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 September 3, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file No. 0-11003
WEGENER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0371341
(State of incorporation) (I.R.S. Employer
Identification No.)
11350 TECHNOLOGY CIRCLE, DULUTH, GEORGIA 30097-1502
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 623-0096
REGISTRANT'S WEB SITE: HTTP://WWW.WEGENER .COM
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. |_|
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 $26,982,498 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 15, 2004, 12,546,051 shares of registrant's Common Stock
were outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement pertaining to the January 25,
2005 Annual Meeting of Stockholders, only to the extent expressly so stated
herein, are incorporated herein by reference into Part III.
WEGENER CORPORATION
FORM 10-K
YEAR ENDED SEPTEMBER 3, 2004
INDEX
PART I
Page
Item 1. Business................................................................................................2
Item 2. Properties.............................................................................................11
Item 3. Legal Proceedings......................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders....................................................11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities......................................................................................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.............................................23
Item 8. Financial Statements and Supplementary Data............................................................23
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures..................................................................................43
Item 9A. Controls and Procedures................................................................................43
Item 9B. Other Information......................................................................................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 and Financial Statement Schedules.............................................................44
1
PART I
ITEM 1. BUSINESS
Wegener(TM) Corporation, the Registrant, together with its subsidiaries,
is referred to herein as "we," "our," "us," the "Company" or "WGNR."
(a) General development of business.
Wegener Corporation was formed in 1977 and is a Delaware corporation. We
conduct our continuing business through Wegener Communications, Inc. (WCI), a
wholly-owned subsidiary. WCI was formed in April 1978 and is a Georgia
corporation. WCI is a leading provider of digital solutions for video, audio and
IP data networks, primarily via satellite delivery. Applications include
broadcast and cable television, business television, IP data delivery, distance
education, business music and radio networks. COMPEL, our patented network
control system, provides network flexibility to regionalize programming,
commercials and file transfers.
(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.
MARKETS AND INDUSTRY OVERVIEW
The primary markets we serve are business and private networks, cable
television, broadcast television and broadcast radio.
Business/Private Networks
Business networks consist of corporate and enterprise networks
distributing video, audio and/or data via satellite. Private networks consist of
networks that target video, audio and/or data to a select group of subscribers
or viewers via satellite. Historically, our equipment is used for a large
percentage of the horse racing video distribution in the United States and
Sweden and we are continuing to expand that market. Our business and private
network customers include Muzak LLC, Roberts Communications, Inc, Scientific
Games-Autotote Communication Service Division, and Swedish companies ATG and
TERACOM. In addition, we work through third-party integrators, such as Ascent
Media and Globecomm, to reach this market space.
Business networks are looking for alternatives to replace the current
methods of corporate training they use. Currently they (1) send trainers to
facilities, which is difficult to coordinate and expensive, or (2) send video
tapes, which is costly and complicated to manage, or (3) broadcast a satellite
television network, which is exceptionally cost prohibitive and requires
schedule coordination throughout the facilities, or (4) stream programming over
their IP networks, which provides low quality video and requires advanced
training for users and operators. Video-on-demand promises to reduce the costs
and complications of their networks by allowing operators to sent video files to
the remote locations and allow trainees to view the training videos when it is
convenient for them with no need to coordinate schedules with the central
office.
The dropping cost of plasmas, LCDs and television monitors has made it
economically feasible for more businesses to use wide screen televisions for
advertising. Digital signs and advertisements are becoming more common and
retail stores are beginning to test market video advertisements within their
prime locations.
2
Cable Television
Cable television consists of (1) companies that provide programming to
cable, direct-to-home satellite and telecom companies for distribution to
consumers, and (2) cable distribution companies, such as cable multiple system
operators. Broadcast television consists of companies that broadcast, typically
free-to-air, television signals to local viewers. Cable television and broadcast
television customers include FOX, HDNet, Time Warner, Adelphia, Turner
Broadcasting, and PaxTV. In addition, we work through distributors, such as
MegaHertz, AMT and Satellite Engineering Group.
With the drop in costs of high definition televisions, more consumers have
now seen high definition television and want a widescreen digital television to
watch DVDs and the programming offered to them. This is increasing pressure on
cable, satellite and telecom networks to offer high definition to their
customers.
Cable programmers continue to distribute their programming over satellite
to cable, direct to home (DTH) satellite, and telecom companies. They are
starting to stream programming directly to consumers via the internet as well.
They continue to launch new services to compete for advertising dollars. They
are launching increasing numbers of high definition services, as well as
distributing video-on-demand content. They are concerned about the effect that
personal video recorders could potentially have on their advertising revenue as
well as about the security of their high value content being stored in
consumers' homes in a digital and potentially easy to copy format.
Cable, DTH satellite and telecom companies are all competing to provide
consumers with television, telephone and high speed internet services. To gain
and maintain subscribers, they are rolling out the new high definition and
video-on-demand services and fielding personal video recording devices.
Broadcast Networks
Broadcasters continue to launch local digital broadcast stations. Many are
opting to only provide HD content during primetime hours from their main
satellite feed and provide multi-channel SD services during the day. They are
hoping the FCC will force cable operators to carry both their analog and digital
channels.
Satellite teleports are recovering from global slowdown that affected
satellite transponder use. They are increasingly looking at integrated video and
data solutions for their customers.
Broadcast radio consists of companies that broadcast, typically
free-to-air, radio signals to local listeners. Radio network customers include
EMF Broadcasting, ABC Radio Network, Christian Radio Consortium, Salem Radio
Network, Clear Channel and Educational Media Foundation.
PRODUCTS
Our products include: iPump(R) Media Servers, MediaPlan(R) Content
Management and Ingest, Compel(R) Network Control System, UNITY(R) Satellite
Receivers, DTV Digital Stream Processors, analog audio products and uplink
products, such as encoders.
iPump Media Servers
The iPump 6400 Media Server combines the features of our integrated
receiver decoders (IRD) with advanced media server functionality. The iPump
delivers and stores digital content into broadcast, cable and business
operations utilizing store and forward technology compared to traditional
real-time delivery. Store and forward technology allows network operators to
store content at receive locations and then play back the content locally either
based on schedules or on-demand user selection. Network operators can reduce
their satellite space segment cost by sending programming and playback schedules
as stored files into the iPump for later playback according to the schedules.
The network operator can then utilize limited satellite time to refresh the
programming and play-out schedules without the necessity to maintain a constant
signal on the satellite.
3
The recently introduced iPump 615 Streaming Media Decoder is a peripheral
settop decoder for the iPump 6400 Professional Media Server. It receives an IP
stream via Ethernet from the iPump 6400 and outputs audio and video. It is
designed for high volume dynamic environments such as retail point-of-sale
kiosks, point of purchase (POP) digital signs and advertisements, and corporate
communications. The iPump 615 offers high-definition video and advanced digital
audio, in addition to standard definition video and audio.
We are targeting all of our core markets for the iPump product. Within
these markets, applications for the iPump products include:
Business and Private Networks
o Interactive Training
o Distance Learning, Educational Purposes
o Customized Training by Site
o Retail Point-of-Sale Displays or Kiosks
o Corporate Communications
o Streaming Video/Audio/Data to the Desktop
Television and Radio Broadcast
o Regional Advertising and Content
o Time Zone Shifted Programming
o News Distribution
o Reduction of Satellite Delivery Cost
Cable Television
o Regional Ad Insertion
o Segment Spot Distribution by Group or Region
o Video on Demand
MediaPlan
MediaPlan(R) i/o and MediaPlan(R) CM products are control and management
system modules to our patented Compel(R) Control System, which is discussed
below. The MediaPlan products are crucial for customers in controlling iPump
Media Server networks and are a competitive advantage for us in sales of iPump
Media Servers.
MediaPlan i/o is a desktop system to encode, store, edit and add
descriptive information to media content. MediaPlan i/o encodes analog or
digital video and audio into digital files. All content is logged into libraries
for retrieval. MediaPlan i/o executes file delivery to the iPump Media Servers
for LAN, IP and terrestrial network, or desktop PC distribution. A browser
interface lets you control operations from any PC.
MediaPlan CM is a powerful content management system used for managing
media assets and actively tracking delivery of content throughout the iPump
network. Operators can create libraries of assets, generate descriptive
information, view content at each network iPump, send requested content directly
to targeted users and track file usage.
MediaPlan is an enabler for iPump sales, so the same markets and
applications exist for MediaPlan as were described in the iPump section above.
4
Compel Network Control System
Compel Network Control System is our patented control system and has been
a key differentiator to our products since 1989. Compel is used in over 150
networks controlling over 100,000 receivers. Compel has patented grouping and
addressing controls that provide flexibility in network management. Receivers
can be controlled as individual sites and as groups. Commands are synchronized
with video and audio programming, which allows users to regionalize programming
and blackout programming from nonsubscribers, as well as target commercials to
subscribers.
Compel option modules include Web Access and Conditional Access. Web
Access allows multiple users to access their Compel system from a LAN using a
browser. Conditional Access utilizes a secure micro in every Unity receiver to
deliver fast, secure conditional access to a network without the high cost of
consumer smart card systems.
Our Unity satellite receivers and iPumps are controlled by our Compel
Network Control System, so the markets for Compel are those for iPump and Unity
receivers.
Unity Receivers
The Unity 4600 receiver is a digital satellite receiver primarily for
cable television networks. It offers analog and digital outputs, which allow
support for analog and digital cable headends. Cable headends utilize the Unity
4600 to support high definition television distribution.
The Unity 4650 receiver is our digital receiver primarily for broadcast
television networks. The Unity 4650 receiver is a video and audio receiver that
features MPEG 4:2:0 and 4:2:2 video for enhanced video quality for television
network distribution.
The Unity 500 receiver is targeted to meet the needs of private and
business television networks. It offers MPEG-2 video distribution and has an
option for high speed Internet Protocol (IP) delivery of data over the
satellite.
The Unity 201 audio receiver is designed for business music providers. It
is a multichannel per carrier satellite music receiver and offers an optional
audio storage card which adds a second stereo pair and one hour of audio storage
for ad insertion or disaster recovery.
DTV Digital Stream Processors
The DTV Digital Stream Processors enable operators to capture off-air high
definition broadcast video signals and easily insert them for use on their
networks. Our products provide for multiple signals to be added to the cable
system through one unit. Models include DTV 720, DTV 742 and DTV 744. The market
for DTV products is cable and telecom television.
Analog Audio
Our legacy analog products are sold primarily to the cable television
market. These products consist of Series 1600 and 1700 mainframes, subcarrier
modulators, demodulators and decoders, which are used for cable audio
distribution. Our Series 2046 network communications and control system cards
allow cable operators to insert local commercials which increase their
advertising revenues.
5
Uplink Equipment
We offer our customers complete system solutions for video and audio
distribution. The complete system solution requires us to resell components,
such as encoders and modulators, from other manufacturers, such as Harmonic,
Inc.
MARKET OPPORTUNITY
Growth opportunities are most significant in the business/private network
market with our iPump Solutions. Sales to date have been limited for the iPump
due to a long and unpredictable sales cycle, product introduction delays and
customers deferring purchasing decisions. (See information contained in MD&A for
additional discussion). We are in the process of rolling out our first
large-scale deployment of iPump and are working on pilot programs with several
customers. Our iPump, MediaPlan and Compel products create systems that directly
address the next generation needs of the distance learning, corporate training
and digital advertising markets, which are all growing industries.
In cable and broadcast markets, our revenue will likely continue at
current levels.
Another area of potentially strong growth for us is HD Settop boxes for
Telecom companies. We have recently introduced our new IP settop box, called the
Streaming Media Decoder (SMD) 515, which helps phone companies attain the highly
desirable "triple play" of providing telephone, television and internet services
to their subscribers. The SMD 515 settop supports standard and high definition
television through a DSL high speed internet connection. No orders have been
received to date for the SMD 515 settop. While it is possible that some revenue
for settops could be recognized in late fiscal 2005, it is more likely that any
significant revenue from this product line would be realized starting in fiscal
2006.
SALES AND MARKETING
Domestically, we sell our products principally through our own direct
sales force, which is organized geographically. We use a major cable distributor
for additional sales coverage in that market. We sell to international customers
primarily through independent distributors and integrators.
Our marketing organization develops strategies for product lines and
provides direction to product development on product feature requirements. Our
marketing organization is also responsible for setting price levels and general
support of the sales force, particularly with major proposal responses,
presentations and demonstrations. We are developing initiatives to establish
more strongly Wegener's brand within the industry, including participation on
technical committees, publication of articles in industry journals and
exhibitions at trade shows.
(iii) Manufacturing and suppliers.
During fiscal 2004 and fiscal 2003, we contracted with offshore
manufacturers for a significant amount of our finished goods. We are currently
working with three offshore manufacturers and we expect to increase the volume
of products supplied by these manufacturers in the future. Raw materials consist
of passive electronic components, electronic circuit boards and fabricated sheet
metal. Approximately 20% of our raw materials are purchased directly from
manufacturers and the other 80% are purchased from distributors. Passive and
active components include parts such as resistors, integrated circuits and
diodes. We use approximately ten distributors and two contract manufacturers to
supply our electronic components. We often use 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. We maintain relationships with
approximately 20 direct suppliers. Most of our materials are available from a
number of different suppliers; however, certain components used in existing and
future products are currently available from single or a limited number of
sources. Although we believe that all single-source components currently are
available in adequate quantities, there can be no assurance that shortages or
unanticipated delivery interruptions will not develop in the future. Any
disruption or termination of supply of certain single-source components or
agreements with contract manufacturers could have an adverse effect on our
business and results of operations. Our manufacturing operations consist
primarily of final assembly and testing of our products, utilizing technically
trained personnel, electronic test equipment and proprietary test programs.
6
(iv) Patents, trademarks, licenses, franchises and concessions
held.
We hold certain patents with respect to some of our products and we market
our services and products under various trademarks and tradenames. We have a
number of patent and trademark applications pending. Although we attempt to
protect our intellectual property rights through patents, trademarks,
copyrights, licensing arrangements and other measures, we cannot assure you that
any patent, trademark, copyright or other intellectual property rights owned by
us will not be invalidated, circumvented or challenged, that such intellectual
property rights will provide competitive advantages to us, or that any of our
pending or future patent applications will be issued. We also cannot assure you
that others will not develop technologies that are similar or superior to our
technology, duplicate our technology or design around the patents that we own.
In order to successfully develop and market certain of our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. Although many companies are often
willing to enter into such technology development or licensing agreements, we
cannot assure you that such agreements will be negotiated on terms acceptable to
us, or at all. The failure to enter into technology development or licensing
agreements, when necessary, could limit our ability to develop and market new
products and could cause our business to suffer. Third parties have in the past
claimed, and may in the future claim, that we have infringed their current or
future intellectual property rights. There can be no assurance that we will
prevail in any intellectual property infringement litigation given the complex
technical issues and inherent uncertainties in litigation. Even if we prevail in
litigation, such litigation could result in substantial costs and diversion of
resources and could negatively affect our business, operating results, financial
position and cash flows.
Although we believe that the patents and trademarks we own are of value, we
believe that success in our industry will be dependent upon new product
introductions, frequent product enhancements, and customer support and service.
However, we intend to protect our rights when, in our view, these rights are
infringed upon. Additionally, we license certain analog audio processing
technology to several manufacturing companies which generated royalty revenues
of approximately $87,000, $141,000, and $120,000 in fiscal 2004, 2003, and 2002,
respectively. These royalty license agreements renew annually unless cancelled
by the licensee on the expiration date.
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. We
believe that these royalties will not have a material adverse effect on our
financial condition or results of operations.
(v) Seasonal variations in business.
There do not appear to be any seasonal variations in our 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.
7
(vii) Dependence upon a limited number of customers.
We sell 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 Muzak accounted for approximately 39.6% of revenues in
fiscal 2004. 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. At
September 3, 2004, two customers accounted for more than 10% of our accounts
receivable. At August 29, 2003, two customers accounted for more than 10% of
accounts receivable. Sales to a relatively small number of major customers have
typically comprised a majority of our revenues. This trend is expected to
continue in fiscal 2005. The loss of one or more of these customers would likely
have, at least in the near term, a material adverse effect on our operations.
(viii) Backlog of orders.
Our backlog is comprised of undelivered, firm customer orders, which are
scheduled to ship within 18 months. Our eighteen month backlog was approximately
$12,010,000 at September 3, 2004, $12,699,000 at August 29, 2003, and
$10,700,000 at August 30, 2002. Three customers accounted for 98.5% of the
backlog at September 3, 2004. 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 September 3, 2004 was approximately
$21,030,000.
Approximately $10,503,000 of the September 3, 2004, backlog is expected to
ship during fiscal 2005. Three customers accounted for 98.5% of our backlog at
September 3, 2004 and for 98.1% of the backlog expected to ship during fiscal
2005.
(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 generally change slowly
over time for the markets we serve. Through relationships with component and
integrated solution providers, we believe we are positioned to provide complete
end-to-end digital video and audio systems to our customers.
Cable Television
Competition for our Unity products in the cable television market is from
large and well-established companies, such as Scientific Atlanta and Motorola.
Our Unity products have a competitive advantage with our advanced Compel
control, so we focus on opportunities where that advantage is of value to the
customer.
Competition for our DTV products is mostly from smaller companies that are
not as well established in the cable television market. Our products in this
area offer technical advantages over competing offerings. Significant orders for
this product line depend on the overall growth of broadcast and telecom HDTV
offerings and possible legislative decisions by the FCC in the future.
Broadcast Television
8
Competition for our Unity products in the broadcast television market is
from the same large and well-established companies with which we compete in
cable television, such as Scientific Atlanta and Motorola. Our Unity products
have a competitive advantage with our advanced Compel control, so we focus on
opportunities where that advantage is of value to the customer. In addition,
since the revenue opportunities in broadcast television are smaller than cable,
our competitors do not compete for all of those opportunities as aggressively.
Broadcast Radio
Competition is currently limited to a few competitors for our iPump Media
Server in the broadcast radio market. The competition is formidable, but with
our long history in the market, we expect to be able to compete successfully
with the iPump.
Business and Private Networks
Competition in the business and private networks market generally comes
from smaller companies with unique products tailored to the needs of the
customer. Competition in this field is increasing, although still limited, and
we expect to be among the industry key players. Our products are well positioned
for this market and have competitive advantages, such as our powerful network
control and targeting capabilities.
(xi) Research and development activities.
Our research and development activities are designed to strengthen and
enhance our existing products and systems and to develop new products and
systems. Our development strategy is to identify features, products and systems
which are, or are expected to be, needed by a number of customers A major
portion of the fiscal 2004 research and development expenses were spent on new
product development of our iPump 6400 and 615, MediaPlan CM, DTV digital stream
processors and the Unity 4600 products . WCI's research and development expenses
totaled $3,095,000 in fiscal 2004, $2,853,000 in fiscal 2003, and $2,410,000 in
fiscal 2002. 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 our Company.
(xiii) Number of employees.
As of September 3, 2004, we had 93 full time employees employed by WCI and
no employees employed by Wegener Corporation. No employees are parties to a
collective bargaining agreement and we believe that employee relations are good.
(d) Financial information about geographic areas.
Information 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.
Our Web site is http://www.wegener.com
9
Information contained on our web site should not be considered incorporated by
reference in this Form 10-K
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 66 Chairman of the Board,
President and Chief Executive Officer President and Chief Executive
of the Company since August 1987 and Director of the Officer of the Company and WCI
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 56 Executive Vice President of
Executive Vice President of WCI since March 2002 and WCI
Director of the Company since May 2003. Senior Vice
President of Business Development of WCI from 1996
to 2002. Vice President European Operations of WCI
from 1994 to 1995. Numerous Sales and Marketing
positions from 1981to 1994. Corporate Senior
Engineer of UA-Columbia Cablevision from 1979 to
1981.
C. TROY WOODBURY, JR. 57 Treasurer and
Treasurer and Chief Financial Officer of the Company Chief Financial Officer
since June 1988 and Director since 1989. Treasurer of the Company and WCI
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.
10
ITEM 2. PROPERTIES
Our executive, sales, engineering and administrative offices 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. We expect that we will be
able to renew the lease for up to three years at approximately the current
annual rental rate. WCI's 40,000 square foot facility and 4.4 acres of adjacent
land are pledged as collateral under our line of credit facility.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we have become a
defendant in various types of legal proceedings. We do not believe that these
proceedings, individually or in the aggregate, will have a material adverse
effect on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the NASDAQ Small-Cap Market (NASDAQ symbol:
WGNR). As of November 15, 2004, there were approximately 381* 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 2004 and 2003 were
as follows:
FISCAL 2004 Fiscal 2003
--------------------- ---------------------
HIGH LOW High Low
First Quarter $3.15 $2.00 $1.07 $ .60
Second Quarter 3.28 1.94 1.10 .69
Third Quarter 2.63 1.35 1.72 .73
Fourth Quarter 2.05 1.06 2.49 1.29
We have not paid any cash dividends on our Common Stock. For the
foreseeable future, our Board of Directors does not intend to pay cash
dividends, but rather plans to retain earnings to support our operations and
growth. Furthermore, we are prohibited from paying dividends in accordance with
our 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 September 3, 2004,
regarding our common stock reserved for issuance under the our equity
compensation plans.
Number of Securities
Remaining Available for
Number of Securities Weighted-Average Future Issuance Under the
to be Issued Upon Exercise Price Plans (Excluding
Exercise of of Outstanding Securities Reflected in
Outstanding Options Options Column (a)
Plan Category (a) (b) (c)
- -------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security
Holders 1,537,781 $ 1.66 485,419
Equity Compensation Plans
Not Approved by Security
Holders(1) 100,000 $ 5.63 --
- -------------------------------------------------------------------------------------------------------------
Total 1,637,781 $ 1.90 485,419
==============================================================================================================
(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
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 3, August 29, August 30, August 31, September 1,
2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Revenue $ 18,104 $ 20,133 $ 23,459 $ 20,333 $ 22,894
Operating income (loss) (3,086) (240) 1,311 (3,100) (5,469)
Net earnings (loss) (2,108) 88 808 (1,976) (3,329)
Net earnings (loss) per share
Basic $ (.17) $(a) $ .07 $ (.17) $ (.28)
Diluted $ (.17) $(a) $ .07 $ (.17) $ (.28)
Cash dividends paid per share (1) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 17,496 $ 18,168 $ 18,700 $ 18,660 $ 24,147
Long-term obligations inclusive
of current maturities -- 4 10 55 578
=================================================================================================================
(a) Less than $.01 per share.
(1) We have never paid cash dividends on our common stock and do not
intend to pay cash dividends in the foreseeable future.
Additionally, our 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, availability of raw materials, 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, through Wegener(TM) Communications, Inc. (WCI), a wholly-owned
subsidiary, designs and manufactures communications transmission and receiving
equipment for the business broadcast, data communications, cable and broadcast
radio and television industries.
We operate on a 52-53 week fiscal year. The fiscal year ends on the Friday
nearest to August 31. Fiscal year 2004 contained 53 weeks while fiscal years
2003 and 2002 contained 52 weeks. All references herein to 2004, 2003 and 2002,
refer to the fiscal years ending September 3, 2004, August 29, 2003 and August
30, 2002, respectively.
OVERVIEW
We continue to believe the iPump, with its store and forward technology, is the
right product for our markets and will make a significant contribution to future
bookings and revenues. The iPump Media Server uses a store and forward approach
to network operations compared to traditional real-time video and audio delivery
networks. The iPump Media Server provides customers with many additional
capabilities not available in traditional real-time delivery networks, such as
streaming video and audio to the desktop, more efficient use of expensive
satellite bandwidth and the ability to originate two complete television
networks from a single unit.
Although our results for fiscal 2004 were disappointing, we believe that the
store and forward market is just beginning to see the potential of this new
technology. In some cases, we have had to educate potential customers on the
benefits of the technology, which has lengthened the sales cycle. In addition,
the system is complex enough that many end customers are not running the
networks themselves; they are contracting third-party integrators and service
providers for network operations. In these applications, our sales team has more
limited access to the end customers, which reduces our visibility on the sales.
Additionally, key customers have deferred purchasing decisions until calendar
year 2005 due to budget constraints caused by a weak economy.
The iPump has experienced delays in feature introductions and resulting bookings
and revenues. A number of factors have contributed to this. Some of the delays
were due to the inherent complexity of the hardware and software development.
The conceptual design of the iPump allows for extremely varied applications for
the product, which caused us to try to focus on too many applications. We now
have a clear set of applications that we are targeting for the product.
Additionally, new features and functionality have been added to the original
design, which resulted from prospective customers' feedback. For example, our
MediaPlan i/o and MediaPlan CM modules were added to enhance content management
and ease of network operations. Capacity, file transfer speeds and other
enhancements were added to meet application requirements. We believe this has
resulted in a more desirable, marketable and technologically advanced product.
In order to achieve better results, we undertook a rigorous fiscal 2005 planning
process in September 2004. The planning resulted in extensive plans for
operational, financial and organizational goals for the year. We anticipate
clearer focus and execution within the organization based on the planning
process.
13
Current Developments
Growth opportunities are most significant in the business/private network market
with our iPump Solutions. We are in the process of deploying our first
large-scale rollout of iPump and are working with multiple customers on pilot
programs. Our iPump, MediaPlan and Compel products create systems that directly
address the next generation needs of satellite delivery of content.
Product approval of the DTV series product line is underway with major cable
Multiple System Operators (MSOs), which is required before their affiliates can
purchase our DTV products. Charter, Time Warner, Adelphia and Comcast have all
approved some or all versions of our DTV products.
Customers, integrators and partners have expressed great interest in our
recently announced IP Settop box, called the Streaming Media Decoder (SMD) 515.
It allows phone companies to provide television service to consumers over their
existing DSL high speed internet connections to complete the "triple play" of
telephone, television and internet service offerings. The SMD 515 Settop
supports standard and high definition television.
During the first quarter of fiscal 2005, we booked an order for $9,600,000 from
a business music network customer. This new order extends and amends our
existing multi-year contract into fiscal year 2009. This order is not reflected
in the backlog reported as of September 3, 2004, but will be reflected in the
backlog to be reported at the end of the first quarter of fiscal 2005 and will
increase the total multi-year backlog significantly.
Third party offshore contract manufacturers are being used for high volume
products, such as the Unity(R) 4600, iPump and other products, to secure
competitive product pricing. Additionally, key partnerships continue to develop
with complementary companies in our market space to meet customer demands for
complete network solutions. Internally, we continue to focus on maintaining ISO
9001:2000 certification.
The rebranding of our corporate image was unveiled at the National Association
of Broadcasters (NAB) tradeshow in April 2004. We have received a very positive
response from our customers and are now marketing our products under the new
Wegener brand.
It is anticipated that revenues and operating performance for the first quarter
of fiscal 2005 will improve substantially compared to the fourth quarter of
fiscal 2004. Although no assurances may be given and order visibility is
limited, we believe we will record sufficient new orders in fiscal 2005 to
achieve increased revenues and fiscal year profitability compared to fiscal
2004.
FINANCIAL POSITION AND LIQUIDITY
We have no long-term debt or line of credit borrowings outstanding at September
3, 2004. Our cash and cash equivalents were $1,521,000 at September 3, 2004. Our
$5,000,000 bank loan facility, which is subject to availability advance formulas
based on eligible accounts receivable, import letter of credit commitment
balances and inventories, is currently being used to support import letters of
credit issued to our offshore manufacturers, which at September 3, 2004 amounted
to $1,916,000. At September 3, 2004, approximately $2,049,000 net of the
outstanding letters of credit was available to borrow under the advance
formulas. We believe that the loan facility along with cash and cash equivalent
balances will be sufficient to support operations over the next twelve months.
Beginning in the first half of fiscal 2005, we expect that, from time to time,
we will use borrowings on the line of credit to support operations. We expect
bookings for new products to result in increased revenues during fiscal 2005,
which could require an increase in the credit limit primarily to support
increases in import letter of credit balances. While no assurances may be given,
we believe additional credit limits would be made available under the existing
line of credit to support borrowing requirements resulting from increased
revenues.
Should the bookings and revenue for the new products not materialize, we are
committed to reducing operating costs to bring them in line with revenue levels.
(See the Liquidity and Capital Resources section on page 22 for further
discussion.)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the
results of operations as a percentage of revenue:
14
Year ended
------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
------------------------------------------
Revenue 100.0% 100.0% 100.0%
Cost of products sold 73.3 62.7 66.7
Gross margin 26.7 37.3 33.3
Selling, general, and administrative 26.7 24.3 17.5
Research & development 17.1 14.2 10.3
Operating income (loss) (17.0) (1.2) 5.6
Interest expense (0.5) (0 .3 (0.3)
Interest income 0.2 0.3 0.1
Earnings (loss) before income taxes (17.3) (1.3) 5.5
Income tax expense (benefit) (5.7) (1.7) 2.0
Net earnings (loss) (11.6)% 0.4% 3.4%
==========================================
Net loss for the year ended September 3, 2004, was $(2,108,000) or $(0.17)
per diluted share, compared to net earnings of $88,000 or less than $0.01 per
diluted share for the year ended August 29, 2003, and net earnings of $808,000
or $0.07 per diluted share for the year ended August 30, 2002.
Revenues for fiscal 2004 decreased $2,029,000, or 10.1%, to $18,104,000
from $20,133,000 in fiscal 2003. Direct Broadcast Satellite (DBS) revenues
(including service revenues) in fiscal 2004 decreased $1,555,000, or 8.3%, to
$17,167,000 from $18,722,000 in fiscal 2003. Telecom and Custom Product revenues
decreased $474,000, or 33.6%, in fiscal 2004 to $937,000 from $1,411,000 in
fiscal 2003. 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. DBS revenues and bookings were adversely impacted by
delayed purchasing decisions in the digital satellite transmission market and
particularly by a longer than expected sales cycle for the iPump Media Server
and DTV 700 series products. Fiscal 2004 revenues included shipments of network
equipment to Roberts Communications for network upgrades and expansion, and to
Ascent Media for new cable network applications and expansion of private video
networks. Shipments to Ascent Media included deliveries of iPump Media Servers
for their network applications. The Telecom and Custom Products Group revenue
decrease in fiscal 2004 was primarily due to completion of shipments of
commercial insertion equipment in fiscal 2003 to a cable television operator.
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 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 from these two customers
decreased approximately $5,563,000 in fiscal 2003 compared to fiscal 2002.
Decreases in fiscal 2003 revenues were partially offset by approximately
$494,000 of earned deposits. 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.
15
WCI's backlog of orders scheduled to ship within 18 months was $12,010,000
at September 3, 2004, compared to $12,699,000 at August 29, 2003, and
$10,700,000 at August 30, 2002. The total multi-year backlog at September 3,
2004, was approximately $21,030,000. Our backlog has been impacted by delayed
purchasing decisions in the digital satellite transmission market, a longer than
expected sales cycle for the iPump Media Server and DTV 700 series products, and
delayed timing of new product introductions by the Company. Approximately
$10,503,000 of the September 3, 2004, backlog is expected to ship during fiscal
2005. Three customers accounted for 98.5% of our backlog at September 3, 2004
and for 98.1% of the backlog expected to ship during fiscal 2005. Sales to a
relatively small number of major customers have typically comprised a majority
of our 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, we expect future revenue
levels and operating results to fluctuate from quarter to quarter. It is
anticipated that revenues and operating performance for the first quarter of
fiscal 2005 will improve substantially compared to the fourth quarter of fiscal
2004. Although no assurances may be given and order visibility is limited, we
believe we will record sufficient new orders in fiscal 2005 to achieve increased
revenues and fiscal year profitability compared to fiscal 2004.
International sales are generated through a direct sales organization and
through foreign distributors. International sales were $606,000 or 3.3% of
revenues in fiscal 2004 compared to $839,000 or 4.2% of revenues in fiscal 2003,
and $1,473,000 or 6.3% of revenues in fiscal 2002. 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 to the consolidated financial
statements.
Gross profit as a percent of sales was 26.7% in fiscal 2004 compared to
37.3% in fiscal 2003, and 33.3% in fiscal 2002. Gross profit margin dollars
decreased $2,670,000, or 35.6%, to $4,840,000 in fiscal 2004 from $7,510,000 in
fiscal 2003. Fiscal 2002 gross profit margin dollars amounted to $7,822,000. The
decrease in margin percentages and dollars in fiscal 2004 was mainly due to
lower revenues, an increase of $654,000 in capitalized software amortization
expense and an increase of $150,000 in inventory reserve expenses. The product
mix for fiscal 2004 included increased amounts of lower margin reseller uplink
equipment compared to fiscal 2003. Reseller equipment comprised approximately
7.8% of sales in fiscal 2004 compared to 2.3% of sales in fiscal 2003.
Selling, general, and administrative (SG&A) expenses decreased $67,000, or
1.4%, to $4,831,000 in fiscal 2004 from $4,898,000 in fiscal 2003. As a
percentage of revenues, SG&A expenses were 26.7% of revenues in fiscal 2004 and
24.3% in fiscal 2003. SG&A expenses in fiscal 2004 included an insurance
reimbursement of $191,000 for a portion of corporate legal costs expensed in
fiscal 2003 related to defending the Company against an unsolicited, hostile
takeover attempt by Radyne ComStream, Inc. SG&A expenses in fiscal 2003 included
$974,000 in corporate legal and professional fees related to defending the
Company against the unsolicited hostile takeover attempt by Radyne ComStream,
Inc. and related litigation. WCI's SG&A expenses increased $755,000 to
$4,085,000 in fiscal 2004 from $3,330,000 in fiscal 2003. Sales and marketing
salary expenses increased $319,000 due to an increase in personnel, marketing
expenses increased $205,000 due to increased sales activity related to new
products.
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 the $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 partially
offset by decreases in certain expenses of $177,000, primarily depreciation, bad
debt provisions and outside sales agent commissions.
General corporate expenses included in SG&A expense were approximately
$746,000, $1,568,000, and $510,000, in fiscal 2004, 2003 and 2002, respectively.
The decrease in fiscal 2004 corporate expenses was primarily due to a decrease
in legal and professional fees incurred in fiscal 2003 related to the takeover
attempt. Fiscal 2004 included an insurance reimbursement of $191,000 for a
portion of the fiscal 2003 corporate legal costs.
16
Research and development expenditures, including capitalized software
development costs, were $4,789,000 or 26.4% of revenues in fiscal 2004,
$4,230,000 or 21.0% of revenues in fiscal 2003, and $2,983,000 or 12.7% of
revenues in fiscal 2002. The increase in expenditures in fiscal 2004 compared to
fiscal 2003 was due to increases in engineering consulting expenses primarily
related to the development of iPump Media Server and the DTV series 700
products. The increase in expenditures in fiscal 2003 compared to fiscal 2002
was 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. Software
development costs totaling $1,693,000, $1,377,000, and $573,000 were capitalized
during fiscal 2004, 2003 and 2002, respectively. The increases in capitalized
software costs during fiscal 2004 compared to 2003, and fiscal 2003 compared to
fiscal 2002, are due to increased expenditures on the COMPEL network control
software, the iPump Media Server, UNITY4600 and DTV series 700 products.
Research and development expenses, excluding capitalized software development
costs, were $3,095,000 or 17.1% of revenues in fiscal 2004, $2,853,000 or 14.2%
of revenues in fiscal 2003, and $2,410,000 or 10.3% of revenues in fiscal 2002.
We expect fiscal 2005 research and development expenditures to approximate
fiscal 2004 levels as we continue to develop and enhance DBS products.
Interest expense was $96,000 in fiscal 2004 compared to $69,000 in fiscal
2003 and $64,000 in fiscal 2002. Interest expense in fiscal years 2004, 2003 and
2002 was principally associated with letters of credit commitments and bank
float charges on lockbox collections. The increase in fiscal 2004 compared to
fiscal 2003 was primarily due to an increase in the average outstanding letter
of credit commitment balances. We believe that interest expense in fiscal 2005
will increase compared to fiscal 2004 as a result of expected increases in
letter of credit commitment balances and line of credit borrowings, as well as
increases in prime rates.
Interest income was $43,000 in fiscal 2004 compared to $57,000 in fiscal
2003 and $33,000 in fiscal 2002. The decrease in fiscal 2004 compared to fiscal
2003 was mainly due to lower average balances of cash and cash equivalents,
which was offset by a one-time benefit of $19,000 related to the collection of a
trade accounts receivable. The increase in fiscal 2003 compared to fiscal 2002
was mainly due to higher average outstanding balances of cash and cash
equivalents.
Fiscal 2004 income tax benefit of $1,031,000 was comprised of deferred
federal and state tax benefits of $969,000 and $62,000, respectively. Net
deferred tax assets increased $1,031,000 to $4,169,000 at September 3, 2004. The
increase was principally due to increases in net operating loss carryforwards,
offset by reductions of general business and foreign tax credits of $98,000
which expired September 3, 2004. Realization of deferred tax assets is dependent
on generating sufficient future taxable income prior to the expiration of the
loss and credit carryforwards. At September 3, 2004, we had a federal net
operating loss carryforward of $6,295,000, which expires beginning fiscal 2020
through 2024. Additionally, we had 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, we believe it is more likely than not that all of
the deferred tax assets will be realized based on our backlog and financial
projections. The amount considered realizable could be reduced if estimates of
future taxable income during the carryforward period are reduced.
Fiscal 2003 income tax expense 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 from $2,848,000 at August 30, 2002.
The increase was principally due to state income tax credits of $199,000 and
increases in net operating loss carryforwards. 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 income tax law
changes and deferred federal and state income tax expenses of $549,000 and
$38,000, respectively. A reconciliation of our effective income tax rate as
compared to the statutory U.S. income tax rate is provided in Note 8 to the
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are very important to the portrayal of our financial
condition and results of operations and require management's most subjective or
difficult judgements. These policies are as follows:
17
REVENUE RECOGNITION - Our revenue recognition policies are in compliance with
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", SAB No. 101,
"Revenue Recognition in Financial Statements" and EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue is recognized when persuasive
evidence of an agreement with the customer exists, products are shipped or title
passes pursuant to the terms of the agreement with the customer, the amount due
from the customer is fixed or determinable, collectibility is reasonably
assured, and there are no significant future performance obligations. Service
revenues are recognized at the time of performance. Revenues from separate
service maintenance agreements are recognized ratably over the term of the
agreements. We recognize revenue in certain circumstances before delivery has
occurred (commonly referred to as "bill and hold" transactions). In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods be held for future delivery as
scheduled and designated by them, and no additional performance obligations
exist by us. For these transactions, the finished goods are segregated from
inventory and normal billing and credit terms are granted. For the year ended
September 3, 2004, revenues to one customer in the amount of $3,837,000 were
recorded prior to delivery as bill and hold transactions. At September 3, 2004,
accounts receivable for these revenues amounted to $1,140,000 and were paid in
full subsequent to September 3, 2004.
These policies require management, at the time of the transaction, to assess
whether the amounts due are fixed or determinable, collection is reasonably
assured and 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.
Our principal sources of revenues are from the sales of various satellite
communications equipment. Embedded in our products is internally developed
software of varying applications. Historically, we have not sold or marketed our
software separately or otherwise licensed our software apart from the related
communications equipment. Should we begin to market or sell software whereby it
is more than an incidental component of the hardware, then we would recognize
software license revenue in accordance with SOP No. 97-2, "Software Revenue
Recognition" as amended by SOP No. 98-9, "Software Revenue Recognition, with
Respect to Certain Transactions."
INVENTORY RESERVES - Inventories are valued at the lower of cost (at standard,
which approximates actual cost on a first-in, first-out basis) or market.
Inventories include the cost of raw materials, labor and manufacturing overhead.
We make inventory reserve provisions to properly reflect inventory value based
on a review of inventory quantities on hand, sales forecasts, new products being
developed and technology changes. 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 September 3, 2004, inventories, net of reserve provisions, amounted to
$3,840,000.
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 September 3, 2004, capitalized software
costs, net of accumulated amortization, amounted to $1,668,000.
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 our deferred tax assets is dependent on generating
sufficient future taxable income prior to the expiration of the loss and credit
carryforwards. Although realization is not assured, we believe it is more likely
than not that all of the deferred tax assets will be realized based on our
backlog and financial projections. The amount of the deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced. Any reduction in the
realizable value of deferred tax assets would result in a charge to income tax
expense in the period such determination was made. In addition, any reductions
in corporate federal tax rates would reduce the carrying value of deferred tax
assets. Each 1% reduction in corporate federal tax rates would reduce deferred
tax assets by approximately $35,000 based on the deferred tax asset balances at
September 3, 2004. At September 3, 2004, deferred tax assets amounted to
$4,169,000, including $2,260,000 in net operating loss carryforwards which
expire in fiscal 2020 through 2024 and state tax credits of $199,000 expiring in
fiscal 2009.
18
ACCOUNTS RECEIVABLE VALUATION - We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. At September 3, 2004, accounts receivable net of
allowances for doubtful accounts amounted to $2,480,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 3, 2004, our primary sources of liquidity were cash and cash
equivalents of $1,521,000 and a $5,000,000 bank loan facility. Cash and cash
equivalents decreased $2,692,000 in fiscal 2004. We have no long-term debt or
line of credit borrowings outstanding at September 3, 2004. Our bank loan
facility, which is subject to availability advance formulas based on eligible
accounts receivable, import letter of credit commitment balances and
inventories, is currently being used to support import letters of credit issued
to our offshore manufacturers, which at September 3, 2004 amounted to
$1,916,000. At September 3, 2004, approximately $2,049,000 net of the
outstanding letters of credit was available to borrow under the advance
formulas. We believe that the loan facility along with cash and cash equivalent
balances will be sufficient to support our operations over the next twelve
months. Beginning in the first half of fiscal 2005, we expect that, from time to
time, we will use borrowings on the line of credit to support operations. We
expect bookings for new products to result in increased revenues during fiscal
2005, which could require an increase in the credit limit primarily to support
increases in import letter of credit balances. While no assurances may be given,
WCI believes additional credit limits would be made available under the existing
line of credit to support borrowing requirements resulting from increased
revenues. Should the bookings and revenues for the new products not materialize,
we are committed to reducing operating costs to bring them in line with revenue
levels.
Cash used by operating activities in fiscal 2004 was $562,000. Cash
provided by operating activities was $1,792,000 in fiscal 2003 and $3,986,000 in
fiscal 2002. Fiscal 2004 net loss adjusted for non cash expenses used cash of
$581,000. Increases in inventories and other assets used cash of $2,062,000
while changes in accounts receivable and customer deposits provided cash of
$1,786,000. Changes in accounts payable and accrued expenses provided cash of
$295,000.
Cash used by investing activities in fiscal 2004 was $2,299,000 compared
to $2,673,000 in fiscal 2003 and $720,000 in fiscal 2002. In fiscal 2004,
investing activities used cash of $395,000 for property and equipment
expenditures, $1,693,000 for capitalized software additions and $210,000 for
legal expenses related to the filing of applications for various patents and
trademarks. Capitalized software expenditures were incurred for the development
of COMPEL network control software, the iPump Media Server, UNITY4600 and DTV
series 700 products. Property and equipment expenditures were for planned
additions of principally manufacturing and engineering test equipment. Fiscal
2005 expenditures for investing activities are expected to approximate fiscal
2004 levels.
Cash provided by financing activities was $168,000 in fiscal 2004. Cash
used by financing activities was $24,000 in fiscal 2003 and $75,000 in fiscal
2002. In fiscal 2004, financing activities used cash of $4,000 for scheduled
repayments of long-term obligations and $38,000 for loan facility fees, and
provided $210,000 of cash from the exercise of stock options.
Net accounts receivable decreased $1,080,000 to $2,480,000 at September 3,
2004, from $3,560,000 at August 29, 2003, compared to $3,038,000 at August 30,
2002. The decrease in fiscal 2004 was primarily due to lower revenues in the
fourth quarter of fiscal 2004 compared to the same period of fiscal 2003. The
allowance for doubtful accounts was $363,000 at September 3, 2004, $355,000 at
August 29, 2003 and $352,000 at August 30, 2002. Write-offs were $5,000 in
fiscal 2004, $27,000 in fiscal 2003 and $108,000 in fiscal 2002. Recoveries in
fiscal 2004 were $14,000. Increases to the allowance and charges to general and
administrative expense were $ 0 in fiscal 2004, $30,000 in fiscal 2003 and
$155,000 in fiscal 2002.
19
Customer deposits increased $705,000 to $960,000 at September 3, 2004,
from $255,000 at August 29, 2003, primarily due to two customer bookings
scheduled to ship in fiscal 2005. Customer deposits vary with the timing and
terms of customer bookings.
Inventory before reserves increased $1,674,000 to $7,307,000 at September
3, 2004, from $5,633,000 at August 29, 2003. The increase was primarily due to
deliveries in the fourth quarter of fiscal 2004 of iPump Media Servers and Unity
4600 receivers from offshore manufacturers which are expected to ship in the
first half of fiscal 2005. During fiscal 2004, inventory reserves were increased
by provisions charged to cost of sales of $225,000. 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 reduced quantities. Inventory reserves were increased by
provisions charged to cost of sales of $75,000 in fiscal 2003 and $800,000 in
fiscal 2002. Inventory reserves were decreased by write-offs of $248,000 in
fiscal 2004, $365,000 in fiscal 2003 and $1,176,000 in fiscal 2002. During
fiscal 2004, increases in inventories used cash of $1,922,000. During fiscal
2003 and 2002, decreases in inventories provided cash of $1,703,000, and
$2,765,000, respectively.
WCI's bank loan facility provides a maximum available credit limit of
$5,000,000 subject to availability advance formulas. The loan facility matures
on June 30, 2006, or upon demand and requires an annual facility fee of .75% of
the maximum credit limit. The loan facility consists of a term loan and a
revolving line of credit with a combined borrowing limit of $5,000,000, bearing
interest at the bank's prime rate (4.75% at September 3, 2004).
The term loan facility provides for a maximum of $1,000,000 for advances
of up to 80% of the cost of equipment acquisitions. Principal advances are
payable monthly over 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; 40% to 50% of eligible finished
goods inventories and 50% of import letter of credit commitment balances. The
loan is secured by a first lien on substantially all of WCI's assets and
guaranteed by Wegener Corporation. At September 3, 2004, no balances were
outstanding on the revolving line of credit or the equipment term loan portions
of the loan facility. The loan facility is currently being used to support
import letters of credit issued to offshore manufacturers, which at September 3,
2004 amounted to $1,916,000. At September 3, 2004, approximately $2,049,000, net
of outstanding letters of credit, was available to borrow under the advance
formulas.
We are required to maintain a minimum tangible net worth with annual
increases at each fiscal year end commencing with fiscal year 2005, retain
certain key employees, maintain certain financial ratios, and are precluded from
paying dividends. At September 3, 2004, we were in compliance with all loan
facility covenants. We believe that the loan facility along with cash and cash
equivalent balances will be sufficient to support operations through fiscal 2005
In addition, at September 3, 2004, we had land and buildings and
improvements with a cost basis of $4,454,000 which had no mortgage balances
outstanding.
We have three manufacturing and purchasing agreements for certain finished
goods inventories. At September 3, 2004, outstanding purchase commitments under
these agreements amounted to $7,233,000. Pursuant to the above agreements, at
September 3, 2004, we had outstanding letters of credit in the amount of
$1,916,000.
A summary of our long-term contractual obligations as of September 3, 2004
consisted of:
Payments Due by Period
-------------------------------------------------
Contractual Obligations Total One Year 2-3 Years 4-5 Years
Operating leases $ 127,000 $ 117,000 $ 6,000 $ 4,000
Purchase commitments 7,741,000 6,808,000 933,000 --
-------------------------------------------------
Total $7,868,000 $6,925,000 $ 939,000 $ 4,000
=================================================
20
IMPACT OF INFLATION
We do not believe that inflation has had a material impact on revenues or
expenses during the past three fiscal years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the EITF released Issue No. 00-21, ("EITF 00-21"),
"Revenue Arrangements with Multiple Deliverables," which addressed certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, EITF 00-21
addresses whether an arrangement contains more than one unit of accounting and
the measurement and allocation to the separate units of accounting in the
arrangement. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of this standard did
not have a material impact our 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. 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 FASB. We have not entered into any financial instruments
covered by this statement and the adoption of this standard did not have a
material impact on our consolidated financial statements or results of
operations.
OUTLOOK: ISSUES AND UNCERTAINTIES
The market for our products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions.
Product introductions are generally characterized by increased functionality and
better quality, sometimes at reduced prices. The introduction of products
embodying new technology may render existing products obsolete and unmarketable
or marketable at substantially reduced prices. Our 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 our ability to grow and remain
competitive. If we are unable, for technological or other reasons, to develop
competitive products in a timely manner in response to changes in the industry,
our 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, We are positioned to provide end-to-end solutions
to our customers. Competition in the market for our MPEG-2 broadcast television
electronics products, including digital video equipment, is driven by
timeliness, performance and price. Our 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. We believe we
are positioned 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 we believe that the competitive position for many of our 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 our digital audio products, is very aggressive and pricing is very
competitive. We believe that our continued success in all of our markets will
depend on aggressive marketing and product development.
21
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. We believe the market as a whole has considerable built-up demand for
digital technology. Although no assurances can be given, we expect to directly
benefit from this increase in demand. There may be fluctuations in our 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 us.
We have 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. We purchased this
inventory based upon previously known backlog and anticipated future sales given
existing knowledge of the marketplace. Our inventory reserve of $3,467,000 at
September 3, 2004, is to provide for items that are potentially slow-moving,
excess or obsolete. Changes in market conditions, lower than expected customer
demand and rapidly changing technology could result in additional obsolete and
slow-moving inventory that is unsaleable or saleable at reduced prices. No
estimate can be made of a range of amounts of loss from obsolescence that might
occur should our sales efforts not be successful.
Sales to a relatively small number of major customers have typically
comprised a majority of our revenues, and that trend is expected to continue
throughout fiscal 2005 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. Three customers accounted
for 98.5% of the backlog at September 3, 2004 and for 98.1% of the backlog
scheduled to ship during fiscal 2005.
Our 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. We are
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 our
satellite receiving equipment if those products are manufactured in a high
volume, standardized production environment.
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 we believe 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 our business
and results of operations.
We have made significant investments in capitalized software principally
related to digital audio and video products. At September 3, 2004, capitalized
software costs were $1,668,000. 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.
22
The industry in which we operate is subject to rapid technological
advances and frequent product introductions. We expect 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 for future products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our revolving line of credit facility and cash equivalents. The
interest rate on certain advances under the line of credit and term loan
facility fluctuates with the bank's prime rate. There were no borrowings
outstanding at September 3, 2004, subject to variable interest rate
fluctuations.
At September 3, 2004, cash equivalents consisted of bank commercial paper
in the amount of $1,045,000. The cash equivalents have maturities of less than
three months and therefore are subject to minimal market risk.
We do not enter into derivative financial instruments. All sales and
purchases are denominated in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firm....................24
Consolidated Statements of Operations
Years ended September 3, 2004, August 29, 2003, and August 30, 2002...25
Consolidated Balance Sheets
As of September 3, 2004 and August 29, 2003...........................26
Consolidated Statements of Shareholders' Equity
Years ended September 3, 2004, August 29, 2003, and August 30, 2002...27
Consolidated Statements of Cash Flows
Years ended September 3, 2004, August 29, 2003, and August 30, 2002...28
Notes to Consolidated Financial Statements.................................29
Consolidated Supporting Schedules Filed:
Schedule II-Valuation and Qualifying Accounts
Years ended September 3, 2004, August 29, 2003, and August 30, 2002...46
23
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 registered public accounting
firm, 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 REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Wegener Corporation Duluth, Georgia
We have audited the accompanying consolidated balance sheets of Wegener
Corporation and subsidiaries as of September 3, 2004, and August 29, 2003, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of three years in the period ended September 3, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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 September 3, 2004, and August 29, 2003, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 3, 2004 in conformity with
accounting principles generally accepted in the United States of
America.
/s/ BDO Seidman, LLP
Atlanta, Georgia BDO Seidman, LLP
December 1, 2004
24
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
---------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Revenue $ 18,104,284 $ 20,133,180 $ 23,458,923
- -----------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of products sold 13,263,822 12,622,799 15,636,657
(including non-cash equity related charges of
$- , $11,688 and $31,256, respectively)
Selling, general and administrative 4,830,875 4,897,864 4,101,062
(including non-cash equity related charges
of $ - , $17,360 and $58,807, respectively)
Research and development 3,095,393 2,852,573 2,409,949
(including non-cash equity related charges of
$139,800, $27,872 and $68,006, respectively)
- -----------------------------------------------------------------------------------------------------
Operating costs and expenses 21,190,090 20,373,236 22,147,668
- -----------------------------------------------------------------------------------------------------
Operating income (loss) (3,085,806) (240,056) 1,311,255
Interest expense (95,962) (69,165) (64,061)
Interest income 42,870 56,980 33,386
- -----------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (3,138,898) (252,241) 1,280,580
Income tax expense (benefit) (1,031,000) (340,000) 473,000
- -----------------------------------------------------------------------------------------------------
Net earnings (loss) $ (2,107,898) $ 87,759 $ 807,580
=====================================================================================================
Net earnings (loss) per share
Basic $ (.17) $ (a) $ .07
Diluted $ (.17) $ (a) $ .07
=====================================================================================================
Shares used in per share calculation
Basic 12,456,914 12,328,571 12,160,865
Diluted 12,456,914 12,479,866 12,229,240
=====================================================================================================
(a) Less than $.01 per share
See accompanying notes to consolidated financial statements.
25
Wegener Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 3, August 29,
2004 2003
- --------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,520,761 $ 4,213,252
Accounts receivable 2,479,712 3,560,127
Inventories 3,839,840 2,142,835
Deferred income taxes 2,199,000 2,109,000
Other 283,291 143,397
- --------------------------------------------------------------------------------------------
Total current assets 10,322,604 12,168,611
Property and equipment, net 2,699,502 2,913,551
Capitalized software costs, net 1,667,632 1,304,416
Deferred income taxes 1,970,000 1,029,000
Other assets 835,878 752,003
- --------------------------------------------------------------------------------------------
$ 17,495,616 $ 18,167,581
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,293,564 $ 1,195,034
Accrued expenses 1,719,119 1,432,749
Customer deposits 960,092 254,667
Current maturities of long-term obligations -- 4,320
- --------------------------------------------------------------------------------------------
Total current liabilities 3,972,775 2,886,770
Long-term obligations, less current maturities -- --
- --------------------------------------------------------------------------------------------
Total liabilities 3,972,775 2,886,770
- --------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock, $.01 par value; 20,000,000
shares authorized; 12,526,051 and 12,381,251 shares 125,261 123,813
respectively, issued and outstanding 19,819,549 19,471,069
Additional paid-in capital (6,421,969) (4,314,071)
Deficit
- --------------------------------------------------------------------------------------------
Total shareholders' equity 13,522,841 15,280,811
- --------------------------------------------------------------------------------------------
$ 17,495,616 $ 18,167,581
============================================================================================
See accompanying notes to consolidated financial statements.
26
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Retained
Common Stock Paid-in Earnings Treasury Stock
Shares Amount Capital (Deficit) Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
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) -- $ --
Common stock issued through
stock options 144,800 1,448 208,680 -- -- --
Value of stock options granted
for services -- -- 139,800 -- -- --
Net loss for the year -- -- -- (2,107,898) -- --
==================================================================================================================================
BALANCE AT SEPTEMBER 3, 2004 12,526,051 $ 125,261 $ 19,819,549 $ (6,421,969) -- $ --
==================================================================================================================================
See accompanying notes to consolidated financial statements.
27
Wegener Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
-----------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
- -------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES
Net earnings (loss) $(2,107,898) $ 87,759 $ 807,580
Adjustments to reconcile net earnings (loss) to
cash (used for) provided by operating activities
Depreciation and amortization 2,103,160 1,513,179 1,692,485
Issuance of treasury stock for
benefit plan -- 82,409 158,119
Value of stock options granted for services 139,800 -- --
Provision for bad debts -- 30,000 155,000
Provision for inventory reserves 225,000 75,000 800,000
Provision (benefit) for deferred income taxes (1,031,000) (290,000) 587,000
Provision for warranty reserves 90,000 -- --
Changes in assets and liabilities
Accounts receivable 1,080,415 (552,365) (2,116,342)
Inventories (1,922,005) 1,702,838 2,765,210
Other assets (139,894) (53,331) 44,029
Accounts payable and accrued expenses 294,900 (280,687) (870,935)
Customer deposits 705,425 (522,356) (36,102)
- -------------------------------------------------------------------------------------------------------
(562,097) 1,792,446 3,986,044
- -------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT ACTIVITIES
Property and equipment expenditures (395,063) (584,245) (147,478)
Capitalized software additions (1,693,243) (1,377,359) (572,718)
License agreements, patents, and trademark
expenditures (210,396) (710,947) --
- -------------------------------------------------------------------------------------------------------
(2,298,702) (2,672,551) (720,196)
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Repayment of long-term debt and capitalized
lease obligations (4,320) (6,094) (44,660)
Loan facility fees (37,500) (50,000) (55,536)
Proceeds from stock options exercised 210,128 31,695 25,381
- -------------------------------------------------------------------------------------------------------
168,308 (24,399) (74,815)
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,692,491) (904,504) 3,191,033
Cash and cash equivalents, beginning of year 4,213,252 5,117,756 1,926,723
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,520,761 $ 4,213,252 $ 5,117,756
========================================================================================================
See accompanying notes to consolidated financial statements.
28
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, "we," "our," "us" or 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. 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 year 2004 contained 53 weeks
while fiscal years 2003 and 2002 contained 52 weeks. All references herein to
2004, 2003 and 2002, refer to the fiscal years ending September 3, 2004, August
29, 2003 and August 30, 2002, respectively.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with
original maturities of three months or less. At September 3, 2004, cash
equivalents consisted of bank commercial paper in the amount of $1,045,000. 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.
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 of the patents and trademarks or their estimated useful
lives. Annual loan facility fees are amortized equally over twelve months.
REVENUE RECOGNITION. Our revenue recognition policies are in compliance with
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", SAB No. 101,
"Revenue Recognition in Financial Statements" and EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue is recognized when persuasive
evidence of an agreement with the customer exists, products are shipped or title
passes pursuant to the terms of the agreement with the customer, the amount due
from the customer is fixed or determinable, collectibility is reasonably
assured, and there are no significant future performance obligations. Service
revenues are recognized at the time of performance. Revenues from separate
service maintenance agreements are recognized ratably over the term of the
agreements. We have 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 by
the Company exist. For these transactions, the finished goods are segregated
from inventory and normal billing and credit terms are granted. For the year
ended September 3, 2004, revenues to one customer in the amount of $3,837,000
were recorded prior to delivery as bill and hold transactions. At September 3,
2004, accounts receivable for these revenues amounted to $1,140,000 and were
paid in full subsequent to September 3, 2004.
29
Wegener Corporation and Subsidiaries
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.
Our principal sources of revenues are from the sales of various satellite
communications equipment. Embedded in the Company's products is internally
developed software of varying applications. Historically, we have not sold or
marketed our software separately or otherwise licensed our software apart from
the related communications equipment. Should we begin to market or sell software
whereby it is more than an incidental component of the hardware, we 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," we included all shipping and handling billings to customers in
revenues, and freight costs incurred for product shipments have been included in
cost of products sold.
RESEARCH AND DEVELOPMENT/CAPITALIZED SOFTWARE COSTS. We expense research and
development costs, including expenditures related to development of our 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 products or (b) the straight-line
method over the remaining estimated economic life of the product. This has
resulted in amortization periods of primarily three years. 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 2004, 2003 and 2002, totaled $1,693,000, $1,377,000
and $573,000, respectively. Amortization expense, included in cost of products
sold, was $1,330,000, $715,000 and $826,000 for the same periods, respectively.
Capitalized software costs, net of accumulated amortization, were $1,668,000 at
September 3, 2004 and $1,304,000 at August 29, 2003. Accumulated amortization
amounted to $6,600,000 at September 3, 2004 and $5,270,000 at August 29, 2003.
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. We have 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 apply Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for our plans. Under APB
No. 25, when the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
The following table includes disclosures required by SFAS No. 123, as amended by
SFAS No. 148, and illustrates the effect on net earnings (loss) and net earnings
(loss) per share as if we had applied the fair value recognition provisions of
SFAS No. 123:
30
Wegener Corporation and Subsidiaries
Year ended
- ---------------------------------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
- ---------------------------------------------------------------------------
Net earnings (loss)
As Reported $ (2,107,898) $ 87,759 $ 807,580
Add:
Compensation cost
included in reported
net earnings (loss) -- -- --
Deduct:
Compensation cost
using the fair value
method, net of tax (131,075) (53,519) (122,984)
- ---------------------------------------------------------------------------
Pro Forma $ (2,238,973) $ 34,240 $ 684,596
===========================================================================
Earnings (loss) per share
As Reported
Basic $ (.17) $ (a) $ .07
Diluted (.17) (a) .07
Pro Forma
Basic (.18) (a) .06
Diluted (.18) (a) .06
============================================================================
(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
- ---------------------------------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
- ---------------------------------------------------------------------------
Risk free interest rate 4.00% 4.75% 5.00%
Expected term 2.8 YEARS 3 years 3 years
Volatility 90% 90% 75%
Expected annual dividends NONE none none
The weighted average fair value of options granted was as follows:
Year ended
- --------------------------------------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
- --------------------------------------------------------------------------------
Per share option value $ 1.23 $ .86 $ .47
Aggregate total $ 474,230 $ 46,530 $ 256,706
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 we expect 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 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.
31
Wegener Corporation and Subsidiaries
The following tables represent required disclosure of the reconciliation of the
earnings and shares of the basic and diluted net earnings (loss) per share
computations:
Year ended
-------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
-------------------------------------------
BASIC
Net earnings (loss) $ (2,107,898) $ 87,759 $ 807,580
-------------------------------------------
Weighted average shares
outstanding 12,456,914 12,328,571 12,160,865
-------------------------------------------
Net earnings (loss) per share $ (.17) $ (a) $ .07
============================================
DILUTED
Net earnings (loss) $ (2,107,898) $ 87,759 $ 807,580
Weighted average shares
outstanding 12,456,914 12,328,571 12,160,865
Effect of dilutive potential common shares:
Stock options -- 151,295 68,375
-------------------------------------------
Total 12,456,914 12,479,866 12,229,240
-------------------------------------------
Net earnings (loss) per share $ (.17) $ (a) $ .07
============================================
(a) Less than $.01 per share
Stock options excluded from the diluted earnings (loss) per share calculation
due to their antidilutive effect are as follows:
Year ended
------------------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
Common stock options:
Number of shares 1,627,781 796,050 882,550
Range of exercise prices $ .63 TO $5.63 $1.41 to $5.63 $1.41 to $5.63
FINANCIAL INSTRUMENTS. Our 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. We do not have financial instruments with off-balance
sheet risk. The fair value estimates were based on market information available
to management as of September 3, 2004.
Financial instruments that potentially subject us to concentrations of
market/credit risk consist principally of cash and cash equivalents and trade
accounts receivable. We invest 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 our customers are affiliated with the
cable television, business broadcast and telecommunications industries. We
perform ongoing credit evaluations of customers worldwide and generally do not
require collateral from our customers. We review accounts receivable on a
regular basis to determine if any such amounts may be potentially uncollectible.
We include any balances that are determined to be uncollectible, along with a
general reserve, in the overall allowance for doubtful accounts. After all
attempts to collect a receivable have failed the receivable is written off
against the allowance. Based on our best estimate we believe the allowance for
doubtful accounts is adequate as presented. Historically, we have not
experienced significant losses related to receivables from individual customers
or groups of customers in any particular industry or geographic area.
32
Wegener Corporation and Subsidiaries
FOREIGN CURRENCY. The U.S. dollar is our functional currency for financial
reporting. International sales are made and remitted in U.S. dollars.
RECENTLY ISSUED ACCOUNTING STANDARDS. In January 2003, the EITF released Issue
No. 00-21, ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables,"
which addressed certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities.
Specifically, EITF 00-21 addresses whether an arrangement contains more than one
unit of accounting and the measurement and allocation to the separate units of
accounting in the arrangement. EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
this statement did not have any impact on our 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. 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
FASB. We have not entered into any financial instruments covered by this
statement and the adoption of this standard did not have a material impact on
our consolidated financial statements or results of operations.
RECLASSIFICATIONS. Certain reclassifications have been made to the 2003 and 2002
financial statements to conform to the 2004 presentation.
33
Wegener Corporation and Subsidiaries
2. ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
SEPTEMBER 3, August 29,
2004 2003
- --------------------------------------------------------------------------------
Accounts receivable - trade $ 2,766,528 $ 3,838,644
Other receivables 76,473 76,143
- --------------------------------------------------------------------------------
2,843,001 3,914,787
Less allowance for doubtful accounts (363,289) (354,660)
- --------------------------------------------------------------------------------
$ 2,479,712 $ 3,560,127
================================================================================
3. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 3, August 29,
2004 2003
- --------------------------------------------------------------------------------
Raw materials $ 3,004,350 $ 2,347,542
Work-in-process 1,073,275 951,078
Finished goods 3,229,704 2,334,578
- --------------------------------------------------------------------------------
7,307,329 5,633,198
Less inventory reserves (3,467,489) (3,490,363)
- --------------------------------------------------------------------------------
$ 3,839,840 $ 2,142,835
================================================================================
We have invested a significant amount of financial resources to acquire certain
raw materials, sub- assemblies and finished goods, to incur direct labor and to
contract to have specific outplant procedures performed on certain inventory in
process. We purchased this inventory based upon prior backlog and anticipated
future sales based upon our existing knowledge of the marketplace. Our inventory
reserve of approximately $3,467,000 at September 3, 2004, is to provide for
items that are potentially slow-moving, excess or obsolete. Changes in market
conditions, lower than expected customer demand and rapidly changing technology
could result in additional obsolete and slow-moving inventory that is unsaleable
or saleable at reduced prices. No estimate can be made of a range of amounts of
loss from obsolescence that is reasonably possible should our sales efforts not
be successful.
4. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
Estimated
Useful Lives SEPTEMBER 3, August 29,
(Years) 2004 2003
- ------------------------------------------------------------------------------------------
Land -- $ 707,210 $ 707,210
Buildings and improvements 3-30 3,746,690 3,746,690
Machinery and equipment 3-5 9,217,354 8,952,095
Furniture and fixtures 5 602,269 514,915
Application software 3-5 737,090 737,090
- ------------------------------------------------------------------------------------------
15,010,613 14,658,000
Less accumulated depreciation
and amortization (12,311,111) (11,744,449)
- ------------------------------------------------------------------------------------------
$ 2,699,502 $ 2,913,551
- ------------------------------------------------------------------------------------------
Depreciation expense for fiscal 2004, 2003 and 2002, totaled approximately
$609,000, $666,000 and $816,000, respectively. Assets recorded under a capital
lease included in property and equipment at September 3, 2004 and August 29,
2003, are machinery and equipment of approximately $613,000 and accumulated
amortization of approximately $613,000.
34
Wegener Corporation and Subsidiaries
5. OTHER ASSETS
Other assets consisted of the following:
SEPTEMBER 3, 2004
- ------------------------------------------------------------------------------
COST ACCUMULATED NET
AMORTIZATION
License agreements $ 570,000 $ (197,828) $ 372,172
Patent applications 352,406 -- 352,406
Trademarks 73,937 (776) 73,161
Loan facility fees 37,500 (6,250) 31,250
Other 6,889 -- 6,889
- ------------------------------------------------------------------------------
$ 1,040,732 $ (204,854) $ 835,878
==============================================================================
August 29, 2003
- ------------------------------------------------------------------------------
Cost Accumulated Net
Amortization
License agreements $ 570,000 $ (82,500) $ 487,500
Patent applications 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
==============================================================================
Amortization expense of other assets amounted to $164,000, $133,000 and $50,000
for fiscal years 2004, 2003 and 2002, respectively.
We conduct an ongoing review of our intellectual property rights and potential
trademarks. As of September 3, 2004, we incurred $352,000 and $63,000 of legal
expenses related to the filing of applications for various patents and
trademarks, respectively. Upon issuance, these costs will be amortized on a
straight-line basis over the lesser of the legal life of the patents and
trademarks or their estimated useful lives. If it becomes more likely than not
that the patent application will not be granted, we will write-off the deferred
cost at that time. At September 3, 2004, the cost of registered trademarks
amounted to $11,000. License agreements are amortized over their estimated
useful life of five years. Loan facility fees are amortized over twelve months.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 3, August 29,
2004 2003
Compensation $ 728,304 $ 570,977
Royalties 295,673 261,639
Warranty 151,390 65,651
Taxes and insurance 50,235 41,503
Commissions 119,493 168,832
Professional fees 254,057 245,129
Other 119,967 79,018
- --------------------------------------------------------------------------------
$ 1,719,119 $ 1,432,749
================================================================================
35
Wegener Corporation and Subsidiaries
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
subject to availability advance formulas. The loan facility matures on June 30,
2006, or upon demand and requires an annual facility fee of .75% of the maximum
credit limit. The loan facility consists of a term loan and a revolving line of
credit with a combined borrowing limit of $5,000,000, bearing interest at the
bank's prime rate (4.75% at September 3, 2004).
The term loan facility provides for a maximum of $1,000,000 for advances of up
to 80% of the cost of equipment acquisitions. Principal advances are payable
monthly over 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; 40% to 50% of eligible finished goods
inventories and 50% of import letter of credit commitment balances. The loan is
secured by a first lien on substantially all of WCI's assets and guaranteed by
Wegener Corporation. At September 3, 2004, no balances were outstanding on the
revolving line of credit or the equipment term loan portions of the loan
facility. The loan facility is currently being used to support import letters of
credit issued to offshore manufacturers, which at September 3, 2004 amounted to
$1,916,000. At September 3, 2004, approximately $2,049,000, net of outstanding
letters of credit, was available to borrow under the advance formulas.
We are required to maintain a minimum tangible net worth with annual increases
at each fiscal year end commencing with fiscal year 2005, retain certain key
employees, maintain certain financial ratios, and are precluded from paying
dividends. At September 3, 2004, we were in compliance with all loan facility
covenants. We believe that the loan facility along with cash and cash equivalent
balances will be sufficient to support operations through fiscal 2005.
8. INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Year ended
- --------------------------------------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
- --------------------------------------------------------------------------------
Current
Federal $ -- $ -- $ (114,000)
State -- (50,000) --
- --------------------------------------------------------------------------------
-- (50,000) (114,000)
- --------------------------------------------------------------------------------
Deferred
Federal (969,000) (85,000) 549,000
State (62,000) (205,000) 38,000
- --------------------------------------------------------------------------------
(1,031,000) (290,000) 587,000
- --------------------------------------------------------------------------------
Total $(1,031,000) $ (340,000) $ 473,000
================================================================================
The effective income tax rate differs from the U.S. federal statutory rate as
follows:
Year ended
- --------------------------------------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
Statutory U.S. income tax rate (34.0)% (34.0)% 34.0%
State taxes, net of federal
benefits (2.0) (99.8) 1.9
Expired federal tax credit 3.1 -- --
Non-deductible expenses .2 1.6 .7
Other, net (.1) (2.6) .3
- --------------------------------------------------------------------------------
Effective income tax rate (32.8)% (134.8)% 36.9%
================================================================================
36
Wegener Corporation and Subsidiaries
Deferred tax assets and liabilities that arise as a result of temporary
differences are as follows:
SEPTEMBER 3, August 29,
2004 2003
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Accounts receivable and inventory reserves $ 1,969,000 $ 1,957,000
Accrued expenses 231,000 179,000
Net operating loss carryforwards 2,260,000 1,043,000
Credit carryforwards 199,000 297,000
AMT credit carryovers 138,000 138,000
Depreciation 80,000 121,000
Capitalized software costs (634,000) (496,000)
Other (74,000) (101,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 4,169,000 $ 3,138,000
================================================================================
Consolidated balance sheet classifications:
Current deferred tax asset $ 2,199,000 $ 2,109,000
Noncurrent deferred tax asset 1,970,000 1,029,000
- --------------------------------------------------------------------------------
Net deferred tax asset $ 4,169,000 $ 3,138,000
- --------------------------------------------------------------------------------
Net deferred tax assets increased $1,031,000 to $4,169,000 at September 3, 2004.
The increase was principally due to increases in net operating loss
carryforwards, offset by reductions of general business and foreign tax credits
of $98,000 which expired September 3, 2004. 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. Although realization is not assured, we believe it is more likely
than not that all of the deferred tax assets will be realized based on our
backlog and financial projections. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of further taxable income during the carryforward period are reduced.
At September 3, 2004, we had a federal net operating loss carryforward of
$6,295,000, which expires beginning fiscal 2020 through 2024. Additionally, we
had 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, our 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 nonqualified 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 1998
Plan in connection with awards granted. Eligible participants include officers
and other key employees, non-employee directors, consultants and advisors to 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 nonqualified 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. On
December 31, 2003, non-employee directors were granted options to purchase 9,000
shares at an exercise price of $2.08. The automatic grants in fiscal 2003 and
2002 were suspended; however, on January 21, 2003 and January 22, 2002,
non-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
1998 Plan has a ten-year term. During fiscal 2004, options for 100,000 shares of
common stock, exercisable at $2.39, were granted pursuant to a consulting
agreement to provide software development services. The fair value of the
options was measured on the grant date using the Black-Scholes option pricing
model. As the options were fully vested and nonforfeitable, the fair value of
$139,800 was charged to research and development expenses in fiscal 2004, in
accordance with EITF 96-18, "Accounting for Equity Instruments That are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Additionally, during fiscal 2004, other stock option activity
included grants of options to employees to purchase an aggregate of 368,156
shares, vesting 25% annually beginning one year from the date of grant, at a
weighted average exercise price of $2.21. Options for 141,800 shares with
exercise prices ranging from $.84 to $2.31 were exercised and options for 33,000
shares were forfeited. 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 an aggregate of 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. At September 3, 2004,
options for 495,419 shares of common stock were available for future issuance.
Subsequent to September 3, 2004, options to purchase 10,000 shares at an
exercise price of $1.38 were granted to a non-employee director.
37
Wegener Corporation and Subsidiaries
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 nonqualified 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 nonqualified 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 nonqualified 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 2004, no options were exercised. During fiscal
2003, options for 16,500 shares were exercised at $ .75. At September 3, 2004,
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 nonqualified 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
nonqualified stock options shall be ten years and one day from the date of the
grant, and the exercise 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. This plan terminated and expired
December 1, 1998. At September 3, 2004, no options for shares of common stock
remained outstanding under the 1988 Incentive Plan.
38
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
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 $ 1.70
Granted 477,156 2.08 - 2.72 2.25
Exercised (144,800) .84 - 2.31 1.45
Forfeited or cancelled (33,000) 1.47 1.47
================================================================================
OUTSTANDING AT
SEPTEMBER 3, 2004 1,627,781 $.63 - 5.63 $ 1.89
AVAILABLE FOR ISSUE AT
SEPTEMBER 3, 2004 495,419 -- --
================================================================================
OPTIONS EXERCISABLE AT
SEPTEMBER 3, 2004 1,257,414 $.63 - 5.63 $ 1.80
August 29, 2003 1,293,425 $.63 - 5.63 $ 1.70
================================================================================
The weighted average remaining contractual life of options outstanding at
September 3, 2004, was 3.8 years.
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 2004, 2003 and 2002.
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 2004, 2003 and 2002,
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 fiscal 2004, all matching contributions in the amount of
$235,000 were in the form of cash. 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 were in the form of Company 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 we have determined that we operate in a single operating segment: the
manufacture and sale of satellite communications equipment.
39
Wegener Corporation and Subsidiaries
In this single operating segment we have three sources of revenues as follows:
Year ended
------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
--------------------------------------------------------------------------------------------
Direct Broadcast Satellite $16,533,758 $18,152,647 $21,932,974
Telecom and Custom Products 937,498 1,411,493 1,073,345
Service 633,028 569,040 452,604
--------------------------------------------------------------------------------------------
$18,104,284 $20,133,180 $23,458,923
============================================================================================
Revenues by geographic areas are as follows:
Year ended
------------------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
--------------------------------------------------------------------------------------------
Geographic Area
United States $17,498,397 $19,293,956 $21,986,074
Canada 83,711 314,625 576,733
Europe 366,474 262,958 387,524
Asia 92,756 147,318 219,778
Latin America and Mexico 20,788 18,366 69,522
Other 42,158 95,957 219,292
--------------------------------------------------------------------------------------------
$18,104,284 $20,133,180 $23,458,923
============================================================================================
Revenues attributed to geographic areas are based on the location of the
customer. All of our long-lived assets are located in the United States.
We sell 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
-------------------------------------
SEPTEMBER 3, August 29, August 30,
2004 2003 2002
-------------------------------------------------
Customer 1 39.6% 39.3% 27.5%
Customer 2 (a) 16.3% 27.9%
Customer 3 (a) (a) 11.1%
(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 our revenues and that trend is expected to continue throughout
fiscal 2005 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 September 3, 2004 and at August 29, 2003, two customers accounted for more
than 10% of our accounts receivable. When deemed appropriate, we use letters of
credit and credit insurance to mitigate the credit risk associated with foreign
sales.
40
Wegener Corporation and Subsidiaries
12. STATEMENTS OF CASH FLOWS
Interest payments were approximately $96,000, $69,000 and $64,000 for fiscal
years 2004, 2003 and 2002, respectively. Income tax refunds received in fiscal
2002 were $208,000. No income taxes were paid or received in 2004 or 2003.
Noncash financing activities in fiscal 2004 included the fair value of stock
options granted for services valued at $140,000. Noncash 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. Noncash financing activities in fiscal 2002 included
167,111 shares of treasury stock reissued for 401(k) matching Company
contributions valued at approximately $158,000.
13. COMMITMENTS AND CONTINGENCIES
We have three manufacturing and purchasing agreements for certain finished goods
inventories. At September 3, 2004, outstanding purchase commitments under these
agreements amounted to $7,233,000. Pursuant to the above agreements, at
September 3, 2004, we had outstanding letters of credit in the amount of
$1,916,000.
During the first quarter of fiscal 2004, we entered into a two-year agreement
aggregating $870,000 for engineering design and software development services.
At September 3, 2004, the outstanding commitment under the agreement was
$508,000.
We lease 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: 2005-$117,000,
2006-$4,000, 2007-$2,000, 2008-$2,000, 2009-$2,000. Rent expense under all
leases was approximately $228,000, $242,000 and $243,000 for fiscal years 2004,
2003 and 2002, respectively.
From time to time in the ordinary course of business, we have become a defendant
in various types of legal proceedings. We do not believe that these proceedings,
individually or in the aggregate, will have a material adverse effect on our
financial position, results of operations or cash flows.
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 alleged 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 sought by Plaintiff included: 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 sought an award of Plaintiff's costs and attorneys' and
other fees. An answer was filed by Wegener, denying all substantive allegations
in the complaint. On January 9, 2004, the Complaint was dismissed without
prejudice.
14. GUARANTEES
Warranty
We warrant our products for a 12 to 14 month period beginning at the date of
shipment. The warranty provides for repair or replacement of defective products
returned during the warranty period at no cost to the customer. We expense costs
for routine warranty repairs as incurred. Additional provisions are made for
non-routine warranty repairs based on estimated costs to repair at the point in
time in which the warranty claim is identified. Accrued warranty liabilities
amounted to $151,000 at September 3, 2004. For the year ended September 3, 2004,
the accrual was increased by $90,000 and reduced by $4,000 for satisfied
warranty claims. Warranty expense recognized during the year ended September 3,
2004, amounted to $90,000.
Letters of Credit
WCI provides standby letters of credit in the ordinary course of business to
certain suppliers pursuant to manufacturing and purchasing agreements. At
September 3, 2004, outstanding letters of credit amounted to $1,916,000.
41
Wegener Corporation and Subsidiaries
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 September 3, 2004, no
balances were outstanding on the loan facility.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------------------------------- -------------
Quarter
------------------------------------------------------------- -------------
First Second Third Fourth Year
FISCAL 2004
REVENUE $4,750,205 $4,712,923 $4,777,394 $3,863,762 $18,104,284
GROSS PROFIT 1,274,668 1,198,311 1,392,372 975,111 4,840,462
OPERATING (LOSS) (687,204) (854,717) (550,703) (993,182) (3,085,806)
NET (LOSS) (448,668) (655,264) (356,641) (647,325) (2,107,898)
NET (LOSS) PER SHARE
BASIC (0.04) (0.05) (0.03) (0.05) (0.17)
DILUTED (0.04) (0.05) (0.03) (0.05) (0.17)
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
(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, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of the end
of the period covered by this report. Based upon that evaluation, the Company's
CEO and CFO have concluded that the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) are effective. There has been no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "ELECTION OF DIRECTORS" in the
Proxy Statement pertaining to the January 25, 2005 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" 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" in the Proxy Statement is incorporated herein by
reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" in the Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information contained under the caption "PRINCIPAL ACCOUNTANT FEES AND
SERVICES" in the Proxy Statement is incorporated herein by reference in response
to this item."
43
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The following consolidated financial statements of Wegener
Corporation and subsidiaries and the related Report of Independent Registered
Public Accounting Firm thereon are filed as part of this report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets - September 3, 2004, and August 29, 2003.
Consolidated Statements of Operations - Years ended September 3, 2004, August
29, 2003, and August 30, 2002.
Consolidated Statements of Shareholders' Equity - Years ended September 3, 2004,
August 29, 2003, and August 30, 2002.
Consolidated Statements of Cash Flows - Years ended September 3, 2004, August
29, 2003, and August 30, 2002.
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 is included herein, beginning
on page 46:
Schedule II-Valuation and Qualifying Accounts Years ended September
3, 2004, August 29, 2003, and August 30, 2002.
(a)(3) The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index on pages 47 and 48.
(b) See Part IV, Item 15(a) (3).
(c) See Part IV, item 15(a) (2).
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Wegener Corporation
Duluth, Georgia
The audits referred to in our report dated December 1, 2004, 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
December 1, 2004
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 SEPTEMBER 3, 2004 $ 354,660 $ -- $ (5,105) $ 13,734 $ 363,289
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
Inventory Reserves:
YEAR ENDED SEPTEMBER 3, 2004 $ 3,490,363 $ 225,000 $ (247,873) $ -- $ 3,467,489
Year ended August 39, 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
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 10.6 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, SEC file No. 0-11003,
Exhibit 3.2).
*3.3 Amendment to Certificate of Incorporation (1997 10-Q, filed
June 27, 1997, SEC file No. 0-11003, Exhibit 3.1).
*3.4 Amended and Restated By-laws (Form 8-K, dated as of May 1,
2003 and filed May 6, 2003, Exhibit 3.1).
*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, SEC
file No. 0-11003, 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 (1998 10-K, filed November 9, 1998, SEC
file No. 0-11003, Exhibit 4.5).
*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.)
*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).
*4.10 Loan and Security Agreement - Sixth Amendment dated June 27,
2004, by and between Wegener Communications, Inc. and LaSalle
National Bank respecting $5,000,000 combined revolving credit
note and term note. (2004 10-Q filed July 9, 2004, 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. 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,
SEC file No. 0-11003, Exhibit 10.4).
47
Exhibit Number Description of Document
*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, SEC file
No. 0-11003, Exhibit 10.14).
*10.3 1989 Directors' Incentive Plan (1990 10-K, filed November 29,
1990, SEC file No. 0-11003, Exhibit 10.9).
*10.3.1 Amendment to 1989 Directors' Incentive Plan effective February
1, 1995, (1995 10-K, filed December 13, 1996, SEC file No.
0-11003, 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)).
10.6 Director Compensation Plan for 2004
*14.1 Wegener Corporation Code of Business Conduct and Ethics (2003
10-K, filed November 26, 2003, SEC file No. 0-11003, Exhibit
14.1).
21 Subsidiaries of the Registrant .
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: December 2, 2004 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 2nd day of December 2004.
Signature Title
/s/ Robert A. Placek President, Chief Executive Officer and Chairman of the Board,
- --------------------------------------- Director (Principal Executive Officer)
/s/ C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer, Director
- --------------------------------------- (Principal Financial and Accounting Officer)
/s/ Ned L. Mountain Director, Executive Vice President of WCI
- ---------------------------------------
Ned L. Mountain
/s/ Phylis Eagle-Oldson Director
- ---------------------------------------
Phylis Eagle-Oldson
/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 and WCI
Ned L. Mountain
Executive Vice President
Wegener Communications, Inc.
C. Troy Woodbury, Jr.
Treasurer and Chief
Financial Officer
Wegener Corporation
Phylis Eagle-Oldson
President and Chief Executive
Officer of Emma L. Bowen
Foundation
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 and 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 REGISTERED
PUBLIC ACCOUNTING FIRM
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 25,
2005 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 2004 and 2003 were as
follows:
High Low
- --------------------------------------
FISCAL YEAR ENDING SEPTEMBER 3, 2004
First Quarter $3.15 $2.00
Second Quarter 3.28 1.94
Third Quarter 2.63 1.35
Fourth Quarter 2.05 1.06
- --------------------------------------
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
- --------------------------------------
The Company had approximately 381* shareholders of record at November 15, 2004.
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