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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from________________________to _______________________
Commission file No. 0-11003
WEGENER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0371341
(State of incorporation) (I.R.S. Employer
Identification No.)
11350 TECHNOLOGY CIRCLE, DULUTH, GEORGIA 30097-1502
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 623-0096
REGISTRANT'S WEB SITE: HTTP://WWW.WEGENER .COM
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO
--- ---
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
--- ---
As of the last business day of the registrant's most recently completed
second fiscal quarter, the aggregate market value of the Common Stock held by
non-affiliates was $10,628,519 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.)
As of November 20, 2003, 12,398,551 shares of registrant's Common Stock
were outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement pertaining to the January 20,
2004 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, 2003
INDEX
PART I
Page
Item 1. Business.............................................................2
Item 2. Properties..........................................................10
Item 3. Legal Proceedings...................................................10
Item 4. Submission of Matters to a Vote of Security.........................11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................11
Item 6. Selected Financial Data.............................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........21
Item 8. Financial Statements and Supplementary Data.........................22
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures................................43
Item 9A. Controls and Procedures.............................................43
PART III
Item 10. Directors and Executive Officers of the Registrant..................43
Item 11. Executive Compensation..............................................43
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters..........................43
Item 13. Certain Relationships and Related Transactions......................43
Item 14. Principal Accountant Fees and Services..............................43
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.............................................44
PART I
ITEM 1. BUSINESS
Wegener Corporation, the Registrant, together with its subsidiaries, is
referred to herein as the "Company" or "WGNR."
(a) General development of business.
Wegener Corporation was formed in 1977 and is a Delaware corporation. The
Company conducts its continuing business through Wegener Communications, Inc.
(WCI), its wholly-owned subsidiary, and Wegener Communications International,
Inc., a wholly-owned subsidiary of WCI.
WCI was formed in April 1978 and is a Georgia corporation. Its wholly-owned
subsidiary, Wegener Communications International, Inc., is a Small Foreign Sales
Corporation. WCI, a market leader in digital and analog compression technology,
designs and manufactures communications transmission and receiving equipment for
the business broadcast, data communications, internet, cable and broadcast radio
and television industries for worldwide markets.
(b) Financial information about segments.
Segment information contained in Note 11 to the consolidated financial
statements contained in this report is incorporated herein by reference in
response to this item.
(c) Narrative description of business.
SERVING THE LARGEST NETWORKS AND BROADCASTERS. Wegener is an innovative
company that develops proprietary as well as standards-based digital video,
audio and data technology. These products constitute the Direct Broadcast
Satellite (DBS) revenues of the Company. Wegener's technology serves some of the
largest broadcasters in the industry, including FOX, NBC, ABC, MSNBC, Turner,
ESPN and The Weather Channel, as well as some of the largest private networks in
the world, including GE Medical Networks, Muzak LLC, Roberts Communications,
Inc. and Autotote Systems, Inc., and Swedish companies ATG and TERACOM.
Wegener's technology also serves the burgeoning high-definition television
("HDTV") market. For example, HDNet, a leader in high-definition broadcasting,
selected Wegener's products for delivery of all its high-definition sports,
entertainment and news networks.
BROAD LINE OF SOLUTIONS. Wegener's solutions make customized regional and
national broadcasting a reality. Wegener has developed state-of-the-art
technology to store digital video broadcasts, mix them with other digital
information and allow them to be replayed at any time. Wegener's family of
products include the new iPUMP(R) Media Server, the MediaPlan(R) content
management system, the COMPEL(R) Network Control System and UNITY(R) broadcast
products, which enables broadcasters, cable operators, and service providers of
all sizes to meet the challenge of cost-effectively implementing digital
solutions that can grow from the delivery of basic broadcast to advanced
service.
MEETING MARKET DEMAND. Wegener believes that it provides the only complete,
end-to-end solution available today for managing the creation, distribution,
storage, and consumption of all forms of electronic media, including digital
video, audio and data. Wegener's iPUMP(R), MediaPlan(R), and COMPEL(R) family of
products give networks the ability to manage and distribute video combined with
other content, such as Internet applications, which are technically superior and
cost-effective. Management believes Wegener provides the only solution with this
depth of functionality available from a single source.
2
The demand for digital products is being driven by the high cost of
satellite capacity and end-user demand for more targeted programming. Wegener's
products were developed to meet these demands as the adoption of digital video
broadcasting grows and enables broader technology applications, which allow
networks to customize programming for end users. The markets Wegener serves
include cable and broadcast television, radio networks, business television,
distance education, business music and satellite paging.
- PRIVATE NETWORK OPPORTUNITY. The iPUMP(R) Media Server is the first of
Wegener's family of new products to address the growing needs of
private networks. The iPUMP(R) family of product enables
next-generation private networks to mix data with video to allow
schools, companies and retailers, among others, to give their
students, employees and customers, respectively, true multimedia
functionality. The digital nature of the content permits searching,
ordering and managing content in order to make customized programming
available to a particular user or group of users, allowing them to
stop, repeat and take their time viewing or learning the information.
- HDTV AND CABLE OPPORTUNITY. Wegener developed the technology and
equipment to launch one of the first new satellite networks devoted to
distribution of high-definition signals to cable. Its technology
processes digital signals for satellite transmission and places them
on cable networks enabling consumers to watch programs on HDTV.
Additionally, Wegener's sophisticated technology captures digital
signals broadcast by TV stations for insertion and use on cable
channels.
PRODUCTS DEVELOPED WITH MAJOR CUSTOMERS. Wegener developed its suite of new
products in conjunction with and at the request of its major customers, who
needed a complete end-to-end content distribution system to accommodate the
convergence of multiple media, including both live broadcast and video-on-demand
("VOD"), with Internet Protocol.
THREE YEARS IN DEVELOPMENT. In 2000, Wegener announced and began developing
the iPUMP(R) family of digital storage products to help its customers better
utilize satellite bandwidth and digital broadcast signals to provide their
end-users with true multimedia functionality. The first of these products will
begin shipping during fiscal 2004. Wegener will continue to develop, launch and
ship additional products within the iPUMP(R), MediaPlan(R), COMPEL(R), and
UNITY(R) product families.
SUPERIOR TECHNOLOGY. The importance of Wegener's new family of iPUMP(R)
products lies in their ability to combine multiple types of media (video, audio,
Internet), allow networks to store, manage and customize such media, then replay
it live or on demand. Wegener's core technology allows networks to target and
store this content digitally and allows users to access it at any time, not only
when a broadcast is live. Wegener believes that its technolgy is the only
end-to-end total solution for storing and effectively managing these networks
and the digital content they distribute.
DIGITAL CONVERSIONS. Throughout fiscal 2003 our customers continued to
convert from analog to digital, and WCI continued to produce and develop digital
compression and decompression products to aid them in the conversions. Wegener's
digital products are in use worldwide. The demand for digital products is being
driven by the high cost of satellite capacity and consumer demand for more
channels. Satellite capacity is scarce due to pressures on both the supply and
demand sides of the market. On the supply side, satellites are extremely
expensive to build, launch, and maintain. The useful life of a satellite is
limited by the amount of positioning fuel that can be carried. Also, the
placement of satellites is regulated by the Federal Communications Commission
(FCC) and therefore the number of satellites within range of any given location
is limited. On the demand side, the cost of receive hardware is being steadily
reduced through advancing technology and high volume manufacturing efficiency.
This is evidenced by the trend in both television and radio toward narrowcasting
to well defined market segments as opposed to broadcasting to the general
population. Digital compression technology allows a four to ten-fold, or more,
increase in the throughput of a satellite channel. For the network, this
compression represents an opportunity to reduce the cost of satellite use. For
the satellite operator it represents an opportunity to increase the revenues
generated by an expensive asset. The conversion of existing analog networks to
digital technology is underway throughout the industries that WCI services. The
slow economy over the last 2 years has caused the conversions to occur more
slowly than expected. Typically the conversions are tied to expiration of
satellite contracts, some of
3
which are likely to expire over the next 36 months. Management believes the
market as a whole has considerable built up demand for digital technology.
SIGNIFICANT FISCAL 2003 WCI ORDER AND REVENUE ACTIVITY:
- BROADCAST TELEVISION MARKET. WCI's long-standing relationship with FOX
Digital continued during fiscal 2003. The Company expects additional
opportunities for its Unity digital receivers, as well as other
products, in the broadcast television market during the next 24
months.
- BROADCAST RADIO MARKET. Numerous small orders continue to provide
revenue as Wegener equipment-based radio networks add affiliates. The
Company remains active in the pursuit of new business opportunities in
this market segment, but revenue potential during the next 24 months
is uncertain.
- CABLE TELEVISION MARKET. The Company continues to aggressively pursue
business opportunities with major cable programmers where the
advantages of the COMPEL network control system give us an edge over
more established and larger competitors.
- During fiscal 2003 the Company began shipping a new line of products
designed to allow the economical addition of broadcast HDTV signals to
cable television systems. This product line, the DTV700 series,
provided an additional stream of revenue throughout fiscal 2003.
Encouraged by market acceptance of the product line, WCI will expand
the DTV series during fiscal 2004. An OEM agreement for the DTV
product line with Scientific Atlanta was signed during fiscal 2003,
which will continue through fiscal 2004.
- Sales of legacy analog equipment to cable television companies
continue to decline as expected resulting from cable industry
consolidation and conversions from analog to digital satellite
transmission technology.
- BUSINESS BROADCAST MARKET. During fiscal 2003, WCI continued to
provide its products around the world to serve private networks such
as the horse racing and business music industries. These networks
utilize Wegener products' core strength in targeted programming.
Additional revenue in this market segment is expected to continue for
the foreseeable future.
- Fiscal 2003 saw the continuation of WCI's shipments against the
previously announced $30 million order to a major international
private network operator. By the conclusion of the contract, the
customer will have created the largest network of Wegener receivers
deployed to date. Both the Company and the customer continue to view
the contract as critical to their business plans. Shipments are
expected to continue against this contract as specified throughout
fiscal 2004 and beyond.
- Extensive development has been devoted to new products for this market
during fiscal 2003 including the iPump Media Server and the MediaPlan
uplink control software. These products allow for commercial satellite
network operators to send television programs over a satellite link
for targeted playback in specific locations at specific times.
Shipments of these products are expected to provide significant
revenue to the Company for the foreseeable future. In addition, these
products have wide ranging applications and revenue potential in all
the markets served by the Company (broadcast television, broadcast
radio, cable television, and business broadcasting).
4
CUSTOMER SERVICE. WCI services the products that it sells. The Company
warrants its products for a period of one year. There were no significant
warranty claims outstanding as of August 29, 2003.
(iii) Manufacturing and suppliers.
During fiscal 2003 and fiscal 2002, the Company contracted with offshore
manufacturers for a significant amount of its finished goods. The Company is
currently working with three offshore manufacturers. Raw materials consist of
passive electronic components, electronic circuit boards and fabricated sheet
metal. WCI purchases approximately 20% of its raw materials directly from
manufacturers and the other 80% are purchased from distributors. Passive and
active components include parts such as resistors, integrated circuits and
diodes. WCI uses approximately ten distributors and two contract manufacturers
to supply its electronic components. WCI often uses a single contract
manufacturer or subcontractor to supply a total sub-assembly or turnkey solution
for higher volume products. Direct suppliers provide sheet metal, electronic
circuit boards and other materials built to specifications. WCI maintains
relationships with approximately 20 direct suppliers. Most of the Company's
materials are available from a number of different suppliers; however, certain
components used in existing and future products are currently available from a
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 $141,000, $120,000, and $230,000 in fiscal 2003, 2002, and 2001,
respectively. These royalty license agreements renew annually unless cancelled
by the licensee on the expiration date. 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.
During the second quarter of fiscal 2003, WCI entered into a license
agreement with StarGuide Digital Networks, Inc., a Nevada Corporation. These
limited licenses were granted to WCI under a number of StarGuide patents related
to delivering IP data by satellite and store/forward audio. These licenses
extend to and conclude upon the last to expire of any licensed patent. WCI has
agreed to pay StarGuide a running royalty on certain of WCI's products.
Management of the Company believes that these royalties will not have a material
adverse effect on the Company's financial condition or results of operations.
(v) Seasonal variations in business.
There do 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) in this report
is incorporated herein by reference in response to this item.
5
(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 Roberts Communications Network and Muzak
accounted for approximately 16.3% and 39.3% of revenues in fiscal 2003,
respectively. Sales to Roberts Communications Network and Muzak and affiliates
accounted for approximately 27.9% and 27.5% of revenues in fiscal 2002,
respectively. Sales to FOX Digital and FOX Sports Net accounted for
approximately 11.1% of revenues in fiscal 2002 and 34.7% of revenues in fiscal
2001. At August 29, 2003, two customers accounted for more than 10% of the
Company's accounts receivable. At August 30, 2002, one customer accounted for
more than 10% 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 2004. There can be no
assurance that the loss of one or more of these customers would not have a
material adverse effect on the Company's operations.
(viii) Backlog of orders.
The Company's backlog is comprised of undelivered, firm customer orders,
which are scheduled to ship within 18 months. The Company's eighteen month
backlog was approximately $12,699,000 at August 29, 2003, $10,700,000 at August
30, 2002, and $19,057,000 at August 31, 2001. One customer accounted for 85.4%
of the backlog at August 29, 2003. Reference is hereby made to the information
contained in MD&A, which is incorporated herein by reference in response to this
item. The total multi-year backlog at August 29, 2003 was approximately
$24,470,000.
Approximately $9,190,000 of the August 29, 2003 backlog is expected to ship
during fiscal 2004. One customer accounted for 78.6% of the August 29, 2003
backlog scheduled to ship during fiscal 2004.
(ix) Government contracts.
Not applicable.
(x) Competitive Conditions.
WCI competes both with companies that have substantially greater resources
and with small-specialized companies. Competitive forces are generally
predictable for each of the markets served by the Company. Through relationships
with component and integrated solution providers, the Company has positioned
itself to provide complete end-to-end digital video and audio systems to its
customers.
Broadcast Television
Competition in the market for the Company's broadcast television
electronics products, including digital video equipment, is driven by features,
timeliness, performance, and price. The Company's broadcast digital video
products in production are competitively priced, with unique, desirable
features. Due to the large number of potential end users, both small and large
competitors continue to emerge. The Company believes it has positioned itself to
capitalize on the market trends in this business through careful development of
its product and market strategies, which have proven successful in increasing
revenues from this sector. It must be emphasized that the overall market for
professional satellite broadcast products is very specialized and somewhat
limited. The Company's long term strategic relationships within the broadcast
industry help assure that it will generally be exposed to whatever sales
opportunities develop.
6
Cable Television
In the cable television market the Company believes that the competitive
position for many of its products is dominant. However, these products are
competing with those of significant and well-established firms. WCI believes
that it maintains a competitive advantage in the cable and broadcast video
markets for advertising-supported networks through its ability to provide
regionalized programming and control. The Company's success in this market will
depend to a great extent on how much emphasis is placed on a network's desire to
target advertising and other messages. Major networks remain to be converted
from analog to digital and the Company continues to pursue opportunities where
it perceives its products will provide value-added features over larger
competitors. Legacy products for analog audio and network digital cue signals
continue to provide revenue, but this revenue is projected to diminish
substantially over the next 24 months due to increased growth in digital
services.
Broadcast Radio Networks
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. This market is limited and new
conversions to digital technology are not expected to bring significant revenue
opportunities during the next 24 months due to remaining useful life of
presently installed systems.
Business Broadcasting
Competition in the business broadcasting market segment generally comes
from smaller companies with unique products tailored to the needs of the
customer. The Company feels that this market segment is one where it enjoys
competitive advantages. Business music networks, for example, continue to rely
on the Company's powerful network control and targeting capabilities to maximize
every advertising dollar. New products such as the iPump digital media server
will allow business broadcasting networks to benefit from satellite broadcasting
technologies without requiring large amounts of satellite cost. Competition in
this field is increasing, although still limited, and the Company expects to be
among the industry key players.
(xi) Research and development activities.
The Company's research and development activities are designed to
strengthen and broaden its existing products and systems and to develop new
products and systems. A major portion of the fiscal 2003 research and
development expenses were spent in the digital video product area. WCI's
research and development expenses totaled $2,853,000 in fiscal 2003, $2,410,000
in fiscal 2002, and $2,689,000 in fiscal 2001. Additional information contained
on pages 2-5 and in MD&A in this report is incorporated herein by reference in
response to this item.
(xii) Environmental Regulation.
Federal, state and local pollution control requirements have had no
material effect upon the capital expenditures, earnings or the competitive
position of the Company.
(xiii) Number of employees.
As of August 29, 2003, the Company had 87 full time employees employed by
the WCI manufacturing subsidiary and no employees employed by Wegener
Corporation or Wegener Communications International, Inc. No employees are
parties to a collective bargaining agreement and the Company believes that
employee relations are good.
7
(d) Financial information about geographic areas.
As described in Note 11 to the consolidated financial statements contained
in this report is incorporated herein by reference in response to this item.
(e) Available information.
Not applicable
The Company's Web site is http://www.wegener.com
8
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, for purposes of section 401(b) of
Regulation S-K, are as follows:
NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD
ROBERT A. PLACEK 65 Chairman of the Board,
President and Chief Executive President and Chief
Officer of the Company since Executive Officer of
August 1987 and Director of the Company
the Company since July 1987.
Chairman of the Board since
1995. Chairman and Chief
Executive Officer and Director
of WCI since 1979. President
of WCI from October 1979 to
June 1998 and from March 2002
to present.
NED L. MOUNTAIN 55 Executive Vice
Executive Vice President of President of WCI
WCI since March 2002 and
Director of the Company since
May 2003. Senior Vice
President of Business
Development of WCI 1996-2002.
Vice President European
Operations of WCI 1994-1995.
Numerous Sales and Marketing
positions 1981-1994. Corporate
Senior Engineer of UA-Columbia
Cablevision 1979-1981.
C. TROY WOODBURY, JR. 56 Treasurer and Chief
Treasurer and Chief Financial Financial Officer of
Officer of the Company since the Company and WCI
June 1988 and Director since
1989. Treasurer and Chief
Financial Officer of WCI since
1992. Senior Vice President of
Finance of WCI since March
2002. Executive Vice President
of WCI from July 1995 to March
2002. Chief Operating Officer
of WCI from September 1992 to
June 1998. Group Controller
for Scientific-Atlanta, Inc.
from March 1975 to June 1988.
9
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 a 21,000 square foot manufacturing facility in Alpharetta, Georgia under
a five-year lease expiring during the second quarter of fiscal 2005. The annual
rent is approximately $136,000 for the first three (3) years and $143,000 for
the fourth and fifth years. WCI's 40,000 square foot facility and 4.4 acres of
adjacent land are pledged as collateral under the Company's line of credit
facility.
ITEM 3. LEGAL PROCEEDINGS
RADYNE COMSTREAM INC. AND WC ACQUISITION CORPORATION, PLAINTIFFS, V. WEGENER
CORPORATION, DEFENDANT, Civil Action No. 03-421-KAJ
On April 23, 2003, WC Acquisition Corporation, a wholly owned subsidiary of
Radyne ComStream, Inc., commenced an all-cash, all-shares tender offer for all
outstanding shares of Wegener Corporation (Wegener) common stock not already
owned by WC Acquisition Corporation. Wegener's Board of Directors appointed an
Independent Committee to investigate the offer, and after reviewing the
Independent Committee's recommendation, Wegener's Board issued a press release
which reflected their findings that the offer was priced too low and therefore
tendering shares was not in the best interest of Wegener's shareholders. On
April 24, 2003, Radyne ComStream, Inc. and WC Acquisition Corporation filed a
complaint in the U.S. District Court for the District of Delaware against
Wegener arising out of this tender offer. The Plaintiffs requested that the
Court enter a declaratory judgment that the public disclosures and documents
filed with the Securities and Exchange Commission by the Plaintiffs, in
connection with the tender offer, fully comply with all applicable laws. The
Plaintiffs also sought an injunction against Wegener, as well as against its
agents and employees, from making any false or misleading statements with
respect to the tender offer and an award of Plaintiffs' costs and attorneys'
fees. Wegener filed an answer to this Complaint on May 15, 2003, and denied all
of the substantive allegations of the Complaint. In its answer, Wegener also
asserted counterclaims, alleging that the tender offer was illegal, and done in
violation of ss. 14 of the Williams Act. On June 27, 2003, the Plaintiffs
dismissed this lawsuit.
RADYNE COMSTREAM, INC. AND WC ACQUISITION CORPORATION PLAINTIFFS, V. WEGENER
CORPORATION, ROBERT A. PLACEK, THOMAS G. ELLIOT, JAMES H. MORGAN, JR., C. TROY
WOODBURY, JR., WENDELL BAILEY AND JOE K. PARKS, DEFENDANTS, Civil Action No.
20279-NC
On April 24, 2003, WC Acquisition Corporation and Radyne ComStream, Inc.
commenced an action against Wegener, Robert A. Placek, Thomas G. Elliot, James
H. Morgan, Jr., C. Troy Woodbury, Jr., Wendell Bailey and Joe K. Parks in the
Court of Chancery for the State of Delaware in and for New Castle County. Each
of the individuals named in the Complaint as Defendants are (or were) officers
and/or directors of Wegener. Plaintiffs asserted that these individuals violated
their fiduciary duties by failing to approve the tender offer and proposed
merger, by failing to exempt the tender offer from Section 203 of the General
Corporation Law of the State of Delaware, by failing to render inapplicable
Article Eighth of Wegener's Certificate of Incorporation, and by adopting
anti-takeover devices. Plaintiffs sought to have the Court compel the Defendants
to approve the proposed acquisition, enjoin the Defendants from applying Section
203 of the General Corporation Law of the State of Delaware and Article Eighth
of Wegener's Certificate of Incorporation, and enjoin Wegener, its agents and
its employees, from adopting any other measure which could impede the
acquisition or other attempts by the Plaintiffs to acquire Wegener. The
Complaint also sought an award of Plaintiffs' costs and attorneys' fees. Wegener
filed an answer to this Complaint on May 19, 2003, and denied all of the
substantive allegations of the Complaint. On June 26, 2003, this lawsuit was
dismissed.
JERRY LEUCH, PLAINTIFF, V. ROBERT A. PLACEK, THOMAS G. ELLIOT, JOE K. PARKS, C.
TROY WOODBURY, JR., WENDELL BAILEY, NED MOUNTAIN AND WEGENER CORPORATION, Civil
Action No.20361-NC
On June 20, 2003, Jerry Leuch commenced an action styled as a direct class
action and a derivative action against Robert A. Placek, Thomas G. Elliot, Joe
K. Parks, C. Troy Woodbury, Jr., Wendell Bailey, Ned Mountain and Wegener
Corporation in the Court of Chancery of the State of Delaware, In and For New
Castle County. The Plaintiff alleges that the individual defendants violated
their fiduciary duties due to him and other shareholders, the
10
members of the alleged class, as well as Wegener. The relief Plaintiff seeks is
as follows: a declaration that the Defendants must consider and evaluate all
bona fide offers to purchase all of the outstanding shares of Wegener consistent
with their fiduciary duties; a declaration that this action is properly styled
as a class action; an injunction against proceeding with any business
combination which benefited the individual defendants and an injunction
requiring that any conflicts of interest be resolved in favor of the Wegener
shareholders; and a declaration removing the anti-takeover measures enacted by
Wegener's Board of Directors. The Complaint also seeks an award of Plaintiff's
costs and attorneys' and other fees. An answer has been filed by Wegener,
denying all substantive allegations in the complaint. Management does not
believe that the ultimate outcome of this litigation will have a material
adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ Small-Cap Market (NASDAQ
symbol: WGNR). As of November 20, 2003, there were approximately 377* holders of
record of Common Stock. *(This number does not reflect beneficial ownership of
shares held in nominee name).
The quarterly ranges of high and low sale prices for fiscal 2003 and 2002
were as follows:
FISCAL 2003 Fiscal 2002
------------------- -------------------
HIGH LOW High Low
First Quarter $ 1.07 $ .60 $ 1.32 $ .50
Second Quarter 1.10 .69 1.25 .80
Third Quarter 1.72 .73 1.70 .81
Fourth Quarter 2.49 1.29 1.47 .90
The Company has not paid any cash dividends on its Common Stock. For the
foreseeable future, the Company's Board of Directors does not intend to pay cash
dividends, but rather plans to retain earnings to support the Company's
operations and growth. Furthermore, the Company is prohibited from paying
dividends in accordance with its bank loan agreement, as more fully described in
MD&A and in Note 7 to the consolidated financial statements contained in this
report.
11
The following table summarizes information as of August 29, 2003 regarding
the Company's common stock reserved for issuance under the Company's equity
compensation plans.
Number of
Securities
Remaining
Available for
Number of Weighted- Future Issuance
Securities Average Under the Plans
to be Issued Exercise (Excluding
Upon Exercise Price of Securities
of Outstanding Outstanding Reflected in
Options Options Column (a)
Plan Category (a) (b) (c)
- --------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security
Holders 1,228,425 $1.39 972,575
Equity Compensation Plans
Not Approved by Security
Holders(1) 100,000 $5.63 --
- --------------------------------------------------------------------------------
Total 1,328,425 $1.71 972,575
================================================================================
(1) Represents a compensation arrangement pursuant to an agreement with a third
party to provide a national financial relations program for the Company,
which agreement terminated in fiscal 2001.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
Year ended
- -------------------------------------------------------------------------------------------------------
AUGUST 29, August 30, August 31, September 1, September 3,
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Revenue $ 20,133 $ 23,459 $ 20,333 $ 22,894 $ 25,259
Operating income (loss) (240) 1,311 (3,100) (5,469) 132
Net earnings (loss) 88 808 (1,976) (3,329) 213
Net earnings (loss) per share
Basic $ (a) $ .07 $ (.17) $ (.28) $ .02
Diluted $ (a) $ .07 $ (.17) $ (.28) $ .02
Cash dividends paid per share (1) -- -- -- -- --
- -------------------------------------------------------------------------------------------------------
Total assets $ 18,168 $ 18,700 $ 18,660 $ 24,147 $ 24,954
Long-term obligations inclusive
of current maturities 4 10 55 578 1,205
=======================================================================================================
(a) Less than $.01 per share
(1) The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. Additionally, the
Company's line of credit precludes the payment of dividends.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results, future business or
product development plans, research and development activities, capital
spending, financing resources or capital structure, the effects of regulation
and competition, and are thus prospective. Such forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, economic conditions, customer plans and commitments, product
demand, government regulation, rapid technological developments and changes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, material availability, new and existing
well-capitalized competitors, and other uncertainties detailed from time to time
in the Company's periodic Securities and Exchange Commission filings.
The Company manufactures satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI manufactures products
for transmission of audio, data and video via satellite.
The Company operates on a 52-53 week fiscal year. The fiscal year ends on
the Friday nearest to August 31. Fiscal years 2003, 2002, and 2001 contained 52
weeks. All references herein to 2003, 2002, and 2001, refer to the fiscal years
ending August 29, 2003, August 30, 2002, and August 31, 2001, respectively.
RESULTS OF OPERATIONS
Net earnings for the year ended August 29, 2003, were $88,000 or less than
$0.01 per diluted share, compared to net earnings of $808,000 or $0.07 per
diluted share for the year ended August 30, 2002, and a net loss of $(1,976,000)
or $(0.17) per diluted share for the year ended August 31, 2001. Net earnings in
fiscal 2003 included after tax charges of $623,000, related to legal and
professional fees incurred in defending the Company against an unsolicited
hostile takeover attempt by Radyne ComStream, Inc. and related litigation.
Revenues for fiscal 2003 decreased $3,326,000 or 14.2% to $20,133,000 from
$23,459,000 in fiscal 2002. Direct Broadcast Satellite (DBS) revenues (including
service revenues) in fiscal 2003 decreased $3,664,000 or 16.4% to $18,722,000
from $22,386,000 in fiscal 2002. Telecom and Custom Product revenues increased
$338,000 or 31.5% in fiscal 2003 to $1,411,000 from $1,073,000 in fiscal 2002.
The decrease in DBS revenues in fiscal 2003 was primarily a result of a lower
backlog of orders at the beginning of fiscal 2003 compared to the beginning of
fiscal 2002. Revenues and order backlog are subject to the timing of significant
orders from customers, and as a result revenue levels may fluctuate on a
quarterly and yearly basis. Revenues were adversely impacted by delayed
purchasing decisions in the digital satellite transmission market and delayed
product introductions by the Company. Fiscal 2002 revenues included shipments of
network equipment to Roberts Communications to provide television coverage of
horseracing to off-track betting venues throughout the United States and
shipments of digital receivers to FOX Digital and FOX Sports Net for their
broadcast and cable television networks. Revenues to these two customers
decreased approximately $5,563,000 in fiscal 2003 compared to fiscal 2002.
Decreases in revenues were partially offset by approximately $494,000 of earned
deposits which are not expected to recur in future reporting periods. The
Telecom and Custom Products Group revenue increase in fiscal 2003 was primarily
due to an increase in orders from a distributor to provide commercial insertion
equipment to a cable television operator.
Revenues for fiscal 2002 increased $3,126,000 or 15.4% to $23,459,000 from
$20,333,000 in fiscal 2001. Direct Broadcast Satellite (DBS) revenues (including
service revenues) in fiscal 2002 increased $3,833,000 or 20.7% to $22,386,000
from $18,553,000 in fiscal 2001. Telecom and Custom Product revenues decreased
$707,000 or 39.7% in fiscal 2002 to $1,073,000 from $1,780,000 in fiscal 2001.
The increase in DBS revenues in fiscal 2002 was a result of a high backlog of
orders at the beginning of fiscal 2002 compared to the beginning of fiscal 2001.
Shipments of network equipment, which initially began in the first quarter of
fiscal 2002, were completed to Roberts
13
Communications to provide television coverage of horseracing to off-track
betting venues throughout the United States. In accordance with a multi-year
contract to provide programming to network subscribers, revenue was recognized
on digital receivers beginning initially in the fourth quarter of fiscal 2001
and continued throughout fiscal 2002. Additionally, during fiscal 2002,
shipments of digital receivers were completed to FOX Digital and FOX Sports Net
for their broadcast and cable television networks. The Telecom and Custom
Product Group revenue decrease in fiscal 2002 was primarily due to lower levels
of shipments of cable television headend products to distributors as a result of
a slowdown in purchases by the major cable television operators which were
impacted by overcapacity and tightened credit availability in the telecom
industry.
WCI's backlog of orders scheduled to ship within 18 months was $12,699,000
at August 29, 2003, compared to $10,700,000 at August 30, 2002, and $19,057,000
at August 31, 2001. The total multi-year backlog at August 29, 2003, was
approximately $24,470,000. The Company's backlog has been impacted by a slowdown
in capital spending, delays by customers in expanding existing networks, and the
delayed timing of new product introductions by the Company. Approximately
$9,190,000 of the August 29, 2003, backlog is expected to ship during fiscal
2004. One customer accounted for 85.4% of the Company's backlog at August 29,
2003 and for 78.6% of the backlog expected to ship during fiscal 2004. Sales to
a relatively small number of major customers have typically comprised a majority
of the Company's revenues and that trend is expected to continue. (See note 11
to the consolidated financial statements, Segment Information and Significant
Customers.) Future revenues are subject to the timing of significant orders from
customers and are difficult to forecast. As a result, the Company expects future
revenue levels to fluctuate from quarter to quarter. It is anticipated that
revenues for the first quarter of fiscal 2004 will decrease compared to the
fourth quarter of fiscal 2003 and will result in an operating loss for the
period. Although no assurances may be given, the Company believes it will record
sufficient new orders in fiscal 2004 to achieve fiscal year profitability and
increased revenues compared to fiscal 2003, although there can be fluctuations
in quarter to quarter operating results due to the timing of orders received.
International sales are generated through a direct sales organization and
through foreign distributors. International sales were $839,000 or 4.2% of
revenues compared to $1,473,000 or 6.3% of revenues in fiscal 2002, and
$2,794,000 or 13.7% of revenues in fiscal 2001. International shipments are
generally project specific and revenues, therefore, are subject to variations
from year to year based on the timing of customer orders. All international
sales are denominated in U.S. dollars. Additional financial information on
geographic areas is provided in Note 11 of the consolidated financial
statements.
Gross profit as a percent of sales was 37.3% in fiscal 2003 compared to
33.3% in fiscal 2002, and 21.3% in fiscal 2001. Gross profit margin dollars
decreased $312,000 or 4.0% to $7,510,000 in fiscal 2003 from $7,822,000 in
fiscal 2002. Fiscal 2001 gross profit margin dollars amounted to $4,334,000. The
increase in margin percentages in fiscal 2003 was mainly due to a product mix
with lower variable cost components and lower inventory reserve provisions. The
decrease in margin dollars in fiscal 2003 compared to fiscal 2002 was mainly due
to lower revenues during the period. Profit margins in fiscal 2003 included
inventory reserve charges of $75,000 compared to $800,000 in fiscal 2002. The
decrease in inventory reserve charges in fiscal 2003 from 2002 was a result of
improved material planning controls and efforts to reduce inventory levels.
Significant reserves were made in fiscal 2002 for slow-moving and obsolete
inventories. Gross profit margins were favorably impacted in fiscal 2002 by
lower unit fixed costs due to the increase in sales volumes, cost reduction
programs and lower manufacturing costs of certain DBS products.
Selling, general, and administrative (SG&A) expenses increased $797,000 or
19.4% to $4,898,000 in fiscal 2003 from $4,101,000 in fiscal 2002. As a
percentage of revenues, SG&A expenses were 24.3% of revenues in fiscal 2003 and
17.5% in fiscal 2002. SG&A expenses in fiscal 2003 included $974,000 in
corporate legal and professional fees related to defending the Company against
an unsolicited hostile takeover attempt by Radyne ComStream, Inc. and related
litigation. These expenses were offset by decreases in certain expenses of
$177,000, primarily depreciation, bad debt provisions and outside sales agent
commissions, which were offset by higher legal fees of WCI.
SG&A expenses decreased $644,000 or 13.6% to $4,101,000 in fiscal 2002 from
$4,745,000 in fiscal 2001. As a percentage of revenues, SG&A expenses were 17.5%
of revenues in fiscal 2002 and 23.3% in fiscal 2001.
14
During the fourth quarter of fiscal 2001, tax reimbursement features were
removed from common stock options. As a result, SG&A expenses in fiscal 2002
were not subject to variable stock option compensation adjustments compared to a
benefit of $488,000 in fiscal 2001. Excluding this benefit, SG&A decreased
$1,132,000 or 21.6% in fiscal 2002 compared to fiscal 2001. SG&A reductions in
fiscal 2002 were mainly due to personnel reductions, lower sales incentive
commissions as a result of a decrease in fiscal 2002 orders and cost reduction
efforts in discretionary spending items. The dollar decrease of expenses in
fiscal 2002 compared to fiscal 2001 includes decreases in 1) compensation
expense of $710,000, 2) travel expenses of $171,000, and 3) trade show and
advertising expenses of $138,000.
General corporate expenses included in SG&A expense were approximately
$1,568,000, $510,000, and $658,000, in fiscal 2003, 2002 and 2001, respectively.
The increase in fiscal 2003 corporate expenses was primarily due to the $974,000
in legal and professional fees related to defending the Company against an
unsolicited takeover attempt by Radyne ComStream, Inc.
Research and development expenditures, including capitalized software
development costs, were $4,230,000 or 21.0% of revenues in fiscal 2003,
$2,983,000 or 12.7% of revenues in fiscal 2002, and $3,073,000 or 15.1% of
revenues in fiscal 2001. The increases in expenditures in fiscal 2003 compared
to fiscal 2002 were due to increases in engineering consulting costs, prototype
parts expenses, and personnel costs primarily related to the development of
iPump Media Server, Unity 4600 digital receiver, and the DTV series 700
products. The decrease in expenditures in fiscal 2002 compared to fiscal 2001
was primarily due to decreases in labor and overhead costs which were offset by
higher engineering consulting costs. Software development costs totaling
$1,377,000, $573,000, and $384,000 were capitalized during fiscal 2003, 2002 and
2001, respectively. The increases in capitalized software costs during fiscal
2003 compared to 2002 are due to increased expenditures on COMPEL network
control software, the iPump Media Server and DTV series 700 products. Research
and development expenses, excluding capitalized software development costs, were
$2,853,000 or 14.2% of revenues in fiscal 2003, $2,410,000 or 10.3% of revenues
in fiscal 2002, and $2,689,000 or 13.2% of revenues in fiscal 2001. The Company
expects fiscal 2004 research and development expenditures to approximate fiscal
2003 levels as it continues to develop and enhance DBS products.
Interest expense was $69,000 in fiscal 2003 compared to $64,000 in fiscal
2002 and $60,000 in fiscal 2001. Interest expense in fiscal 2003 was principally
associated with letters of credit commitments and bank float charges on lockbox
collections. The increases during fiscal 2003 and 2002 were due primarily to an
increase in the average outstanding letter of credit commitment balances. The
Company believes that interest expense in fiscal 2004 will approximate fiscal
2003 expense.
Interest income was $57,000 in fiscal 2003 compared to $33,000 in fiscal
2002 and $71,000 in fiscal 2001. The increase in fiscal 2003 compared to fiscal
2002 was mainly due to higher average outstanding balances of cash and cash
equivalents. The decrease in fiscal 2002 compared to fiscal 2001 was mainly due
to lower investment yields. Interest income is expected to decrease in fiscal
2004 due to expected lower average outstanding balances of cash and cash
equivalents.
Fiscal 2003 income tax benefit of $340,000 was comprised of a current state
income tax benefit of $50,000 and deferred federal and state tax benefits of
$85,000 and $205,000, respectively. The fiscal 2003 state income tax benefits
were favorably impacted primarily by state income tax credits of $199,000
related to Georgia retraining credits. Net deferred tax assets increased
$290,000 to $3,138,000 at August 29, 2003. The increase was principally due to
state income tax credits of $199,000 and increases in net operating loss
carryforwards. Realization of deferred tax assets is dependent on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. At August 29, 2003, the Company had a federal net operating loss
carryforward of $2,900,000, which expires beginning fiscal 2020 through 2023.
Additionally, the Company had general business and foreign tax credit
carryforwards of $98,000 expiring fiscal 2004 , an alternative minimum tax
credit of $138,000 and state income tax credits of $199,000 expiring in fiscal
2009. Although realization is not assured, management believes it is more likely
than not that all of the deferred tax assets will be realized based on the
Company's backlog, financial projections and operating history. The amount
considered realizable could be reduced if estimates of future taxable income
during the carryforward period are reduced. Fiscal 2002 income tax expense of
$473,000 was comprised of a current federal income tax benefit of $114,000 from
receipt of alternative minimum tax refunds as a result of federal
15
income tax law changes and deferred federal and state income tax expenses of
$549,000 and $38,000, respectively. Net deferred tax assets decreased $587,000
to $2,848,000 at August 30, 2002 from $3,435,000 at August 31, 2001. The
decrease was principally due to current period utilization of net operating loss
carryforwards and refunds of alternative minimum tax credits. Fiscal 2001 income
tax benefit was comprised of a deferred federal and state tax benefit of
$1,049,000 and $63,000, respectively. A reconciliation of the Company's
effective income tax rate as compared to the statutory U.S. income tax rate is
provided in Note 8 of the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are very important to the portrayal of the Company's
financial condition and results of operations and require management's most
subjective or difficult judgements. These policies are as follows:
REVENUE RECOGNITION - The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," as published by the staff of the Securities and Exchange
Commission. Revenue is recognized when persuasive evidence of an agreement with
the customer exists, products are shipped or title passes pursuant to the terms
of the agreement with the customer, the amount due from the customer is fixed or
determinable, collectibility is reasonably assured, and there are no significant
future performance obligations. Service revenues are recognized at the time of
performance. The Company recognizes revenue in certain circumstances before
delivery has occurred (commonly referred to as "bill and hold" transactions). In
such circumstances, among other things, risk of ownership has passed to the
buyer, the buyer has made a written fixed commitment to purchase the finished
goods, the buyer has requested the finished goods be held for future delivery as
scheduled and designated by them, and no additional performance obligations
exist by the Company. For these transactions, the finished goods are segregated
from inventory and normal billing and credit terms are granted. For the year
ended August 29, 2003, revenues to one customer in the amount of $3,049,000 were
recorded prior to delivery as bill and hold transactions. At August 29, 2003,
accounts receivable for these revenues amounted to $1,395,000 and were paid in
full subsequent to August 29, 2003.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured and no future performance obligations exist. These assessments are based
on the terms of the agreement with the customer, past history and
creditworthiness of the customer. If management determines that collection is
not reasonably assured or future performance obligations exist, revenue
recognition is deferred until these conditions are satisfied.
The Company's principal sources of revenues are from the sales of various
satellite communications equipment. Imbedded in the Company's products is
internally developed software of varying applications. Historically, the Company
has not sold or marketed its software separately or otherwise licensed its
software apart from the related communications equipment. Should the Company
begin to market or sell software whereby it is more than an incidental component
of the hardware, the Company will recognize software license revenue in
accordance with SOP No. 97-2, "Software Revenue Recognition" as amended by SOP
No. 98-9, "Software Revenue Recognition, with Respect to Certain Transactions".
INVENTORY RESERVES - Inventories are valued at the lower of cost (at standard,
which approximates actual cost on a first-in, first-out basis) or market.
Inventories include the cost of raw materials, labor and manufacturing overhead.
The Company makes inventory reserve provisions based on a review of inventory
quantities on hand, estimated sales forecasts, new products being developed and
technology changes to properly reflect inventory value. These reserves are to
provide for items that are potentially slow-moving, excess or obsolete. Changes
in market conditions, lower than expected customer demand and rapidly changing
technology could result in additional obsolete and slow-moving inventory that is
unsaleable or saleable at reduced prices which could require additional
inventory reserve provisions. At August 29, 2003, inventories, net of reserve
provisions, amounted to $2,143,000.
CAPITALIZED SOFTWARE COSTS - Software development costs are capitalized
subsequent to establishing technological feasibility. Capitalized costs are
amortized based on the larger of the amounts computed using (a) the ratio that
current gross revenues for each product bears to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product. Expected
future revenues and estimated economic lives are subject to revisions due to
market conditions, technology changes and other factors resulting in shortfalls
of expected revenues or reduced economic lives which could result in additional
amortization expense or write-offs. At August 29, 2003, capitalized software
costs, net of accumulated amortization, amounted to $1,304,000.
DEFERRED TAX ASSET VALUATION ALLOWANCE - Deferred tax assets are recognized for
deductible temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits will be
realized. Realization of the Company's deferred tax assets is dependent on
generating sufficient future taxable income prior to the expiration of the loss
and credit carryforwards. Although realization is not
16
assured, management believes it is more likely than not that all of the deferred
tax assets will be realized based on the Company's backlog, financial
projections and operating history. The amount of the deferred tax assets
considered realizable, however, could be reduced if estimates of further taxable
income during the carryforward period are reduced. Any reduction in the
realizable value of deferred tax assets would result in a charge to income tax
expense in the period such determination was made.
At August 29, 2003, deferred tax assets amounted to $3,138,000, of which
$1,043,000 relates to net operating loss carryforwards which expire in fiscal
2020 through 2023, $98,000 of general business and foreign tax credits expiring
fiscal 2004 and state tax credits of $199,000 expiring fiscal 2009.
ACCOUNTS RECEIVABLE VALUATION - The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. At August 29, 2003, accounts receivable
net of allowances for doubtful accounts amounted to $3,560,000.
LIQUIDITY AND CAPITAL RESOURCES
At August 29, 2003, the Company's primary sources of liquidity were cash
and cash equivalents of $4,213,000 and a $5,000,000 bank loan facility. Cash and
cash equivalents decreased $905,000 in fiscal 2003.
Cash provided by operating activities in fiscal 2003 was $1,792,000
compared to $3,986,000 in fiscal 2002. Cash used by operating activities in
fiscal 2001 was $1,265,000. Fiscal 2003 net earnings adjusted for non-cash
expenses provided cash of $1,498,000 while changes in inventories provided cash
of $1,703,000. Changes in accounts receivable, accounts payable, accrued
expenses and customer deposits used cash of $1,409,000.
Cash used by investing activities was $2,673,000 in fiscal 2003 compared to
$720,000 in fiscal 2002 and $860,000 in fiscal 2001. In fiscal 2003, investing
activities used cash of $584,000 for property and equipment expenditures,
$1,377,000 for capitalized software additions and $711,000 for license agreement
expenditures and legal expenses related to the filing of applications for
various patents and trademarks. Property and equipment expenditures were for
planned additions of principally manufacturing and engineering test equipment.
Fiscal 2004 expenditures for investing activities are expected to approximate
fiscal 2003 levels.
Cash used by financing activities was $24,000 in fiscal 2003, $75,000 in
fiscal 2002, and $551,000 in fiscal 2001. In fiscal 2003, financing activities
used cash of $6,000 for scheduled repayments of long-term obligations, $50,000
for debt issuance costs and provided $32,000 of cash from the exercise of stock
options. At August 29, 2003, scheduled fiscal 2004 debt repayments are
approximately $4,000.
Net accounts receivable increased $522,000 to $3,560,000 at August 29,
2003, from $3,038,000 at August 30, 2002, compared to $1,706,000 at August 31,
2001. The increase in fiscal 2003 was primarily due to early collection on
account from a major customer in the fourth quarter of fiscal 2002. The
allowance for doubtful accounts was $355,000 at August 29, 2003, $352,000 at
August 30, 2002 and $305,000 at August 31, 2001. Write-offs in fiscal 2003 were
$27,000 and $108,000 in fiscal 2002. Net recoveries in fiscal 2001 were $19,000.
Increases to the allowance and charges to general and administrative expense
were $30,000 in fiscal 2003, $155,000 in fiscal 2002 and $120,000 in fiscal
2001.
Inventory before reserves decreased $2,068,000 to $5,633,000 at August 29,
2003, from $7,701,000 at August 30, 2002. The decrease was primarily due to
management efforts to lower inventory levels in line with backlog, sales
forecasts and the timing of new products being developed. During fiscal 2003,
inventory reserves were increased by provisions charged to cost of sales of
$75,000. The increase in the provision was to provide additional reserves for 1)
slower-moving analog products, 2) excess digital audio inventories, and 3)
potentially slow-moving inventories of earlier generations of other digital
products. These products continue to sell but at
17
reduced quantities. During fiscal 2002, inventory reserves were increased by
provisions charged to cost of sales of $800,000 and $1,325,000 in fiscal 2001.
Inventory reserves were decreased by write-offs of $365,000 in fiscal 2003 and
$1,176,000 in fiscal 2002. During fiscal 2003, 2002 and 2001 decreases in
inventories provided cash of $1,703,000, $2,765,000, and $1,296,000,
respectively.
WCI's bank loan facility provides a maximum available credit limit of
$5,000,000 with sublimits as defined. The amended loan facility matures on June
30, 2004, or upon demand and requires an annual facility fee of 1% of the
maximum credit limit. The loan facility consists of a term loan and a revolving
line of credit with a combined borrowing limit of $5,000,000, bearing interest
at the bank's prime rate (4.00% at August 29, 2003).
The term loan facility provides for a maximum of $1,000,000 for advances of
up to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over sixty months with a balloon payment due at maturity. The revolving
line of credit is subject to availability advance formulas of 80% against
eligible accounts receivable; 20% of eligible raw materials inventories; 20% of
eligible work-in-process kit inventories; and 40% to 50% of eligible finished
goods inventories. Advances against inventory are subject to a sublimit of
$2,000,000. At August 29, 2003, no balances were outstanding on the revolving
line of credit or the equipment term loan portions of the loan facility.
Additionally, at August 29, 2003, approximately $2,530,000, net of outstanding
letters of credit in the amount of $2,172,000, was available to borrow under the
advance formulas of the revolving line of credit.
The Company is required to maintain a minimum tangible net worth with
annual increases at each fiscal year end commencing with fiscal year 2003,
retain certain key employees, limit expenditures of Wegener Corporation to
$1,400,000 in fiscal 2003 and $600,000 per fiscal year thereafter, maintain
certain financial ratios, and is precluded from paying dividends. At August 29,
2003, the Company was in compliance with all loan facility covenants. The
Company believes that the amended loan facility along with cash and cash
equivalent balances will be sufficient to support operations through fiscal
2004. While no assurances may be given, WCI believes, upon maturity, the
existing loan facility will be renewed on substantially similar terms.
During the second quarter of fiscal 2003, the Company entered into two
manufacturing and purchasing agreements for certain finished goods inventories.
The agreements committed the Company to purchase $2,116,000 over an
eighteen-month period, beginning in the third quarter of fiscal 2003. At August
29, 2003, outstanding purchase commitments under these agreements amount to
$2,049,000. In addition, the Company maintains a cancelable manufacturing and
purchasing agreement of finished goods inventories for which the Company has
firm customer order commitments. The Company had outstanding purchase
commitments under this agreement of $1,261,000 at August 29, 2003. Pursuant to
the above agreements, at August 29, 2003, the Company had outstanding letters of
credit in the amount of $2,172,000.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. Additionally, the
Company's line of credit precludes the payment of dividends.
A summary of the Company's long-term contractual obligations as of August
29, 2003 consisted of:
Payments Due by Period
----------------------------------------------------
Contractual Obligations Total One Year 2 -3 Years 4 -5 Years
- ----------------------- ---------- ---------- ---------- ----------
Debt $ 4,000 $ 4,000 $ -- $ --
Operating leases 346,000 224,000 118,000 4,000
Purchase commitments 3,310,000 3,310,000 -- --
---------- ---------- ---------- ----------
Total $3,660,000 $3,538,000 $ 118,000 $ 4,000
========== ========== ========== ==========
18
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 November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain
guarantees to be recorded at fair value regardless of the probability of the
loss. The adoption did not have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The Company believes
that the adoption of this standard will have no material impact on its financial
position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123, "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. The disclosure requirements shall be effective for
financial reports for interim periods beginning after December 15, 2002. The
Company adopted the disclosure portion of this statement for the fiscal quarter
ended May 30, 2003. The adoption did not have any impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. Many of such instruments were previously classified as
equity. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities. The statement is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. On November 7, 2003 the FASB deferred the
classification and measurement provisions of SFAS No. 150 as they apply to
certain mandatory redeemable non-controlling interests. This deferral is
expected to remain in effect while these provisions are further evaluated by the
FSAB. Management believes that the adoption of this statement will not have a
significant impact on the financial position, results of operations or cash
flows of the Company.
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
19
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 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.
WCI competes with companies that have substantially greater resources and a
larger number of products, as well as with small specialized companies. Through
relationships with technology partners and original equipment manufacturer (OEM)
suppliers, the Company has positioned itself to provide end-to-end solutions to
its customers. Competition in the market for the Company's MPEG-2 broadcast
television electronics products, including digital video equipment, is driven by
timeliness, performance and price. The Company's broadcast digital video
products in production are competitively priced, with unique, desirable
features. The COMPEL Network Control System meets customer needs by providing
regionalization of receiver control and spot advertisement. Due to the large
number of potential end users, both small and large competitors continue to
emerge. The Company believes it has positioned itself to capitalize on the
market trends in this business through careful development of its product and
market strategies, which have proven successful in increasing revenues from this
sector. In the cable television market the Company believes that the competitive
position for many of its products is strong. However, the UNITY product family
competes with significant and established firms. Other products for cable
television include proprietary cueing and network control devices. Competition
for radio network products, including the Company's digital audio products, is
very aggressive and pricing is very competitive. The Company believes that its
continued success in all of its markets will depend on aggressive marketing and
product development.
The demand for digital products is being driven by the high cost of
satellite capacity and increasing demand for video and multi-media content. The
digital conversion of major networks is expected to continue, but it remains
difficult to predict the precise timing and number of customers converting to
digital. Management believes the market as a whole has considerable built-up
demand for digital technology. Although no assurances can be given, the Company
expects to directly benefit from this increase in demand. There may be
fluctuations in the Company's revenues and operating results from quarter to
quarter due to several factors, including the timing of significant orders from
customers and the timing of new product introductions by the Company.
The Company has invested a significant amount of financial resources to
acquire certain raw materials, to incur direct labor and to contract to have
specific outplant procedures performed on inventory in process. The Company
purchased this inventory based upon previously known backlog and anticipated
future sales given existing knowledge of the marketplace. The Company's
inventory reserve of $3,490,000 at August 29, 2003, is to provide for items that
are potentially slow-moving, excess or obsolete. Changes in market conditions,
lower than expected customer demand and rapidly changing technology could result
in additional obsolete and slow-moving inventory that is unsaleable or saleable
at reduced prices. No estimate can be made of a range of amounts of loss from
obsolescence that might occur should the Company's sales efforts not be
successful.
Sales to a relatively small number of major customers have typically
comprised a majority of the Company's revenues, and that trend is expected to
continue throughout fiscal 2003 and beyond. Future revenues are subject to the
timing of significant orders from customers and are difficult to forecast. As a
result, future revenues may fluctuate from quarter to quarter. One customer
accounted for 85.4% of the backlog at August 29, 2003 and for 78.6% of the
backlog scheduled to ship during fiscal 2004.
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 is very focused on controlling both direct and indirect
manufacturing costs and other operating expenses. These costs will be adjusted
as necessary if revenues 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.
20
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 are currently 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 a material adverse effect on
the Company's business and results of operations.
The Company has made significant investments in capitalized software
principally related to digital audio and video products. At August 29, 2003,
capitalized software costs were $1,304,000. These costs are amortized based on
the larger of the amounts computed using (a) the ratio that current gross
revenues for each product bears to the total of current and anticipated future
gross revenues for that product, or (b) the straight-line method over the
remaining estimated economic life of the product. Expected future revenues and
estimated economic lives are subject to revisions due to market conditions,
technology changes and other factors resulting in shortfalls of expected
revenues or reduced economic lives.
The industry in which the Company operates is subject to rapid
technological advances and frequent product introductions. The Company expects
to remain committed to research and development expenditures as required to
compete effectively and maintain pace with the rapid technological changes in
the communications industry and to support innovative engineering and design in
its future products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to its revolving line of credit and cash equivalents. The
interest rate on certain advances under the line of credit and term loan
facility fluctuates with the bank's prime rate. There were no borrowings
outstanding at August 29, 2003, subject to variable interest rate fluctuations.
At August 29, 2003, cash equivalents consisted of bank commercial paper in
the amount of $1,850,000 and variable rate municipals in the amount of
$2,000,000. The cash equivalents have maturities of less than three months and
therefore are subject to minimal market risk.
The Company does not enter into derivative financial instruments. All sales
and purchases are denominated in U.S. dollars.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Certified Public Accountants............................23
Consolidated Statements of Operations
Years ended August 29, 2003, August 30, 2002, and August 31, 2001..........24
Consolidated Balance Sheets
As of August 29, 2003 and August 30, 2002..................................25
Consolidated Statements of Shareholders' Equity
Years ended August 29, 2003, August 30, 2002, and August 31, 2001..........26
Consolidated Statements of Cash Flows
Years ended August 29, 2003, August 30, 2002, and August 31, 2001..........27
Notes to Consolidated Financial Statements....................................28
Consolidated Supporting Schedules Filed:
Schedule II-Valuation and Qualifying Accounts
Years ended August 29, 2003, August 30, 2002, and August 31, 2001..........46
22
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Wegener Corporation is responsible for the accuracy and
consistency of all the information contained in the annual report, including the
accompanying consolidated financial statements. These statements have been
prepared to conform with generally accepted accounting principles appropriate to
the circumstances of the Company. The statements include amounts based on
estimates and judgments as required.
Wegener Corporation maintains internal accounting controls designed to
provide reasonable assurance that the financial records are accurate, that the
assets of the Company are safeguarded, and that the financial statements present
fairly the consolidated financial position, results of operations and cash flows
of the Company.
The Audit Committee of the Board of Directors reviews the scope of the
audits and the findings of the independent certified public accountants. The
auditors meet regularly with the Audit Committee to discuss audit and financial
reporting issues, with and without management present.
BDO Seidman, LLP the Company's independent certified public accountants,
has audited the financial statements prepared by management. Their opinion on
the statements is presented below.
/s/ Robert A. Placek
Robert A. Placek,
President, Chief Executive Officer
and Chairman of the Board
/s/ C. Troy Woodbury, Jr.
C. Troy Woodbury, Jr.
Treasurer and Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of Wegener Corporation
Duluth, Georgia
We have audited the accompanying consolidated balance sheets of Wegener
Corporation and subsidiaries as of August 29, 2003, and August 30, 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of three years in the period ended August 29, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Wegener
Corporation and subsidiaries as of August 29, 2003, and August 30, 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 29, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
November 14, 2003
23
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
---------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------------------------
Revenue $ 20,133,180 $ 23,458,923 $ 20,332,899
- --------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 12,622,799 15,636,657 15,998,989
(including non-cash equity related charges of
$11,688, $31,256, and $37,294, respectively)
Selling, general and administrative 4,897,864 4,101,062 4,744,913
(including non-cash equity related charges
(benefits) of $17,360, $58,807,and $(365,641),
respectively)
Research and development 2,852,573 2,409,949 2,688,844
(including non-cash equity related charges of
$27,872, $68,006, and $75,688, respectively)
- --------------------------------------------------------------------------------------------------
Operating costs and expenses 20,373,236 22,147,668 23,432,746
- --------------------------------------------------------------------------------------------------
Operating income (loss) (240,056) 1,311,255 (3,099,847)
Interest expense (69,165) (64,061) (59,929)
Interest income 56,980 33,386 71,475
- --------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (252,241) 1,280,580 (3,088,301)
Income tax expense (benefit) (340,000) 473,000 (1,112,000)
- --------------------------------------------------------------------------------------------------
Net earnings (loss) $ 87,759 $ 807,580 $ (1,976,301)
==================================================================================================
Net earnings (loss) per share
Basic $ (a) $ .07 $ (.17)
Diluted $ (a) $ .07 $ (.17)
==================================================================================================
Shares used in per share calculation
Basic 12,328,571 12,160,865 11,943,048
Diluted 12,479,866 12,229,240 11,943,048
==================================================================================================
(a) Less than $.01 per share
See accompanying notes to consolidated financial statements.
24
Wegener Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
AUGUST 29, August 30,
2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 4,213,252 $ 5,117,756
Accounts receivable 3,560,127 3,037,762
Inventories 2,142,835 3,920,673
Deferred income taxes 2,109,000 2,225,000
Other 143,397 90,066
- --------------------------------------------------------------------------------
Total current assets 12,168,611 14,391,257
Property and equipment, net 2,913,551 2,995,332
Capitalized software costs, net 1,304,416 641,710
Deferred income taxes 1,029,000 623,000
Other assets 752,003 48,556
- --------------------------------------------------------------------------------
$ 18,167,581 $ 18,699,855
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,195,034 $ 1,424,101
Accrued expenses 1,432,749 1,409,369
Customer deposits 254,667 777,023
Current maturities of long-term obligations 4,320 6,120
- --------------------------------------------------------------------------------
Total current liabilities 2,886,770 3,616,613
Long-term obligations, less current maturities -- 4,294
- --------------------------------------------------------------------------------
Total liabilities 2,886,770 3,620,907
- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000
shares authorized; 12,381,251 and
12,314,575 shares respectively, issued
and outstanding 123,813 123,146
Additional paid-in capital 19,471,069 19,513,977
Deficit (4,314,071) (4,401,830)
Less treasury stock, at cost; 0 and 72,977
shares, respectively -- (156,345)
- --------------------------------------------------------------------------------
Total shareholders' equity 15,280,811 15,078,948
- --------------------------------------------------------------------------------
$ 18,167,581 $ 18,699,855
================================================================================
See accompanying notes to consolidated financial statements.
25
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Retained Treasury Stock
------------ Paid-in Earnings --------------
Shares Amount Capital (Deficit) Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE at September 1, 2000 12,314,575 $ 123,146 $ 20,324,568 $ (3,233,109) 481,471 $ (1,037,507)
Treasury stock reissued through
401(k) plan -- -- (271,567) -- (211,883) 459,945
Value of stock options granted
for services -- -- 47,093 -- -- --
Value of stock
option compensation -- -- (348,400) -- -- --
Net loss for the year -- -- -- (1,976,301) -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE at August 31, 2001 12,314,575 $ 123,146 $ 19,751,694 $ (5,209,410) 269,588 $ (577,562)
Treasury stock reissued through
stock options and 401(k) plan -- -- (237,717) -- (196,611) 421,217
Net earnings for the year -- -- -- 807,580 -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE at August 30, 2002 12,314,575 $ 123,146 $ 19,513,977 $ (4,401,830) 72,977 $ (156,345)
Issuance of shares through
stock options and 401(k) plan 66,676 667 (42,908) -- (72,977) 156,345
Net earnings for the year -- -- -- 87,759 -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT AUGUST 29, 2003 12,381,251 $ 123,813 $ 19,471,069 $ (4,314,071) -- $ --
================================================================================================================================
See accompanying notes to consolidated financial statements.
26
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
---------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings (loss) $ 87,759 $ 807,580 $ (1,976,301)
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities
Depreciation and amortization 1,513,179 1,692,485 1,769,984
Issuance of treasury stock for
benefit plan 82,409 158,119 188,378
Non-cash stock option
compensation -- -- (488,130)
Other non-cash expenses -- -- 47,093
Provision for bad debts 30,000 155,000 120,000
Provision for inventory reserves 75,000 800,000 1,325,000
Provision (benefit) for deferred income taxes (290,000) 587,000 (1,112,000)
Changes in assets and liabilities
Accounts receivable (552,365) (2,116,342) 2,914,407
Inventories 1,702,838 2,765,210 1,295,893
Other assets (53,331) 44,029 (85,480)
Accounts payable and accrued expenses (280,687) (870,935) (1,470,597)
Customer deposits (522,356) (36,102) (1,263,236)
- ---------------------------------------------------------------------------------------------------
1,792,446 3,986,044 1,265,011
- ---------------------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (584,245) (147,478) (476,176)
Capitalized software additions (1,377,359) (572,718) (384,068)
License agreements, patents, and trademark
expenditures (710,947) -- --
- ---------------------------------------------------------------------------------------------------
(2,672,551) (720,196) (860,244)
- ---------------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES
Repayment of long-term debt and capitalized
lease obligations (6,094) (44,660) (541,511)
Proceeds from long-term debt -- -- 18,114
Loan facility fees (50,000) (55,536) (27,500)
Proceeds from stock options exercised 31,695 25,381 --
- ---------------------------------------------------------------------------------------------------
(24,399) (74,815) (550,897)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (904,504) 3,191,033 (146,130)
Cash and cash equivalents, beginning of year 5,117,756 1,926,723 2,072,853
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,213,252 $ 5,117,756 $ 1,926,723
===================================================================================================
See accompanying notes to consolidated financial statements.
27
Wegener Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION. The financial statements
include the accounts of Wegener Corporation (WGNR) (the "Company") and its
wholly-owned subsidiaries. Wegener Communications, Inc. (WCI) designs,
manufactures and distributes satellite communications electronics equipment in
the U.S., and internationally through Wegener Communications International, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Examples include provisions for bad debts, inventory obsolescence and
warranties. Actual results could vary from these estimates.
FISCAL YEAR. The Company operates on a 52-53 week fiscal year. The fiscal year
ends on the Friday nearest to August 31. Fiscal 2003, 2002, and 2001 each
contained 52 weeks. All references herein to 2003, 2002, and 2001 relate to the
fiscal years ended August 29, 2003, August 30, 2002, and August 31, 2001,
respectively.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with
original maturities of three months or less. At August 29, 2003, cash
equivalents consisted of bank commercial paper in the amount of $1,850,000, and
variable rate municipals in the amount of $2,000,000. At August 30, 2002, cash
equivalents consisted of bank commercial paper in the amount of $2,900,000 and
variable rate municipals in the amount of $2,000,000.
INVENTORIES. Inventories are stated at the lower of cost (at standard, which
approximates actual cost on a first-in, first-out basis) or market. Inventories
include the cost of raw materials, labor and manufacturing overhead. The Company
makes 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 financed under lease contracts have been capitalized.
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.
OTHER ASSETS. Other assets consist primarily of technology licenses, patents,
trademarks, and loan facility fees. Costs of license agreements are amortized on
a straight-line basis over their estimated useful lives. Legal expenses related
to the filing of patent and trademark applications are capitalized. Upon
issuance these costs will also be amortized on a straight-line basis over the
lesser of the legal life or their estimated useful lives. Annual loan facility
fees are amortized equally over twelve months.
REVENUE RECOGNITION. The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No 101, "Revenue Recognition in
Financial Statements," as published by the staff of the Securities and Exchange
Commission. Revenue is recognized when persuasive evidence of an agreement with
the customer exists, products are shipped or title passes pursuant to the terms
of the agreement with the customer, the amount due from the customer is fixed or
determinable, collectibility is reasonably assured, and there are no significant
future performance obligations. Service revenues are recognized at the time of
performance. The Company has recognized revenue in certain circumstances before
delivery has occurred (commonly referred to as "bill and hold" transactions). In
such circumstances, among other things, risk of ownership has passed to the
buyer, the buyer has made a written fixed commitment to purchase the finished
goods, the buyer has requested the finished goods to be held for future delivery
as scheduled and designated by them, and no additional performance obligations
exist by the Company. For these transactions, the finished goods are segregated
from inventory and normal billing and credit terms are granted. For the period
ended August 29, 2003, revenues to one customer in the amount of $3,049,000 were
recorded prior to delivery as bill and hold transactions. At August 29, 2003,
accounts receivable for these revenues amounted to $1,395,000 and were paid in
full subsequent to August 29, 2003.
The policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured, and no future performance obligations exist. These assessments are
based on the terms of the agreement with the customer, past history and
creditworthiness of the customer. If
28
Wegener Corporation and Subsidiaries
management determines that collection is not reasonably assured or future
performance obligations exist, revenue recognition is deferred until these
conditions are satisfied.
The Company's principal sources of revenues are from the sales of various
satellite communications equipment. Imbedded in the Company's products is
internally developed software of varying applications. Historically, the Company
has not sold or marketed its software separately or otherwise licensed its
software apart from the related communications equipment. Should the Company
begin to market or sell software whereby it is more than an incidental component
of the hardware, the Company will recognize software license revenue in
accordance with SOP No. 97-2, "Software Revenue Recognition" as amended by SOP
No. 98-9, "Software Revenue Recognition, with Respect to Certain Transactions".
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," the Company included all shipping and handling billings to customers
in revenues, and freight costs incurred for product shipments have been included
in cost of products sold.
RESEARCH AND DEVELOPMENT/CAPITALIZED SOFTWARE COSTS. 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 technological
feasibility. Capitalized costs are amortized based on the larger of the amounts
computed using (a) the ratio that current gross revenues for each product bears
to the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product. Expected future revenues and estimated economic lives are subject
to revisions due to market conditions, technology changes and other factors
resulting in shortfalls of expected revenues or reduced economic lives. Software
development costs capitalized during fiscal 2003, 2002, and 2001, totaled
$1,377,000, $573,000, and $384,000, respectively. Amortization expense, included
in cost of goods sold, was $715,000, $826,000, and $698,000 for the same
periods, respectively. Capitalized software costs, net of accumulated
amortization, were $1,304,000 at August 29, 2003, and $642,000 at August 30,
2002. Accumulated amortization amounted to $5,270,000 at August 29, 2003, and
$4,555,000 at August 30, 2002.
LONG-LIVED ASSETS. 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.
STOCK BASED COMPENSATION. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," but applies Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans. Under APB
No. 25, when the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
The following table includes disclosures required by SFAS No. 123, as amended by
SFAS No. 148, and illustrates the effect on net earnings (loss) and net earnings
(loss) per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123:
29
Wegener Corporation and Subsidiaries
Year ended
- --------------------------------------------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Net earnings (loss)
As Reported $ 87,759 $ 807,580 $ (1,976,301)
Add:
Compensation cost
included in reported
net earnings (loss) -- -- --
Deduct:
Compensation cost
using the fair value
method, net of tax (53,519) (122,984) (178,239)
- --------------------------------------------------------------------------------
Pro Forma $ 34,240 $ 684,596 $ (2,154,540)
================================================================================
Earnings (loss) per share
As Reported
Basic $ (a) $ .07 $ (.17)
Diluted (a) .07 (.17)
Pro Forma
Basic (a) .06 (.18)
Diluted (a) .06 (.18)
================================================================================
(a) Less than $.01 per share
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Year ended
- --------------------------------------------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Risk free interest rate 4.75% 5.00% 5.00%
Expected term 3 years 3 years 3 years
Volatility 90% 75% 80%
Expected annual dividends none none none
The weighted average fair value of options granted was as follows:
Year ended
- --------------------------------------------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Per share option value $ .86 $ .47 $ .34
Aggregate total $ 46,530 $ 256,706 $ 2,040
================================================================================
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. Valuation allowances are established to reduce deferred tax assets to
amounts that the Company expects are more likely than not realizable.
EARNINGS PER SHARE. Basic and diluted net earnings (loss) per share were
computed in accordance with SFAS No. 128, "Earnings per Share." Basic net
earnings per share are computed by dividing net earnings available to
30
Wegener Corporation and Subsidiaries
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and exclude the dilutive effect of
stock options. Diluted net earnings per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
earnings per share, the average stock price for the period is used in
determining the number of shares assumed to be reacquired under the treasury
stock method from the hypothetical exercise of stock options.
The following tables represent required disclosure of the reconciliation of the
earnings and shares of the basic and diluted net earnings (loss) per share
computations:
Year ended
-------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
-------------------------------------------
BASIC
Net earnings (loss) $ 87,759 $ 807,580 $ (1,976,301)
-------------------------------------------
Weighted average shares
outstanding 12,328,571 12,160,865 11,943,048
-------------------------------------------
Net earnings (loss) per share $ (a) $ .07 $ (.17)
===========================================
DILUTED
Net earnings (loss) $ 87,759 $ 807,580 $ (1,976,301)
-------------------------------------------
Weighted average shares
outstanding 12,328,571 12,160,865 11,943,048
Effect of dilutive potential
common shares:
Stock options 151,295 68,375 --
-------------------------------------------
Total 12,479,866 12,229,240 11,943,048
-------------------------------------------
Net earnings (loss) per share $ (a) $ .07 $ (.17)
===========================================
(a) Less than $.01 per share
Stock options excluded from the diluted earnings (loss) per share calculation
due to their anti-dilutive effect are as follows:
Year ended
-------------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
-------------------------------------------------
Common stock options:
Number of shares 796,050 882,550 1,034,050
Range of exercise prices $1.41 to $5.63 $1.41 to $5.63 $.63 to $5.63
=================================================
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 borrowings. The fair value of these instruments
approximates their recorded value. The Company does not have financial
instruments with off-balance sheet risk. The fair value estimates were based on
market information available to management as of August 29, 2003.
Financial instruments that potentially subject the Company to concentrations of
market/credit risk consist principally of cash and cash equivalents and trade
accounts receivable. The Company invests cash through a high credit-quality
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
worldwide and
31
Wegener Corporation and Subsidiaries
generally does not require collateral from its customers. Management reviews its
accounts receivable on a regular basis to determine if any such amounts may be
potentially uncollectible. The Company includes any balances that are determined
to be uncollectible, along with a general reserve, in its overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed the
receivable is written off against the allowance. Based on management's best
estimate it believes the Company's allowance for doubtful accounts is adequate
as presented. Historically, the Company has not experienced significant losses
related to receivables from individual customers or groups of customers in any
particular industry or geographic area.
FOREIGN CURRENCY. The U.S. dollar is the Company's functional currency for
financial reporting. International sales are made and remitted in U.S. dollars.
RECENTLY ISSUED ACCOUNTING STANDARDS. In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires certain guarantees to be recorded at fair value
regardless of the probability of the loss. The adoption did not have a material
impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The Company believes
that the adoption of this standard will have no material impact on its financial
position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123, "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. The disclosure requirements shall be effective for
financial reports for interim periods beginning after December 15, 2002. The
Company adopted the disclosure portion of this statement for the fiscal quarter
ended May 30, 2003. The adoption did not have any impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. Many of such instruments were previously classified as equity. The
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The statement is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted. On November 7,2003 the FASB deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatory
redeemable non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FSAB. Management
believes that the adoption of this statement will not have a significant impact
on the financial position, results of operations or cash flows of the Company.
RECLASSIFICATIONS. Certain reclassifications have been made to the 2002 and 2001
financial statements to conform to the 2003 presentation.
32
Wegener Corporation and Subsidiaries
2. ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
AUGUST 29, August 30,
2003 2002
- --------------------------------------------------------------------------------
Accounts receivable - trade $ 3,838,644 $ 3,314,046
Other receivables 76,143 75,308
- --------------------------------------------------------------------------------
3,914,787 3,389,354
Less allowance for doubtful accounts (354,660) (351,592)
- --------------------------------------------------------------------------------
$ 3,560,127 $ 3,037,762
================================================================================
3. INVENTORIES
Inventories are summarized as follows:
AUGUST 29, August 30,
2003 2002
- --------------------------------------------------------------------------------
Raw materials $ 2,347,542 $ 2,917,924
Work-in-process 951,078 1,639,620
Finished goods 2,334,578 3,143,736
- --------------------------------------------------------------------------------
5,633,198 7,701,280
Less inventory reserves (3,490,363) (3,780,607)
- --------------------------------------------------------------------------------
$ 2,142,835 $ 3,920,673
================================================================================
The Company has invested a significant amount of financial resources to acquire
certain raw materials, to incur direct labor and to contract to have specific
outplant procedures performed on certain inventory in process. The Company
purchased this inventory based upon prior backlog and anticipated future sales
based upon existing knowledge of the marketplace. The Company's inventory
reserve of approximately $3,490,000 at August 29, 2003, 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 consist of the following:
Estimated
Useful Lives AUGUST 29, August 30,
(Years) 2003 2002
- --------------------------------------------------------------------------------
Land -- $ 707,210 $ 707,210
Buildings and improvements 3-30 3,746,690 3,742,790
Machinery and equipment 3-5 8,952,095 8,398,260
Furniture and fixtures 5 514,915 513,316
Application software 3-5 737,090 734,590
- --------------------------------------------------------------------------------
14,658,000 14,096,166
Less accumulated depreciation
and amortization (11,744,449) (11,100,834)
- --------------------------------------------------------------------------------
$ 2,913,551 $ 2,995,332
================================================================================
Depreciation expense for fiscal 2003, 2002, and 2001, totaled approximately
$666,000, $816,000, and $1,000,000, respectively. Assets recorded under a
capital lease included in property and equipment at August 29, 2003 and August
30, 2002, are machinery and equipment of approximately $613,000 and accumulated
amortization of approximately $613,000.
33
Wegener Corporation and Subsidiaries
5. OTHER ASSETS
Other assets consisted of the following:
AUGUST 29, 2003
- --------------------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
- --------------------------------------------------------------------------------
License agreements $ 570,000 $ (82,500) $ 487,500
Patents 174,369 -- 174,369
Trademarks 41,578 -- 41,578
Loan facility fees 50,000 (8,333) 41,667
Other 6,889 -- 6,889
- --------------------------------------------------------------------------------
$ 842,836 $ (90,833) $ 752,003
================================================================================
August 30, 2002
- --------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
- --------------------------------------------------------------------------------
Loan facility fees $ 50,000 $ (8,333) $ 41,667
Other 6,889 -- 6,889
- --------------------------------------------------------------------------------
$ 56,889 $ (8,333) $ 48,556
================================================================================
Amortization expense of other assets amounted to $133,000, $50,000, and $52,000
for fiscal years 2003, 2002, and 2001, respectively.
The Company conducts an on-going review of its intellectual property rights and
potential trademarks. During fiscal 2003, the Company incurred $174,000 and
$42,000 of legal expenses related to filing of applications for various patents
and trademarks, respectively. Upon issuance, these costs will be amortized over
their estimated useful lives. License agreements are amortized over their
estimated useful life of five years. Loan facility fees are amortized over
twelve months.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
AUGUST 29, August 30,
2003 2002
- --------------------------------------------------------------------------------
Compensation $ 570,977 $ 527,688
Royalties 261,639 235,444
Warranty 65,651 96,136
Taxes and insurance 41,503 194,074
Commissions 168,832 139,399
Professional fees 245,129 127,176
Other 79,018 89,452
- --------------------------------------------------------------------------------
$ 1,432,749 $ 1,409,369
================================================================================
7. FINANCING AGREEMENTS
REVOLVING LINE OF CREDIT AND TERM LOAN FACILITY
WCI's bank loan facility provides a maximum available credit limit of $5,000,000
with sublimits as defined. The loan facility matures on June 30, 2004, or upon
demand and requires an annual facility fee of 1% of the maximum credit limit.
The loan facility consists of a term loan and a revolving line of credit with a
combined borrowing limit of $5,000,000, bearing interest at the bank's prime
rate (4.00% at August 29, 2003).
34
Wegener Corporation and Subsidiaries
The term loan facility provides for a maximum of $1,000,000 for advances of up
to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over 60 months with a balloon payment due at maturity. The revolving
line of credit is subject to availability advance formulas of 80% against
eligible accounts receivable; 20% of eligible raw materials inventories; 20% of
eligible work-in process kit inventories; and 40% to 50% of eligible finished
goods inventories. Advances against inventory are subject to a sublimit of
$2,000,000. The loan is secured by a first lien on substantially all of WCI's
assets and guaranteed by Wegener Corporation. At August 29, 2003, no balances
were outstanding on the revolving line of credit or the equipment term loan
portions of the loan facility. Additionally, at August 29, 2003, approximately
$2,530,000 net of outstanding letters of credit in the amount of $2,172,000 was
available to borrow in accordance with the revolving line of credit advance
formulas.
The Company is required to maintain a minimum tangible net worth with annual
increases at each fiscal year end commencing with fiscal year 2003, retain
certain key employees, limit expenditures of Wegener Corporation to $1,400,000
in fiscal 2003 and $600,000 per fiscal year thereafter, maintain certain
financial ratios, and is precluded from paying dividends. At August 29, 2003,
the Company was in compliance with all loan facility covenants. The Company
believes that the loan facility along with cash and cash equivalent balances
will be sufficient to support operations through fiscal 2004. While no
assurances may be given, WCI believes, upon maturity, the existing loan facility
will be renewed on substantially similar terms.
8. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Year ended
- --------------------------------------------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Current
Federal $ -- $ (114,000) $ --
State (50,000) -- --
- --------------------------------------------------------------------------------
(50,000) (114,000) --
- --------------------------------------------------------------------------------
Deferred
Federal (85,000) 549,000 (1,049,000)
State (205,000) 38,000 (63,000)
- --------------------------------------------------------------------------------
(290,000) 587,000 (1,112,000)
- --------------------------------------------------------------------------------
Total $ (340,000) $ 473,000 $ (1,112,000)
================================================================================
The effective income tax rate differs from the U.S. federal statutory rate as
follows:
Year ended
- --------------------------------------------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Statutory U.S. income tax rate (34.0)% 34.0% (34.0)%
State taxes, net of federal
benefits (99.8) 1.9 (1.3)
Non-deductible expenses 1.6 .7 .3
Other, net (2.6) .3 (1.0)
- --------------------------------------------------------------------------------
Effective income tax rate (134.8)% 36.9% (36.0)%
================================================================================
35
Wegener Corporation and Subsidiaries
Deferred tax assets and liabilities that arise as a result of temporary
differences are as follows:
AUGUST 29, August 30,
2003 2002
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Accounts receivable and inventory reserves $ 1,957,000 $ 2,057,000
Accrued expenses 179,000 208,000
Net operating loss carryforwards 1,043,000 561,000
Credit carryforwards 297,000 98,000
AMT credit carryovers 138,000 138,000
Depreciation 121,000 143,000
Capitalized software costs (496,000) (244,000)
Other (101,000) (113,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 3,138,000 $ 2,848,000
================================================================================
Consolidated balance sheet classifications:
Current deferred tax asset $ 2,109,000 $ 2,225,000
Noncurrent deferred tax asset 1,029,000 623,000
- --------------------------------------------------------------------------------
Net deferred tax asset $ 3,138,000 $ 2,848,000
================================================================================
Net deferred tax assets increased $290,000 to $3,138,000 at August 29, 2003. The
increase was principally due to state income tax credits of $199,000 and
increases in net operating loss carryforwards. Net deferred tax assets decreased
$587,000 to $2,848,000 at August 30, 2002. The decrease was principally due to
decreases in net operating loss carryforwards and receipt of tax refunds of
$114,000 as a result of federal income tax law changes. Realization of deferred
tax assets is dependent on generating sufficient future taxable income prior to
the expiration of the loss and credit carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax assets will be realized based on the Company's backlog, financial
projections and operating history. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of further taxable income during the carryforward period are reduced.
At August 29, 2003, the Company had a federal net operating loss carryforward of
$2,900,000, which expires beginning fiscal 2020 through 2023. Additionally, the
Company had general business and foreign tax credit carryforwards of $98,000
expiring fiscal 2004, an alternative minimum tax credit of $138,000 and state
income tax credits of $199,000 expiring in fiscal 2009.
9. COMMON STOCK AND STOCK OPTIONS.
1998 INCENTIVE PLAN. On February 26, 1998, the stockholders approved the 1998
Incentive Plan (the "1998 Plan"). The Plan provides for awards of up to an
aggregate of 2,000,000 shares of common stock which may be represented by (i)
incentive or non-qualified stock options, (ii) stock appreciation rights (tandem
and free-standing), (iii) restricted stock, (iv) deferred stock, or (v)
performance units entitling the holder, upon satisfaction of certain performance
criteria, to awards of common stock or cash. In addition, the 1998 Plan provides
for loans and supplemental cash payments to persons participating in the Plan in
connection with awards granted. Eligible participants include officers and other
key employees, non-employee directors, consultants and advisors of the Company.
The exercise price per share in the case of incentive stock options and any
tandem stock appreciation rights may be not less than 100% of the fair market
value on the date of grant or, in the case of an option granted to a 10% or
greater stockholder, not less than 110% of the fair market value on the date of
grant. The exercise price for any other option and stock appreciation rights
shall be at least 75% of the fair market value on the date of grant. The
exercise period for non-qualified stock options may not exceed ten years and one
day from the date of the grant, and the expiration period for incentive stock
options or stock appreciation rights shall not exceed ten years from the date of
the grant (five years for a 10% or greater stockholder). The 1998 plan contains
an automatic option grant program to non-employee members of the Board of
Directors. Such members will each be granted an option to purchase 3,000 shares
of common stock on the last day of each December on which regular trading occurs
on the NASDAQ Stock Market, at an exercise price equal to the fair market value
of such stock on the date of grant. Such options will be exercisable during the
period of ten years and one day from the date of grant of the option. The
automatic grants in fiscal 2003 and 2002 were suspended; however, on January 21,
2003 and January 22, 2002, non-
36
Wegener Corporation and Subsidiaries
employee directors were granted options to purchase 9,000 shares at an exercise
price of $1.09 and 40,900 shares at an exercise price of $1.00, respectively.
The effective date of the 1998 plan is January 1, 1998 and the plan has a
ten-year term. During fiscal 2003, options for 54,000 shares of common stock
were granted to outside directors and employees pursuant to employment
agreements at exercise prices ranging from $ .91 to $2.09. Additionally, options
for 7,500 shares were forfeited and options for 23,000 shares were exercised at
$ .84 and $1.47. During fiscal 2002, options for 552,375 shares of common stock
were granted at exercise prices ranging from $ .60 to $1.03. Additionally,
options for 25,000 shares were forfeited and options for 22,000 shares were
exercised at prices ranging from $ .60 to $ .67. During fiscal 2001, options for
6,000 shares of common stock were granted at an exercise price of $ .63 and
options for 148,000 shares were forfeited. At August 29, 2003, options for
972,575 shares of common stock were available for future issuance.
1989 DIRECTORS' INCENTIVE PLAN. On January 9, 1990, the stockholders approved
the Wegener Corporation 1989 Directors' Incentive Plan permitting certain
participating directors of the Company to be eligible to receive incentive
awards consisting of common stock of the Company, performance units or stock
appreciation rights payable in stock or cash, or non-qualified stock options to
purchase such stock, or any combination of the foregoing, together with
supplemental cash payments. During the second quarter of fiscal 1995, the
Company amended the 1989 Directors' Stock Option Plan to increase the aggregate
number of shares of common stock that may be awarded from 100,000 to 300,000
shares; to remove the ineligibility provision for certain directors; and to
grant annually to each non-employee director, options to purchase 2,000 shares
of common stock at an exercise price equal to the fair market value of such
stock on the date of grant. The exercise price per share for non-qualified stock
options or stock appreciation rights shall not be less than 85% of fair market
value on the date the award is made or not more than nine trading days
immediately preceding such date. The expiration period for a non-qualified stock
option shall be ten years and one day from the date of the grant. The expiration
period for stock appreciation rights, including any extension, shall not exceed
ten years from the date of grant. This plan terminated and expired effective
December 1, 1999. During fiscal 2003, options for 16,500 shares were exercised
at $ .75. At August 29, 2003, options for 265,000 shares of common stock
remained outstanding under the 1989 Directors' Incentive Plan.
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, incentive or non-qualified stock
options to purchase stock, or any combination of the above, together with
supplemental cash payments. The aggregate number of shares issuable under the
1988 plan is 750,000 common shares. The exercise price per share in the case of
incentive stock options and any tandem stock appreciation rights will be equal
to 100% of the fair market value or, in the case of an option granted to a 10%
or greater stockholder, l10% of the fair market value. The exercise price for
any other option and stock appreciation rights shall be at least 85% of the fair
market value on the date the option is granted. The exercise period for
non-qualified stock options shall be ten years and one day from the date of the
grant, and the expiration period for incentive stock options or stock
appreciation rights shall not exceed ten years from the date of the grant.
During fiscal 2003, options for 114,000 shares of common stock were forfeited.
During fiscal 2002, options for 7,500 shares of common stock were exercised at
$1.44 and options for 96,500 shares were forfeited. During fiscal 2001, options
for 12,750 shares of common stock were forfeited. This plan terminated and
expired December 1, 1998. At August 29, 2003, no options for shares of common
stock remained outstanding under the 1988 Incentive Plan.
37
Wegener Corporation and Subsidiaries
A summary of stock option transactions for the above plans follows:
Weighted
Number Range of Average
of Shares Exercise Prices Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
September 1, 2000 1,188,800 $ .75 - 5.63 $2.35
Granted 6,000 .63 .63
Exercised -- -- --
Forfeited or cancelled (160,750) 1.41 - 5.63 4.25
================================================================================
Outstanding at
August 31, 2001 1,034,050 $ .75 - 5.63 $2.04
Granted 552,375 .60 - 1.03 .90
Exercised (29,500) .60 - 1.44 .86
Forfeited or cancelled (121,500) 1.44 - 2.31 1.56
================================================================================
Outstanding at
August 30, 2002 1,435,425 $.63 - 5.63 $1.67
Granted 54,000 .91 - 2.09 1.65
Exercised (39,500) .75 - .84 .80
Forfeited or cancelled (121,500) 1.41 - 2.31 1.47
================================================================================
OUTSTANDING AT
AUGUST 29, 2003 1,328,425 $ .63 - 5.63 $1.71
AVAILABLE FOR ISSUE AT
AUGUST 29, 2003 972,575 -- --
================================================================================
Options exercisable at
AUGUST 29, 2003 1,293,425 $ .63 - 5.63 $1.70
August 30, 2002 1,135,425 $ .75 - 5.63 $1.89
================================================================================
The weighted average remaining contractual life of options outstanding at August
29, 2003, was 3.9 years.
During fiscal 2001, options for 402,500 shares of common stock at a weighted
average exercise price of $1.54 were deemed to be variable stock options. These
options required the recognition of compensation expense based on the difference
between the exercise price and the fair market value of the stock at the end of
a reporting period. For the year ended August 31, 2001, a non-cash compensation
benefit of $488,000 was included in SG&A expenses. During the fourth quarter of
fiscal 2001, tax reimbursement features were removed from common stock options.
As a result, fiscal 2002 SG&A expenses were not subject to variable stock option
compensation adjustments.
On January 25, 2000, the Company entered into an agreement with RCG Capital
Markets Group, Inc. to provide a national financial relations program. The
agreement was for an 18 month period and provided for a monthly fee of $6,000
and stock options for 200,000 shares of Wegener Corporation common stock
exercisable for a period of five years from the date of grant at $5.625 per
share. Options for 100,000 shares vested upon execution of the agreement with
the remaining options for 100,000 shares vesting upon completion of agreed upon
performance criteria. In accordance with EITF Issue No. 96-18 and SFAS No. 123,
these options were measured on January 25, 2000, for fair value using the
Black-Scholes option pricing model. The fair value of the options amounted to
$445,000 and was amortized to expense over the 18 month term of the agreement.
The options for 100,000 shares of common stock related to performance criteria
were forfeited July 25, 2001, upon expiration of the agreement. Since the stated
performance criteria were not met, none of the underlying options were deemed
vested and earned. As such, the fair value of the forfeited options amounting to
$222,000 was credited to SG&A expenses at the date of forfeiture. For the year
ended August 31, 2001, a net charge of $47,000 was included in SG&A expenses. At
August 29, 2003, options for 100,000 shares were vested and outstanding.
Pursuant to the agreement, the Company has granted certain registration rights
to RCG covering the shares underlying the options.
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 2003, 2002 and 2001.
38
Wegener Corporation and Subsidiaries
Eligible WCI employees are permitted to make contributions, up to certain
regulatory limits, to the plan on a tax deferred basis under Section 401(k) of
the Internal Revenue Code. The plan provides for a minimum company matching
contribution on a quarterly basis at the rate of 25% of employee contributions
with a quarterly discretionary match. During fiscal years 2003, 2002 and 2001,
an additional discretionary matching contribution of 25% of employee
contributions was made for all quarters. All matching contributions are in the
form of Company stock or cash at the discretion of the Company's Board of
Directors. During the first five months of fiscal 2003, matching contributions
were made in the form of Company stock with the remainder of the fiscal year's
contributions made in the form of cash. Fiscal 2003 matching contributions of
$189,000 consisted of $132,000 in the form of cash and $57,000 in the form of
Company stock. Matching Company contributions of $158,000 in fiscal 2002 and
$188,000 in fiscal 2001 were in the form of common stock.
11. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for the way that public business enterprises
report information about operating segments in their financial statements. The
standard defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Based on these standards the Company has determined that
it operates in a single operating segment: the manufacture and sale of satellite
communications equipment.
In this single operating segment the Company has three sources of revenues as
follows:
Year ended
-------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Direct Broadcast Satellite $ 18,152,647 $ 21,932,974 $ 18,038,738
Telecom and Custom Products 1,411,493 1,073,345 1,779,988
Service 569,040 452,604 514,173
- --------------------------------------------------------------------------------
$ 20,133,180 $ 23,458,923 $ 20,332,899
================================================================================
Revenues by geographic areas are as follows:
Year ended
-------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Geographic Area
United States $ 19,293,956 $ 21,986,074 $ 17,539,328
Canada 314,625 576,733 111,096
Europe 262,958 387,524 1,074,642
Asia 147,318 219,778 122,762
Latin America and Mexico 18,366 69,522 1,366,070
Other 95,957 219,292 119,001
- --------------------------------------------------------------------------------
$ 20,133,180 $ 23,458,923 $ 20,332,899
================================================================================
Revenues attributed to geographic areas are based on the location of the
customer. All of the Company's long-lived assets are located in the United
States.
39
Wegener Corporation and Subsidiaries
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. Customers representing 10% or more of the year's revenues are as
follows:
Year ended
-------------------------------------------
AUGUST 29, August 30, August 31,
2003 2002 2001
---------------------------------------------------------------------------
Customer 1 39.3% 27.5% (a)
Customer 2 16.3% 27.9% (a)
Customer 3 (a) 11.1% 34.7%
(a) Revenues for the year were less than 10% of total revenues.
Sales to a relatively small number of major customers have typically comprised a
majority of the Company's revenues and that trend is expected to continue
throughout fiscal 2004 and beyond. Future revenues are subject to the timing of
significant orders from customers and are difficult to forecast. As a result,
future revenue levels may fluctuate from quarter to quarter.
At August 29, 2003, two customers accounted for more than 10% of the Company's
accounts receivable. At August 30, 2002, one customer accounted for more than
10% of the Company's accounts receivable. When deemed appropriate, the Company
uses letters of credit and credit insurance to mitigate the credit risk
associated with foreign sales.
12. STATEMENTS OF CASH FLOWS
Interest payments were approximately $69,000, $64,000 and $70,000 for fiscal
years 2003, 2002 and 2001, respectively. Income tax refunds received in fiscal
2002 and 2001 were $208,000 and $532,000, respectively. No income taxes were
paid or received in 2003. Non-cash financing activities in fiscal 2003 included:
72,977 shares of treasury stock reissued and 27,176 shares of common stock
issued for 401(k) matching Company contributions valued at approximately
$82,000. Non-cash financing activities in fiscal 2002 included: 167,111 shares
of treasury stock reissued for 401(k) matching Company contributions valued at
approximately $158,000. Non-cash financing activities in fiscal 2001 included:
1) 211,883 shares of treasury stock reissued for 401(k) matching Company
contributions valued at approximately $188,000, 2) non-cash stock option
compensation benefit of $488,000, and 3) fair value of stock options granted for
services valued at $47,000.
13. COMMITMENTS AND CONTINGENCIES
During the second quarter of fiscal 2003, the Company entered into two
manufacturing and purchasing agreements for certain finished goods inventories.
The agreements committed the Company to purchase $2,116,000 over an 18 month
period, beginning in the third quarter of fiscal 2003. At August 29, 2003,
outstanding purchase commitments under these agreements amounted to $2,049,000.
In addition, the Company maintains a cancelable manufacturing and purchasing
agreement of finished goods inventories for which the Company has firm customer
order commitments. The Company had outstanding purchase commitments under this
agreement of $1,261,000 at August 29, 2003. Pursuant to the above agreements, at
August 29, 2003, the Company had outstanding letters of credit in the amount of
$2,172,000.
The Company leases certain office and manufacturing facilities, vehicles and
equipment under long-term non-cancelable operating leases that expire through
fiscal 2007. Future minimum lease commitments are approximately as follows:
2004-$224,000, 2005-$114,000, 2006-$4,000, 2007-$2,000, 2008-$2,000. Rent
expense under all leases was approximately $242,000, $243,000 and $273,000 for
fiscal years 2003, 2002 and 2001, respectively.
From time to time in the ordinary course of business, the Company has become a
defendant in various types of legal proceedings. Management does not believe
that these proceedings individually or in the aggregate, will have a material
adverse effect on the Company's financial position, results of operations or
cash flows. In June 2002, a complaint was filed against WCI in federal district
court in Nevada by StarGuide Digital Networks, Inc. (StarGuide Digital Network,
Inc., Plaintiff, v. Wegener Communications, Inc., and John Scaggs, Defendants)
alleging patent infringement by WCI and seeking injunctions, unspecified
compensatory and punitive damages and costs and attorneys' fees. WCI answered
the complaint denying all liability and filed counterclaims against StarGuide.
In the
40
Wegener Corporation and Subsidiaries
first quarter of fiscal 2003, WCI and John Scaggs reached an agreement with
StarGuide settling all disputes between the parties. The terms of the settlement
are confidential but include StarGuide's grant of limited licenses to Wegener
under a number of StarGuide patents. WCI has agreed to pay StarGuide a running
royalty on certain products. Management of the Company believes that the
settlement will not have a material adverse effect on the Company's financial
condition or results of operations.
On April 23, 2003, WC Acquisition Corporation, a wholly owned subsidiary of
Radyne ComStream, Inc., commenced an all-cash, all-shares tender offer for all
outstanding shares of Wegener Corporation (Wegener) common stock not already
owned by WC Acquisition Corporation. Wegener's Board of Directors appointed an
Independent Committee to investigate the offer, and after reviewing the
Independent Committee's recommendation, Wegener's Board issued a press release
which reflected their findings that the offer was priced too low and therefore
tendering shares was not in the best interest of Wegener's shareholders. On
April 24, 2003, Radyne ComStream, Inc. and WC Acquisition Corporation filed a
complaint in the U.S. District Court for the District of Delaware against
Wegener arising out of this tender offer. The Plaintiffs requested that the
Court enter a declaratory judgment that the public disclosures and documents
filed with the Securities and Exchange Commission by the Plaintiffs, in
connection with the tender offer, fully comply with all applicable laws. The
Plaintiffs also sought an injunction against Wegener, as well as against its
agents and employees, from making any false or misleading statements with
respect to the tender offer and an award of Plaintiffs' costs and attorneys'
fees. Wegener filed an answer to this Complaint on May 15, 2003, and denied all
of the substantive allegations of the Complaint. In its answer, Wegener also
asserted counterclaims, alleging that the tender offer was illegal, and done in
violation of ss. 14 of the Williams Act. On June 27, 2003, the Plaintiffs
dismissed this lawsuit.
On April 24, 2003, WC Acquisition Corporation and Radyne ComStream, Inc.
commenced an action against Wegener, Robert A. Placek, Thomas G. Elliot, James
H. Morgan, Jr., C. Troy Woodbury, Jr., Wendell Bailey and Joe K. Parks in the
Court of Chancery for the State of Delaware in and for New Castle County. Each
of the individuals named in the Complaint as Defendants are (or were) officers
and/or directors of Wegener. Plaintiffs asserted that these individuals violated
their fiduciary duties by failing to approve the tender offer and proposed
merger, by failing to exempt the tender offer from Section 203 of the General
Corporation Law of the State of Delaware, by failing to render inapplicable
Article Eighth of Wegener's Certificate of Incorporation, and by adopting
anti-takeover devices. Plaintiffs sought to have the Court compel the Defendants
to approve the proposed acquisition, enjoin the Defendants from applying Section
203 of the General Corporation Law of the State of Delaware and Article Eighth
of Wegener's Certificate of Incorporation, and enjoin Wegener, its agents and
its employees, from adopting any other measure which could impede the
acquisition or other attempts by the Plaintiffs to acquire Wegener. The
Complaint also sought an award of Plaintiffs' costs and attorneys' fees. Wegener
filed an answer to this Complaint on May 19, 2003, and denied all of the
substantive allegations of the Complaint. On June 26, 2003, this lawsuit was
dismissed.
On June 20, 2003, Jerry Leuch commenced an action styled as a direct class
action and a derivative action against Robert A. Placek, Thomas G. Elliot, Joe
K. Parks, C. Troy Woodbury, Jr., Wendell Bailey, Ned Mountain and Wegener
Corporation in the Court of Chancery of the State of Delaware, In and For New
Castle County. The Plaintiff alleges that the individual defendants violated
their fiduciary duties due to him and other shareholders, the members of the
alleged class, as well as Wegener. The relief Plaintiff seeks is as follows: a
declaration that the Defendants must consider and evaluate all bona fide offers
to purchase all of the outstanding shares of Wegener consistent with their
fiduciary duties; a declaration that this action is properly styled as a class
action; an injunction against proceeding with any business combination which
benefited the individual defendants and an injunction requiring that any
conflicts of interest be resolved in favor of the Wegener shareholders; and a
declaration removing the anti-takeover measures enacted by Wegener's Board of
Directors. The Complaint also seeks an award of Plaintiff's costs and attorneys'
and other fees. An answer has been filed by Wegener, denying all substantive
allegations in the complaint. Management does not believe that the ultimate
outcome of this litigation will have a material adverse effect on its financial
condition or results of operations.
14. GUARANTEES
Warranty
The Company warrants its products for a 12 to 14 month period beginning at the
date of shipment. The warranty provides for repair or replacement of defective
products returned during the warranty period at no cost to the customer. The
Company expenses costs for routine warranty repairs as incurred. Additional
provisions are made for non-routine warranty repairs based on estimated costs to
repair at the point in time in which the warranty claim is identified. Accrued
warranty liabilities amounted to $66,000 at August 29, 2003. For the year ended
August 29, 2003 the accrual was reduced by $30,000 for satisfied warranty
claims. There was no warranty expense recognized during the year ended August
29, 2003.
41
Wegener Corporation and Subsidiaries
Letters of Credit
Wegener Communications, Inc., the Company's wholly owned subsidiary (WCI),
provides standby letters of credit in the ordinary course of business to certain
suppliers pursuant to manufacturing and purchasing agreements. At August 29,
2003, outstanding letters of credit amounted to $2,172,000.
Financing Agreements
The Company guarantees the bank loan facility of WCI. The bank facility provides
a maximum available credit limit of $5,000,000. At August 29, 2003, no balances
were outstanding on the loan facility.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter
------------------------------------------------------------ ------------
First Second Third Fourth Year
------------------------------------------------------------ ------------
FISCAL 2003
REVENUE $ 3,945,118 $ 5,219,152 $ 6,254,459 $ 4,714,451 $ 20,133,180
GROSS PROFIT 1,301,208 1,874,297 2,441,736 1,893,140 7,510,381
OPERATING INCOME (LOSS) (583,587) 187,755 195,159(b) (39,383)(b) (240,056)
NET EARNINGS (LOSS) (369,546) 116,657 122,968 217,680(c) 87,759
NET EARNINGS (LOSS) PER SHARE
BASIC (0.03) 0.01 0.01 0.02 (a)
DILUTED (0.03) 0.01 0.01 0.02 (a)
(a) Less than $ .01 per share
Fiscal 2002
Revenue $ 6,032,616 $ 5,860,702 $ 6,290,810 $ 5,274,795 $ 23,458,923
Gross profit 1,965,894 2,084,349 2,198,219 1,573,804 7,822,266
Operating income (loss) 224,984 414,613 610,327 61,331 1,311,255
Net earnings (loss) 132,165 255,946 379,498 39,971 807,580
Net earnings (loss) per share
Basic 0.01 0.02 0.03 (a) 0.07
Diluted 0.01 0.02 0.03 (a) 0.07
(a) Less than $ .01 per share
(b) Includes $809,000 in the third quarter and $165,000 in the fourth
quarter of corporate legal and professional fees related to defending
the Company against an unsolicited hostile takeover attempt by Radyne
ComStream, Inc., and related litigation.
(c) Includes $199,000 of state income tax credits earned.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company carried out an evaluation pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of the end
of the period covered by this Report. Based upon that evaluation, the Company's
CEO and CFO have concluded that the Company's disclosure controls and procedures
are effective. There has been no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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 20, 2004 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 9 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "EXECUTIVE COMPENSATION" contained
in the Proxy Statement is incorporated herein by reference in response to this
item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information contained under the captions "ELECTION OF DIRECTORS," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "EQUITY COMPENSATION
PLAN INFORMATION" contained in the Proxy Statement is incorporated herein by
reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" contained in the Proxy Statement is incorporated herein by
reference in response to this item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information contained in the Proxy Statement is incorporated herein by
reference in response to this item.
43
PART IV
ITEM 15. 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:
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets - August 29, 2003, and August 30, 2002.
Consolidated Statements of Operations - Years ended August 29, 2003, August 30,
2002, and August 31, 2001.
Consolidated Statements of Shareholders' Equity - Years ended August 29, 2003,
August 30, 2002, and August 31, 2001.
Consolidated Statements of Cash Flows - Years ended August 29, 2003, August 30,
2002, and August 31, 2001.
Notes to Consolidated Financial Statements.
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 wholly-owned.
(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 42:
Schedule II-Valuation and Qualifying Accounts Years ended August
29, 2003, August 30, 2002, and August 31, 2001.
(a) (3) The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index on pages 44 and 45.
(b) Reports on Form 8-K during the fourth quarter ended August 29,
2003:
Current Report on Form 8-K dated as of May 1, 2003, and filed May
6, 2003, disclosing Amended and Restated By-laws of Wegener
Corporation (Exhibit 3.1) and Stockholder Rights Agreement dated
as of May 1, 2003, between Wegener Corporation and Securities
Transfer Corporation, as Rights Agent (Exhibit 4.1).
Current Report on Form 8-K dated June 17, 2003, furnishing its
press release regarding its results for the third fiscal quarter
ended May 30, 2003.
(c) See Part IV, Item 15(a) (3).
(d) Not applicable.
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of Wegener Corporation
Duluth, Georgia
The audits referred to in our report dated November 14, 2003, relating to
the consolidated financial statements of Wegener Corporation and subsidiaries,
which is contained in Item 8 of this Form 10-K included the audit of the
financial statement schedule listed in the accompanying index. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
November 14, 2003
45
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
account receivable:
YEAR ENDED AUGUST 29, 2003 $ 351,592 $ 30,000 $ (26,932) $ -- $ 354,660
Year ended August 30, 2002 $ 305,021 $ 155,000 $ (108,429) $ -- $ 351,592
Year ended August 31, 2001 $ 165,578 $ 120,000 $ (45,136) $ 64,579 $ 305,021
Inventory Reserves:
YEAR ENDED AUGUST 29, 2003 $ 3,780,607 $ 75,000 $ (365,244) $ -- $ 3,490,363
Year ended August 30, 2002 $ 4,156,494 $ 800,000 $ (1,175,887) $ -- $ 3,780,607
Year ended August 31, 2001 $ 3,444,494 $ 1,325,000 $ (613,000) $ -- $ 4,156,494
46
EXHIBIT INDEX
The following documents are filed as exhibits to this report. An asterisk
identifies those exhibits previously filed and incorporated herein by reference
below. For each such asterisked exhibit there is shown below the description of
the previous filing. Exhibits which are not required for this report are
omitted. Exhibits 10.3 through 10.5 identify management contracts or
compensatory plans.
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).
*3.4 Amended and Restated By-laws (Form 8-K, dated as of May 1,
2003 and filed May 6, 2003, 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).
*4.5 Loan and Security Agreement - First Amendment dated August
4, 1998, by and between Wegener Communications, Inc. and
LaSalle National Bank respecting $10,000,000 combined
revolving credit note and term note.
*4.6 Loan and Security Agreement - Third Amendment dated December
11, 2000, by and between Wegener Communications, Inc., and
LaSalle National Bank respecting $10,000,000 combined
revolving credit note and term note. (2001 10-Q filed April
16, 2001, Exhibit 4.1.)
*4.7 Loan and Security Agreement - Fourth Amendment dated March
28, 2002, by and between Wegener Communications, Inc., and
LaSalle National Bank respecting $5,000,000 combined
revolving credit note and term note (2002 10-Q filed June
28, 2002, 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.
*4.8 Loan and Security Agreement - Fifth Amendment dated June 27,
2003, by and between Wegener Communications, Inc. and
LaSalle National Bank respecting $5,000,000 combined
revolving credit note and term note. (2003 10-Q filed July
9, 2003, Exhibit 4.1.)
*4.9 Stockholder Rights Agreement (Form 8-K, dated as of May 1,
2003 and filed May 6, 2003, Exhibit 4.1).
47
Exhibit Number Description of Document
- -------------- -----------------------
*10.1 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).
*10.2 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).
*10.3 1989 Directors' Incentive Plan (1990 10-K, filed November
29, 1990, Exhibit 10.9).
*10.3.1 Amendment to 1989 Directors' Incentive Plan effective
February 1, 1995, (1995 10-K, filed December 13, 1996,
Exhibit 10.4.1).
*10.4 1998 Incentive Plan (1998 Form S-8, Registration No.
333-51205, filed April 28, 1998, Exhibit 10.1).
*10.5 Form of Agreement between Wegener Corporation and Robert A.
Placek, Ned L. Mountain, and C. Troy Woodbury, Jr.
respecting severance payments in the event of change of
control (Schedule 14D-9, filed May 6, 2003, Exhibit (e)
(1)).
14.1 Wegener Corporation Code of Business Conduct and Ethics.
*21 Subsidiaries of the Registrant (1990 10-K, filed November
29, 1990, Exhibit 22).
23 Consent of BDO Seidman, LLP.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WEGENER CORPORATION
Date: November 26, 2003 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 26th day of November 2003.
Signature Title
- --------- -----
/s/ Robert A. Placek President, Chief Executive Officer and
- ----------------------------- Chairman of the Board (Principal Executive
Robert A. Placek Officer)
/s/ C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer,
- ----------------------------- Director (Principal Financial and Accounting
C. Troy Woodbury, Jr. Officer)
/s/ Ned L. Mountain Director, Executive Vice President of WCI
- -----------------------------
Ned L. Mountain
/s/ Joe K. Parks Director
- -----------------------------
Joe K. Parks
/s/ Thomas G. Elliot Director
- -----------------------------
Thomas G. Elliot
/s/ Wendell H. Bailey Director
- -----------------------------
Wendell H. Bailey
49
DIRECTORS
Robert A. Placek
Chairman of the Board,
President and Chief
Executive Officer
Wegener Corporation
Ned L. Mountain
Executive Vice President
Wegener Communications, Inc.
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
Wegener Corporation
Joe K. Parks
Retired, Previously
Laboratory Director,
Systems Development Laboratory
Georgia Tech Research Institute
Georgia Institute of Technology
Thomas G. Elliot
Senior Vice President of
Technical Projects
CableLabs
Wendell H. Bailey
President & Chief Executive
Officer of Strategic
Technology International
OFFICERS
Robert A. Placek
Chairman of the Board,
President and Chief
Executive Officer
Ned L. Mountain
Executive Vice President
Wegener Communications, Inc.
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
BDO Seidman, LLP
285 Peachtree Center Avenue
Suite 800
Atlanta, Georgia 30303-1230
TRANSFER AGENT
Securities Transfer Corporation
2591 Dallas Parkway
Suite 102
Frisco, Texas 75034
CORPORATE
HEADQUARTERS
11350 Technology Circle
Duluth/Atlanta, Georgia 30097-1502
ANNUAL MEETING
The annual meeting of stockholders
will be held on January 20, 2004
at 7:00 p.m. at the Corporate
Headquarters.
COMMON STOCK NASDAQ
NASDAQ Small-Cap Market Symbol: WGNR
FORM 10-K REPORT
Wegener Corporation's Annual Report
on Form 10-K, filed with the Securities
and Exchange Commission, is available
free of charge by written request to:
Elaine Miller, Secretary
Investor Relations
Wegener Corporation
11350 Technology Circle
Duluth, Georgia 30097-1502
WEB SITE
HTTP://WWW.WEGENER.COM
QUARTERLY COMMON
STOCK PRICES
The Company's common stock is traded
on the NASDAQ Small-Cap Market. The
quarterly ranges of high and low sale
prices for fiscal 2003 and 2002 were
as follows:
High Low
- ----------------------------------
FISCAL YEAR ENDING AUGUST 29, 2003
First Quarter $1.07 $ .60
Second Quarter 1.10 .69
Third Quarter 1.72 .73
Fourth Quarter 2.49 1.29
- ----------------------------------
FISCAL YEAR ENDING AUGUST 30, 2002
First Quarter $1.32 $ .50
Second Quarter 1.25 .80
Third Quarter 1.70 .81
Fourth Quarter 1.47 .90
- ----------------------------------
The Company had approximately 377*
shareholders of record at November
20, 2003. The Company has never paid
cash dividends on its common stock
and does not intend to pay cash
dividends in the foreseeable future.
*(This number does not reflect
beneficial ownership of shares held
in nominee names).
50