphically
displayed on a subscriber's television. Products in this area were among the
first generated by WCI. WCI has continued to add new products to this family to
meet market demand.
RADIO AND TELEVISION BROADCASTING. Broadcasters use WCI equipment to distribute
digital audio, analog audio, video, and cue/network control signals. Television
networks, such as NBC and Turner Broadcasting, use WCI products to distribute
programming from remote locations and between affiliates. Satellite based radio
networks distribute programming and network control signals to network
affiliates.
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 voice and data circuits that accompany a
television 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 circuits. The equipment is controlled by the
business music supplier using WCI's network control technology. Potential users
of this WCI equipment include any business purchasing background music,
foreground music and broadcast data.
4
(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 dealers 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 to
supply its electronic components. Direct sources provide sheet metal, electronic
circuit boards and other materials built to specifications. WCI maintains
relationships with approximately twenty direct dealers. Most of the Company's
materials are available from a number of different suppliers; however, certain
components used in existing and future products are currently available from
single or limited sources. Although the Company believes that all single-source
components currently are available in adequate quantities, there can be no
assurance that shortages or unanticipated delivery interruptions will not
develop in the future. Any disruption or termination of supply of certain
single-source components could have an adverse effect on the Company's business
and results of operations.
(iv) Patents, trademarks, licenses, franchises and concessions held.
The Company holds certain patents with respect to some of its products and
markets its services and products under various trademarks and tradenames.
Additionally, the Company licenses certain analog audio processing technology to
several manufacturing companies which generated royalty revenues of
approximately $121,000, $112,000 and $173,000 in fiscal 1997, 1996, and 1995,
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) on pages 11-18
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 The Church of Jesus Christ of Latter-Day
Saints accounted for approximately 11.0% of revenues in fiscal 1997. Sales to
Ascent Network Services, Inc. accounted for approximately 14.2% of revenues in
fiscal 1996. Sales to Glenayre Technologies accounted for approximately 15.0% of
revenues in fiscal 1995. At August 29, 1997, one customer accounted for 27.7% of
the Company's accounts receivable. At August 30, 1996, two customers accounted
for 34.6% and 10.8% 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 1998.
There can be no assurance that the loss of one or more of these customers would
not have an adverse effect on the Company's operations.
5
(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 $19,501,000 at August 29, 1997 and $13,807,000 at August 30, 1996.
Reference is hereby made to page 12 of this document which is incorporated
herein by reference in response to this item.
Approximately $17,464,000 of the August 29, 1997 backlog is expected to
ship during fiscal 1998, and the remainder in fiscal 1999.
(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. Competition in the emerging distance learning
industry is comprised of both established firms as well as relative newcomers.
Through relationships with satellite service providers, the Company has
positioned itself to provide end-to-end solutions to its customers. Competition
in the market for the Company's MPEG-2 broadcast television electronics
products, including digital video equipment, is driven by timeliness,
performance, and price. The Company's broadcast digital video products are in
production and are competitively priced, with unique, desirable features.
Management believes these products are physically smaller and priced below other
equivalent products on the market today. The competitive situation of data
products is significantly different than that of the markets for other WCI
products. Due to the large number of potential end users, both small and large
competitors continue to emerge. The Company believes it has positioned itself to
capitalize on the market trends in this business through careful development of
its product and market strategies, which have proven successful in increasing
revenues from this sector. In the cable television market the Company believes
that the competitive position for many of its products is dominant. However, the
UNITY product family is potentially competing with significant and established
firms. WCI believes that it maintains a competitive advantage in the market for
advertising-supported networks through its ability to provide regionalized
programming and control. Other products for cable television include proprietary
cueing and network control devices. Competition for radio network products,
including the Company's digital audio products, is very aggressive and pricing
is very competitive. The Company believes that its continued success in all of
its markets will depend on aggressive marketing and product development.
(xi) Research and development activities.
The Company's research and development is designed to strengthen and
broaden its existing products and systems and to develop new products and
systems. A major portion of the fiscal 1997 research and development expenses
were spent in the digital video product area. WCI research and development
expenses totalled $1,999,000 in fiscal 1997, $2,286,000 in fiscal 1996, and
$1,985,000 in fiscal 1995. Additional information contained in MDA on pages
11-18 of this document is incorporated herein by reference in response to this
item.
6
(xii) Environmental disclosures.
Federal, state and local pollution control requirements have no material
effect upon the capital expenditures, earnings or the competitive position of
the Company.
(xiii) Number of employees.
As of August 29, 1997, the Company had 136 employees employed by the WCI
manufacturing subsidiary. No employees are parties to a collective bargaining
agreement and the Company believes that its relationships with its employees are
good.
(d) Financial information about foreign and domestic operations
and export sales.
Information contained under the caption "Consolidation" in Note 1 on page
23 of this document, and in Note 11 on page 30 of this document are incorporated
herein by reference in response to this item.
7
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
ROBERT A. PLACEK 59 President,
President and Chief Executive Officer Chief Executive
of the Company since August 1987 and Officer
Director since July 1987. Chairman of and Chairman of the
the Board since 1995. President and Board
Director of WCI since 1979.
C. TROY WOODBURY, JR. 50 Treasurer and
Treasurer and Chief Financial Officer Chief Financial
of the Company since June 1988 and Officer
Director since 1989. Executive Vice
President of WCI since July 1996.
Treasurer and Chief Operating Officer
of WCI since September 1992. Group
Controller for Scientific-Atlanta,
Inc. from March 1975 to June 1988.
JAMES T. TRAICOFF 47 Controller
Controller of the Company since
November 1991; Controller for WCI
since July 1988; Controller for BBL
Industries, Inc. from April 1985 to
July 1988.
8
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 long-term leases expiring during
fiscal 1999, at an annual rental of approximately $79,000. This space is for
additional warehouse and manufacturing capacity. WCI's manufacturing facility is
subject to a mortgage note securing the indebtedness. WCI's 4.4 acres of
adjacent land is pledged as collateral under the Company's line of credit
facility.
ITEM 3. LEGAL PROCEEDINGS
No significant legal proceedings were pending as of August 29, 1997.
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 December 2, 1997 there were approximately 423*
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 1997 and
1996 were as follows:
Fiscal 97 Fiscal 96
--------- ---------
High Low High Low
First Quarter $6 $3 7/8 $12 $ 9
Second Quarter 4 1/8 2 5/8 13 3/4 8 1/2
Third Quarter 3 7/8 1 7/16 10 5/8 7 3/4
Fourth Quarter 3 1/2 1 13/16 12 1/4 5 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.
9
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
Year Ended
----------------------------------------------------------------
August 29, August 30, September 1, September 2, August 27,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
Revenue $ 21,812 $ 23,195 $ 19,488 $ 16,521 $ 14,673
Earnings (loss) from
continuing operations (1,809) 1,456 385 (69) (428)
Earnings (loss) per share
from continuing operations $ (.19) (2) $ .16 $ .05 $ (.01) $ (.06)
Earnings (loss) per share $ (.19) (2) $ .16 $ .05 $ (.01) $ (.07)
Cash dividends paid per share (1) - - - - -
- ------------------------------------------------------------------------------------------------
Total assets $ 25,614 $ 27,737 $ 22,018 $ 11,893 $ 10,827
Long-term obligations and
current maturities 3,667 7,935 2,796 2,979 3,556
- ------------------------------------------------------------------------------------------------
(1) The Company has never paid cash dividends on its common stock and does not intend to pay
cash dividends in the foreseeable future.
(2) Fully diluted earnings per share were anti-dilutive.
10
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, plans for future
business development activities, capital spending or financing sources, capital
structure and 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, product demand, timing of orders, governmental regulation,
technological developments, competition and other uncertainties detailed from
time to time in the Company's 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
Net loss for the year ended August 29, 1997 was $(1,809,000) or $(0.19)
per share, compared to net earnings of $1,456,000 or $0.16 per share for the
year ended August 30, 1996 and $385,000 or $0.05 per share for the year ended
September 1, 1995.
Revenues for fiscal 1997 decreased $1,383,000 to $21,812,000, from
$23,195,000 in fiscal 1996, which compared to revenues of $19,488,000 in fiscal
1995. During fiscal 1997, the Company continued to focus on improved product
quality and the development of new products. Direct Broadcast Satellite (DBS)
revenues in fiscal 1997 decreased $698,000 to $18,207,000 from $18,905,000 in
fiscal 1996. Telecom and Custom Product revenues decreased $685,000 in fiscal
1997 to $3,605,000 from $4,290,000 in fiscal 1996. The decrease in DBS revenues
was due to lower than expected orders for the digital product line and late
deliveries of scheduled fiscal 1997 shipments. The Company believes that
bookings of new orders were impacted by several factors. Customer decision
processes were impacted by introductions of newer MPEG-2 technology which
resulted in longer evaluation periods of MPEG-1 and MPEG-2 technologies as well
as competitors products and performance claims. Existing satellite transponder
contracts, along with additional space segment becoming available, provided
adequate transponder capacity for current service which resulted in networks
deferring conversions to digital broadcasting. Budget decisions and constraints
of certain broadcast network customers resulted in deferring placement of orders
into fiscal 1998. Orders by customers for products used in the distance learning
markets are subject to state or federal funding approvals, which has resulted in
the sales process taking from eighteen months to three years to complete. The
Business TV market was impacted by an evaluation period during which customers
defined their network requirements and compared equipment alternatives between
low-end non-addressable network systems versus high-end addressable networks. As
the market became segmented, sales efforts were focused on the market for
addressable systems where the Company believes it has a competitive advantage.
Orders for digital audio products to convert existing analog radio networks to
digital broadcasting were impacted by industry consolidations which have
resulted in deferring purchasing decisions into fiscal 1998. Late deliveries of
scheduled fiscal 1997 deliveries resulted from delays in internally developed
software and vendor design problems in a sole sourced assembly. Internally
developed software was completed in the fourth quarter of fiscal 1997. Design
11
changes by outside vendors and rework of related components were completed
subsequent to fiscal 1997. The Telecom and Custom Product Group revenue decrease
was primarily due to a higher level of shipments in fiscal 1996 of uplink
equipment to radio networks for conversion from analog to digital broadcasting.
WCI's backlog of orders scheduled to ship within eighteen months increased
$5,694,000 or 41.2% to $19,501,000 at August 29, 1997 from $13,807,000 at August
30, 1996 which compares to $12,725,000 at September 1, 1995. Approximately,
$17,464,000 of the August 29, 1997 backlog is expected to ship during fiscal
1998. Orders received subsequent to fiscal 1997, which are scheduled to ship
during fiscal 1998 amounted to $5,888,000, bringing the total orders received to
date and expected to ship within fiscal 1998 to $23,352,000. The Company expects
to book sufficient additional orders to achieve its fiscal 1998 business plan
which reflects an increase in revenues compared to fiscal 1997 and a return to
profitability.
International sales are generated through a direct sales organization
and through foreign distributors. International sales were $2,964,000 or 13.6%
of revenues in fiscal 1997, compared to $2,549,000 or 11.0% of revenues in
fiscal 1996, and $3,926,000 or 20.1% of revenues in fiscal 1995. Management
believes that international sales could increase as more business opportunities
become available for WCI products in the future. All international sales are
denominated in U.S. dollars.
Gross profit decreased $2,548,000 in fiscal 1997 compared to fiscal
1996. Gross profit as a percent of sales was 22.6% in fiscal 1997, compared to
32.2% in fiscal 1996 and 34.1% in fiscal 1995. The decrease in profit margin
dollars and percentages in fiscal 1997 compared to fiscal 1996 were mainly due
to (1) a sales mix of products with higher material costs which decreased
margins by approximately $936,000 or 4.3% of sales; (2) lower revenues which
decreased the margin contribution to cover fixed overhead costs by approximately
$608,000 or 2.8% of sales; and (3) an increase in manufacturing overhead
expenses of $577,000 or 2.6% of sales, principally due to increases in
amortization and write-offs of capitalized software. Additionally, profit
margins were adversely impacted by start-up costs associated with the
introduction of new digital video products and higher than expected material
component costs of certain products. The gross profit in fiscal 1997 was reduced
by charges of $825,000 in reserves for slow-moving and obsolete inventory and by
$242,000 for write-offs of capitalized software. These reserves resulted
primarily from the need to reduce to net realizable value the inventory of
slower moving, mature analog products and earlier generations of digital
products. These products continue to sell but at reduced rates. This compares to
an inventory reserve charge of $775,000 in fiscal 1996 and $77,000 in fiscal
1995.
Selling, general and administrative expenses increased $1,210,000 or
30.6% to $5,161,000 in fiscal 1997 from $3,951,000 in fiscal 1996. As a
percentage of revenues, selling, general and administrative expenses were 23.7%
of revenues in fiscal 1997 and 17.0% in fiscal 1996. The dollar increase of
expenses in fiscal 1997 from fiscal 1996 includes increases in (1) bad debt
expense of $297,000; (2) restructuring expense of $100,000; (3) depreciation and
amortization expense of $111,000, principally for loan origination fees and
convertible bond issuance costs; and (4) professional fees of $98,000. Other
increases of approximately $398,000 were due to higher levels of selling and
marketing expenses and compensation expenses. Selling, general and
administrative expenses increased $280,000 or 7.6% to $3,951,000 in fiscal 1996
from $3,671,000 in fiscal 1995.
Research and development expenditures, including capitalized software
development costs, were $3,089,000 or 14.2% of revenues in fiscal 1997,
$3,180,000 or 13.7% of revenues in fiscal 1996, and $2,453,000 or 12.6% of
12
revenues in fiscal 1995. The decrease in the dollar amount of expenditures in
fiscal 1997 as compared to fiscal 1996 is primarily due to lower proto-type
material costs and consulting expenses which were partially offset by an
increase in engineering personnel. During fiscal 1997, $1,090,000 of software
development costs were capitalized in accordance with SFAS 86, and $894,000 and
$468,000 of software development costs were capitalized in fiscal 1996 and 1995,
respectively. Research and development expenses, excluding capitalized software
development costs, were $1,999,000 or 9.2% of revenues in fiscal 1997,
$2,286,000 or 9.9% of revenues in fiscal 1996, and $1,985,000 or 10.2% of
revenues in fiscal 1995.
Interest expense decreased 21.6% in fiscal 1997 compared to fiscal 1996,
and increased 10.6% in fiscal 1996 compared to fiscal 1995. The decrease during
fiscal 1997 was primarily due to a decrease in the weighted average interest
rate of total indebtedness including the convertible debentures. The Company
believes that interest expense in fiscal 1998 will decrease as a result of a
decrease in outstanding debt.
Fiscal 1997 income tax benefit was comprised of a deferred income tax
benefit of $946,000. The Company has provided no deferred tax asset valuation
allowance at August 29, 1997 based on management's assessment that existing tax
benefits will "more likely than not" be realized in future tax returns. The
Company expects to achieve its current business plan for fiscal 1998 which
reflects an increase in revenues compared to fiscal 1997 and a return to
profitability. The income tax benefit recognized during fiscal 1997 was
principally the result of an increase in the Company's net operating loss
carryforward. The Company recognized an income tax benefit in fiscal 1996 of
$848,000 due to the reversal of the valuation allowance on the deferred tax
assets. No income tax benefit was recognized in fiscal 1995 due to
fully-reserved deferred tax benefits related to federal net operating loss
carryforwards, deductible temporary differences, and tax credit carryforwards.
The Company operates on a 52-53 week fiscal year. The fiscal year
ends on the Friday nearest to August 31. Fiscal 1997, 1996 and 1995 contained 52
weeks.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in fiscal 1997 was $6,325,000
compared to cash used in operating activities of $6,041,000 and $2,488,000 in
fiscal 1996 and 1995, respectively. The primary sources of cash from operating
activities in fiscal 1997 were (1) a decrease in accounts receivable of
$2,137,000; (2) a decrease in inventories of $1,877,000; and (3) an increase in
customer deposits of $2,588,000. These sources were offset by a decrease in
accounts payable of $746,000.
Cash used by investment activities was $2,128,000 in fiscal 1997 compared
to $1,472,000 in 1996 and $958,000 in 1995. Cash used in 1997 includes property
and equipment expenditures of $1,038,000 and capitalized software additions of
$1,090,000.
Cash used by financing activities was $2,126,000 in fiscal 1997 compared
to cash provided by financing activities of $2,771,000 in fiscal 1996 and
$8,358,000 in fiscal 1995. In fiscal 1997, financing activities used cash of
$1,530,000 for a reduction of the line-of-credit and $539,000 for scheduled
repayments of long-term obligations. In fiscal 1996, net proceeds from the
issuance of convertible debentures and long-term debt provided cash of
$5,074,000.
13
Net accounts receivable decreased 35.1% to $4,613,000 at August 29,
1997, from $7,106,000 at August 30, 1996, compared to $4,572,000 at September 1,
1995. The decrease in fiscal 1997 was primarily due to a $1,438,000 decrease in
revenues during the fourth quarter of fiscal 1997 compared to fiscal 1996 and a
decrease in the days outstanding. The allowance for doubtful accounts was
$362,000 at August 29, 1997, $58,000 at August 30, 1996, and $42,000 at
September 1, 1995. Write-offs in fiscal 1997, 1996 and 1995 were $53,000,
$70,000 and $149,000, respectively. Increases to the allowance and charges to
general and administrative expense were $357,000 in fiscal 1997, $60,000 in
fiscal 1996 and $70,000 in fiscal 1995.
During fiscal 1997, inventory reserves were increased by provisions
charged to cost of sales of $825,000 and were reduced by write-offs of $481,000.
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. During fiscal 1997, decreases in inventories provided cash of
$1,877,000 while in fiscal 1996 increases in inventories used cash of
$6,237,000. During fiscal 1996 inventory reserves were increased by provisions
charged to cost of sales of $775,000. During fiscal 1995 inventory reserves were
reduced by write-offs of $196,000 and increased by provisions charged to cost of
sales of $77,000.
On May 31, 1996, the Company issued $5,000,000 of 8% Convertible
debentures, due May 31,1999, in a private placement to various accredited
investors for net proceeds to the Company of $4,700,000. The proceeds were used
for working capital and reduction of the line-of-credit note payable. These
debentures are convertible at the option of the holders at any time through May
31, 1999, 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 29, 1997 and August 30, 1996) 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 is payable
quarterly in cash or, at the option of the Company, by adding the amount of such
interest to the outstanding principal amount due under the debenture. During
fiscal 1997 and 1996 debentures in the amount of $101,222 and $33,973
respectively, were issued for payment of accrued interest. During fiscal 1997,
$3,850,000 principal amount of debentures were converted into 2,131,987 shares
of common stock. No debentures were converted in fiscal 1996. The Company filed
two Registration Statements to register up to 3,680,000 shares of common stock
underlying such debentures for resale following conversion. These shares
constitute management's estimate of the maximum number of shares of common stock
to be issued upon conversion, giving effect to possible fluctuations in the
market price of common stock. Subsequent to August 29, 1997, $964,192 of
debentures were converted into 659,023 shares of common stock.
WCI maintains a secured revolving line of credit and term loan facility
with a combined maximum available credit limit of $8,500,000 expiring May 4,
1999 or upon demand. The term loan portion provides for a maximum of $1,000,000
for advances of up to 80% of the cost of equipment acquisitions. Interest on the
term loan is payable monthly at the bank's prime rate (8.5% at August 29, 1997)
plus 1 1/2%. Principal advances are payable monthly over sixty months with a
balloon payment due at maturity. Interest on the revolving line of credit
portion is payable monthly at the bank's prime rate plus 1/2%. Additionally, the
facility requires an annual facility fee of 1% of the maximum credit limit. 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 loans are secured by a first lien on substantially all of
14
WCI's assets except assets secured under the existing mortgage note and
equipment note on which the bank has 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 WGNR to $600,000 per fiscal year, and is precluded from paying
dividends. At August 29, 1997 the Company was in violation of the minimum
tangible net worth covenant by approximately $369,000 as to which the bank
granted a waiver. The revolving line of credit had no outstanding balance as of
August 29, 1997, compared to $1,530,000 at August 30, 1996, and $3,079,000 at
September 1, 1995. At August 29, 1997, $5,223,000 was available to borrow under
the advance formulas, as defined. While no assurances may be given, the Company
anticipates that it will be in compliance with the minimum tangible net worth
convenant or in the event that it is not, the Company believes that it will be
able to obtain a waiver prior to requiring any future borrowings on the line of
credit. If however, the Company is unable to meet the minimum tangible net worth
covenant or obtain a waiver, it may be required to obtain other debt or equity
financing. WGNR guarantees the revolving line of credit and term loan.
Subsequent to August 29, 1997, the Company received an additional
customer deposit in the amount of $8,577,000 related to the August 29, 1997
order backlog. The Company does not have any material scheduled commitments for
capital expenditures during fiscal 1998. The Company expects that its current
cash and cash equivalents combined with expected cash flows from operating
activities and the Company's available line of credit will be sufficient to
support the Company's operations during fiscal 1998.
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 March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share."
SFAS No. 128 simplifies the standards for computing earnings per share and
requires presentation of two new amounts, basic and diluted earnings per share.
The Company will be required to retroactively adopt this statement when it
reports its operating results for the quarter and year ended August 28, 1998.
When the Company presents this information, it expects to report the following
restated amounts:
Year Ended
1997 1996
-------------------------------------------------
Basic earnings $(.19) $.17
(loss) per share
-------------------------------------------------
Diluted earnings $(.19) $.16
(loss) per share
-------------------------------------------------
15
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which addresses standards for reporting and display of comprehensive
income and its components in a full set of financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company will
be required to adopt this statement when it reports its operating results for
the quarter ending November 27, 1998. The adoption is not expected to have a
material impact on the Company's consolidated financial statements.
Additionally, in June 1997, the FASB issued SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
companies to report certain information about operating segments, products and
services, geographical areas in which they operate, and major customers. The
statement is effective for fiscal years beginning after December 15, 1997. The
Company will be required to retroactively adopt this statement when it reports
its operating results for the quarter and year ended August 29, 1999. The
adoption is not expected to have a material impact on the Company's consolidated
financial statements.
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 than the Company, as well as with
small specialized companies. Competition in the emerging distance learning
industry is comprised of both established firms as well as relative newcomers.
Through relationships with satellite service providers, the Company has
positioned itself to provide end-to-end solutions to its customers. Competition
in the market for the Company's MPEG-2 broadcast television electronics
products, including digital video equipment, is driven by timeliness,
performance, and price. Although design improvements continue, the Company is
delivering its broadcast digital video products which are aggressively priced,
with unique, desirable features. These products are physically smaller and
priced below other equivalent products on the market today. In addition, the
Company is beginning to market digital video products to cable networks, but,
because the Company is still a relative newcomer to cable program distribution,
competition in this segment will be primarily against larger, more established
entities. Due to the large number of potential end users, both small and large
competitors continue to emerge. Competition for radio network products,
including the Company's digital audio products, is very aggressive and pricing
is very competitive. The Company believes that its continued success in all of
its markets will depend on aggressive marketing and product development.
The demand for digital products is being driven by the high cost of
satellite capacity. Satellite capacity is scarce due to pressures on both the
supply and demand side of the market. On the supply side, satellites are
extremely expensive to launch, build, and maintain. The useful life of a
satellite is limited by the amount of positioning fuel that can be carried.
16
Also, the placement of satellites is regulated by the 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 revenue 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's
internal decision processes. Management believes the market as a whole has
considerable built up demand for digital technology. Although no assurances can
be given, the Company expects to directly benefit from this increase in demand.
There may be fluctuations in the Company's revenues and operating results from
quarter to quarter due to several factors, including the timing of significant
orders from customers and the timing of new product introductions by the
Company.
The Company has invested a significant amount of financial resources to
acquire certain raw materials, incur direct labor and contract to have specific
outplant procedures performed on inventory in process. As of August 29, 1997,
approximately $8,000,000 of inventory was related to MPEG-1 and MPEG-2 digital
components. The Company purchased this inventory based upon current backlog and
anticipated future sales based upon existing knowledge of the marketplace. The
Company's inventory reserve of $1,865,000 at August 29, 1997, 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.
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. The Company believes margins could increase in fiscal 1998 if
the Company is successful in increasing revenues, improving manufacturing
efficiencies, reducing start-up costs on new products, achieving reductions in
material costs with planned redesign of certain products, implementing other
cost reductions, and streamlining operations to reduce costs. However, there can
be no assurance that increased margins will in fact be realized.
Certain raw materials, video sub-components, and licensed video processing
technologies used in existing and future products are currently available from
single or limited sources. Although the Company believes that all single-source
components currently are available in adequate quantities, there can be no
assurance that shortages or unanticipated delivery interruptions will not
develop in the future. Any disruption or termination of supply of certain
single-source components or technologies could have an adverse effect on the
Company's business and results of operations.
The Company has made significant investments in capitalized software costs
principally related to the digital audio and video products. At August 29, 1997
capitalized software costs were $1,701,000. These costs are being amortized over
anticipated future gross revenues for the product or the estimated economic life
of the product. Expected future revenues and estimated economic lives are
subject to revisions due to market conditions, technology changes, and other
factors resulting in shortfalls of expected revenues or reduced economic lives.
17
During fiscal 1997, $242,000 of capitalized software costs were written-off to
cost of sales due to a reduction of expected revenues on certain slow-moving
products.
The industry in which the Company operates is subject to rapid technology
changes and frequent product introductions. The Company expects to remain
committed to such research and development expenditures as are required to
effectively compete and maintain pace with the rapid technological changes in
the communications industry and to support innovative engineering and design in
its future products.
The Company had an accumulated deficit of $2,878,000 at August 29, 1997.
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. While no assurances may be given, management believes that
implementation of the current business plan for fiscal 1998 will result in
increased revenues compared to fiscal 1997 and a return to profitability.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
-------------------------------------------------
August 29, August 30, September 1,
1997 1996 1995
- ------------------------------------------------------------------------------------------------
Revenue $ 21,811,870 $ 23,195,052 $ 19,488,113
- ------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 16,885,840 15,721,320 12,841,412
Selling, general and administrative 5,160,975 3,951,086 3,671,203
Research and development 1,999,106 2,286,378 1,984,661
- ------------------------------------------------------------------------------------------------
Operating costs and expenses 24,045,921 21,958,784 18,497,276
- ------------------------------------------------------------------------------------------------
Operating income (loss) (2,234,051) 1,236,268 990,837
Interest expense (545,914) (696,513) (629,772)
Interest income 24,160 67,606 24,232
Other (expense) income, net 605 717 (427)
- ------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (2,755,200) 608,078 384,870
Income tax benefit 946,000 848,000 --
- ------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,809,200) $ 1,456,078 $ 384,870
================================================================================================
Earnings (loss) per share $ (.19) $ .16 $ .05
================================================================================================
Shares used in per share calculation 9,640,127 9,055,351 7,447,627
================================================================================================
See accompanying notes to consolidated financial statements.
19
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 29, August 30,
1997 1996
- --------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 2,242,433 $ 171,687
Accounts receivable 4,612,634 7,105,984
Inventories 9,992,672 12,694,823
Deferred income taxes 1,241,000 1,123,000
Other 21,376 54,996
-------------------------------------------------------------------------------------------------
Total current assets 18,110,115 21,150,490
Property and equipment 4,979,856 4,727,659
Capitalized software costs 1,701,416 1,267,836
Deferred income taxes 553,000 --
Other assets 269,566 590,715
-------------------------------------------------------------------------------------------------
$ 25,613,953 $ 27,736,700
-------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Note payable $ -- $ 1,530,332
Accounts payable 2,128,941 2,874,923
Accrued expenses 1,440,945 1,519,952
Customer deposits 3,458,401 645,235
Current maturities of long-term obligations 599,157 569,626
-------------------------------------------------------------------------------------------------
Total current liabilities 7,627,444 7,140,068
Long-term obligations, less current maturities 1,782,460 2,331,443
Convertible debentures 1,285,195 5,033,973
Deferred income taxes -- 275,000
-------------------------------------------------------------------------------------------------
Total liabilities 10,695,099 14,780,484
=================================================================================================
Commitments
Shareholders' equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 11,363,917 and 9,231,930 shares issued 113,639 92,319
Additional paid-in capital 18,084,700 14,369,157
Deficit (2,877,675) (1,068,475)
Less treasury stock, at cost (432,730 and 470,397 shares) (401,810) (436,785)
-------------------------------------------------------------------------------------------------
Total shareholders' equity 14,918,854 12,956,216
-------------------------------------------------------------------------------------------------
$ 25,613,953 $ 27,736,700
=================================================================================================
See accompanying notes to consolidated financial statements.
20
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Treasury Stock
------------ Paid-in --------------
Shares Amount Capital Deficit Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, at September 2, 1994 7,493,680 74,937 6,498,358 (2,909,423) (589,351) (631,242)
Treasury stock reissued through
stock options and 401(k) plan - - (11,809) - 73,997 152,712
Issuance of restricted common
stock in private placement 1,700,000 17,000 7,644,638 - - -
Net earnings for the year - - - 384,870 - -
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, at September 1, 1995 9,193,680 91,937 14,131,187 (2,524,553) (515,354) (478,530)
Treasury stock reissued through
stock options, commissions
and 401(k) plan - - 126,134 - 44,957 41,745
Issuance of common stock for
exercise of warrants and
options 38,250 382 111,836 - - -
Net earnings for the year - - - 1,456,078 - -
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, at August 30, 1996 9,231,930 92,319 14,369,157 (1,068,475) (470,397) (436,785)
Treasury stock reissued through
stock options and 401(k) plan - - 61,474 - 37,667 34,975
Issuance of common stock for
convertible debentures 2,131,987 21,320 3,654,069 - - -
Net earnings (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)
=============================================================================================================================
See accompanying notes to consolidated financial statements.
21
WEGENER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended Year ended
August 29, August 30, September 1,
1997 1996 1995
- --------------------------------------------------------------------------------------------------
Cash provided (used) by operating activities
Net earnings (loss) $(1,809,200) $ 1,456,078 $ 384,870
Adjustments to reconcile net earnings (loss) to
cash provided (used) by operating activities
Depreciation and amortization 1,471,201 1,050,964 679,654
Write-down of capitalized software 241,841 -- --
Issuance of treasury stock for
compensation expenses 90,263 142,333 98,198
Issuance of convertible debt for interest
expense 101,222 33,973 --
Bad debt allowance 356,555 60,000 70,000
Inventory reserves 825,000 775,000 77,000
Deferred income taxes (946,000) (848,000) --
Warranty provisions 146,000 -- 70,000
Changes in assets and liabilities
Accounts receivable 2,136,795 (2,594,395) (1,730,110)
Inventories 1,877,151 (6,237,302) (3,001,417)
Other assets (8,115) 2,932 (89,880)
Accounts payable (745,982) (887,296) 693,961
Customer deposits and accrued expenses 2,588,159 1,004,370 259,661
- --------------------------------------------------------------------------------------------------
6,324,890 (6,041,343) (2,488,063)
- --------------------------------------------------------------------------------------------------
Cash provided (used) by investment activities
Property and equipment expenditures (1,038,413) (578,801) (489,873)
Capitalized software additions (1,089,931) (893,532) (468,415)
- --------------------------------------------------------------------------------------------------
(2,128,344) (1,472,333) (958,288)
- --------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities
Net change in borrowings under
revolving line-of-credit (1,530,332) (1,548,633) 1,097,199
Repayment of long-term debt and capitalized
lease obligations (539,074) (891,996) (850,044)
Proceeds from long-term debt -- 5,617,037 453,594
Proceeds from issuance of common stock -- 112,219 7,661,638
Debt issuance costs (62,581) (542,771) (47,294)
Proceeds from stock options exercised 6,187 25,545 42,705
- --------------------------------------------------------------------------------------------------
(2,125,800) 2,771,401 8,357,798
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,070,746 (4,742,275) 4,911,447
Cash and cash equivalents, beginning of year 171,687 4,913,962 2,515
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,242,433 $ 171,687 $ 4,913,962
==================================================================================================
See accompanying notes to consolidated financial statements.
22
WEGENER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. 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 1997 and 1996 contained 52 weeks. Fiscal 1995 contained 53 weeks. The
financial statement effect is not significant.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with original maturities of
three months or less. At August 29, 1997 cash equivalents of $2,200,000 consisted of a bank
certificate of deposit. There were no cash equivalents at August 30, 1996.
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.
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 1997,
$242,000 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 1997, 1996, and 1995 totaled $1,090,000, $894,000 and $468,000, respectively. Amortization
expense, included in cost of goods sold was $415,000, $252,000, and $88,000 for the same periods.
Capitalized software costs, net of accumulated amortization, were $1,701,000 at August 29, 1997 and
$1,268,000 at August 30, 1996. Accumulated amortization amounted to $813,000 at August 29, 1997 and
$398,000 at August 30, 1996.
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.
23
WEGENER CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE. Earnings (loss) per share are computed based on the weighted average number of
common and dilutive common equivalent shares outstanding during each year. Common equivalent shares
are calculated using the treasury stock method and include dilutive stock options, warrants and
awards. The convertible debentures are not considered to be common stock equivalents. For fiscal
1997, common stock equivalents would not have an effect on the net loss per share since the effect
would be anti-dilutive. For fiscal 1997 and 1996, fully diluted earnings per share were
anti-dilutive. In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128 simplifies the
standards for computing earnings per share and requires presentation of two new amounts, basic and
diluted earnings per share. The Company will be required to retroactively adopt this standard when
it reports its operating results for the quarter and year ended August 1998. When the Company
presents this information, it expects to report the following restated amounts:
Year Ended
1997 1996
-----------------------------------------------------------------
Basic earnings (loss) per share $(.19) $.17
-----------------------------------------------------------------
Diluted earnings (loss) per share $(.19) $.16
-----------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which addresses
standards for reporting and display of comprehensive income and its components in a full set of
financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
The Company will be required to adopt this statement when it reports its operating results for the
quarter ending November 27, 1998. The adoption is not expected to have a material impact on the
Company's consolidated financial statements.
FINANCIAL INSTRUMENTS. The Company's financial instruments consist of cash and cash equivalents,
trade accounts receivable, accounts payable, accrued expenses and long and short-term bank
borrowings and convertible debentures. The fair value of these instruments approximates their
recorded value. The Company does not have financial instruments with off-balance sheet risk. The
fair value estimates were based on market information available to management as of August 29, 1997.
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.
2. ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
August 29, August 30,
1997 1996
- ----------------------------------------------------------------------------------------------------
Accounts receivable - trade $4,881,565 $7,066,462
Other receivables 92,812 97,434
- ----------------------------------------------------------------------------------------------------
4,974,377 7,163,896
Less allowance for doubtful accounts (361,743) (57,912)
- ----------------------------------------------------------------------------------------------------
$4,612,634 $7,105,984
====================================================================================================
24
WEGENER CORPORATION AND SUBSIDIARIES
3. INVENTORIES
Inventories are summarized as follows:
August 29, August 30,
1997 1996
- ----------------------------------------------------------------------------------------------------
Raw materials $ 4,550,550 $ 5,675,954
Work-in-process 4,051,281 5,627,543
Finished goods 3,256,294 2,913,252
- ----------------------------------------------------------------------------------------------------
11,858,125 14,216,749
Less inventory reserves (1,865,453) (1,521,926)
- ----------------------------------------------------------------------------------------------------
$ 9,992,672 $ 12,694,823
====================================================================================================
The Company has invested a significant amount of financial resources to acquire certain raw
materials, incur direct labor and contract to have specific outplant procedures performed on
inventory in process. As of August 29, 1997, approximately $8,000,000 of inventory was related to
MPEG-1 and MPEG-2 digital components. The Company purchased this inventory based upon current
backlog and anticipated future sales based upon existing knowledge of the marketplace. The Company's
inventory reserve of $1,865,000 at August 29, 1997, is to provide for items that are potentially
slow-moving, excess, or obsolete. Changes in market conditions, lower than expected customer demand,
and rapidly changing technology could result in additional obsolete and slow-moving inventory that
is unsaleable or saleable at reduced prices. No estimate can be made of a range of amounts of loss
from obsolescence that are reasonably possible should the Company's sales efforts not be successful.
4. PROPERTY AND EQUIPMENT
Major classes of property and equipment consisted of the following:
Estimated
Useful Lives August 29, August 30,
(Years) 1997 1996
- ----------------------------------------------------------------------------------------------------
Land - $ 707,210 $ 707,210
Buildings and improvements 3-30 3,689,643 3,670,499
Machinery and equipment 3-5 7,369,121 6,538,216
Furniture and fixtures 5 621,965 609,603
Application software 5 734,590 734,590
- ----------------------------------------------------------------------------------------------------
13,122,529 12,260,118
Less accumulated depreciation
and amortization (8,142,673) (7,532,459)
- ----------------------------------------------------------------------------------------------------
$ 4,979,856 $ 4,727,659
====================================================================================================
Depreciation expense for fiscal 1997, 1996 and 1995 totaled approximately $660,000, $562,000, and
$480,000, respectively. Assets recorded under a capital lease included in property and equipment at
August 29, 1997 are machinery and equipment of approximately $613,000 and accumulated amortization
of approximately $216,000, compared to machinery and equipment of approximately $593,000 and
accumulated amortization of approximately $90,000 at August 30, 1996.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
August 29, August 30,
1997 1996
- ----------------------------------------------------------------------------------------------------
Compensation $ 530,521 $ 588,512
Royalties 333,759 464,149
Other 576,665 467,291
- ----------------------------------------------------------------------------------------------------
$ 1,440,945 $ 1,519,952
====================================================================================================
25
WEGENER CORPORATION AND SUBSIDIARIES
6. FINANCING AGREEMENTS
REVOLVING LINE-OF-CREDIT AND TERM LOAN FACILITY
WCI maintains a secured revolving line of credit and term loan facility with a combined maximum
available credit limit of $8,500,000 expiring May 4, 1999 or upon demand. The term loan portion
provides for a maximum of $1,000,000 for advances of up to 80% of the cost of equipment
acquisitions. Interest on the term loan is payable monthly at the bank's prime rate (8.5% at August
29, 1997) plus 1 1/2%. Principal advances are payable monthly over sixty months with a balloon
payment due at maturity. Interest on the revolving line of credit portion is payable monthly at the
bank's prime rate plus 1/2%. Additionally, the facility requires an annual fee of 1% of the maximum
credit limit. 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 loans are secured by a first lien on
substantially all of WCI's assets except assets secured under the existing mortgage note and
equipment note on which the bank has 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 WGNR to $600,000 per fiscal year, and is
precluded from paying dividends. At August 29, 1997 the Company was in violation of the minimum
tangible net worth covenant by approximately $369,000 as to which the bank granted a waiver. The
revolving line-of-credit and term loan had no outstanding balances as of August 29, 1997 compared to
$1,530,000 at August 30, 1996. At August 29, 1997, $5,223,000 was available to borrow under the
advance formulas. While no assurances may be given, the Company anticipates that it will be in
compliance with the minimum tangible net worth convenant or in the event that it is not, the Company
believes that it will be able to obtain a waiver prior to requiring any future borrowings on the
line of credit. If however, the Company is unable to meet the minimum tangible net worth covenant or
obtain a waiver, it may be required to obtain other debt or equity financing. Additionally, Wegener
Corporation guarantees the revolving line of credit and term loan. Information relative to the
revolving line-of credit is as follows:
Year ended
August 29, August 30,
1997 1996
- ----------------------------------------------------------------------------------------------------
Maximum amount outstanding at any month-end $1,758,397 $3,684,934
Average amount outstanding during the period 201,117 2,388,500
Weighted average interest rate during the period 16.3% 12.6%
====================================================================================================
LONG-TERM OBLIGATIONS
August 29, August 30,
Long-term obligations consist of: 1997 1996
- ----------------------------------------------------------------------------------------------------
Mortgage note, payable $38,024 monthly, including interest
through February 2002, collateralized by real estate and
cross collateralized under the loan facility, interest is
charged at the bank's prime rate plus 1%. $1,651,200 $1,887,466
Capital lease obligations, bearing interest ranging from 11.1%
to 12.0%, principal and interest payable monthly, currently
$13,706, final payments due from June 1998 through February
2000 257,259 431,070
Other long-term obligations, collateralized by equipment 473,158 582,533
- ----------------------------------------------------------------------------------------------------
2,381,617 2,901,069
Less current maturities (599,157) (569,626)
- ----------------------------------------------------------------------------------------------------
$1,782,460 $2,331,443
====================================================================================================
On April 8, 1996, Wegener Communications, Inc. (WCI), a wholly owned subsidiary of the Company,
entered into a $600,000 promissory note with interest at the rate of 9.6% per annum with principal
and interest payable in 60 consecutive monthly installments of $12,597 beginning May 1, 1996. The
note is secured by certain machinery and equipment. Proceeds of the note were used for working
capital. Wegener Corporation guarantees the note.
26
WEGENER CORPORATION AND SUBSIDIARIES
A summary of future maturities of long-term debt and minimum capital lease obligations follows:
Capital
Debt Lease
Fiscal Year Maturities Obligations Total
- ----------------------------------------------------------------------------------------------------
1998 $ 463,329 $161,044 $ 624,373
1999 447,629 110,238 557,867
2000 490,905 19,905 510,810
2001 487,441 - 487,441
2002 235,054 - 235,054
- ----------------------------------------------------------------------------------------------------
2,124,358 291,187 2,415,545
Less interest - (33,928) (33,928)
- ----------------------------------------------------------------------------------------------------
$2,124,358 $257,259 $2,381,617
====================================================================================================
The Company leases certain office and manufacturing facilities, vehicles and equipment under
long-term noncancelable operating leases which expire through fiscal 2002. Future minimum lease
commitments are approximately as follows: 1998-$164,000; 1999-$102,000; 2000-$73,000; 2001-$73,000;
and 2002-$24,000. Rent expense under all leases was approximately $202,000, $299,000 and $260,000
for fiscal years 1997, 1996, and 1995, 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 are convertible at the option of the holders at any time through May 31, 1999, 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 29, 1997 and
August 30, 1996) 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 is payable quarterly
beginning July 1, 1996 in cash or, at the option of the Company, by adding the amount of such
interest to the outstanding principal amount due under the debenture. During fiscal 1997 and 1996
debentures in the amount of $101,222 and $33,973 respectively, were issued for payment of accrued
interest. During fiscal 1997, $3,850,000 principal amount of debentures were converted into
2,131,987 shares of common stock. The Company has filed two Registration Statements to register up
to 3,680,000 shares of common stock underlying such debentures for resale following conversion.
These shares constitute management's estimate of the maximum number of shares of common stock to be
issued upon conversion, giving effect to possible fluctuations in the market price of common stock.
Subsequent to August 29, 1997, $964,192 of debentures were converted into 659,023 shares of common
stock.
8. INCOME TAXES
Fiscal 1997 income tax benefit was comprised of a deferred income tax benefit of $946,000 as a
result of an increase in deferred tax assets of $946,000. The Company has provided no deferred tax
asset valuation allowance at August 29, 1997 based on management's assessment that existing tax
benefits will "more likely than not" be realized in future tax returns. The Company expects to
achieve its current business plan for fiscal 1998 which reflects an increase in revenues compared to
fiscal 1997 and a return to profitability. The income tax benefit recognized during fiscal 1997 was
principally the result of an increase in the Company's net operating loss carryforward. Fiscal 1996
income tax benefit was comprised of a deferred income tax benefit of $848,000, which resulted from a
reduction of the deferred tax asset valuation allowance from $848,000 to zero. Net deferred tax
assets decreased $241,000 during fiscal 1996. There was no current federal or state income tax
expense in fiscal 1996 due to utilization of net federal and state operating loss carryforwards. In
fiscal 1995 deferred income tax expense of $109,000 was fully offset by reductions in the deferred
tax asset valuation allowance.
Differences between the effective income tax rate and the statutory federal income rate in fiscal
1997 are primarily due to certain expenses not being deductible for tax purposes. In fiscal 1996 and
1995 the differences were primarily the result of changes in the valuation allowance.
27
WEGENER CORPORATION AND SUBSIDIARIES
Deferred tax assets and liabilities that arise as a result of temporary differences are as follows:
August 29, August 30,
1997 1996
- ----------------------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable and inventory reserves $1,075,000 $ 634,000
Accrued expenses 166,000 114,000
Net operating loss carryforwards 1,078,000 448,000
General business credit carryforwards 137,000 137,000
AMT credit carryovers 159,000 159,000
- ----------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,615,000 1,492,000
Deferred tax asset valuation allowance - -
- ----------------------------------------------------------------------------------------------------
Total deferred tax assets 2,615,000 1,492,000
Deferred tax liabilities:
Depreciation (95,000) (74,000)
Capitalized software costs (653,000) (497,000)
Other (73,000) (73,000)
- ----------------------------------------------------------------------------------------------------
Total deferred tax liabilities (821,000) (644,000)
- ----------------------------------------------------------------------------------------------------
Net deferred tax asset $1,794,000 $ 848,000
====================================================================================================
Consolidated balance sheet classifications:
Current deferred tax asset $1,241,000 $1,123,000
Noncurrent deferred tax asset 553,000 -
Noncurrent deferred tax liability - (275,000)
- ----------------------------------------------------------------------------------------------------
Net deferred tax asset $1,794,000 $ 848,000
====================================================================================================
At August 29, 1997, the Company had approximately $3,013,000 of federal net operating loss
carryforwards which expire in 2008 through 2012; and $137,000 of alternative minimum tax credits and
$159,000 of other federal tax credits expiring through 2004 available to offset future tax
liabilities.
Additionally, no provision for deferred tax liability has been made on the undistributed earnings of
a 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 $405,000 was approximately $138,000.
9. COMMON STOCK AND STOCK OPTIONS.
1989 DIRECTORS' STOCK OPTION PLAN. On January 9, 1990, the stockholders approved the Wegener
Corporation 1989 Directors' Incentive Plan permitting certain participating directors of the Company
to be eligible to receive incentive awards consisting of common stock of the Company, performance
units or stock appreciation rights payable in stock or cash, or non-qualified stock options to
purchase such stock, or any combination of the foregoing, together with supplemental cash payments.
During the second quarter of fiscal 1995, the Company amended the 1989 Directors' Stock Option Plan
to increase the aggregate number of shares of common stock that may be awarded from 100,000 to
300,000 shares; to remove the ineligibility provision for certain directors; and to grant annually
to each non-employee director, options to purchase 2,000 shares of common stock at an exercise price
equal to the fair market value of such stock on the date of grant. The exercise price per share for
non-qualified stock options or stock appreciation rights shall not be less than 85% of fair market
value on the date the award is made or not more than nine trading days immediately preceding such
date. The expiration period for a non-qualified stock option shall be ten years and one day from the
date of the grant. The expiration period for stock appreciation rights, including any extension,
shall not exceed ten years from the date of grant. During fiscal 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.
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 500,000
common shares. The exercise price per share in the case of incentive stock options and any tandem
28
WEGENER CORPORATION AND SUBSIDIARIES
stock appreciation rights will be 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 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, new options were granted for 150,000
shares of common stock at an exercise price of $1.44 per share.
A summary of stock option transactions for the above plans follows:
Weighted
Number Range of Average
of Shares Exercise Prices Exercise Price
-----------------------------------------------------------------------------
Outstanding at
September 2, 1994 95,500 $. 43-1.63 $ .79
Granted 403,785 1.50-7.00 3.69
Exercised (39,141) .75-1.93 .90
Forfeited or cancelled (1,500) .75 .75
-----------------------------------------------------------------------------
Outstanding at
September 1, 1995 458,644 $1.50-7.00 $3 .34
Granted 4,000 12.13 12.13
Exercised (28,144) .43-.75 .91
Forfeited or cancelled - -
-----------------------------------------------------------------------------
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
=============================================================================
Options exercisable at
August 29, 1997 315,500 $.75-12.13 $ 1.65
August 30, 1996 248,500 .75-12.12 3.30
=============================================================================
Weighted average fair value of options
granted during the year ended
-----------------------------------------------------------------------------
August 29, 1997 $198,562
August 30, 1996 29,607
=============================================================================
The weighted average remaining contractual life of options outstanding at August 29, 1997 was 4.5
years.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans. If the Company had elected to recognize compensation cost
based on the fair value at the 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 been changed to the pro forma amounts indicated below:
Year Ended
1997 1996
-----------------------------------------------------------
Net earnings (loss)
As Reported $(1,809,200) $1,456,078
Pro Forma (1,902,485) 1,426,471
-----------------------------------------------------------
Earnings (loss) per share
As Reported $ (.19) $ .16
Pro Forma (.20) .16
===========================================================
29
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 1997 and 1996: No dividend
yield for both years; expected volatility of 60% in 1997 and 40% in 1996; a risk free interest rate
of 6.62% in 1997 and 5.58% in 1996; and an expected option life of 4.5 years in 1997 and 10.0 years
in 1996.
OTHER OPTIONS, AWARDS AND WARRANTS. At August 29, 1997, options for 22,500 common shares, fully
exercisable at a price of $2.44 per share, expiring five years from date of grant, were outstanding.
During fiscal 1996 options for 4,500 common shares were exercised. In conjunction with a private
placement of common stock during fiscal 1995 the Company issued warrants for 45,000 shares at an
exercise price of $3.00 per share expiring two years from the date of issue. During fiscal 1997,
warrants for 11,250 common shares expired. During fiscal 1996, warrants for 33,750 common shares
were exercised. In addition, stock awards issued under the 1988 Incentive Plan of 12,500 shares
remained outstanding at August 29, 1997.
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 1997, 1996 and 1995.
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 an annual discretionary match subject to WCI's profitability. All matching
contributions are in the form of Company stock or cash at the discretion of the Company's Board of
Directors. Matching Company contributions in the form of common stock were approximately $90,000 in
fiscal 1997, $37,000 in fiscal 1996 and $44,000 in fiscal 1995.
11. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
WCI operates in a single industry segment of manufacture and sale of satellite communications
electronics equipment. General corporate expenses included in selling, general and administrative
expense were approximately $578,000, $412,000, and $368,000 in 1997, 1996 and 1995 respectively. Net
equipment sales to foreign customers were $2,964,000 for the year ended August 29, 1997, $2,549,000
for the year ended August 30, 1996, and $3,926,000 for the year ended September 1, 1995. All foreign
sales are denominated in U.S. dollars. Sales to foreign customers in 1997, 1996 and 1995 were
primarily to customers located in Latin America, Canada and Europe. Profit margins on foreign sales
are approximately the same as on domestic sales.
The Company sells to a variety of domestic and international customers on an open-unsecured account
basis. These customers principally operate in the cable television, broadcast business music,
private network, and data communications industries. One customer accounted for 11.0% of revenues in
fiscal 1997. A second customer accounted for 14.2% of revenues in fiscal 1996. In fiscal 1995, one
customer accounted for 15% of the Company's revenues. At August 29, 1997, one customer accounted for
27.7% of the Company's accounts receivable. At August 30, 1996 two customers accounted for 34.6% and
10.8 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.
Additionally, in June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires companies to report certain information
about operating segments, products and services, geographical areas in which they operate, and major
customers. The statement is effective for fiscal years beginning after December 15, 1997. The
Company will be required to retroactively adopt this statement when it reports its operating results
for the quarter and year ended August 29, 1999. The adoption is not expected to have a material
impact on the Company's consolidated financial statements.
30
WEGENER CORPORATION AND SUBSIDIARIES
12. STATEMENT OF CASH FLOWS
Interest payments were approximately $563,000, $592,000, and $647,000 for fiscal years 1997, 1996
and 1995, respectively. Non-cash investing and financing activities in fiscal 1997 were: (1)
Equipment acquired under capital leases of approximately $20,000; (2) 32,167 shares of treasury
stock reissued for 401(k) matching Company contributions valued at approximately $90,000, and (3)
2,131,987 shares of common stock were issued upon conversion of $3,850,000 principal amount of
convertible debentures. Non-cash investing and financing activities in fiscal 1996 were: (1)
Equipment acquired under capital leases of approximately $380,000; (2) 6,517 shares of treasury
stock reissued for 401(k) matching Company contributions valued at approximately $65,000; and (3)
10,296 shares of treasury stock reissued for compensation valued at approximately $77,000. Non-cash
financing activities in fiscal 1995 were: (1) Equipment acquired under capital leases of
approximately $213,000; (2) 12,910 shares of treasury stock reissued for 401(k) matching Company
contributions valued at approximately $37,000; and (3) 18,946 shares of treasury stock reissued for
compensation valued at approximately $62,000.
13. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended August 29, 1997, the Company recorded as charges to cost
of sales: (1) an increase in the inventory obsolescence reserve of $825,000; (2) a write-down of
capitalized software in the amount of $242,000; and (3) an increase in the warranty provision of
$70,000. In addition, charges to selling, general, and administrative expenses were recorded for (1)
an increase in the allowance of bad debts of $266,000; and (2) a restructuring reserve of $100,000.
31
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Wegener Corporation is BDO Seidman, LLP the Company's independent
responsible for the accuracy and consistency of certified public accountants, has audited the
all the information contained in the annual financial statements prepared by management.
report, including the accompanying consolidated Their opinion on the statements is presented
financial statements. These statements have been below.
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 /s/ Robert A. Placek
accounting controls designed to provide
reasonable assurance that the financial records Robert A. Placek,
are accurate, that the assets of the Company are President, Chief Executive Officer
safeguarded, and that the financial statements and Chairman of the Board
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 /s/ C. Troy Woodbury, Jr.
of the independent certified public accountants.
The auditors meet regularly with the Audit C. Troy Woodbury, Jr.
Committee to discuss audit and financial Treasurer and Chief Financial Officer
reporting issues, with and without management
present.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Wegener Corporation
Duluth, Georgia
We have audited the accompanying In our opinion, the financial statements
consolidated balance sheets of Wegener referred to above present fairly, in all
Corporation and subsidiaries as of August 29, material respects, the consolidated financial
1997 and August 30, 1996, and the related position of Wegener Corporation and subsidiaries
consolidated statements of operations, as of August 29, 1997 and August 30, 1996 and
shareholders' equity and cash flows for each of the consolidated results of their operations and
three years in the period ended August 29, 1997. their cash flows for each of the three years in
These financial statements are the the period ended August 29, 1997 in conformity
responsibility of the Company's management. Our with generally accepted accounting principles.
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 Atlanta, Georgia BDO Seidman, LLP
presentation. We believe that our audits provide November 14, 1997
a reasonable basis for our opinion.
32
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 27, 1998 Annual Meeting of
Stockholders ("Proxy Statement") is incorporated herein by reference in partial
response to this item. See also Item 1. "Business - Executive Officers of the
Registrant" on page 8 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "EXECUTIVE COMPENSATION" and
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," respectively, of 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" 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" in the Proxy Statement is incorporated herein by reference in
response to this item.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Wegener
Corporation and subsidiaries and the related Report of Independent Certified
Public Accountants thereon are filed as part of this report:
Consolidated Balance Sheets August 29, 1997 and August 30, 1996
Consolidated Statements of Operations Years ended August 29, 1997, August 30,
1996, and September 1, 1995
Consolidated Statements of Shareholders' Equity Years ended August 29, 1997,
August 30, 1996, and September 1, 1995
Consolidated Statements of Cash Flows Years ended August 29, 1997, August 30,
1996, and September 1, 1995
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 37:
II Valuation and Qualifying Accounts Years ended August 29, 1997,
August 30, 1996, and September 1, 1995
34
(a) (3) The exhibits filed in response to Item 601 of Regulation S K are
listed in the Exhibit Index on pages 38 and 39.
(b) There were no reports on Form 8-K filed for the Quarter ended August
29, 1997.
(c) See Part IV, Item 14(a)(3).
(d) Not applicable.
35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Wegener Corporation
Duluth, Georgia
The audit referred to in our report dated November 14, 1997, 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.
Atlanta, Georgia BDO Seidman, LLP
November 14, 1997
36
SCHEDULE II
WEGENER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Write-offs Recoveries Period
--------- -------- ---------- ---------- ------
Allowance for doubtful
accounts receivable:
Year ended August 29, 1997 $ 57,912 $ 356,555 $ (53,279) $ 555 $ 361,743
Year ended August 30, 1996 $ 41,602 $ 60,000 $ (70,190) $ 26,500 $ 57,912
Year ended September 1, 1995 $ 112,040 $ 70,000 $ (148,714) $ 8,276 $ 41,602
Inventory Reserves:
Year ended August 29, 1997 $ 1,521,926 $ 825,000 $ (481,473) $ - $ 1,865,453
Year ended August 30, 1996 $ 736,290 $ 775,000 $ 10,636 $ - $ 1,521,926
Year ended September 1, 1995 $ 855,093 $ 77,000 $ (195,803) $ - $ 736,290
37
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).
*4.4 8% Convertible Debentures dated May 31, 1996, aggregating
$5,000,000, due May 31, 1999 (1996 S-3, Registration No.
333-08017, filed July 11, 1996, Exhibit 4.1).
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).
38
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).
*21. Subsidiaries of the Registrant (1990 10-K, filed November
29, 1990, Exhibit 22).
23. Consent of BDO Seidman, LLP.
27. Financial Data Schedule.
39
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: December 11, 1997 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 11th day of December, 1997.
Signature Title
/s/ Robert A. Placek President, Chief Executive Officer and
------------------------------ Chairman of the Board
Robert A. Placek (Principal Executive Officer)
/s/ C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer,
------------------------------ Director (Principal 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
40
DIRECTORS INDEPENDENT CERTIFIED QUARTERLY COMMON STOCK PRICES
Robert A. Placek PUBLIC ACCOUNTANTS The Company's common stock is
Chairman of the Board, BDO Seidman, LLP traded on the NASDAQ Small-Cap
President and Chief 285 Peachtree Center Avenue Market. The quarterly ranges of
Executive Officer Suite 800 high and low closing sale prices
Wegener Corporation Atlanta, Georgia 30303-1230 for fiscal 1997 and 1996 were as
follows:
James H. Morgan, Jr., Esq. TRANSFER AGENT
Partner Securities Transfer Corporation High Low
Smith, Gambrell & Russell 16910 Dallas Parkway ----------------------------------
Suite 100
C. Troy Woodbury, Jr. Dallas, Texas 75248 Fiscal Year Ending August 29, 1997
Treasurer and Chief
Financial Officer CORPORATE First Quarter $6 $3 7/8
Wegener Corporation HEADQUARTERS
11350 Technology Circle Second Quarter 4 1/8 2 5/8
Joe K. Parks Duluth/Atlanta, Georgia 30097-1502
Retired, Served as Third Quarter 3 7/8 1 7/16
Laboratory Director ANNUAL MEETING The annual meeting
Systems Development Laboratory of stockholders will be held on Fourth Quarter 3 1/2 1 13/16
Georgia Tech Research Institute January 27, 1998 at 7 p.m. at the -----------------------------------
Georgia Institute of Technology Corporate Headquarters.
Fiscal Year Ending August 30, 1996
OFFICERS COMMON STOCK NASDAQ
Robert A. Placek NASDAQ Small-Cap Market Symbol: First Quarter $12 $9
Chairman of the Board, WGNR
President and Chief Second Quarter 13 3/4 8 1/2
Executive Officer FORM 10-K REPORT
Wegener Corporation's Annual Report Third Quarter 10 5/8 7 3/4
C. Troy Woodbury, Jr. on Form 10-K, filed with the
Treasurer and Chief Securities and Exchange Commission, Fourth Quarter 12 1/4 5 5/8
Financial Officer is available free of charge by -----------------------------------
written request to:
James T. Traicoff Elaine Miller, Secretary The Company had approximately 423*
Controller Investor Relations shareholders of record at December
Wegener Corporation 2, 1997. The Company has never paid
11350 Technology Circle cash dividends on its common stock
Duluth, Georgia 30097-1502 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).
41