-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uq7/JXtpYX+ITrgY60VfWwvo1dL4fxdW+PjBErkfdJCNLScHYeODK2SpC9gqhv5g 7Do8TyJTXE3kcpe7o5BpPw== 0000912057-96-027864.txt : 19961202 0000912057-96-027864.hdr.sgml : 19961202 ACCESSION NUMBER: 0000912057-96-027864 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960830 FILED AS OF DATE: 19961127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEGENER CORP CENTRAL INDEX KEY: 0000715073 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 810371341 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11003 FILM NUMBER: 96673831 BUSINESS ADDRESS: STREET 1: 11350 TECHNOLOGY CIRCLE CITY: DULUTH STATE: GA ZIP: 30136-1528 BUSINESS PHONE: 4046230096 MAIL ADDRESS: STREET 1: 11350 TECHNOLOGY CIRCLE CITY: DULUTH STATE: GA ZIP: 30136-1528 FORMER COMPANY: FORMER CONFORMED NAME: TELECRAFTER CORP DATE OF NAME CHANGE: 19890718 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended August 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to --------------------- ------------------------- Commission file No. 0-11003 WEGENER CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 81-0371341 (State of incorporation) (I.R.S. Employer Identification No.) 11350 TECHNOLOGY CIRCLE, DULUTH, GEORGIA 30155-1528 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 623-0096 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO ----- ----- As of November 15, 1996, 9,014,937 shares of registrant's Common Stock were outstanding and the aggregate market value of the Common Stock held by nonaffiliates was $31,189,828 based on the last sale price of the Common Stock as quoted on the NASDAQ Small-Cap Marketing System on such date. (The officers and directors of the registrant, and owners of over 10% of the registrant's common stock, are considered affiliates for purposes of this calculation.) Indicate by check mark if disclosure of deliquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement pertaining to the January 21, 1997 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 AUGUST 30, 1996 INDEX PART I Page Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . .9 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . 11 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 16 PART III Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 31 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 31 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . . . . . 31 Item 13. Certain Relationships and Related Transactions . . . . . . . . . 31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 32 1 PART I ITEM 1. BUSINESS Wegener Corporation, the Registrant, together with its subsidiaries, is referred to herein as the "Company". (a) General development of business. Wegener Corporation was formed in 1977 and is a Delaware corporation. The Company conducts its continuing business through Wegener Communications, Inc. (WCI), its wholly-owned subsidiary, and Wegener Communications International, Inc., a wholly-owned subsidiary of WCI. WCI was formed in April 1978 and is a Georgia corporation. Its wholly- owned subsidiary, Wegener Communications International, Inc., is a Small Foreign Sales Corporation. WCI, a market leader in digital and analog compression technology, designs and manufactures communications transmission and receiving equipment for the business broadcast, data communications, cable and broadcast radio and television industries for worldwide markets. (b) Financial information about industry segments. Segment information contained in Note 11 to the consolidated financial statements on page 28 of this document is incorporated herein by reference in response to this item. (c) Narrative description of business. (i) Principal products produced and services rendered, and (ii) Status of a product or segment. SATELLITE COMMUNICATIONS ELECTRONICS. WCI manufacturers electronics for the distance learning, broadcast television and radio, cable television, business music, private network and data communications industries. WCI services all of the products that it sells. The Company warrants its products for a period of one year. There were no significant warranty claims outstanding as of August 30, 1996. WCI manufacturers primarily high volume standard products. During fiscal 1994, the Company divested its low volume custom products operations and entered into a distributor agreement for the sale of these products. Throughout fiscal 1995 and fiscal 1996, WCI continued to produce and develop digital compression products. These products are in use world wide in distance learning, radio, cable television, and private 2 business networks. In terms of new orders, compressed digital products are the fastest growing product segment for the Company. Bookings for the Company's digital video products are strong and management believes they will more than compensate for other areas which are being impacted due to shifts in technology. As expected, demand for the Company's analog products has begun to decline following market demand for, and the Company's emphasis on, digital technology. DIGITAL COMMUNICATIONS. The demand for digital products is being driven by the high cost of satellite capacity. Satellite capacity is scarce due to pressures on both the supply and demand side of the market. On the supply side, satellites are extremely expensive to launch, build, and maintain. The useful life of a satellite is limited by the amount of positioning fuel that can be carried. Also, the placement of satellites is regulated by the FCC and therefore the number of satellites within range of any given location is limited. On the demand side, the cost of receive hardware is being steadily reduced through advancing technology. The reduction in the cost of network hardware increases the economic feasibility of a greater number of networks. This is evidenced by the trend in both television and radio towards narrow- casting to well-defined market segments as opposed to broadcasting to the general population. Digital compression technology allows a four to ten-fold, or more, increase in the throughput of a satellite channel. For the network it represents an opportunity to reduce the cost of satellite use. For the satellite operator it represents an opportunity to increase the revenue generated by an expensive asset. The market as a whole has built up demand for digital technology. With ongoing breakthroughs in digital compression, digitized audio and video products have become increasingly important. WCI manufactures MPEG-2 broadcast quality digital video products for commercial program distribution. During the fourth quarter of fiscal 1996 WCI received an order for its MPEG-2 products for use by NBC in the MSNBC network. A significant portion of the order was delivered during the fourth quarter with the remainder to be delivered during the first quarter of fiscal 1997. The order comprised over 450 satellite receivers and over 80 transmit systems. Similar WCI equipment is also in use by Turner Broadcasting. WCI's lower data rate products have been ordered by Eli Lilly and Company for their global business network. Ongoing projects include shipments of digital video products to Dow Jones Investor Network, NBC Desktop, and Reuters Financial Television for use in terrestrial and satellite business information networks which deliver compressed video to subscribers' desktops. The Company's digital audio products employ MPEG digital audio compression technology and are used to distribute radio and business music programming to network affiliates. During fiscal 1996, ABC Radio Network, Jones Satellite Networks, Moody Broadcasting and a variety of smaller networks throughout the world chose WCI digital audio products to upgrade their networks. The Company also manufacturers specialized data communications products used in satellite broadcast data applications. Bookings for these products remained strong in fiscal 1996. WCI manufactures satellite data receivers for Glenayre Technologies which are being used to expand Glenayre's paging network. Reuters also uses WCI data equipment to expand distribution for its international news feed. CABLE TELEVISION PRODUCTS. WCI's products are widely employed in the cable industry to provide a variety of audio, data, and video services to cable subscribers. These products deliver high quality 3 video and stereo sound to cable headends via satellite. This includes transmission of stereo sound associated with cable television programming, discrete audio-only services provided to cable systems, automated program delivery for regional sports networks, and pay-per-view movies. A wide variety of data transmission products are used to deliver specialized data services to cable headends and subscribers. These applications range from data to feed news services, weather and program guide graphics, delivery to personal computers, and control of cable subscribers' addressable converters. Other cable products are cue and control equipment for cable television networks. Cueing signals are used on advertising supported networks to permit affiliated cable systems to insert local commercials at appropriate times. Control equipment delivers switching commands from the network to provide program routing and blackouts. An additional product family of the cable television segment is graphic generators. These products deliver custom data by satellite that is graphically displayed on a subscriber's television. Products in this area were among the first generated by WCI. WCI has continued to add new products to this family to meet market demand. RADIO AND TELEVISION BROADCASTING. Broadcasters use WCI equipment to distribute digital audio, analog audio, video, and cue/network control signals. Television networks, such as NBC and Turner Broadcasting, use WCI products to distribute programming from remote locations and between affiliates. Satellite based radio networks distribute programming and network control signals to network affiliates. OPTICAL FIBER AND TERRESTRIAL MICROWAVE. Most of WCI's products used on satellite communications links are easily used on existing microwave or fiber circuits. Typical applications are voice and data circuits that accompany a television signal. BUSINESS MUSIC. This market consists of suppliers of business music to retail restaurants, offices and retail establishments. WCI manufactures the equipment required to transmit audio and data from the business music supplier to the end user via satellite circuits. The equipment is controlled by the business music supplier using WCI's network control technology. Potential users of this WCI equipment include any business purchasing background music, foreground music and broadcast data. (iii) Sources and availability of raw materials. Raw materials consist of passive electronic components, electronic circuit boards and fabricated sheet metal. WCI purchases approximately one-half of its raw materials from direct dealers and the other half is purchased from distributors. Passive and active components include parts such as resistors, integrated circuits and diodes. WCI uses approximately ten distributors to supply their electronic components. Direct sources provide sheet metal, electronic circuit boards and other materials built to specifications. WCI maintains relationships with almost twenty direct dealers. Most of the Company's materials are available from a number of different suppliers, however, certain components used in 4 existing and future products are currently available from single or limited sources. Although the Company believes that all single-source components currently are available in adequate quantities, there can be no assurance that shortages or unanticipated delivery interruptions will not develop in the future. Any disruption or termination of supply of certain single-source components could have an adverse effect on the Company's business and results of operations. (iv) Patents, trademarks, licenses, franchises and concessions held. The Company holds certain patents with respect to some of its products and markets its services and products under various trademarks and tradenames. Additionally, the Company licenses certain analog audio processing technology to several manufacturing companies which generated royalty revenues of approximately $112,000, $173,000 and $170,000 in fiscal 1996, 1995, and 1994, respectively. Although the Company believes that the patents and trademarks owned are of value, the Company believes that success in its industry will be dependent upon new product introductions, frequent product enhancements, and customer support and service. However, the Company intends to protect its rights when, in its view, these rights are infringed upon. (v) Seasonal variations in business. There does not appear to be any seasonal variations in the Company's business. (vi) Working capital practices. Information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) on pages 11-16 of this document is incorporated herein by reference in response to this item. (vii) Dependence upon a limited number of customers. The Company sells to a variety of domestic and international customers on an open-unsecured account basis. These customers principally operate in the cable television, broadcast business music, private network, and data communications industries. Sales to Ascent Network Services, Inc. accounted for approximately 14.2% of revenues in fiscal 1996. Sales to Glenayre Technologies, Inc. accounted for approximately 15.0% of revenues in fiscal 1995. Sales to Muzak accounted for approximately 18.6% of revenues in fiscal 1994. At August 30, 1996, two customers accounted for 34.6% and 10.8% respectively, of the Company's accounts receivable. At September 1, 1995, one customer accounted for 18.7% of the Company's accounts receivable. Sales to a relatively small number of major customers have typically comprised a majority of the Company's revenues. This trend is expected to continue in fiscal 1997. There can be no assurance that the loss of one or more of these customers would not have an adverse effect on the Company's operations. (viii) Backlog of orders. The Company's backlog is comprised of undelivered, firm customer orders. The Company's backlog was approximately $28,045,000 at August 30, 1996 and $27,402,000 at September 1, 1995. Reference is hereby made to page 11 of this document which is incorporated herein by reference in response to this item. 5 Approximately $12,396,000 of the August 30, 1996 backlog is expected to ship during fiscal 1997, $2,400,000 in fiscal 1998, and the remainder beyond fiscal 1998. (ix) Government contracts. Not applicable. (x) Competitive Conditions. The Company competes with companies which have substantially greater resources and a larger number of products than the Company, as well as with small specialized companies. Competition in the emerging distance learning industry is comprised of both established firms as well as relative newcomers. Through relationships with satellite service providers, the Company has positioned itself to provide end-to-end solutions to its customers. Competition in the market for the Company's MPEG-2 broadcast television electronics products, including digital video equipment, is driven by timeliness, performance, and price. The Company's broadcast digital video products are in production and are aggressively priced, with unique, desirable features. Management believes these products are physically smaller and priced below other equivalent products on the market today. The competitive situation of data products is significantly different than that of the markets for other WCI products. Due to the large number of potential end users, both small and large competitors continue to emerge. The Company believes it has positioned itself to capitalize on the market trends in this business through careful development of its product and market strategies, which have proven successful in increasing revenues from this sector. In the cable television market the Company believes that the competitive position for its products is dominant. Products for cable television include proprietary cueing and network control devices. Competition for radio network products, including the Company's digital audio products, is very aggressive and pricing is very competitive. The Company believes that its continued success in all of its markets will depend on aggressive marketing and product development. (xi) Research and development activities. The Company's research and development is designed to strengthen and broaden its existing products and systems and to develop new products and systems. A major portion of the fiscal 1996 research and development expenses were spent in the digital video product area. WCI research and development expenses totalled $2,286,000 in fiscal 1996, $1,985,000 in fiscal 1995, and $2,025,000 in fiscal 1994. Additional information contained in MDA on pages 11- 16 of this document is incorporated herein by reference in response to this item. (xii) Environmental disclosures. Federal, state and local pollution control requirements have no material effect upon the capital expenditures, earnings or the competitive position of the Company. 6 (xiii) Number of employees. As of August 30, 1996, the Company had 131 employees employed by the WCI manufacturing subsidiary. No employees are parties to a collective bargaining agreement and the Company believes that its relationships with its employees are good. (d) Financial information about foreign and domestic operations and export sales. Information contained under the caption "Consolidation" on page 21 of this document , and in Note 11 on page 28 of this document are incorporated herein by reference in response to this item. 7 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows: NAME AND BUSINESS EXPERIENCE AGE OFFICE HELD ROBERT A. PLACEK 58 President, President and Chief Executive Officer Chief Executive Officer of the Company since August and Chairman of the 1987 and Director since July 1987. Board Chairman of the Board since 1994. President and Director of WCI since 1979. C. TROY WOODBURY, JR. Treasurer and Chief Financial 49 Treasurer and Officer of the Company since Chief Financial Officer June 1988 and Director since 1989. Executive Vice President of WCI since July 1995. Treasurer and Chief Operating Officer of WCI since September 1992. Group Controller for Scientific-Atlanta, Inc. from March 1975 to June 1988. JAMES T. TRAICOFF Controller of the Company since 46 Controller November 1991; Controller for WCI since July 1988; Controller for BBL Industries, Inc. from April 1985 to July 1988. 8 ITEM 2. PROPERTIES The home offices of the Company are located at 11350 Technology Circle, Duluth, Georgia 30155-1528. This 40,000 square foot facility, which is located on a 4.7 acre site, was purchased in February 1987. During August 1989, WCI purchased an additional 4.4 acres of adjacent property. WCI also leases approximately 11,300 square feet under long-term leases expiring during fiscal 1999, at an annual rental of approximately $79,000. This space is for additional warehouse and manufacturing capacity. WCI's manufacturing facility is subject to a mortgage note securing the indebtedness. WCI's 4.4 acres of adjacent land is pledged as collateral under the Company's line of credit facility. ITEM 3. LEGAL PROCEEDINGS No significant legal proceedings were pending as of August 30, 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ Small-Cap Market System (NASDAQ symbol WGNR). As of November 15, 1996 there were approximately 3,453 holders of record of Common Stock. The quarterly range of high and low closing sale prices for fiscal 1996 and 1995 were as follows: Fiscal 96 Fiscal 95 --------- --------- High Low High Low First Quarter $12 $ 9 $ 2 1/4 $1 1/2 Second Quarter 13 3/4 8 1/2 3 5/8 1 7/8 Third Quarter 10 5/8 7 3/4 5 7/8 3 1/4 Fourth Quarter 12 1/4 5 5/8 11 1/2 5 13/16 The Company has not paid any cash dividends on its Common Stock. For the foreseeable future, the Company's Board of Directors does not intend to pay cash dividends, but rather plans to retain earnings to support the Company's operations and growth. 9 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Year Year Year Year ended ended ended ended ended August 30, September 1, September 2, August 27, August 28, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- Revenue $23,195 $19,488 $16,521 $14,673 $15,722 Primary earnings (loss) from continuing operations 1,456 (2) 385 (69) (428) (1,431) Primary earnings (loss) per share from continuing operations $ .16 (2) $ .05 $ (.01) $ (.06) $ (.19) Primary earnings (loss) per share $ .16 (2) $ .05 $ (.01) $ (.07) $ (.41) Cash dividends paid per share (1) - - - - - Total assets $27,737 $22,018 $11,893 $10,827 $12,497 Long-term obligations and current maturities 7,935 2,796 2,979 3,556 4,923
(1) The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. (2) Fully diluted earnings per share were anti-dilutive. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to financial results, plans for future business development activities, capital spending or financing sources, capital structure and the effects of regulation and competition, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, economic conditions, product demand, governmental and technological factors, competition and other uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings. The Company manufactures satellite communications equipment through Wegener Communications, Inc. (WCI), a wholly-owned subsidiary. WCI manufactures products for transmission of audio, data, and video via satellite. RESULTS OF OPERATIONS Net earnings were $1,456,000 or $0.16 per share for the year ended August 30, 1996, compared to $385,000 or $.05 per share for the year ended September 1, 1995 and a loss of $(69,000) or $(0.01) per share for the year ended September 2, 1994. Revenues for fiscal 1996 were $23,195,000, up 19.0% from revenues of $19,488,000 in fiscal 1995, compared to revenues of $16,521,000 in fiscal 1994. During fiscal 1996, the Company continued to focus on improved product quality and the development of new products. Direct Broadcast Satellite (DBS) revenues increased approximately $2,948,000 or 19.5% in fiscal 1996 compared to fiscal 1995. Telecom and Custom Product revenues increased approximately $692,000 or 19.2% in fiscal 1996 compared to fiscal 1995. The increase in DBS revenues was due to increased shipments of MPEG-2 digital video products which was partially offset by a decrease in shipments of audio and data products. The Telecom and Custom Product Group revenue increase was primarily due to increased shipments of uplink equipment to radio networks for conversion of analog to digital broadcasting. WCI's backlog was approximately $28,045,000 as of August 30, 1996, compared to $27,402,000 as of September 1, 1995, and $10,502,000 as of September 2, 1994. Approximately $12,396,000 of the August 30, 1996 backlog is expected to ship during fiscal 1997, $2,400,000 in fiscal 1998, and the remainder beyond fiscal 1998. This backlog is the result of positive acceptance of Wegener's new digital communications products. Management believes the ability of digital compression technology to dramatically reduce the cost of satellite communications will result in a significant increase in demand for satellite communications products utilizing digital compression technology. Although no assurances can be given, the Company expects to directly benefit from this increase in demand. There may be fluctuations in the Company's revenues and operating results from quarter to quarter due to several factors, including the timing of significant orders from customers and the timing of new product introductions by the Company. International sales are generated through a direct sales organization and through foreign distributors. International sales were $2,549,000 or 11.0% of revenues in fiscal 1996, compared to $3,926,000 or 20.1% of revenues in fiscal 1995, and $2,709,000 or 16.4% of revenues in fiscal 1994. 11 Management believes that international sales could increase as more business opportunities become available for WCI products in the future. All international sales are denominated in U.S. dollars. Gross profit increased $827,000 or 12.4% in fiscal 1996 compared to fiscal 1995 as a result of increased revenues for the year. Gross profit as a percent of sales was 32.2% in fiscal 1996, compared to 34.1% in fiscal 1995 and 34.5% in fiscal 1994. The gross profit in fiscal 1996 was reduced by $775,000 or 3.3% as a result of a charge to inventory reserves for slow-moving and obsolete inventory. The charge resulted primarily from the continued maturing of analog products. This compares to a charge of $77,000 in fiscal 1995 and none in fiscal 1994. Additionally, profit margins in fiscal 1996 were adversely impacted by start-up costs associated with the introduction of new digital video products and higher than expected material component costs of certain products. The Company believes margins could increase in fiscal 1997 if the Company is successful in improving manufacturing efficiencies, reducing start-up costs on new products, and achieving cost reductions with planned redesign of certain products. However, there can be no assurance that increased margins will in fact be realized. Selling, general and administrative expenses were $3,951,000 or 17.0% of revenues in fiscal 1996, $3,671,000 or 18.8% of revenues in fiscal 1995, and $3,309,000 or 20.0% in fiscal 1994. The percentage decrease in fiscal 1996 is due to higher revenue levels partially offset by a 7.6% increase in expenses compared to fiscal 1995. The increase in expenses is due primarily to increases in compensation and selling and marketing expenses. Research and development expenditures, including capitalized software development costs, were $3,180,000 or 13.7% of revenues in fiscal 1996, $2,453,000 or 12.6% of revenues in fiscal 1995, and $2,212,000 or 13.4% of revenues in fiscal 1994. During fiscal 1996, $894,000 of software development costs were capitalized in accordance with FASB 86, and $468,000 and $187,000 of software development costs were capitalized in fiscal 1995 and 1994, respectively. Research and development expenses were $2,286,000 or 9.9% of revenues in fiscal 1996, $1,985,000 or 10.2% of revenues in fiscal 1995, and $2,025,000 or 12.3% of revenues in fiscal 1994. The Company remains committed to such research and development expenditures as are required to effectively compete and maintain pace with the rapid technological changes in the communications industry and to support innovative engineering and design in its future products. The amount of future research and development expenditures is expected to increase compared to fiscal 1996 and decrease as a percentage of revenues. The Company's ability to continue the development of new digital products is directly tied to its ability to obtain additional funding, if required. Interest expense increased 10.6% in fiscal 1996 compared to fiscal 1995, and increased 42.0% in fiscal 1995 compared to fiscal 1994. The increase during fiscal 1996 was primarily due to increases in the average outstanding borrowings. The Company believes that interest expense in fiscal 1997 will approximate fiscal 1996 expense. The Company recognized an income tax benefit in fiscal 1996 of $848,000 due to the reversal of the valuation allowance on the deferred tax assets. The reversal of the valuation allowance was based on management's assessment that existing tax benefits will "more likely than not" be realized in future tax returns. No income tax benefit was recognized in fiscal 1995 and fiscal 1994 due to fully-reserved deferred tax benefits related to federal net operating loss carryforwards, deductible temporary differences, 12 and tax credit carryforwards. During fiscal 1997 the Company will again recognize income tax expense on earnings. The Company operates on a 52-53 week fiscal year. The fiscal year ends on the Friday nearest to August 31. Fiscal 1996 and 1995 contained 52 weeks. Fiscal 1994 contained 53 weeks. The financial statement effect was not significant. LIQUIDITY AND CAPITAL RESOURCES On May 31, 1996, the Company issued $5,000,000 of 8% Convertible Debentures, due May 31, 1999, in a private placement to various accredited investors for net proceeds to the Company of $4,700,000. Proceeds were used for working capital and reduction of the line-of-credit note payable. These debentures are convertible at the option of the holders at any time through May 31, 1999, into a number of shares of common stock at a price equal to the lesser of (i) $12.25 per share or (ii) a percentage, based on the holding period, ranging from 95% to 82.5% (82.5% at August 30, 1996) of the average of the lowest sale price on each of the five trading days immediately preceding the conversion date. Interest at the rate of 8% per annum is payable quarterly beginning July 1, 1996 in cash or, at the option of the Company, by adding the amount of such interest to the outstanding principal amount due under the Debenture. At July 1, 1996, convertible debentures in the amount of $33,972 were issued for payment of interest. At August 30, 1996 no debentures had been converted. The Company filed Form S-3 during the fourth quarter to register 1,150,000 shares of common stock underlying such debentures for resale following conversion. Subsequent to August 30, 1996, $1,050,000 of debentures had been converted into 247,377 shares of common stock. On April 8, 1996, WCI entered into a $600,000 promissory note with interest at the rate of 9.6% per annum with principal and interest payable in 60 consecutive monthly installments of $12,597 beginning May 1, 1996. The note is secured by certain machinery and equipment. Proceeds of the note were used for working capital. During fiscal 1995, the Company received proceeds, net of issuance costs, of approximately $7,662,000 in a private placement of 1,700,000 shares of common stock. These funds were used for working capital purposes and enabled the Company to sustain higher levels of shipments in fiscal 1996. Depending on the level of revenues and profitability in fiscal 1997, additional funds for working capital may be required. The Company believes that additional funds will be available, if required, through a private placement or a public offering of additional shares of common stock or through additional borrowing. If additional financing is required and is not available, management of the Company is committed to cutting the necessary costs throughout the organization and limiting certain planned programs in order to keep cash requirements within the current line-of-credit availability. This action would very likely result in lower revenues. This would ultimately impact the level of expenditures available for research and development expenses. However, management believes that suitable financing will be successfully obtained if required. The Company used cash in operations of $6,041,000 in fiscal 1996 and $2,488,000 in fiscal 1995, while continuing operations provided cash of $280,000 in fiscal 1994. Total indebtedness increased by $3,590,000 in fiscal 1996 compared to increases of $914,000 in fiscal 1995 and $116,000 in fiscal 1994. Capital equipment expenditures were $579,000 in fiscal 1996, compared to $490,000 in fiscal 1995 and $234,000 in fiscal 1994. Working capital increased 76.4% to 13 $14,010,000 at August 30, 1996 from $7,941,000 at September 1, 1995, compared to $1,013,000 at September 2, 1994. The increase in total indebtedness and in working capital are primarily results of the aforementioned private placement. The Company has no material commitments for future capital expenditures. Net accounts receivable increased 55.4% to $7,106,000 at August 30, 1996, from $4,572,000 at September 1, 1995, compared to $2,911,000 at September 2, 1994. This increase in fiscal 1996 was due primarily to increased revenues in the fourth quarter. The allowance for doubtful accounts was $58,000 at August 30, 1996, $42,000 at September 1, 1995, and $112,000 at September 2, 1994. Write-offs in fiscal 1996, 1995 and 1994 were $70,000, $149,000 and $10,000, respectively. Increases to the allowance and charges to general and administrative expense were $60,000 in fiscal 1996, $70,000 in fiscal 1995 and $60,000 in fiscal 1994. During fiscal 1996, increases in inventories used cash in the amount of $6,237,000. The Company has invested a significant amount of financial resources to acquire certain raw materials, incur direct labor and contract to have specific outplant procedures performed on inventory in process. As of August 30, 1996, approximately $8,500,000 of inventory was related to MPEG-1 and MPEG-2 digital components. The Company purchased this inventory based upon current backlog and anticipated future sales based upon existing knowledge of the marketplace. Competition in the market for digital products is driven by timeliness, performance and price. The Company's digital products are in production and are aggressively priced, with unique, desirable features. The Company believes it has positioned itself to capitalize on the market trends in this business and believes that its continued success will depend on aggressive marketing and product development. No estimate can be made of a range of amounts of loss from obsolescence that are reasonably possible should the Company's sales efforts not be successful. The Company's inventory reserve of $1,522,000 at August 30, 1996, is to provide for items that are potentially slow-moving, excess, or obsolete resulting from rapid technological change, frequent product introductions, changes in customer needs, and evolving industry standards which require that the Company continue to add engineering refinements to its existing products and develop and introduce new products which achieve market acceptance. During fiscal 1996 inventory reserves were increased by provisions charged to cost of sales of $775,000. During fiscal 1995 inventory reserves were reduced by write-offs of $196,000 and increased by provisions charged to cost of sales of $77,000. Inventory reserves were reduced by $794,000 during fiscal 1994 due to: (i) write-offs of $561,000 and (ii) reductions of $233,000 associated with the recorded cost of inventory included in the divestiture of the Custom Products Division. On June 5, 1996, WCI obtained from a bank a new secured revolving line of credit and term loan facility with a combined maximum available credit limit of $8,500,000 expiring May 4, 1999 or upon demand. The term loan portion provides for a maximum of $1,000,000 for advances of up to 80% of the cost of equipment acquisitions. Interest on the term loan is payable monthly at the bank's prime rate (8.25% at August 30, 1996) plus 1 1/2%. Principal advances are payable monthly over sixty months with a balloon payment due at maturity. Interest on the revolving line of credit portion is payable monthly at the bank's prime rate plus 1/2%. Additionally, the facility requires an annual facility fee of 1% of the maximum credit limit. The revolving line of credit is subject to availability advance formulas of 80% against eligible accounts receivable; 20% of eligible raw material inventories; 20% of eligible work-in-process kit inventories; and 40% to 50% of eligible finished goods inventories. Advances against inventory are subject to a sublimit of $2,000,000. The loans are secured by a first lien on substantially all of WCI's assets except assets secured under the existing mortgage note and equipment note on which the bank has a second lien. The Company is required to maintain a minimum tangible net worth with 14 minimum annual increases at each fiscal year-end commencing with fiscal year 1997. Initial advances under the revolving line of credit were used to pay off the balances outstanding under the existing revolving line of credit and term loan facility with a credit finance company which expired on June 21, 1996. The revolving lines of credit had an outstanding balance of $1,530,000 as of August 30, 1996, compared to $3,079,000 at September 1, 1995, and $1,982,000 at September 2, 1994. At August 30, 1996, $4,277,000 was available to borrow under the advance formulas. WGNR guarantees the revolving line of credit and term loan. Long-term obligations, including the convertible debentures, increased 184% to $7,935,000 at August 30, 1996 from $2,796,000 at September 1, 1995, compared to $2,979,000 at September 2, 1994. WCI's mortgage note on a manufacturing facility accounts for approximately $1,887,000 of total long-term debt. The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. The Company had an accumulated deficit of $1,068,000 at August 30, 1996. The sale of the Company's Custom Product Division in fiscal year 1994 has allowed management to focus on the design and manufacturing of high volume digital products. The Company is very focused on controlling both direct and indirect manufacturing costs and other operating expenses. These costs will be adjusted as necessary if the revenues of the Company do not increase as planned. Management believes that digital compression technology may be profitably employed to create increased demand for its satellite receiving equipment if those products are manufactured in a high volume standardized production environment. Management believes that implementation of the current business plan will allow the Company to continue to operate profitably which will ultimately remedy this deficiency. The Company's ability to continue the rapid development of these new digital products is dependent on its ability to obtain additional financing, if required. IMPACT OF INFLATION The Company does not believe that inflation has had a material impact on revenues or expenses during its last three fiscal years. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of. SFAS No. 121 addresses issues surrounding the measurement and recognition of losses when the value of certain assets has been deemed to be permanently impaired. This Statement will be effective for the Company's 1997 fiscal year. The Company does not expect SFAS No. 121 to have a material impact on the Company's financial position or results of operations. In October 1995, The FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes a method of accounting for stock compensation plans based on fair value, but also permits companies to continue to account for stock option under the intrinsic value method 15 established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company plans to continue to account for stock-based compensation following the intrinsic value method. Beginning in fiscal 1997, SFAS No. 123 requires disclosure in the notes to financial statements of pro forma net income and earnings per share as if the alternative method established in SFAS No. 123 had been used to measure compensation cost. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED Year ended Year ended AUGUST 30, September 1, September 2, 1996 1995 1994 - ------------------------------------------------------------------------------------------- Revenue $23,195,052 $19,488,113 $16,521,192 - ------------------------------------------------------------------------------------------- Operating costs and expenses Cost of products sold 15,721,320 12,841,412 10,817,457 Selling, general and administrative 3,951,086 3,671,203 3,309,315 Research and development 2,286,378 1,984,661 2,024,676 - ------------------------------------------------------------------------------------------- Operating costs and expenses 21,958,784 18,497,276 16,151,448 - ------------------------------------------------------------------------------------------- Operating income 1,236,268 990,837 369,744 Interest expense (696,513) (629,772) (443,548) Interest income 67,606 24,232 - Other (expense) income, net 717 (427) 4,447 - ------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 608,078 384,870 (69,357) Income tax benefit 848,000 - - - ------------------------------------------------------------------------------------------- Net earnings (loss) $ 1,456,078 $ 384,870 $ (69,357) - ------------------------------------------------------------------------------------------- Primary earnings (loss) per share $ .16 $ .05 $ (.01) - ------------------------------------------------------------------------------------------- Weighted average number of shares 9,055,351 7,447,627 7,352,621 - -------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 30, September 1, 1996 1995 - ------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 171,687 $ 4,913,962 Accounts receivable 7,105,984 4,571,589 Inventories 12,694,823 7,232,521 Deferred income taxes 1,123,000 - Other 54,996 57,328 - ------------------------------------------------------------------------------------------- Total current assets 21,150,490 16,775,400 Property and equipment, net 4,727,659 4,412,183 Capitalized software costs 1,267,836 626,739 Other assets, net 590,715 203,785 - ------------------------------------------------------------------------------------------- $27,736,700 $22,018,107 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Note payable $ 1,530,332 $ 3,078,965 Accounts payable 2,874,923 3,762,219 Accrued expenses 1,519,952 643,757 Customer deposits 645,235 517,060 Current maturities of long-term obligations 569,626 831,838 - ------------------------------------------------------------------------------------------- Total current liabilities 7,140,068 8,833,839 Long-term obligations, less current maturities 2,331,443 1,964,227 Convertible debentures 5,033,973 - Deferred income taxes 275,000 - - ------------------------------------------------------------------------------------------- Total liabilities 14,780,484 10,798,066 - ------------------------------------------------------------------------------------------- Commitments - - Shareholders' equity Common stock, $.01 par value; 10,000,000 shares authorized; 9,231,930 and 9,193,680 shares issued 92,319 91,937 Additional paid-in capital 14,369,157 14,131,187 Deficit (1,068,475) (2,524,553) Less treasury stock, at cost (470,397 and 515,354 shares) (436,785) (478,530) - ------------------------------------------------------------------------------------------- Total shareholders' equity 12,956,216 11,220,041 - ------------------------------------------------------------------------------------------- $27,736,700 $22,018,107 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Treasury Stock ------------ Paid-in -------------- Shares Amount Capital Deficit Shares Amount - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, at August 27, 1993 7,493,680 $74,937 $6,695,448 $(2,840,066) (89,126) $(370,752) Treasury stock reissued through stock options and 401(k) plan - - (197,090) - 56,775 256,710 Treasury stock acquired through divestiture of custom products group - - - - (557,000) (517,200) Net loss for the year - - - (69,357) - - - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, at September 2, 1994 7,493,680 74,937 6,498,358 (2,909,423) (589,351) (631,242) Treasury stock reissued through stock options and 401(k) plan - - (11,809) - 73,997 152,712 Issuance of restricted common stock in private placement 1,700,000 17,000 7,644,638 - - - Net earnings for the year - - - 384,870 - - - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, at September 1, 1995 9,193,680 91,937 14,131,187 (2,524,553) (515,354) (478,530) Treasury stock reissued through stock options, commissions - - 126,134 - 44,957 41,745 and 401(k) plan Issuance of common stock for exercise of warrants and options 38,250 382 111,836 - - - Net earnings for the year - - - 1,456,078 - - - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, AT AUGUST 30, 1996 9,231,930 $92,319 $14,369,157 $(1,068,475) (470,397) $(436,785) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 WEGENER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED Year ended Year ended AUGUST 30, September 1, September 2, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net earnings (loss) $1,456,078 $ 384,870 $ (69,357) Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities Depreciation and amortization 1,050,964 679,654 748,583 Issuance of treasury stock for compensation expenses 142,333 98,198 44,320 Issuance of convertible debt for interest expense 33,973 - - Bad debt allowance 60,000 70,000 60,000 Inventory reserves 775,000 77,000 - Deferred income taxes (848,000) - - Warranty provisions - 70,000 50,000 Changes in assets and liabilities Accounts receivable (2,594,395) (1,730,110) (1,344,917) Inventories (6,237,302) (3,001,417) (593,204) Other assets 2,932 (89,880) (109,866) Accounts payable (887,296) 693,961 1,415,060 Customer deposits and accrued expenses 1,004,370 259,661 79,211 - ----------------------------------------------------------------------------------------------------- (6,041,343) (2,488,063) 279,830 - ----------------------------------------------------------------------------------------------------- CASH PROVIDED (USED) BY INVESTMENT ACTIVITIES Property and equipment expenditures (578,801) (489,873) (233,734) Capitalized software additions (893,532) (468,415) (187,184) Proceeds from note receivable related to the sale of discontinued business - - 145,000 - ----------------------------------------------------------------------------------------------------- (1,472,333) (958,288) (275,918) - ----------------------------------------------------------------------------------------------------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES Net change in borrowings under revolving line-of-credit (1,548,633) 1,097,199 692,455 Repayment of long-term debt and capitalized lease obligations (891,996) (850,044) (1,295,783) Proceeds from long-term debt 5,617,037 453,594 718,888 Proceeds from issuance of common stock 112,219 7,661,638 - Debt issuance costs (542,771) (47,294) (133,413) Proceeds from stock options exercised 25,545 42,705 15,300 - ----------------------------------------------------------------------------------------------------- 2,771,401 8,357,798 (2,553) - ----------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (4,742,275) 4,911,447 1,359 Cash and cash equivalents, beginning of year 4,913,962 2,515 1,156 - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 171,687 $4,913,962 $ 2,515 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. The financial statements include the accounts of Wegener Corporation (WGNR) (the "Company") and its wholly-owned subsidiaries. Wegener Communications, Inc. (WCI) designs, manufactures and distributes satellite communications electronics equipment in the U.S., and internationally through Wegener Communications International Inc. All significant intercompany balances and transactions have been eliminated in consolidation. FISCAL YEAR. The Company operates on a 52-53 week fiscal year. The fiscal year ends on the Friday nearest to August 31. Fiscal 1996 and 1995 contained 52 weeks. Fiscal 1994 contained 53 weeks. The financial statement effect is not significant. CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with original maturities of three months or less. There were no cash equivalents at August 30, 1996. At September 1, 1995 cash equivalents of $4,908,000 consisted of bank commercial paper. INVENTORIES. Inventories are stated at the lower of cost (standards, which approximate actual cost on a first-in, first-out basis) or market. The Company has invested a significant amount of financial resources to acquire certain raw materials, incur direct labor and contract to have specific outplant procedures performed on inventory in process. As of August 30, 1996, approximately $8,500,000 of inventory was related to MPEG-1 and MPEG-2 digital components. The Company purchased this inventory based upon current backlog and anticipated future sales based upon existing knowledge of the marketplace. Competition in the market for digital products is driven by timeliness, performance and price. The Company's digital products are in production and are aggressively priced, with unique, desirable features. The Company believes it has positioned itself to capitalize on the market trends in this business and believes that its continued success will depend on aggressive marketing and product development. No estimate can be made of a range of amounts of loss from obsolescence that are reasonably possible should the Company's sales efforts not be successful. PROPERTY, EQUIPMENT AND DEPRECIATION. Property and equipment are stated at cost. Certain assets are financed under lease contracts which have been capitalized. Aggregate lease payments, discounted at appropriate rates, have been recorded as long-term debt, the related leased assets have been capitalized, and the amortization of such assets is included in depreciation expense. Depreciation is computed over the estimated useful lives of the assets on the straight-line method for financial reporting and accelerated methods for income tax purposes. Substantial betterments to property and equipment are capitalized and repairs and maintenance are expensed as incurred. SOFTWARE COSTS. Software development costs are capitalized subsequent to establishing the technological feasibility of a product. Capitalized costs related to analog products are amortized over the lesser of three years or the products estimated market life. Capitalized costs related to digital products 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. Capitalized software costs for fiscal 1996, 1995, and 1994 totaled $894,000, $468,000 and $187,000, respectively. Amortization expense, included in cost of goods sold was $252,000, $88,000, and $48,000 for the same periods. Accumulated amortization amounted to $398,000 at August 30, 1996 and $146,000 at September 1, 1995. REVENUE RECOGNITION. Product sales and services are recorded when the product is shipped or the service is rendered to the customer. RESEARCH AND DEVELOPMENT. The Company expenses research and development costs, including expenditures related to development of the Company's software products that do not qualify for capitalization. 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. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. 21 EARNINGS PER SHARE. Earnings (loss) per share are computed based on the weighted average number of common and dilutive common equivalent shares outstanding during each year. Common equivalent shares are calculated using the treasury stock method and include dilutive stock options, warrants and awards. The Convertible debentures are not considered to be common stock equivalents. For fiscal 1996, fully diluted earnings per share were anti-dilutive. 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 1996, 1995 and 1994. Eligible WCI employees are permitted to make contributions, up to certain regulatory limits, to the plan on a tax deferred basis under Section 401(k) of the Internal Revenue Code. The plan provides for a minimum company matching contribution on a quarterly basis at the rate of 25% of employee contributions with an annual discretionary match subject to WCI's profitability. All matching contributions are in the form of Company stock or cash at the discretion of the Company's Board of Directors. Matching Company contributions in the form of common stock were approximately $65,000 in fiscal 1996, $37,000 in fiscal 1995 and $44,000 in fiscal 1994. STOCK OPTIONS. The Company accounts for employee stock options under the intrinsic value based method whereby compensation expense is recognized on the difference between the quoted market price of the Company stock and the option price at the date of grant. FINANCIAL INSTRUMENTS. The Company's financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and long and short-term bank borrowings and the recently issued convertible debentures. The fair value of these instruments approximates their recorded value. The Company does not have financial instruments with off-balance sheet risk. The fair value estimates were based on market information available to management as of August 30, 1996. Financial instruments that potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts receivable. The Company invests cash through a high-credit-quality financial institution and performs periodic evaluations of the relative credit standing of the financial institution. A concentration of credit risk may exist with respect to trade receivables, as a substantial portion of the Company's customers are affiliated with the cable television, business broadcast and telecommunications industries. The Company performs ongoing credit evaluations of customers world-wide and generally does not require collateral from its customers. Historically, the Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could vary from these estimates. FOREIGN CURRENCY. The U.S. dollar is the Company's functional currency for financial reporting. International sales are made and remitted in U.S. dollars. 2. ACCOUNTS RECEIVABLE Accounts receivable are summarized as follows: AUGUST 30, September 1, 1996 1995 - -------------------------------------------------------------------------------- Accounts receivable - trade $7,066,462 $4,501,509 Other receivables 97,434 111,682 - -------------------------------------------------------------------------------- 7,163,896 4,613,191 Less allowance for doubtful accounts (57,912) (41,602) - -------------------------------------------------------------------------------- $7,105,984 $4,571,589 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 22 3. INVENTORIES Inventories are summarized as follows: AUGUST 30, September 1, 1996 1995 - -------------------------------------------------------------------------------- Raw materials $ 5,675,954 $3,929,885 Work-in-process 5,627,543 2,594,977 Finished goods 2,913,252 1,443,949 - -------------------------------------------------------------------------------- 14,216,749 7,968,811 Less inventory reserves (1,521,926) (736,290) - -------------------------------------------------------------------------------- $12,694,823 $7,232,521 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. PROPERTY AND EQUIPMENT Major classes of property and equipment consisted of the following: Estimated AUGUST 30, September 1, Useful Lives 1996 1995 (Years) - -------------------------------------------------------------------------------- Land $ 707,210 $ 707,210 - Buildings and improvements 3,670,499 3,639,844 3-30 Machinery and equipment 6,538,216 5,771,897 3-5 Furniture and fixtures 609,603 589,803 5 Application software 734,590 596,150 5 - -------------------------------------------------------------------------------- 12,260,118 11,304,904 Less accumulated depreciation and amortization (7,532,459) (6,892,721) - -------------------------------------------------------------------------------- $ 4,727,659 $ 4,412,183 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Depreciation expense for fiscal 1996, 1995 and 1994 totaled approximately $562,000, $480,000, and $639,000, respectively. Assets recorded under a capital lease included in property and equipment at August 30, 1996 are machinery and equipment of approximately $593,000 and accumulated amortization of approximately $90,000, compared to machinery and equipment of approximately $213,000 and accumulated amortization of approximately $9,000 at September 1, 1995. 5. FINANCING AGREEMENTS REVOLVING LINE-OF-CREDIT AND TERM LOAN FACILITY On June 5, 1996, WCI obtained from a bank a new secured revolving line of credit and term loan facility with a combined maximum available credit limit of $8,500,000 expiring May 4, 1999 or upon demand. The term loan portion provides for a maximum of $1,000,000 for advances of up to 80% of the cost of equipment acquisitions. Interest on the term loan is payable monthly at the bank's prime rate (8.25% at August 30, 1996) plus 1 1/2%. Principal advances are payable monthly over sixty months with a balloon payment due at maturity. Interest on the revolving line of credit portion is payable monthly at the bank's prime rate plus 1/2%. Additionally, the facility requires an annual facility fee of 1% of the maximum credit limit. The revolving line of credit is subject to availability advance formulas of 80% against eligible accounts receivable; 20% of eligible raw material inventories; 20% of eligible work-in-process kit inventories; and 40% to 50% of eligible finished goods inventories. Advances against inventory are subject to a sublimit of $2,000,000. At August 30, 1996, $4,277,000 was available to borrow under the advance formulas. The loans are secured by a first lien on substantially all of WCI's assets except assets secured under the existing mortgage note and equipment note on which the bank has a second lien. The Company is required to maintain certain financial ratios, retain certain key employees, limit expenditures of WGNR to $600,000 per fiscal year, and is precluded from paying dividends. Additionally, Wegener Corporation guarantees the revolving line of credit and term loan. 23 The revolving line-of-credit had an outstanding balance of $1,530,000 as of August 30, 1996 compared to $3,079,000 at September 1, 1995. Information relative to the revolving line-of credit is as follows: Year ended AUGUST 30, September 1, 1996 1995 - -------------------------------------------------------------------------------- Maximum amount outstanding at any month-end $3,684,934 $3,078,965 Average amount outstanding during the period 2,388,500 $1,953,071 Weighted average interest rate during the period 12.6% 16.0% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS AUGUST 30, September 1, Long-term obligations consist of: 1996 1995 - ---------------------------------------------------------------------------------------------------- Mortgage note, payable $37,211 monthly, including interest through February 2002, collateralized by real estate and cross collateralized under the loan facility, interest is charged at the bank's prime rate plus 1%. $1,887,466 $2,118,732 Capital lease obligations, bearing interest ranging from 11.1% to 12.0%, principal and interest payable monthly, currently $22,020, final payments due from May 1997 through February 2000 431,070 194,217 Other long-term obligations, collateralized by equipment 582,533 483,116 - --------------------------------------------------------------------------------------------------- 2,901,069 2,796,065 Less current maturities (569,626) (831,838) - --------------------------------------------------------------------------------------------------- 2,331,443 $1,964,227 - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
On April 8, 1996, Wegener Communications, Inc. (WCI), a wholly owned subsidiary of the Company, entered into a $600,000 promissory note with interest at the rate of 9.6% per annum with principal and interest payable in 60 consecutive monthly installments of $12,597 beginning May 1, 1996. The note is secured by certain machinery and equipment. Proceeds of the note were used for working capital. Wegener Corporation guarantees the note. During the second quarter of fiscal 1995, WGNR Chairman, Robert A. Placek, sold 150,000 shares of Wegener Corporation common stock in an open market transaction and loaned the proceeds to the Company in the form of two unsecured promissory notes. The promissory notes dated February 2 and February 9, 1995 in the amounts of $404,844 and $48,750 respectively bear interest at 7.43% per annum. The notes were repaid during the fourth quarter of fiscal 1995 from proceeds of the issuance of common stock in a private placement (Note 9). 24 A summary of future maturities of long-term debt and minimum capital lease obligations follows: Capital Debt Lease Fiscal Year Maturities Obligations Total - -------------------------------------------------------------------------------- 1997 $ 379,341 $234,154 $ 613,495 1998 414,747 143,884 558,631 1999 447,630 110,238 557,868 2000 490,905 19,905 510,810 2001 487,441 - 487,441 Thereafter 249,935 - 249,935 - -------------------------------------------------------------------------------- 2,469,999 508,181 2,978,180 Less interest - (77,111) (77,111) - -------------------------------------------------------------------------------- $2,469,999 $431,070 $2,901,069 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company leases office and manufacturing facilities, vehicles and equipment under long-term noncancelable operating leases which expire through fiscal 2000. Future minimum lease commitments are approximately as follows: 1997-$155,000; 1998-$154,000; 1999-$92,000; 2000-$63,000; and 2001-$63,000. Rent expense under all leases was approximately $299,000, $260,000 and $210,000 for fiscal years 1996, 1995, and 1994, respectively. 6. CONVERTIBLE DEBENTURES On May 31, 1996, the Company issued $5,000,000 of 8% Convertible Debentures, due May 31,1999, in a private placement to various accredited investors for net proceeds to the Company of $4,700,000. The proceeds were used for working capital and reduction of the line-of-credit note payable. These debentures are convertible at the option of the holders at any time through May 31, 1999, into a number of shares of common stock at a price equal to the lesser of (i) $12.25 per share or (ii) a percentage, based on the holding period, ranging from 95% to 82.5% (82.5% at August 30, 1996) of the average of the lowest sale price on each of the five trading days immediately preceding the conversion date. Interest at the rate of 8% per annum is payable quarterly beginning July 1, 1996 in cash or, at the option of the Company, by adding the amount of such interest to the outstanding principal amount due under the Debenture. At July 1, 1996 convertible debentures in the amount of $33,972 were issued for payment of interest. At August 30, 1996, no debentures had been converted. The Company filed a Registration Statement during the fourth quarter to register up to 1,150,000 shares of common stock underlying such debentures for resale following conversion. Subsequent to August 30, 1996, $1,050,000 of debentures were converted into 234,377 shares of common stock. 7. ACCRUED EXPENSES Accrued expenses consisted of the following: AUGUST 30, September 1, 1996 1995 - -------------------------------------------------------------------------------- Compensation $ 588,512 $399,814 Royalties 464,149 - Other 467,291 243,943 - -------------------------------------------------------------------------------- $1,519,952 $643,757 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 25 8. INCOME TAXES Fiscal 1996 income tax benefit was comprised of a deferred income tax benefit of $848,000, which resulted from a reduction in the fourth quarter of the deferred tax asset valuation allowance from $848,000 to zero. The reduction of the valuation allowance was based on management's assessment that existing tax benefits will "more likely than not" be realized in future tax returns. Net deferred tax assets decreased $241,000 during fiscal 1996. There was no current federal or state income tax expense in fiscal 1996 due to utilization of net federal and state operating loss carryforwards. In fiscal 1995 deferred income tax expense of $109,000 was fully offset by reductions in the deferred tax asset valuation allowance. In fiscal 1994, deferred tax assets increased by $40,000 which were fully reserved by an increase in the valuation allowance. Deferred tax assets and liabilities that arise as a result of temporary differences are as follows: - -------------------------------------------------------------------------------- AUGUST 30, September 1, 1996 1995 Deferred tax assets: Accounts receivable and inventory reserves $ 634,000 $ 500,000 Accrued expenses 114,000 84,000 Net operating loss carryforwards 448,000 564,000 General business credit carryforwards 137,000 137,000 AMT credit carryovers 159,000 159,000 - -------------------------------------------------------------------------------- Total gross deferred tax assets 1,492,000 1,444,000 Deferred tax asset valuation allowance - (1,089,000) - -------------------------------------------------------------------------------- Total deferred tax assets 1,492,000 355,000 Deferred tax liabilities: Depreciation (74,000) (12,000) Capitalized software costs (497,000) (264,000) Other (73,000) (79,000) - -------------------------------------------------------------------------------- Total deferred tax liabilities (644,000) (355,000) - -------------------------------------------------------------------------------- Net deferred tax asset $ 848,000 $ - - -------------------------------------------------------------------------------- Consolidated balance sheet classifications: Current deferred tax asset $1,123,000 - Noncurrent deferred tax liability 275,000 - - -------------------------------------------------------------------------------- Net deferred tax asset $ 848,000 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- At August 30, 1996, the Company had approximately $1,298,000 of federal net operating loss carryforwards which expire in 2009 and 2010; and $137,000 of alternative minimum tax credits and $159,000 of other federal tax credits expiring through 2004 available to offset future tax liabilities. Differences between the effective income tax rate and the statutory federal income rate in each of the three years presented were primarily the result of changes in the valuation allowance. Additionally, no provision for deferred tax liability has been made on the undistributed earnings of a Foreign Sales Corporation as the earnings will not be remitted in the foreseeable future and are considered permanently invested. The amount of the unrecognized deferred tax liability for the undistributed earnings of approximately $405,000 was approximately $138,000. 26 9. COMMON STOCK. During the third and fourth quarters of fiscal 1995, the Company, in a private placement to various accredited investors issued 1,700,000 shares of common stock for net cash proceeds of approximately $7,662,000. In conjunction with the private placement, the Company issued warrants for 45,000 common stock shares at an exercise price of $3.00 per share expiring two years from the date of issuance. The Company filed a Registration Statement to register 1,722,000 shares of common stock. Effective May 28, 1994, the Company transferred the assets of its Custom Products Division to Cross Technologies, Inc. ("CTI") a company owned by and controlled by Heinz W. Wegener (former Chairman of the Board of WGNR) in exchange for the surrender by Mr. Wegener and redemption by the Company of 557,000 shares of the common stock of the Company owned by Mr. Wegener. In addition, Mr. Wegener, the Company and a Voting Trustee entered into a Voting Trust Agreement pursuant to which Mr. Wegener transferred his remaining shares of Wegener common stock (the "shares") to the Voting Trustee for the purpose of vesting in the Voting Trustee the sole right to vote the shares. Under the Voting Trust Agreement, the Voting Trustee will vote the shares proportionately to the manner in which votes are cast by all other shareholders of the Company who vote on any issue, and Mr. Wegener has no direct control over the voting of such shares. 10. COMMON STOCK OPTIONS AND WARRANTS. DIRECTORS' STOCK OPTION PLAN. On January 9, 1990, the stockholders approved the Wegener Corporation 1989 Directors' Incentive Plan permitting certain participating directors of the Company to be eligible to receive incentive awards consisting of common stock of the Company, performance units or stock appreciation rights payable in stock or cash, or non-qualified stock options to purchase such stock, or any combination of the foregoing, together with supplemental cash payments. During the second quarter of fiscal 1995, the Company amended the 1989 Directors' Incentive Plan to increase the aggregate number of shares of common stock that may be awarded from 100,000 to 300,000 shares; to remove the ineligibility provision for certain directors; and to grant annually to each non-employee director, options to purchase 2,000 shares of common stock at an exercise price equal to the fair market value of such stock on the date of grant. The exercise price per share for non-qualified stock options or stock appreciation rights shall not be less than 85% of fair market value on the date the award is made or not more than nine trading days immediately preceding such date. The expiration period for a non-qualified stock option shall be ten years and one day from the date of the grant. The expiration period for stock appreciation rights, including any extension, shall not exceed ten years from the date of grant. 1988 INCENTIVE PLAN. On January 10, 1989 the stockholders approved the 1988 Incentive Plan providing to key employees other than directors of the Company, incentive awards consisting of common stock, performance units or stock appreciation rights payable in stock or cash; or incentive or non-qualified stock options to purchase stock; or any combination of the above, together with supplemental cash payments. The aggregate number of shares issuable under the 1988 plan is 500,000 common shares. The exercise price per share in the case of incentive stock options and any tandem stock appreciation rights will be the fair market value or, in the case of an option granted to a 10% or greater stockholder, l10% of the fair market value. The exercise price for any other option and stock appreciation rights shall be at least 85% of the fair market value on the date the option is granted. The exercise period for non-qualified stock options shall be ten years and one day from the date of the grant, and the expiration period for an incentive stock option or stock appreciation rights shall not exceed ten years from the date of the grant. 27 A summary of stock option transactions for the above plans follows: Number Per of Share Share ------------------------------------------------------------- Outstanding August 27, 1993 125,700 $ .75 Granted 10,000 1.63 Exercised (34,900) .75 Terminated (5,300) .44 ------------------------------------------------------------- Outstanding September 2, 1994 95,500 1.63 Granted 403,785 1.50-7.00 Exercised (39,141) 1.93 Terminated (1,500) .75 ------------------------------------------------------------- Outstanding September 1, 1995 458,644 7.00 Granted 4,000 12.13 Exercised (28,144) .75 Terminated - - ------------------------------------------------------------- Outstanding August 30, 1996 434,500 $ .75-12.13 ------------------------------------------------------------- Exercisable August 30, 1996 248,500 $ .75-12.13 ------------------------------------------------------------- ------------------------------------------------------------- At September 1, 1995, options for 193,144 shares were exercisable at prices ranging from $.44 to $3.25. OTHER OPTIONS, AWARDS AND WARRANTS. At August 30, 1996, options for 22,500 common shares, fully exercisable at a price of $2.44 per share, expiring five years from date of grant, were outstanding. During fiscal 1996 options for 4,500 common shares were exercised. In conjunction with a private placement of common stock (Note 9) the Company issued warrants for 45,000 shares at an exercise price of $3.00 per share expiring two years from the date of issue. During fiscal 1996, warrants for 33,750 common shares were exercised. At August 30, 1996, warrants for 11,250 common shares were fully exercisable. In addition, stock awards issued under the 1988 Incentive Plan of 12,500 shares remained outstanding at August 30, 1996. 11. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS WCI operates in a single industry segment of manufacture and sale of satellite communications electronics equipment. General corporate expenses included in selling, general and administrative expense were approximately $412,000, $368,000, and $196,000 in 1996, 1995 and 1994 respectively. Net equipment sales to foreign customers were $2,549,000 for the year ended August 30, 1996, $3,926,000 for the year ended September 1, 1995, and $2,709,000 for the year ended September 2, 1994. All foreign sales are denominated in U.S. dollars. Sales to foreign customers in 1996, 1995 and 1994 were primarily to customers located in Latin America, Canada and Europe. Profit margins on foreign sales are approximately the same as on domestic sales. The Company sells to a variety of domestic and international customers on an open-unsecured account basis. These customers principally operate in the cable television, broadcast business music, private network, and data communications industries. One customer accounted for 14.2% of revenues in fiscal 1996. A second unrelated customer accounted for 15.0% of revenues in fiscal 1994. One additional unrelated customer accounted for 18.6% of revenues in fiscal 1994. At August 30, 1996 two customers accounted for 34.6% and 10.8 respectively, of the Company's accounts receivable. At September 1, 1995, one customer accounted for 18.7% respectively, of the Company's accounts receivable. When deemed appropriate, the Company uses letters-of-credit and credit insurance to mitigate the credit risk associated with foreign sales. 28 12. STATEMENT OF CASH FLOWS Interest payments were approximately $592,000, $647,000, and $459,000 for fiscal years 1996, 1995 and 1994, respectively. Non-cash investing and financing activities in fiscal 1996 were: (1) Equipment acquired under capital leases of approximately $380,000; (2) 6,517 shares of treasury stock reissued for 401(k) matching Company contributions valued at approximately $65,000, (3) 10,296 shares of treasury stock reissued for compensation valued at approximately $77,000, and (4) convertible debentures issued for interest expense of approximately $34,000. Non-cash investing and financing activities in fiscal 1995 were: (1) Equipment acquired under capital leases of approximately $213,000; (2) 12,910 shares of treasury stock reissued for 401(k) matching Company contributions valued at approximately $37,000; and (3) 18,946 shares of treasury stock reissued for compensation valued at approximately $62,000. Non-cash financing activities in fiscal 1994 were: (1) Acquisition of 557,000 shares of treasury stock in exchange for inventory of approximately $429,000, and equipment and other assets of approximately $88,000 (See Note 9);and (2) 20,890 shares of treasury stock reissued for 401(k) matching Company contributions valued at approximately $44,000. 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED AUGUST 30, 1996 Net sales $4,368,805 $5,540,490 $5,227,909 $8,057,848 Gross profit 1,597,907 1,867,409 2,010,415 1,998,001 Net income 64,632 187,059 180,833 1,023,554 Primary earnings (loss) per share* $ 0.01 $ 0.02 $ 0.02 $ 0.11 - --------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 1, 1995 Net sales $3,833,612 $3,476,784 $5,492,665 $6,685,052 Gross profit 1,418,334 1,052,693 1,879,786 2,295,888 Net income (loss) 12,905 (173,702) 135,831 409,836 Primary earnings (loss) per share $ - $ (0.02) $ 0.02 $ 0.05 - ---------------------------------------------------------------------------------------------------------
* For the fourth quarter ended August 30, 1996, earnings per share on a fully diluted basis were anti-dilutive. During the fourth quarter of the year ended August 30, 1996, the Company increased the inventory obsolescence reserve by $775,000 for slow-moving inventory, and also released the valuation allowance for the deferred tax asset in the amount of $848,000. 29 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Wegener Corporation is responsible for the accuracy and consistency of all the information contained in the annual report, including the accompanying consolidated financial statements. These statements have been prepared to conform with generally accepted accounting principles appropriate to the circumstances of the Company. The statements include amounts based on estimates and judgments as required. Wegener Corporation maintains internal accounting controls designed to provide reasonable assurance that the financial records are accurate, that the assets of the Company are safeguarded, and that the financial statements present fairly the consolidated financial position, results of operations and cash flows of the Company. The Audit Committee of the Board of Directors reviews the scope of the audits and the findings of the independent certified public accountants. The auditors meet regularly with the Audit Committee to discuss audit and financial reporting issues, with and without management present. BDO Seidman, LLP the Company's independent certified public accountants, has audited the financial statements prepared by management. Their opinion on the statements is presented below. Robert A. Placek, President, Chief Executive Officer and Chairman of the Board C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Wegener Corporation Duluth, Georgia We have audited the accompanying consolidated balance sheets of Wegener Corporation and subsidiaries as of August 30, 1996 and September 1, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of three years in the period ended August 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wegener Corporation and subsidiaries as of August 30, 1996 and September 1, 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 30, 1996 in conformity with generally accepted accounting principles. Atlanta, Georgia BDO Seidman, LLP November 19, 1996 30 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 21, 1997 Annual Meeting of Stockholders ("Proxy Statement") is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION Information contained under the captions "EXECUTIVE COMPENSATION" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," respectively, of the Proxy Statement is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the captions "ELECTION OF DIRECTORS" and "BENEFICIAL OWNERSHIP OF SHARES" 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. 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following consolidated financial statements of Wegener Corporation and subsidiaries and the related Report of Independent Certified Public Accountants thereon are filed as part of this report: Consolidated Balance Sheets August 30, 1996 and September 1, 1995 Consolidated Statements of Operations Years ended August 30, 1996, September 1, 1995, and September 2, 1994 Consolidated Statements of Shareholders' Equity Years ended August 30, 1996, September 1, 1995, and September 2, 1994 Consolidated Statements of Cash Flows Years ended August 30, 1996, September 1, 1995, and September 2, 1994 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants Separate financial statements of the Registrant have been omitted because the Registrant is primarily a holding company and all subsidiaries included in the consolidated financial statements are deemed to be totally held. (a) (2) The following consolidated financial statements schedule for Wegener Corporation and subsidiaries, and the related Report of Independent Certified Public Accountants are included herein, beginning on page 15: Report of Independent Certified Public Accountants II Valuation and Qualifying Accounts Years ended August 30, 1996, September 1, 1995, and September 2, 1994 32 (a) (3) The exhibits filed in response to Item 601 of Regulation S K are listed in the Exhibit Index on pages 37 and 38. (b) There were no reports on Form 8-K filed for the Quarter ended August 30, 1996. (c) See Part IV, Item 14(a)(3). (d) Not applicable. 33 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Wegener Corporation Duluth, Georgia The audit referred to in our report dated November 19, 1996, relating to the consolidated financial statements of Wegener Corporation and subsidiaries, which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedule listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. Atlanta, Georgia BDO Seidman, LLP November 19, 1996 34 SCHEDULE II WEGENER CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Costs and End of of Period Expenses Write-offs Recoveries Period ---------- ---------- ---------- ---------- ----------- Allowance for doubtful accounts receivable: Year ended August 30, 1996 $ 41,602 $ 60,000 $ (70,190) $ 26,500 $ 57,912 Year ended September 1, 1995 $ 112,040 $ 70,000 $ (148,714) $ 8,276 $ 41,602 Year ended September 2, 1994 $ 62,238 $ 60,000 $ (10,198) $ - $ 112,040 Inventory Reserves: Year ended August 30, 1996 $ 736,290 $775,000 $ - $10,636 $1,521,926 Year ended September 1, 1995 $ 855,093 $ 77,000 $(195,803) $ - $ 736,290 Year ended September 2, 1994 $1,648,654 $ - $(793,561) $ - $ 855,093
35 EXHIBIT INDEX The following documents are filed as exhibits to this report. Those exhibits previously filed and incorporated herein by reference are identified below by an asterisk. For each such asterisked exhibit there is shown below the description of the previous filing. Exhibits which are not required for this report are omitted. Exhibit Number Description of Document *3.1 By-Laws (Reg. No. 2-81795, Exhibits 3(a) and 3(b)). *3.2 Certificate of Incorporation as amended through May 4, 1989 (1989 10-K, filed November 30, 1989, Exhibit 3.2). *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. *4.2 Loan Agreement, Promissory Note and Deed to Secure Debt, and Security Agreement dated February 27, 1987 between Bank South, N.A. and Wegener Communications, Inc. respecting $3,500,000 promissory note (1990 10-K, filed November 29, 1990, Exhibit 4.4). *4.3 Promissory Note dated April 8, 1996 in favor of Lyon Credit Corporation and Wegener Communications, Inc. in the principal amount of $600,000 (1996 10Q, filed July 11, 1996, Exhibit 4.1). *4.4 8% Convertible Debentures dated May 31, 1996, aggregating $5,000,000, due May 31, 1999 (1996 S-3, Registration No. 333-08017, filed July 11, 1996, Exhibit 4.1). No other long-term debt instrument of the Registrant or its subsidiaries authorizes indebtedness exceeding 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis and the Registrant hereby undertakes to provide the Commission upon request with any long-term debt instrument not filed herewith. *10.1 1988 Incentive Plan (1989 10-K, filed November 30, 1989, Exhibit 10.2). *10.2 License Agreement, Distributorship and Supply Agreement, and Purchase Pooling and Warehouse Agreement dated May 28, 1994 by and between Wegener Communications, Inc. and Cross Technologies, Inc (1994 10-K, filed December 15, 1994, Exhibit 10.4). *10.3 Wegener Communications, Inc. Profit Sharing Plan and Trust dated January 1, 1982, amended and restated as of January 1, 1984. (1987 10K, dated and filed November 25, 1987, Exhibit 10.14). 36 Exhibit Number Description of Document - -------------- ----------------------- *10.4 1989 Directors' Incentive Plan (1990 10-K, filed November 29, 1990, Exhibit 10.9). *10.4.1 Amendment to 1989 Directors' Incentive Plan effective February 1, 1995 (1995 10-K, filed December 13, 1996). *21. Subsidiaries of the Registrant (1990 10-K, filed November 29, 1990, Exhibit 22). 23. Consent of BDO Seidman, LLP. 27. Financial Data Schedule. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WEGENER CORPORATION Date: November 27, 1996 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 27th day of November, 1996. Signature Title - --------- ----- /s/ Robert A. Placek President, Chief Executive Officer and Chairman of - -------------------------- the Board (Principal Executive Officer) Robert A. Placek /s/ C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer, Director - -------------------------- (Principal Accounting Officer) C. Troy Woodbury, Jr. /s/ James T. Traicoff Controller - -------------------------- James T. Traicoff /s/ James H. Morgan, Jr. Director - -------------------------- James H. Morgan, Jr. /s/ Joe K. Parks Director - -------------------------- Joe K. Parks 38 DIRECTORS Robert A. Placek Chairman of the Board, President and Chief Executive Officer Wegener Corporation James H. Morgan, Jr., Esq. Partner Smith, Gambrell & Russell C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer Wegener Corporation Joe K. Parks Laboratory Director Systems Development Laboratory Georgia Tech Research Institute Georgia Institute of Technology OFFICERS Robert A. Placek Chairman of the Board, President and Chief Executive Officer C. Troy Woodbury, Jr. Treasurer and Chief Financial Officer James T. Traicoff Controller INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS BDO Seidman, LLP 285 Peachtree Center Avenue Suite 800 Atlanta, Georgia 30303-1230 TRANSFER AGENT Securities Transfer Corporation 16910 Dallas Parkway Suite 100 Dallas, Texas 75248 CORPORATE HEADQUARTERS 11350 Technology Circle Duluth/Atlanta, Georgia 30155-1528 ANNUAL MEETING The annual meeting of stockholders will be held on January 21, 1997 at 7 p.m. at the Corporate Headquarters. COMMON STOCK NASDAQ NASDAQ Small-Cap Marketing System 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 30155-1528 QUARTERLY COMMON STOCK PRICES The Company's common stock is traded on the NASDAQ Small-Cap Marketing System. The quarterly range of high and low closing sale prices for fiscal 1996 and 1995 were as follows: High Low - ----------------------------------------------------- Fiscal Year Ending August 30, 1996 First Quarter $12 $9 Second Quarter 13 3/4 8 1/2 Third Quarter 10 5/8 7 3/4 Fourth Quarter 12 1/4 5 5/8 - ----------------------------------------------------- Fiscal Year Ending September 1, 1995 First Quarter $2 1/4 $1 1/2 Second Quarter 3 5/8 1 7/8 Third Quarter 5 7/8 3 1/4 Fourth Quarter 11 1/2 5 13/16 - ----------------------------------------------------- The Company had approximately 3453 shareholders of record at November 18, 1996. The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. 39 EX-4.1 2 EXHIBIT 4.1 DEMAND NOTE Exh. 4.1 Executed as of the 5th day of No. 1100820000 June, 1996 at Chicago, Illinois. Amount $8,500,000 FOR VALUE RECEIVED, the Undersigned (jointly and severally, if more than one) promises to pay to the order of LASALLE NATIONAL BANK (hereinafter, together with any holder hereof, called "Bank"), at the main office of the Bank, the principal sum of Eight Million Five hundred thousand Dollars $(8,500,000.00) plus the aggregate unpaid principal amount of all advances made by Bank to the Undersigned (or any one of them, if more than one) pursuant to and in accordance with Paragraph 2 of the Loan Agreement (as hereinafter defined) in excess of such amount, or, if less, the aggregate unpaid principal amount of all advances made by Bank to the Undersigned (or any one of them, if more than one) pursuant to and in accordance with Paragraph 2 of the Loan Agreement. The Undersigned (jointly and severally, if more than one) further promises to pay interest on the outstanding principal amount hereof on the dates and at the rates provided in the Loan Agreement from the date hereof until payment in full hereof. This Demand Note is referred to in and was delivered pursuant to that certain Loan and Security Agreement, as it may be amended from time to time, together with all exhibits thereto, dated June 5, 1996, between Bank and the Undersigned (the "Loan Agreement"). All terms which are capitalized and used herein (which are not otherwise defined herein) shall have the meaning ascribed to such term in the Loan Agreement. THE OUTSTANDING PRINCIPAL BALANCE OF THE UNDERSIGNED'S LIABILITIES TO BANK UNDER THIS DEMAND NOTE SHALL BE PAYABLE UPON DEMAND. Prior to demand, principal hereunder shall be payable pursuant to the terms of the Loan Agreement. The Undersigned (and each one of them, if more than one) hereby authorizes the Bank to charge any account of the Undersigned (and each one of them, if more than one) for all sums due hereunder. If payment hereunder becomes due and payable on a Saturday, Sunday or legal holiday under the laws of the United States or the State of Illinois, the due date thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate specified during such extension. Credit shall be given for payments made in the manner and at the times provided in the Loan Agreement. It is the intent of the parties that the rate of interest and other charges to the Undersigned under this Demand Note shall be lawful; therefore, if for any reason the interest or other charges payable hereunder are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Bank may lawfully charge the Undersigned, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to the Undersigned. 1 The principal and all accrued interest hereunder may be prepaid by the Undersigned, in part or in full, at any time; provided, however, that the Undersigned shall pay a prepayment fee as provided in the Loan Agreement. The Undersigned (and each one of them, if more than one) waives the benefit of any law that would otherwise restrict or limit Bank in the exercise of its right, which is hereby acknowledged, to set-off against the Liabilities, without notice and at any time hereafter, any indebtedness matured or unmatured owing from Bank to the Undersigned (or any one of them). The Undersigned (and each one of them, if more than one) waives every defense, counterclaim or setoff which the Undersigned (or any one of them) may now have or hereafter may have to any action by Bank in enforcing this Note and/or any of the other Liabilities, or in enforcing Bank's rights in the Collateral and ratifies and confirms whatever Bank may do pursuant to the terms hereof and of the Loan Agreement and with respect to the Collateral and agrees that Bank shall not be liable for any error in judgment or mistakes of fact or law. The Undersigned, any other party liable with respect to the Liabilities and any and all endorsers and accommodation parties, and each one of them, if more than one, waive any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Bank's rights hereunder. The loan evidenced hereby has been made and this Note has been delivered at Chicago, Illinois. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, and shall be binding upon the Undersigned (and each one of them, if more than one) and the Undersigned's heirs, legal representatives, successors and assigns (and each of them, if more than one). If this Note contains any blanks when executed by the Undersigned (or any one of them, if more than one), the Bank is hereby authorized, without notice to the Undersigned (or any one of them, if more than one) to complete any such blanks according to the terms upon which the loan or loans were granted. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or be invalid under such law, such provision shall be severable, and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Note. If more than one party shall execute this Note, the term "Undersigned" as used herein shall mean all parties signing this Note, and each one of them, and all such parties, their respective heirs, executors, administrators, successors and assigns, shall be jointly and severally obligated hereunder. To induce the Bank to make the loan evidenced by this Note, the Undersigned (and each one of them, if more than one) (i) irrevocably agrees that, subject to Bank's sole and absolute election, all actions arising directly or indirectly as a result or in consequence of this Note or any other agreement with the Bank, or the Collateral, shall be instituted and litigated only in courts having situs in the City of Chicago, Illinois; (ii) hereby consents to the exclusive jurisdiction and venue of any State or Federal Court located and having its situs in said city; and (iii) waives any objection based on forum non-conveniens. IN ADDITION, BANK AND THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN ONE) HEREBY WAIVE TRIAL BY JURY IN ANY ACTION Exh. 4.1 2 OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED OR BANK OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN THE UNDERSIGNED AND BANK, waives personal service of any and all process, and consents that all such service of process may be made by certified mail, return receipt requested, directed to the Undersigned at the address indicated in the Bank's records; and service so made shall be complete five (5) days after the same has been deposited in the U.S. mails as aforesaid. As used herein, all provisions shall include the masculine, feminine, neuter, singular and plural thereof, wherever the context and facts require such construction and in particular the word "Undersigned" shall be so construed. IN WITNESS WHEREOF, each of the Undersigned, if more than one, has executed this Note on the date above set forth. (INDIVIDUAL(S) SIGN BELOW) (CORPORATION OR PARTNERSHIP SIGN BELOW) WEGENER COMMUNICATIONS, INC. - ------------------------------ ----------------------------------------- Name Name of Corporation or Partnership By C. Troy Woodbury, Jr. - ------------------------------ --------------------------------------- Address Name and Title Exec. V.P. and COO 11350 Technology Circle; Duluth GA, 30155 - ------------------------------ ----------------------------------------- Address By - ------------------------------ --------------------------------------- Name Name and Title - ------------------------------ ----------------------------------------- Address Address - ------------------------------ ----------------------------------------- ================================================================== FOR BANK USE ONLY Officer's Initials: __________ Approval: __________ Exh. 4.1 3 Exh. 4.1 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT") made this 5th day of June, 1996 by and between LASALLE NATIONAL BANK, a national banking association ("BANK"), LaSalle and Monroe Streets, Chicago, Illinois 60674, and Wegener Communicaitons,Inc.; 11350 Technology Circle; Duluth Georgia, 30155 ("BORROWER") [INSERT ENTITY DESIGNATION(S) AND ADDRESS(ES) OF PRINCIPAL PLACE OF BUSINESS]. WITNESSETH: WHEREAS, Borrower may, from time to time, request Loans from Bank, and the parties wish to provide for the terms and conditions upon which such Loans, if made by Bank, shall be made; NOW, THEREFORE, in consideration of any Loan (including any Loan by renewal or extension) hereafter made to Borrower by Bank, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Borrower, the parties agree as follows: 1. DEFINITIONS. (a) "ACCOUNT," "ACCOUNT DEBTOR," "CHATTEL PAPER," "DOCUMENTS," "EQUIPMENT," "GENERAL INTANGIBLES," "GOODS," "INSTRUMENTS," and "INVENTORY," shall have the respective meanings assigned to such terms, as of the date of this Agreement, in the Illinois Uniform Commercial Code. (b) "AFFILIATE" shall mean any Person directly or indirectly controlling, controlled by or under common control with Borrower. (c) "COLLATERAL" shall mean all of the property of Borrower described in paragraph 4 hereof, together with all other real or personal property of any Obligor or any other Person now or hereafter pledged to Bank to secure, either directly or indirectly, repayment of any of the Liabilities. (d) "ELIGIBLE ACCOUNT" shall mean an Account owing to Borrower which is acceptable to Bank in its sole discretion for lending purposes. Without limiting Bank's discretion, Bank shall, in general, consider an Account to be an Eligible Account if it meets, and so long as it continues to meet, the following requirements: (i) it is genuine and in all respects what it purports to be; (ii) it is owned by Borrower, Borrower has the right to subject it to a security interest in favor of Bank or assign it to Bank and it is subject to a first priority perfected security interest in favor of Bank and to no other claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; (iii) it arises from (A) the performance of services by Borrower and such services have been fully performed and acknowledged and accepted by the Exh. 4.1 Account Debtor thereunder; or (B) the sale or lease of Goods by Borrower, and such Goods have been completed in accordance with the Account Debtor's specifications (if any) and delivered to and accepted by the Account Debtor, such Account Debtor has not refused to accept any of the Goods, returned or offered to return any of the Goods, or refused to accept any of the services which are the subject of such Account, and Borrower has possession of, or Borrower has delivered to Bank (at Bank's request) shipping and delivery receipts evidencing delivery of such Goods; (iv) it is evidenced by an invoice rendered to the Account Debtor thereunder, is due and payable within ninety (90) days after the date of the invoice and does not remain unpaid ninety (90) days past the invoice date thereof; provided, however, that if more than fifty percent (50%) of the aggregate dollar amount of invoices owing by a particular Account Debtor remain unpaid ninety (90) days after the respective invoice dates thereof, then all Accounts owing by that Account Debtor shall be deemed ineligible; (v) it is a valid, legally enforceable and unconditional obligation of the Account Debtor thereunder, and is not subject to setoff, counterclaim, credit, allowance or adjustment by such Account Debtor, or to any claim by such Account Debtor denying liability thereunder in whole or in part; (vi) it does not arise out of a contract or order which fails in any material respect to comply with the requirements of applicable law; (vii) the Account Debtor thereunder is not a director, officer, employee or agent of Borrower, or a Subsidiary, Parent or Affiliate, unless the Account arises out of a transaction permitted by paragraph 10(l) hereof and is otherwise an Eligible Account; (viii) it is not an Account with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Bank pursuant to, and in full compliance with, the Assignment of Claims Act of 1940, as amended; (ix) it is not an Account with respect to which the Account Debtor is located in a state which requires Borrower, as a precondition to commencing or maintaining an action in the courts of that state, either to (A) receive a certificate of authority to do business and be in good standing in such state, or (B) file a notice of business activities report or similar report with such state's taxing authority, unless (x) Borrower has taken one of the actions described in clauses (A) or (B), (y) the failure to take one of the actions described in either clause (A) or (B) may be cured retroactively by Borrower at its election, or (z) Borrower has proven, to Bank's satisfaction, that it is exempt from any such requirements under any such state's laws; (x) it is an Account which arises out of a sale made in the ordinary course of Borrower's business; Exh. 4.1 (xi) the Account Debtor is a resident or citizen of, and is located within, the United States of America; (xii) it is not an Account with respect to which the Account Debtor's obligation to pay is conditional upon the Account Debtor's approval of the Goods or services or is otherwise subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale on approval, sale or return or consignment basis; (xiii) it is not an Account (A) with respect to which any representation or warranty contained in this Agreement is untrue or (B) which violates any of the covenants of Borrower contained in this Agreement; (xiv) it is not an Account which, when added to a particular Account Debtor's other indebtedness to Borrower, exceeds a credit limit determined by Bank in its sole discretion for that Account Debtor (except that Accounts excluded from Eligible Accounts solely by reason of this subparagraph 1(d)(xiv) shall be Eligible Accounts to the extent of such credit limit); and (xv) it is not an Account with respect to which the prospect of payment or performance by the Account Debtor is or will be impaired, as determined by Bank in its sole discretion. (e) "ELIGIBLE INVENTORY" shall mean Inventory of Borrower which is acceptable to Bank in its sole discretion for lending purposes. Without limiting Bank's discretion, Bank shall, in general, consider Inventory to be Eligible Inventory if it meets, and so long as it continues to meet, the following requirements: (i) it is owned by Borrower, Borrower has the right to subject it to a security interest in favor of Bank and it is subject to a first priority perfected security interest in favor of Bank and to no other claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; (ii) it is located on the premises listed on Exhibit B and is not in transit; (iii) if held for sale or lease or furnishing under contracts of service, it is (except as Bank may otherwise consent in writing) new and unused and free from defects which would, in Bank's sole determination, affect its market value; (iv) it is not stored with a bailee, consignee, warehouseman, processor or similar party unless Bank has given its prior written approval and Borrower has caused any such bailee, consignee, warehouseman, processor or similar party to issue and deliver to Bank, in form and substance acceptable to Bank, such UCC financing statements, warehouse receipts, waivers and other documents as Bank shall require; Exh. 4.1 (v) Bank has determined in accordance with Bank's customary business practices that it is not unacceptable due to age, type, category or quantity; and (vi) it is not Inventory (A) with respect to which any of the representations and warranties contained in this Agreement are untrue or (B) which violates any of the covenants of Borrower contained in this Agreement. (f) "EVENT OF DEFAULT" shall have the meaning specified in paragraph 12 hereof. (g) "EXHIBIT A" shall mean the exhibit entitled Exhibit A - Special Provisions which is attached hereto and made a part hereof. (h) "EXHIBIT B" shall mean the exhibit entitled Exhibit B - Business and Collateral Locations which is attached hereto and made a part hereof. (i) "INDEMNIFIED PARTY" shall have the meaning specified in paragraph 14 hereof. (j) "LETTER OF CREDIT" or "LETTERS OF CREDIT" shall mean any standby or documentary letter of credit issued by Bank on behalf of Borrower. (k) "LIABILITIES" shall mean any and all obligations, liabilities and indebtedness of Borrower to Bank or to any parent, affiliate or subsidiary of Bank of any and every kind and nature, howsoever created, arising or evidenced and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, whether primary, secondary, direct, indirect, absolute, contingent or otherwise (including, without limitation, obligations of performance), whether several, joint or joint and several, and whether arising or existing under written or oral agreement or by operation of law. (l) "LOAN" or "LOANS" shall mean all advances made by Bank to Borrower pursuant to paragraph 2 hereof and all other loans, advances and financial accommodations made by Bank to or on behalf of Borrower hereunder. (m) "LOAN LIMIT" shall have the meaning specified in paragraph 1 of Exhibit A. (n) "LOCK BOX" and "LOCK BOX ACCOUNT" shall have the meanings specified in paragraph 7 hereof. (o) "OBLIGOR" shall mean Borrower and each Person who is or shall become primarily or secondarily liable for any of the Liabilities. (p) "ORIGINAL TERM" shall have the meaning specified in paragraph 9 hereof. (q) "OTHER AGREEMENTS" shall mean all agreements, instruments and documents, other than this Agreement, including, without limitation, guaranties, mortgages, trust deeds, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, leases, financing statements and all other writings heretofore, now or from time to time hereafter executed by or on Exh. 4.1 behalf of Borrower or any other Person and delivered to Bank or to any parent, affiliate or subsidiary of Bank in connection with the Liabilities or the transactions contemplated hereby. (r) "PARENT" shall mean any Person now or at any time or times hereafter owning or controlling (alone or with any other Person) at least a majority of the issued and outstanding stock of Borrower. (s) "PERMITTED LIENS" shall mean (i) statutory liens of landlord's, carriers, warehousemen, mechanics, materialmen or suppliers incurred in the ordinary course of business and securing amounts not yet due or declared to be due by the claimant thereunder, (ii) liens or security interests in favor of Bank, (iii) zoning restrictions and easements, licenses, covenants and other restrictions affecting the use of real property that do not individually or in the aggregate have a material adverse effect on Borrower's ability to use such real property for its intended purpose in connection with Borrower's business, and (iv) liens specifically permitted by Bank in writing. (t) "PERSON" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or foreign or United States government (whether federal, state, county, city, municipal or otherwise), including, without limitation, any instrumentality, division, agency, body or department thereof. (u) "RENEWAL TERM" shall have the meaning specified in paragraph 9 hereof. (v) "SUBSIDIARY" shall mean any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by Borrower or by any partnership or joint venture of which more than fifty percent (50%) of the outstanding equity interests are at the time, directly or indirectly, owned by Borrower. (w) "TANGIBLE NET WORTH" shall have the meaning specified in subparagraph 11(o) hereof. 2. LOANS. Subject to the terms and conditions of this Agreement (including Exhibit A) and the Other Agreements, during the Original Term and any Renewal Term, Bank may, in its sole discretion, make such Loans to Borrower as Borrower shall from time to time request. The aggregate unpaid principal of all Loans outstanding at any one time shall not exceed the Loan Limit set forth in Exhibit A and shall bear interest at the rates set forth in Exhibit A. ALL LOANS SHALL BE REPAID BY BORROWER UPON DEMAND BY BANK. Prior to Bank making such demand, Loans shall be repaid as provided elsewhere in this Agreement. If at any time the outstanding principal balance of the Loans exceeds the Loan Limit, or any portion of the Loans exceeds any applicable sublimit set forth in Exhibit A, Borrower shall immediately, and without the necessity of a demand by Bank, pay to Bank such amount as may be necessary to eliminate such excess and Bank shall apply such payment to the Liabilities in such order as Bank shall determine in its sole discretion. Borrower hereby authorizes Bank, in its sole discretion, to charge any of Borrower's accounts to make any payments of principal, interest or fees required by this Agreement. All Loans shall, in Bank's sole discretion, be evidenced by one or more promissory notes in form and substance satisfactory to Bank. Exh. 4.1 However, if such Loans are not so evidenced, such Loans may be evidenced solely by entries upon the books and records maintained by Bank. 3. FEES AND CHARGES. Borrower shall pay to Bank, in addition to all other amounts payable hereunder, the fees and charges set forth in Exhibit A. It is the intent of the parties that the rate of interest and the other charges to Borrower under this Agreement shall be lawful; therefore, if for any reason the interest or other charges payable under this Agreement are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Bank may lawfully charge Borrower, then the obligation to pay interest and other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to Borrower. 4. GRANT OF SECURITY INTEREST TO BANK. As security for the payment of all Loans now or in the future made by Bank to Borrower hereunder and for the payment or other satisfaction of all other Liabilities, Borrower hereby assigns to Bank and grants to Bank a continuing security interest in the following property of Borrower, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located: (a) all Accounts (whether or not Eligible Accounts) and all Goods whose sale, lease or other disposition by Borrower has given rise to Accounts and have been returned to, or repossessed or stopped in transit by, Borrower; (b) all Chattel Paper, Instruments, Documents and General Intangibles (including, without limitation, all patents, patent applications, trademarks, trademark applications, tradenames, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, contracts rights, security interests, security deposits and any rights to indemnification); (c) all Inventory (whether or not Eligible Inventory); (d) all Goods (other than Inventory), including, without limitation, Equipment, vehicles and fixtures; (e) all deposits and cash; (f) any other property of Borrower now or hereafter in the possession, custody or control of Bank or any agent or any parent, affiliate or subsidiary of Bank or any participant with Bank in the Loans for any purpose (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise); and (g) all additions and accessions to, substitutions for, and replacements, products and proceeds of the foregoing property, including, without limitation, proceeds of all insurance policies insuring the foregoing property, and all of Borrower's books and records relating to any of the foregoing and to Borrower's business. 5. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN. Borrower shall, at Bank's request, at any time and from time to time, execute and deliver to Bank such financing statements, documents and other agreements and instruments (and pay the cost of filing or recording the same in all public offices deemed necessary or desirable by Bank) and do such other acts and things as Bank may deem necessary or desirable in order to establish and maintain a valid, attached and perfected security interest in the Collateral in favor of Bank (free and clear of all other liens, claims and rights of third parties whatsoever, whether voluntarily or involuntarily created, except Permitted Liens) to secure payment of the Liabilities, and in order to facilitate the collection of the Collateral. Borrower irrevocably hereby makes, constitutes and appoints Bank (and all Persons designated by Bank for that purpose) as Borrower's true and lawful attorney and agent-in-fact to execute such financing statements, documents and other agreements and instruments and do such other acts and things as may be necessary to preserve and perfect Bank's security interest in the Collateral. Borrower further agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement shall be sufficient as a financing statement. Exh. 4.1 6. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until the commencement of a foreclosure or liquidation to realize upon the Collateral, Borrower shall have the right, except as otherwise provided in this Agreement, in the ordinary course of Borrower's business, to (a) sell, lease or furnish under contracts of service any of Borrower's Inventory normally held by Borrower for any such purpose, and (b) use and consume any raw materials, work in process or other materials normally held by Borrower for such purpose; provided, however, that a sale in the ordinary course of business shall not include any transfer or sale in satisfaction, partial or complete, of a debt owed by Borrower 7. COLLECTIONS. Exh. 4.1 (a) Borrower shall direct all of its Account Debtors to make all payments on the Accounts directly to a post office box (the "LOCK BOX") designated by, and under the exclusive control of, Bank or another financial institution acceptable to Bank. Borrower shall establish an account (the "LOCK BOX ACCOUNT") in Borrower's name with Bank or such other financial institution acceptable to Bank, into which all payments received in the Lock Box shall be deposited, and into which Borrower will immediately deposit all payments received by Borrower for Inventory or services in the identical form in which such payments were received, whether by cash or check. If Borrower, any Affiliate or Subsidiary, or any shareholder, officer, director, employee or agent of Borrower or any Affiliate or Subsidiary, or any other Person acting for or in concert with Borrower shall receive any monies, checks, notes, drafts or other payments relating to or as proceeds of Accounts or other Collateral, Borrower and each such Person shall receive all such items in trust for, and as the sole and exclusive property of, Bank and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to the Lock Box Account. If the Lock Box Account is not established with Bank, the financial institution with which the Lock Box Account is established shall acknowledge and agree, in a manner satisfactory to Bank, that the amounts on deposit in such Lock Box Account are the sole and exclusive property of Bank, that such financial institution has no right to setoff against the Lock Box Account or against any other account maintained by such financial institution into which the contents of the Lock Box Account are transferred, and that such financial institution shall wire, or otherwise transfer in immediately available funds in a manner satisfactory to Bank, funds deposited in the Lock Box Account on a daily basis as such funds are collected. Borrower agrees that all payments made to such Lock Box Account or otherwise received by Bank, whether in respect of the Accounts or as proceeds of other Collateral or otherwise, will be applied on account of the Liabilities in accordance with the terms of this Agreement. If the Lock Box Account is established with Bank, Borrower agrees to pay all fees, costs and expenses which Bank incurs in connection with opening and maintaining the Lock Box Account and depositing for collection by Bank any check or other item of payment received by Bank on account of the Liabilities. All of such fees, costs and expenses shall constitute Loans hereunder, shall be payable to Bank by Borrower upon demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder. All checks, drafts, instruments and other items of payment or proceeds of Collateral shall be endorsed by Borrower to Bank, and, if that endorsement of any such item shall not be made for any reason, Bank is hereby irrevocably authorized to endorse the same on Borrower's behalf. For the purpose of this paragraph, Borrower irrevocably hereby makes, constitutes and appoints Bank (and all Persons designated by Bank for that purpose) as Borrower's true and lawful attorney and agent-in-fact (i) to endorse Borrower's name upon said items of payment and/or proceeds of Collateral and upon any Chattel Paper, document, instrument, invoice or similar document or agreement relating to any Account of Borrower or goods pertaining thereto; (ii) to take control in any manner of any item of payment or proceeds thereof; and (iii) to have access to any lock box or postal box into which any of Borrower's mail is deposited, and open and process all mail addressed to Borrower and deposited therein. (b) Bank may, at any time and from time to time, after the occurrence of an Event of Default whether before or after notification to any Account Debtor and whether before or after the maturity of any of the Liabilities, (i) enforce collection of any of Borrower's Accounts or contract rights by suit or otherwise; (ii) exercise all of Borrower's rights and remedies with respect to proceedings brought to collect any Accounts; (iii) surrender, release or exchange all or any part of any Accounts, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any Account of Borrower upon such terms, for such amount and at such time or times as Bank deems advisable; (v) prepare, file and sign Borrower's name Exh. 4.1 on any proof of claim in bankruptcy or other similar document against any Account Debtor; and (vi) do all other acts and things which are necessary, in Bank's sole discretion, to fulfill Borrower's obligations under this Agreement and to allow Bank to collect the Accounts. In addition to any other provision hereof, Bank may at any time, after the occurrence of an Event of Default, at Borrower's expense, notify any parties obligated on any of the Accounts to make payment directly to Bank of any amounts due or to become due thereunder. (c) For purposes of calculating interest, Bank shall, within two (2) business days after receipt by Bank at its office in Chicago, Illinois of (i) checks and (ii) cash or other immediately available funds from collections of items of payment and proceeds of any Collateral, apply the whole or any part of such collections or proceeds against the Liabilities in such order as Bank shall determine in its sole discretion. For purposes of determining the amount of Loans available for borrowing purposes, (i) checks and (ii) cash or other immediately available funds from collections of items of payment and proceeds of any Collateral shall be applied in whole or in part against the Liabilities, in such order as Bank shall determine in its sole discretion, on the day of receipt, subject to actual collection. (d) Bank, in its sole discretion, without waiving or releasing any obligation, liability or duty of Borrower under this Agreement or the Other Agreements or any Event of Default, may at any time or times hereafter, but shall not be obligated to, pay, acquire or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person in, upon or against the Collateral. All sums paid by Bank in respect thereof and all costs, fees and expenses including, without limitation, reasonable attorney fees, all court costs and all other charges relating thereto incurred by Bank shall constitute Loans, payable by Borrower to Bank on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder. (e) Immediately upon Borrower's receipt of any portion of the Collateral evidenced by an agreement, Instrument or Document, including, without limitation, any Chattel Paper, Borrower shall deliver the original thereof to Bank together with an appropriate endorsement or other specific evidence of assignment thereof to Bank (in form and substance acceptable to Bank). If an endorsement or assignment of any such items shall not be made for any reason, Bank is hereby irrevocably authorized, as Borrower's attorney and agent-in-fact, to endorse or assign the same on Borrower's behalf. 8. SCHEDULES AND REPORTS. (a) Within ten (10) days after the close of each calendar month, and at such other times as may be requested by Bank from time to time hereafter, Borrower shall deliver to Bank (i) a schedule identifying each Eligible Account together with copies of the invoices when requested by Bank (with evidence of shipment attached) pertaining to each such Eligible Account, for the month (or other applicable period) immediately preceding; (ii) such additional schedules, certificates, reports and information with respect to the Collateral as Bank may from time to time require; and (iii) an assignment of any or all items of Collateral to Bank. Bank, through its officers, employees or agents, shall have the right, at any time and from time to time in Bank's name, in the name of a nominee of Bank or in Borrower's name, to verify the validity, amount or any other matter relating to any of Borrower's Accounts, by mail, telephone, telegraph or otherwise. Borrower shall reimburse Bank, on demand, for all costs, fees and expenses incurred by Bank in this regard. Exh. 4.1 (b) Without limiting the generality of the foregoing, Borrower shall deliver to Bank, at least once a month (or more frequently when requested by Bank), a report with respect to Borrower's Inventory. Borrower shall immediately notify Bank of any event causing loss or depreciation in value of Borrower's Inventory (other than normal depreciation occurring in the ordinary course of business). (c) All schedules, certificates, reports, assignments and other items delivered by Borrower to Bank hereunder shall be executed by an authorized representative of Borrower and shall be in such form and contain such information as Bank shall specify. 9. TERMINATION. This Agreement shall be in effect from the date hereof until May 5, 1999 (the "ORIGINAL TERM") unless (a) Bank makes demand for repayment prior to the end of the Original Term (b) the due date of the Liabilities is accelerated pursuant to paragraph 13 hereof; or (c) Borrower prepays all of the Liabilities in full prior to the end of the Original Term. Absent an Event of Default, Bank will give at least one hundred twenty days (120) notice of its intention to demand the Loans or terminate this Agreement prior to the end of the Original Term. If one or more of the events specified in clauses (a), (b) and (c) occurs, this Agreement shall terminate on the date thereafter that the Liabilities are paid in full, provided, however, that the security interests and liens created under this Agreement and the Other Agreements shall survive such termination until the payment of the Liabilities has become indefeasible. At such time as Borrower has repaid all of the Liabilities and this Agreement has terminated, Borrower shall deliver to Bank a release, in form and substance satisfactory to Bank, of all obligations and liabilities of Bank and its officers, directors, employees, agents, parents, subsidiaries and affiliates to Borrower, and if Borrower is obtaining new financing from another lender, Borrower shall deliver such lender's indemnification of Bank, in form and substance satisfactory to Bank, for checks which Bank has credited to Borrower's account, but which subsequently are dishonored for any reason. If, during the term of this Agreement, Borrower prepays all or any portion of the Liabilities, and in connection therewith, either (a) permits any security agreement, financing statement or analogous instrument to be executed or filed with respect to the Collateral for the benefit of someone other than Bank, or (b) creates, incurs or assumes any liability for borrowed money (except for borrowings from Bank and borrowings permitted pursuant to paragraph 10(g) hereof). Borrower agrees to pay to Bank, as a prepayment fee, in addition to the payment of all other Liabilities, an amount equal to the product of (i) fifty percent (50%) of the average monthly interest earned by Bank on the Loans made hereunder preceding the date of prepayment, multiplied by (ii) the number of full and partial months remaining from the date of prepayment to the end of the Original Term or the then current Renewal Term, provided, that Borrower shall not be required to pay such prepayment fee if the Liabilities are prepaid by Borrower in response to the Bank's demand for payment of the Loans before the occurrence of an Event of Default. 10. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower hereby represents, warrants and covenants that: (a) the financial statements delivered or to be delivered by Borrower to Bank at or prior to the date of this Agreement and at all times subsequent thereto accurately reflect in all material respects the financial condition of Borrower, and there has been no material adverse change in the financial condition, the operations or any other status of Borrower since the date of the financial statements delivered to Bank most recently prior to the date of this Agreement; Exh. 4.1 (b) the office where Borrower keeps its books, records and accounts (or copies thereof) concerning the Collateral, Borrower's principal place of business and all of Borrower's other places of business, locations of Collateral and post office boxes are as set forth in Exhibit B; Borrower shall promptly (but in no event less than ten (10) days prior thereto) advise Bank in writing of the proposed opening of any new place of business, the closing of any existing place of business, any change in the location of Borrower's books, records and accounts (or copies thereof) or the opening or closing of any post office box of Borrower; (c) the Collateral, including, without limitation, the Equipment (except any part thereof which prior to the date of this Agreement Borrower shall have advised Bank in writing consists of Collateral normally used in more than one state) is and shall be kept, or, in the case of vehicles, based, only at the addresses set forth on Exhibit B, and at other locations within the continental United States of which Bank has been advised by Borrower in writing; (d) if any of the Collateral consists of Goods of a type normally used in more than one state, whether or not actually so used, Borrower shall immediately give written notice to Bank of any use of any such Goods in any state other than a state in which Borrower has previously advised Bank such Goods shall be used, and such Goods shall not, unless Bank shall otherwise consent in writing, be used outside of the continental United States; (e) no security agreement, financing statement or analogous instrument exists or shall exist with respect to any of the Collateral other than any security agreement, financing statement or analogous instrument evidencing security interests in favor of Bank or evidencing Permitted Liens; (f) each Account or item of Inventory which Borrower shall, expressly or by implication, request Bank to classify as an Eligible Account or as Eligible Inventory, respectively, shall, as of the time when such request is made, conform in all respects to the requirements of such classification as set forth in the respective definitions of "Eligible Account" and "Eligible Inventory" as set forth herein and as otherwise established by Bank from time to time, and Borrower shall promptly notify Bank in writing if any such Eligible Account or Eligible Inventory shall subsequently become ineligible; (g) Borrower is and shall at all times during the Original Term or any Renewal Term be the lawful owner of all Collateral now purportedly owned or hereafter purportedly acquired by Borrower, free from all liens, claims, security interests and encumbrances whatsoever, whether voluntarily or involuntarily created and whether or not perfected, other than the Permitted Liens; (h) Borrower has the right and power and is duly authorized and empowered to enter into, execute and deliver this Agreement and the Other Agreements and perform its obligations hereunder and thereunder; Borrower's execution, delivery and performance of this Agreement and the Other Agreements does not and shall not conflict with the provisions of any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on Borrower where such conflict would have a material adverse effect on its business, property assets, operations or condition, financial or otherwise, and Borrower's execution, delivery and performance of this Agreement and the Other Agreements shall not result in the imposition of any lien or other encumbrance upon any of Borrower's property (other than Permitted Liens) under any existing Exh. 4.1 indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which Borrower or any of its property may be bound or affected; (i) except as previously disclosed to Bank in writing, there are no actions or proceedings which are pending, to the best of Borrower's knowledge, or threatened against Borrower which might result in any material adverse change in its financial condition or materially adversely affect the Collateral and Borrower shall, promptly upon becoming aware of any such pending or threatened action or proceeding, give written notice thereof to Bank; (j) Borrower has obtained all licenses, authorizations, approvals and permits the lack of which would have a material adverse effect on the operation of its business, and Borrower is and shall remain in compliance in all material respects with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety or environmental matters) the failure to comply with which would have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise; (k) all written information now, heretofore or hereafter furnished by Borrower to Bank is and shall be true and correct as of the date with respect to which such information was or is furnished; (l) Borrower is not conducting, permitting or suffering to be conducted, nor shall it conduct, permit or suffer to be conducted, any activities pursuant to or in connection with which any of the Collateral is now, or will (while any Liabilities remain outstanding) be owned by any Affiliate; provided, however, that Borrower may enter into transactions with Affiliates for the purchase or sale of Inventory or services in the ordinary course of business pursuant to terms that are no less favorable to Borrower than the terms upon which such transfers or transactions would have been made had they been made to or with a Person that is not an Affiliate and, in connection therewith, may transfer cash or property to Affiliates for fair value; (m) Borrower's name has always been as set forth on the first page of this Agreement and Borrower uses no tradenames or division names in the operation of its business, except as otherwise disclosed in writing to Bank; Borrower shall notify Bank in writing within ten (10) days of the change of its name or the use of any tradenames or division names not previously disclosed to Bank in writing; (n) with respect to Borrower's Equipment: (i) other than Equipment leased by Borrower on the date hereof, Borrower has good and indefeasible and merchantable title to and ownership of all Equipment, including, without limitation, the Equipment described or listed on the schedule of Equipment delivered to Bank concurrently with this Agreement; (ii) Borrower shall keep and maintain the Equipment in good operating condition and repair and shall make all necessary replacements thereof and renewals thereto so that the value and operating efficiency thereof shall at all times be preserved and maintained; (iii) Borrower shall not permit any such items to become a fixture to real estate or an accession to other personal property; and (iv) Borrower, immediately on demand by Bank, shall deliver to Bank any and all evidence of ownership of, including, without limitation, certificates of title and applications of title to, any of the Equipment; Exh. 4.1 (o) this Agreement and the Other Agreements to which Borrower is a party are the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms; (p) Borrower is solvent, is able to pay its debts as they become due and has capital sufficient to carry on its business, now owns property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts, and will not be rendered insolvent by the execution and delivery of this Agreement or any of the Other Agreements or by completion of the transactions contemplated hereunder or thereunder; (q) Borrower is not now obligated, nor shall it create, incur, assume or become obligated (directly or indirectly), for any loans or other indebtedness for borrowed money other than the Loans, except that Borrower may (i) borrow money from a Person other than Bank on an unsecured and subordinated basis if a subordination agreement in favor of Bank and in form and substance satisfactory to Bank is executed and delivered to Bank relative thereto; (ii) maintain any present indebtedness to any Person which has been disclosed to Bank in writing and consented to in writing by Bank; and (iii) incur unsecured indebtedness to trade creditors in the ordinary course of Borrower's business; (r) Borrower does not own any margin securities, and none of the proceeds of the Loans hereunder shall be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation G or Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time; (s) except as otherwise disclosed in writing to Bank, Borrower has no Parents, Subsidiaries or divisions, nor is Borrower engaged in any joint venture or partnership with any other Person; (t) if Borrower is a corporation or partnership, Borrower is duly organized and in good standing in its state of organization and Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary; or, if Borrower is not so qualified, Borrower may cure any such failure without losing any of its rights or affecting Bank's rights; (u) Borrower is not in default under any material contract, lease or commitment to which it is a party or by which it is bound, nor does Borrower know of any dispute regarding any contract, lease or commitment which is material to the continued financial success and well-being of Borrower; (v) there are no controversies pending or to the best of Borrower's knowledge threatened between Borrower and any of its employees, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material to the continued financial success and well-being of Borrower, and Borrower is in compliance in all material respects with all federal and state laws respecting employment and employment terms, conditions and practices; and Exh. 4.1 (w) Borrower possesses, and shall continue to possess, adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and tradenames to continue to conduct its business as heretofore conducted by it. Borrower represents, warrants and covenants to Bank that all representations and warranties of Borrower contained in this Agreement (whether appearing in paragraphs 10 or 11 hereof or elsewhere) shall be true at the time of Borrower's execution of this Agreement, shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto, shall remain true until the repayment in full of all of the Liabilities and termination of this Agreement, and shall be remade by Borrower at the time each Loan is made pursuant to this Agreement. 11. ADDITIONAL COVENANTS OF BORROWER. Until payment or satisfaction in full of all Liabilities and termination of this Agreement, unless Borrower obtains Bank's prior written consent waiving or modifying any of Borrower's covenants hereunder in any specific instance, Borrower agrees as follows: (a) Borrower shall at all times keep accurate and complete books, records and accounts with respect to all of Borrower's business activities, in accordance with sound accounting practices and generally accepted accounting principles consistently applied, and shall keep such books, records and accounts, and any copies thereof, only at the addresses indicated for such purpose on Exhibit B; (b) Borrower agrees to deliver to Bank the following financial information, all of which shall be prepared in accordance with generally accepted accounting principles consistently applied: (i) no later than twenty (20) days after each calendar month, copies of internally prepared financial statements, including, without limitation, balance sheets and statements of income, retained earnings and cash flow of Borrower, certified by the Chief Financial Officer of Borrower; (ii) no later than forty-five (45) days after the end of each of the first three quarters of Borrower's fiscal year a balance sheet, operating statement and reconciliation of surplus of Borrower, which quarterly financial statements may be unaudited but shall be certified by the Chief Financial Officer of Borrower; and (iii) no later than ninety (90) days after the end of each of Borrower's fiscal years, audited annual financial statements with an unqualified certification by independent certified public accountants selected by Borrower and reasonably satisfactory to Bank, provided, however, that with respect to any fiscal year, in the event Borrower obtains an extension from the SEC with respect to the filing of its 10-K Borrower may submit such certified annual financial statements no later than one hundred twenty (120) days after the end of such fiscal year so long as Borrower submits a draft no later than ninety (90) days after the end of such fiscal year; (c) Borrower shall promptly advise Bank in writing of any material adverse change in the business, assets or condition, financial or otherwise, of Borrower, the occurrence of any Event of Default hereunder or the occurrence of any event which, if uncured, will become an Event of Default hereunder after notice or lapse of time (or both); (d) Bank, or any Persons designated by it, shall have the right, at any time, to call at Borrower's places of business at any reasonable times, and, without hindrance or delay, to inspect the Collateral and to inspect, audit, check and make extracts from Borrower's books, records, journals, Exh. 4.1 orders, receipts and any correspondence and other data relating to Borrower's business, the Collateral or any transactions between the parties hereto, and shall have the right to make such verification concerning Borrower's business as Bank may consider reasonable under the circumstances. Borrower shall furnish to Bank such information relevant to Bank's rights under this Agreement as Bank shall at any time and from time to time request. Borrower authorizes Bank to discuss the affairs, finances and business of Borrower with any officers, employees or directors of Borrower or with any Affiliate or the officers, employees or directors of any Affiliate, and to discuss the financial condition of Borrower with Borrower's independent public accountants. Any such discussions shall be without liability to Bank or to Borrower's independent public accountants. Borrower shall pay to Bank all customary fees and out-of- pocket expenses incurred by Bank in the exercise of its rights hereunder, and all of such fees and expenses shall constitute Loans hereunder, shall be payable on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (e) Borrower shall: (i) keep the Collateral properly housed and insured for the full insurable value thereof against loss or damage by fire, theft, explosion, sprinklers, collision (in the case of motor vehicles) and such other risks as are customarily insured against by Persons engaged in businesses similar to that of Borrower, with such companies, in such amounts and under policies in such form as shall be satisfactory to Bank. Original (or certified) copies of such policies of insurance have been or shall be delivered to Bank within fifteen (15) days after the date hereof, together with evidence of payment of all premiums therefor, and shall contain an endorsement, in form and substance acceptable to Bank, showing loss under such insurance policies payable to Bank. Such endorsement, or an independent instrument furnished to Bank, shall provide that the insurance company shall give Bank at least thirty (30) days written notice before any such policy of insurance is altered or canceled and that no act, whether willful or negligent, or default of Borrower or any other Person shall affect the right of Bank to recover under such policy of insurance in case of loss or damage. In addition, Borrower shall cause to be executed and delivered to Bank an assignment of proceeds of its business interruption insurance policies. Borrower hereby directs all insurers under all policies of insurance to pay all proceeds payable thereunder directly to Bank. Borrower irrevocably, makes, constitutes and appoints Bank (and all officers, employees or agents designated by Bank) as Borrower's true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with respect to such policies of insurance; provided, that no Event of Default shall have occurred, Borrower may make, settle and adjust claims involving less than $150,000.00 in the aggregate without Bank's consent; and (ii) maintain, at its expense, such public liability and third party property damage insurance as is customary for Persons engaged in businesses similar to that of Borrower with such companies and in such amounts, with such deductbles and under policies in such form as shall be satisfactory to Bank and original (or certified) copies of such policies have been or shall be delivered to Bank within fifteen (15) days after the date hereof, together with evidence of payment of all premiums therefor; each Exh. 4.1 such policy shall contain an endorsement showing Bank as additional insured thereunder and providing that the insurance company shall give Bank at least thirty (30) days written notice before any such policy shall be altered or canceled. If Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium relating thereto, then Bank, without waiving or releasing any obligation or default by Borrower hereunder, may (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premiums and take such other actions with respect thereto as Bank deems advisable. All sums disbursed by Bank in connection with any such actions, including, without limitation, court costs, expenses, other charges relating thereto and reasonable attorneys' fees, shall constitute Loans hereunder, shall be payable on demand by Borrower to Bank and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (f) Borrower shall not use the Collateral, or any part thereof, in any unlawful business or for any unlawful purpose or use or maintain any of the Collateral in any manner that does or could result in material damage to the environment or a violation of any applicable environmental laws, rules or regulations; shall keep the Collateral in good condition, repair and order; ordinary wear and tear excepted, shall permit Bank to examine any of the Collateral at any time and wherever the Collateral may be located; shall not permit the Collateral, or any part thereof, to be levied upon under execution, attachment, distraint or other legal process; shall not sell, lease, grant a security interest in or otherwise dispose of any of the Collateral except as expressly permitted by this Agreement; shall not settle or adjust any Account identified by Borrower as an Eligible Account or with respect to which the Account Debtor is an Affiliate without the consent of Bank, provided, that following the occurrence of an Event of Default, Borrower shall not settle or adjust any Account without the consent of Bank; and shall not secrete or abandon any of the Collateral, or remove or permit removal of any of the Collateral from any of the locations listed on Exhibit B or in any written notice to Bank pursuant to subparagraph 10(b) hereof, except for the removal of Inventory sold in the ordinary course of Borrower's business as permitted herein; (g) all monies and other property obtained by Borrower from Bank pursuant to this Agreement will be used solely for business purposes of Borrower; (h) Borrower shall, at the request of Bank, indicate on its records concerning the Collateral a notation, in form satisfactory to Bank, of the security interest of Bank hereunder; (i) Borrower shall file all required tax returns and pay all of its taxes when due, subject to any extensions granted by the applicable taxing authority, including, without limitation, taxes imposed by federal, state or municipal agencies, and shall cause any liens for taxes to be promptly released; provided, that Borrower shall have the right to contest the payment of such taxes in good faith by appropriate proceedings so long as (i) the amount so contested is shown on Borrower's financial statements, (ii) the contesting of any such payment does not give rise to a lien for taxes, (iii) Borrower keeps on deposit with Bank (such deposit to be held without interest) an amount of money which, in the sole judgment of Bank, is sufficient to pay such taxes and any interest or penalties that may accrue thereon, or the Borrower maintains adequate reserves on its balance sheet in accordance with generally accepted accounting principles, and (iv) if Borrower fails to prosecute such contest with reasonable diligence, Bank may apply the money so deposited in payment of such taxes. If Borrower Exh. 4.1 fails to pay any such taxes and in the absence of any such contest by Borrower, Bank may (but shall be under no obligation to) advance and pay any sums required to pay any such taxes and/or to secure the release of any lien therefor, and any sums so advanced by Bank shall constitute Loans hereunder, shall be payable by Borrower to Bank on demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (j) Borrower shall not assume, guarantee or endorse, or otherwise become liable in connection with, the obligations of any Person, except by endorsement of instruments for deposit or collection or similar transactions in the ordinary course of business; (k) Borrower shall not (i) enter into any merger or consolidation (ii) sell, lease or otherwise dispose of all or substantially all of its assets, (iii) purchase all or substantially all of the assets of any Person or division of such Person, or (iv) enter into any other transaction outside the ordinary course of Borrower's business, including, without limitation, any purchase, redemption or retirement of any shares of any class of its stock, and any issuance of any shares of, or warrants or other rights to receive or purchase any shares of, any class of its stock; (l) Borrower shall not declare or pay any dividend or other distribution (whether in cash or in kind) on any class of its stock (if Borrower is a corporation) or on account of any equity interest in Borrower (if Borrower is a partnership or other type of entity); (m) Borrower shall not purchase or otherwise acquire, or contract to purchase or otherwise acquire, the obligations or stock of any Person, other than direct obligations of the United States; (n) Borrower shall not amend its organizational documents or change its fiscal year or enter into a new line of business materially different from Borrower's current business; (o) Borrower's Tangible Net Worth shall not at any time be less than that shown on the financial statement most recently presented to Bank prior to the date hereof; "TANGIBLE NET WORTH" being defined for purposes of this subparagraph as Borrower's shareholders' equity (including retained earnings) LESS the book value of all intangible assets as determined solely by Bank on a consistent basis PLUS the amount of any LIFO reserve plus the amount of any debt subordinated to Bank, all as determined under generally accepted accounting principles applied on a basis consistent with the aforesaid financial statement except as set forth herein; (p) Borrower shall reimburse Bank for all costs and expenses, including, without limitation, legal expenses and reasonable attorneys' fees, incurred by Bank in connection with (i) documentation and consummation of this transaction and any other transactions between Borrower and Bank, including, without limitation, Uniform Commercial Code and other public record searches, lien filings, Federal Express or similar express or messenger delivery, appraisal costs, surveys, title insurance and environmental audit or review costs, (ii) collection, protection or enforcement any rights in or to the Collateral, (iii) collection of any Liabilities and (iv) administration and enforcement of any of Bank's rights under this Agreement. Borrower shall also pay all normal service charges with respect to all accounts maintained by Borrower with Bank and any additional services requested by Borrower from Bank. All such costs, expenses and charges shall constitute Loans hereunder, shall be payable by Exh. 4.1 Borrower to Bank on demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; 12. DEFAULT. The occurrence of any one or more of the following events shall constitute an "EVENT OF DEFAULT" by Borrower hereunder: (a) the failure of any Obligor to pay when due, declared due, or demanded by Bank, any of the Liabilities; (b) the failure of any Obligor to perform, keep or observe any of the covenants, conditions, promises, agreements or obligations of such Obligor under this Agreement or any of the Other Agreements; provided that any such failure by Borrower under this Agreement shall not constitute an Event of Default hereunder until the tenth (10th) day following written notice hereof. Bank agrees to endeavor to provide a copy of such notice of default to the law firm of Smith, Gambrell & Russell by mail at the mailing address of 1230 Peachtree Street NE, Suite 3100, Atlanta, Georgia 30309-3592 , or by facsmilie transmission at facsimile number (404) 264-2652. Failure of Bank to provide such copy of notice of default shall not impair Bank's rights hereunder; (c) the failure of any Obligor to perform, keep or observe any of the covenants, conditions, promises, agreements or obligations of such Obligor under any other agreement with any Person if such failure may have a material adverse effect on such Obligor's business, property, assets, operations or condition, financial or otherwise; (d) the making or furnishing by any Obligor to Bank of any representation, warranty, certificate, schedule, report or other communication within or in connection with this Agreement or the Other Agreements or in connection with any other agreement between such Obligor and Bank, which is untrue or misleading in any respect; (e) the loss, theft, damage or destruction of any of the Collateral in an amount in excess of $50,000.00 in the aggregate for all such events during any year of the Original Term or any Renewal Term determined by Bank in its sole discretion, or (except as permitted hereby) sale, lease or furnishing under a contract of service of, any of the Collateral; (f) the creation (whether voluntary or involuntary) of, or any attempt to create, any lien or other encumbrance upon any of the Collateral, other than the Permitted Liens, or the making or any attempt to make any levy, seizure or attachment thereof; (g) the commencement of any proceedings in bankruptcy by or against any Obligor or for the liquidation or reorganization of any Obligor, or alleging that such Obligor is insolvent or unable to pay its debts as they mature, or for the readjustment or arrangement of any Obligor's debts, whether under the United States Bankruptcy Code or under any other law, whether state or federal, now or hereafter existing for the relief of debtors, or the commencement of any analogous statutory or non-statutory proceedings involving any Obligor; provided, however, that if such commencement of proceedings against such Obligor is involuntary, such action shall not constitute an Event of Default unless such proceedings are not dismissed within thirty (30) days after the commencement of such proceedings; Exh. 4.1 (h) the appointment of a receiver or trustee for any Obligor, for any of the Collateral or for any substantial part of any Obligor's assets or the institution of any proceedings for the dissolution, or the full or partial liquidation, or the merger or consolidation, of any Obligor which is a corporation or a partnership; provided, however, that if such appointment or commencement of proceedings against such Obligor is involuntary, such action shall not constitute an Event of Default unless such appointment is not revoked or such proceedings are not dismissed within thirty (30) days after the commencement of such proceedings; (i) the entry of any judgment or order against any Obligor which remains unsatisfied or undischarged and in effect for thirty (30) days after such entry without a stay of enforcement or execution; to the extent such judgments exceed $50,000.00 outstanding at any time; (j) the death of any Obligor who is a natural Person, or of any partner of any Obligor which is a partnership, or the dissolution of any Obligor which is a partnership or corporation; (k) the occurrence of an event of default under, or the revocation or termination of, any agreement, instrument or document executed and delivered by any Person to Bank pursuant to which such Person has guaranteed to Bank the payment of all or any of the Liabilities or has granted Bank a security interest in or lien upon some or all of such Person's real and/or personal property to secure the payment of all or any of the Liabilities; (l) the institution in any court of a criminal proceeding for which the possibility of a forfeiture of assets exists against any Obligor, or the indictment of any Obligor for any crime; other than traffic and boating tickets and misdemeanors not punishable by jail terms; and (m) Bank shall reasonably feel insecure for any material reason whatsoever, including, without limitation, fear of removal or waste of the Collateral, or any part thereof. 13. REMEDIES UPON AN EVENT OF DEFAULT. (a) Upon the occurrence of an Event of Default described in subparagraph 12(g) hereof, all of Borrower's Liabilities shall immediately and automatically become due and payable, without notice of any kind. Upon the occurrence of any other Event of Default, all Liabilities may, at the option of Bank, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable. (b) Upon the occurrence of an Event of Default, Bank may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any of the Other Agreements and all of Bank's rights and remedies shall be cumulative and non-exclusive to the extent permitted by law. In particular, but not by way of limitation of the foregoing, Bank may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which it already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may enter into any of Borrower's premises where any of the Collateral may be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of, and Bank shall have the right to store the same at any of Borrower's premises without cost to Bank. At Bank's Exh. 4.1 request, Borrower shall, at Borrower's expense, assemble the Collateral and make it available to Bank at one or more places to be designated by Bank and reasonably convenient to Bank and Borrower. Borrower recognizes that if Borrower fails to perform, observe or discharge any of its Liabilities under this Agreement or the Other Agreements, no remedy at law will provide adequate relief to Bank, and agrees that Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Any notification of intended disposition of any of the Collateral required by law will be deemed reasonably and properly given if given at least five (5) calendar days before such disposition. Any proceeds of any disposition by Bank of any of the Collateral may be applied by Bank to the payment of expenses in connection with the Collateral, including, without limitation, legal expenses and reasonable attorneys' fees, and any balance of such proceeds may be applied by Bank toward the payment of such of the Liabilities, and in such order of application, as Bank may from time to time elect. 14. INDEMNIFICATION. Borrower agrees to defend (with counsel satisfactory to Bank), protect, indemnify and hold harmless Bank, each affiliate or subsidiary of Bank, and each of their respective officers, directors, employees, attorneys and agents (each an "INDEMNIFIED PARTY") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Party shall be designated a party thereto), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any Other Agreement, or any act, event or transaction related or attendant thereto, the making or issuance and the management of the Loans or any Letters of Credit or the use or intended use of the proceeds of the Loans or any Letters of Credit; provided, however, that Borrower shall not have any obligation hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Borrower shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall, together with interest thereon at the highest rate then applicable to Loans hereunder from the date incurred by each Indemnified Party until paid by Borrower, be added to the Liabilities of Borrower and be secured by the Collateral. The provisions of this paragraph 14 shall survive the satisfaction and payment of the other Liabilities and the termination of this Agreement. 15. NOTICE. All written notices and other written communications with respect to this Agreement shall be sent by ordinary, certified or overnight mail, by telecopy or delivered in person, and in the case of Bank shall be sent to it at LaSalle and Monroe Streets, Chicago, Illinois 60674, Attention: Asset Based Lending Division, and in the case of Borrower shall be sent to it at its principal place of business set forth on the first page of this Agreement. 16. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This Agreement and the Other Agreements are submitted by Borrower to Bank for Exh. 4.1 Bank's acceptance or rejection at Bank's principal place of business as an offer by Borrower to borrow monies from Bank now and from time to time hereafter, and shall not be binding upon Bank or become effective until accepted by Bank, in writing, at said place of business. If so accepted by Bank, this Agreement and the Other Agreements shall be deemed to have been made at said place of business. THIS AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN COLLATERAL LOCATED OUTSIDE OF THE STATE OF ILLINOIS, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION IN WHICH SUCH COLLATERAL IS LOCATED. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or remaining provisions of this Agreement. To induce Bank to accept this Agreement, Borrower irrevocably agrees that, subject to Bank's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE. Borrower hereby irrevocably appoints and designates the Secretary of State of Illinois, whose address is Springfield, Illinois (or any other person having and maintaining a place of business in such state whom Borrower may from time to time hereafter designate upon ten (10) days written notice to Bank and who Bank has agreed in its sole discretion in writing is satisfactory and who has executed an agreement in form and substance satisfactory to Bank agreeing to act as such attorney and agent), as Borrower's true and lawful attorney and duly authorized agent for acceptance of service of legal process. Borrower agrees that service of such process upon such person shall constitute personal service of such process upon Borrower. Bank agrees to endeavor to provide a copy of such process to the law firm of Smith, Gambrell & Russell by mail at the mailing address of 1230 Peachtree Street NE, Suite 3100, Atlanta, Georgia 30309-3592 or by facsimile transmission at facsimile number (404) 264-2652. Failure of Bank to provide a copy of such process shall not impair Bank's rights hereunder. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY BANK IN ACCORDANCE WITH THIS PARAGRAPH. 17. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the Other Agreements may not be modified, altered or amended except by an agreement in writing signed by Borrower and Bank. Borrower may not sell, assign or transfer this Agreement or the Other Agreements or any portion thereof, including, without limitation, Borrower's rights, titles, interest, remedies, powers or duties hereunder and thereunder. Borrower hereby consents to Bank's sale, assignment, transfer or other disposition, at any time and from time to time hereafter, of this Agreement or the Other Agreements, or of any portion thereof, or participations therein, including, without limitation, Bank's rights, titles, interest, remedies, powers and/or duties and agrees that it shall Exh. 4.1 execute and deliver such documents as Bank may request in connection with any such sale, assignment, transfer or other disposition. 18. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this Agreement are for convenience of reference only, and shall not govern the interpretation of any of the provisions of this Agreement. 19. POWER OF ATTORNEY. Borrower acknowledges and agrees that its appointment of Bank as its attorney and agent-in-fact for the purposes specified in this Agreement is an appointment coupled with an interest and shall be irrevocable until all of the Liabilities are paid in full and this Agreement is terminated. 20. WAIVER OF JURY TRIAL; OTHER WAIVERS. (a) BORROWER AND BANK EACH HEREBY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR BANK OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND BANK. IN NO EVENT SHALL BANK BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. (b) Borrower hereby waives demand, presentment, protest and notice of nonpayment, and further waives the benefit of all valuation, appraisal and exemption laws. (c) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY BANK OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL WITHOUT PRIOR NOTICE OR HEARING; provided that in the event that Bank seeks to enforce its rights hereunder by judicial process, Bank shall provide Borrower with such notices as are required by law.. (d) Bank's failure, at any time or times hereafter, to require strict performance by Borrower of any provision of this Agreement or any of the Other Agreements shall not waive, affect or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Bank of an Event of Default under this Agreement or any default under any of the Other Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the Other Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. No delay on the part of Bank in the exercise of any right or remedy under this Agreement or any Other Agreement shall preclude other or further exercise thereof or the exercise of any right or remedy. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the Other Agreements and no Event of Default under this Agreement or default under any of the Other Agreements shall be deemed to have been suspended or waived by Bank unless such suspension or waiver is in writing, signed by a duly authorized officer of Bank and directed to Borrower specifying such suspension or waiver. Exh. 4.1 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the5th day of June, 1996. WEGENER COMMUNICATIONS, INC. LASALLE NATIONAL BANK By C. Troy Woodbury,Jr. By -------------------------------- --------------------------------- Title Exec. V.P. & COO Title --------------------------- ----------------------------- and By James Traicoff -------------------------------- Title Assistant Secretary --------------------------- EXHIBIT B - BUSINESS AND COLLATERAL LOCATIONS Attached to and made a part of that certain Loan and Security Agreement of even date herewith betweenWegener Communications, Inc. ("BORROWER") and LASALLE NATIONAL BANK ("BANK"). A. Borrower's Business Locations (please indicate which location is the principal place of business and at which locations originals and all copies of Borrower's books, records and accounts are kept). 1. 11350 Technology Circle Duluth, Georgia 30155 2. 3. B. Other locations of Collateral (including, without limitation, warehouse locations, processing locations, consignment locations) and all post office boxes of Borrower. Please indicate the relationship of such location to Borrower (i.e. public warehouse, processor, etc.). 1. 3400 Corporate Way Suite D & E, Building B Duluth, Georgia 30136 2. C/O Clover Electronics 136 Hillwood Circle Newnan, Georgia 30264 3. 3496 Highway 141 Suwanee, Georgia 30174 Exh. 4.1 EXHIBIT A-SPECIAL PROVISIONS Attached to and made a part of that certain Loan and Security Agreement of even date herewith between WEGENER COMMUNICATIONS, INC. (" Borrower ") and LASALLE NATIONAL BANK (" Bank "). CREDIT TERMS (1) LOAN LIMIT: Bank may, in its sole discretion, advance an amount up to the sum of the following sublimits (the "Loan Limit"): (A) Subject to subparagraph (4)(a) of this Exhibit A, up to eighty percent (80%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith) of Borrower's Eligible Accounts; PLUS (B) Subject to subparagraph (4)(b) of this Exhibit A, up to eighty percent (80%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith) of Borrower's Eligible Accounts or Five Hundred Thousand and No/100 Dollars ($500,000.00), whichever is less; PLUS (C) Subject to subparagraph (5)(a) of this Exhibit A, up to twenty percent (20%) of the lower of the cost or market value of Borrower's Eligible Inventory; PLUS (D) Subject to subparagraph (5)(b) of this Exhibit A, up to twenty percent (20%) of the lower of the cost or market value of Borrower's Eligible Inventory; PLUS (E) Subject to subparagraph (5)(c) of this Exhibit A, up to forty percent (40%) of the lower of the cost or market value of Borrower's Eligible Inventory; PLUS (F) Subject to subparagraph (5)(d) of this Exhibit A, up to fifty percent (50%) of the lower of the cost or market value of Borrower's Eligible Inventory; PLUS (G) Subject to subparagraph (2)(a) of this Exhibit A, up to eighty percent (80%) of the purchase price of the Equipment purchased with such advances (exclusive of sales taxes, delivery charges and other "soft" costs related to such purchases), to be used by Borrower from time to time to purchase new Equipment, or One Million and No/100 Dollars ($1,000,000.00), whichever is less; provided that, prior to any advance under this subparagraph, Borrower shall furnish to Bank an invoice and acceptance letter for the Equipment being purchased and shall have executed such documents and taken such other actions as Bank shall require to assure that Bank PAGE 2 has a first perfected security interest in such Equipment; and further provided, that each advance under this subparagraph shall equal or exceed One Hundred Thousand and No/100 Dollars ($100,000.00) and may be made not more frequently than quarterly; MINUS (H) Such reserves as Bank elects, in its sole discretion, to establish from time to time; provided, that the aggregate amount of Loans made pursuant to subparagraphs (1)(c), (1)(d), (1)(e) and (1)(f) of this Exhibit A shall in no event exceed Two Million and No/100 Dollars ($2,000,000.00); and further provided, that the aggregate Loan Limit shall in no event exceed Eight Million Five Hundred Thousand and No/100 Dollars ($8,500,000.00), except as such amount may be increased or decreased by Bank, in its sole discretion, from time to time. (2) AVAILABILITY REDUCTIONS: (A) Borrower shall repay to Bank monthly an amount sufficient (assuming a like payment each month) to repay the entire principal amount of each advance made pursuant to subparagraph (1)(g) of this Exhibit A within sixty (60) months following the date of such advance. Such payments shall be made on the thirtieth (30th) day following the date of each such advance, and on the corresponding day of each month thereafter until the earliest to occur of (i) the date upon which each such advance is repaid in full, (ii) the date upon which demand for repayment of the Loans is made by Bank and (iii) the date upon which this Agreement terminates pursuant to the provisions of Paragraph 9 of the Agreement. (3) AVAILABILITY INCREASES: (A) With respect to the advance rates and/or sublimits against Eligible Inventory referenced in subparagraphs (1)(c), (1)(d), (1)(e) and (1)(f) of this Exhibit A, upon Bank's receipt and review of Borrower's 1996 certified fiscal year end financial statements and 1996 10K Bank will consider increasing said advance rates and/or sublimits, provided, however, that Bank will be under no obligation to increase said advance rate and/or sublimits and may decline to do so in its sole discretion. PAGE 3 (4) ADDITIONS AND REVISIONS TO ELIGIBLE ACCOUNTS CRITERIA: LIMITS ON ELIGIBLE ACCOUNTS: Without limiting Bank's discretion to determine the acceptability of Accounts for lending purposes in accordance with subparagraph 1(d)(xii) of the Agreement: (A) SPECIFIC CATEGORY ACCOUNTS: With respect to the Accounts set forth at subparagraph (1)(a) of this Exhibit A, such Accounts shall consist solely of Accounts in which the Account Debtor is a resident or citizen of and is located within the United States of America or is a resident or citizen of and is located within a foreign country and, in each case, the Account is payable in U.S. Dollars and with respect to Account Debtors who are residents or citizens of and are located within a foreign country, the Account is supported by a Letter of Credit which is in form and substance satisfactory to Bank, issued by a financial institution acceptable to Bank and assigned to Bank in a manner acceptable Bank. (B) SPECIFIC CATEGORY ACCOUNTS: With respect to the Accounts set forth at subparagraph (1)(b) of this Exhibit A, such Accounts shall consist solely of Accounts in which the Account Debtor is a resident or citizen of and is located within the United States of America or is a resident or citizen of and is located within a foreign country and, in each case, the Account is payable in U.S. Dollars. (5) ADDITIONS TO ELIGIBLE INVENTORY CRITERIA: LIMITS ON ELIGIBLE INVENTORY: Without limiting Bank's discretion to determine the acceptability of Inventory for lending purposes in accordance with subparagraph 1(e)(vi) of the Agreement: (A) SPECIFIC CATEGORY INVENTORY: With respect to the advance described in subparagraph (1)(c) of this Exhibit A, such Inventory shall consist solely of generic raw materials of electronic components, electronic circuit boards and fabricated sheet metal. (B) SPECIFIC CATEGORY INVENTORY: With respect to the advance described in subparagraph (1)(d) of this Exhibit A, such Inventory shall consist solely of generic portions of kits of boxes of various raw materials necessary to assemble a finished product. PAGE 4 4 (C) SPECIFIC CATEGORY INVENTORY: With respect to the advance described in subparagraph (1)(e) of this Exhibit A, such Inventory shall consist solely of distributor parts consisting mainly of Moving Pictures Expert Group computer chips. (D) SPECIFIC CATEGORY INVENTORY: With respect to the advance described in subparagraph (1)(f) of this Exhibit A, such Inventory shall consist solely of finished goods consisting of completed satellite communications equipment. (6) INTEREST RATE: (i) All Loans made pursuant to subparagraphs (1)(a), (1)(b), (1)(c), (1)(d), (1)(e) and (1)(f) of this Exhibit A shall bear interest at the rate of one-half of one percent (1/2 of 1%) per annum in excess of Bank's publicly announced prime rate (which is not intended to be Bank's lowest or most favorable rate in effect at any time) (the "Prime Rate") in effect from time to time; and (ii) all Loans made pursuant to subparagraph (1)(g) of this Exhibit A shall bear interest at the rate of one and one-half percent (1-1/2%) per annum in excess of the Prime Rate. Interest shall be payable on the last business day of each month, in arrears. Each rate of interest set forth herein shall increase or decrease with each increase or decrease in the Prime Rate, effective on the effective date of each such change in the Prime Rate. Upon the occurrence of an Event of Default and the continuance thereof, each Loan shall bear interest at the rate of two percent (2%) per annum in excess of the interest rate otherwise payable thereon, which interest shall be payable on demand. All interest shall be calculated upon the basis of a 360-day year. (7) FEES AND CHARGES: (A) FACILITIES FEES: Borrower shall pay to Bank a facilities fee equal to one percent (1%) of the maximum amount of Loans available pursuant to subparagraphs (1)(a), (1)(b), (1)(c), (1)(d), (1)(e) and (1)(f) of this Exhibit A, which fee shall be fully earned by Bank and payable on the date that Bank makes its initial disbursement under this Agreement and on each anniversary of the date of this Agreement during the Original Term and any Renewal Term. PAGE 5 (B) TRANSACTION FEE: Borrower shall pay to Bank a one time transaction fee equal to one percent (1%) of the aggregate Loan Limit, which fee shall be fully earned by Bank and payable on the date that Bank makes its initial disbursement under this Agreement. ADDITIONS AND CHANGES TO COVENANTS (8) CHECKING ACCOUNT PROVISIONS: Borrower shall maintain its controlled disbursement account with Bank. (9) TANGIBLE NET WORTH: Notwithstanding the provisions of subparagraph 11(o) of the Agreement, Borrower shall at all times maintain a tangible net worth of not less than the Minimum Tangible Net Worth, as hereinafter defined. From the date hereof through the last day of Borrower's 1996 fiscal year, Minimum Tangible Net Worth shall be equal to Borrower's tangible net worth as shown on Borrower's financial statement dated May 31, 1996 less $1,000,000. Commencing with the first day of the Borrower's 1997 fiscal year through the day prior to the last day of Borrower's 1997 fiscal year, Minimum Tangible Net Worth shall be equal to Borrower's tangible net worth as shown on Borrower's financial statement dated May 31, 1996. Commencing with the last day of Borrower's 1997 fiscal year through the day prior to the last day of Borrower's 1998 fiscal year, Minimum Tangible Net Worth shall be equal to Borrower's Minimum Tangible Net Worth as shown on Borrower's financial statement dated May 31, 1996 plus Borrower's net profits for the 1996 fiscal fourth quarter. Thereafter, for each period beginning on the last day of Borrower's fiscal year through the day prior to the last day of Borrower's subsequent fiscal year, commencing with the last day of Borrower's 1998 fiscal year, Minimum Tangible Net Worth shall be equal to Minimum Tangible Net Worth as of the last day of the immediately preceding fiscal year plus the net profits for such preceding fiscal year. (10) CAP ON AUDIT AND INVENTORY EXAM COSTS: Subsequent to Bank's initial audit, prior to the occurrence of an Event of Default, the amount Borrower shall be required to pay to Bank pursuant to subparagraph 11(d) of the PAGE 6 Agreement shall be the amount of Bank's out-of-pocket expenses incurred in the exercise by Bank of its rights thereunder. (11) RESTRICTION OF PAYMENT OF EXPENSES OF PARENT: Notwithstanding anything contained in the Agreement to the contrary, Borrower may pay various administrative expenses of Borrower's Parent, Wegener Corporation, provided that: (i) such payment is permitted under all applicable laws (ii) no Event of Default shall have occurred prior to the time of, or would occur as a result of such payment and (iii) the amount of expenses paid does not exceed Six Hundred Thousand and No/100 Dollars ($600,000.00) per year. ADDITIONS AND CHANGES TO DEFAULT PROVISIONS (12) CHANGE OF MANAGEMENT DEFAULT: In addition of the Events of Default specified in Paragraph 12 of the Agreement, it shall be an Event of Default hereunder if Robert A. Placek and Troy Woodbury shall cease to be part of Senior Management of Borrower. OTHER PROVISIONS (13) PERMITTED LIENS: Bank acknowledges that the liens evidenced by the following filed financing statements and any amendments thereto, as said financing statements exist as of May 21, 1996 shall constitute Permitted Liens: 004165 . . . ------------------------------------------------------------------------ ------------------------------------------------------------------------ CONDITIONS TO CLOSING (14) ADDITIONAL CONDITIONS TO CLOSING: Bank shall be under no obligation to consummate the transactions contemplated by this Agreement until each of the conditions listed in this Paragraph (14) has been satisfied. Whenever a condition contained herein requires delivery of an agreement or other document to Bank, each such agreement or other document shall be in form and substance satisfactory to Bank in its sole discretion. PAGE 7 (A) REAL PROPERTY AS COLLATERAL: Borrower shall convey, mortgage, assign, transfer and pledge to Bank that certain real property commonly known as 11350 Technology Circle, Duluth, Georgia 30155 and a 4.4214 acre tract which is adjacent to the aforesaid property (collectively, the "Properties") and, if title to said Properties are in a land trust, any beneficial interest relative thereto. In connection therewith, Borrower shall execute such documentation as Bank, in its sole discretion, deems necessary, including, without limitation, a Mortgage and Security Agreement or similar instrument, Assignment of Leases and Rents, Tenant Subordination, Tenant and Attornment Agreement and Collateral Assignment of Beneficial Interest. Borrower shall also provide Bank with a copy of all leases, if any, relative to said Properties. Borrower shall furnish Bank (i) an existing spotted plat of survey of the Properties, if any, prepared by a Georgia Licensed Surveyor setting forth: (a) all easements, rights of way and other encumbrances and matters of record affecting or appurtenant to the Properties; (b) the established building line(s) and side yard line(s), if any; (c) the line of the street or streets abutting the Properties or any portion thereof; (d) any and all encroachments (and the extent thereof in feet and inches) upon the Properties or any easement appurtenant thereto; (e) all improvements on the Properties; and (f) the area of the Properties; and (ii) a commitment for an ALTA Mortgagee's Policy of Title Insurance (the "Title Policy") issued by a title insurance company acceptable to Bank (the "Title Company") in such amount and with such exceptions and endorsements as Bank deems proper in its sole discretion. Said Title Policy shall include, without limitation, the following endorsements: (i) Comprehensive Endorsement; (ii) Location Endorsement; (iii) Last Dollar Endorsement; (iv) Variable Rate Endorsement; (v) Future Advance, Revolving Credit Endorsement; (vi) Access Endorsement; (vii) Survey Endorsement; (viii) Usury Endorsement; (ix) Contiguity Endorsement; and (x) Tax Parcel Endorsement. Borrower shall furnish evidence satisfactory to Bank that the Properties are not located in an area designated by the Secretary of Housing and Urban Development PAGE 8 as having special flood hazards, or if they are so located, furnish satisfactory evidence that flood insurance is in effect. At Bank's request, Borrower will cause to be performed an environmental audit of the Property in scope, and by an auditor, satisfactory to Bank, and the results of said audit shall be satisfactory to Bank in its sole discretion. (B) LANDLORD'S AGREEMENT: Borrower shall cause to be executed in favor of Bank and delivered to Bank a Landlord's Agreement from each lessor of property set forth on Exhibit B, which Landlord's Agreement shall include a copy of the relevant lease. (C) GUARANTIES: (i) Borrower shall cause to be executed in favor of Bank and delivered to Bank the Continuing Unconditional Guaranty of Wegener Corporation of any and all indebtedness of Borrower to Bank. (ii) Borrower shall cause to be executed in favor of Bank and delivered to Bank the Validity Guaranty of Robert A. Placek. (D) INTERCREDITOR AGREEMENT: Borrower shall cause Lyon Credit Corporation to execute and deliver to Bank an Intercreditor Agreement. (E) PROCESSOR'S LETTERS: Bank hereby acknowledges that Eligible Inventory is and from time to time may be delivered to a processor for processing at the locations set forth in Exhibit B. Relative thereto, Borrower shall cause each such party to execute and deliver a Processor's Letter to Bank and shall cause each such party to execute and deliver a Uniform Commercial Code Financing Statement to Bank. (F) PATENT, TRADEMARK AND LICENSE MORTGAGE: Borrower shall execute and deliver to Bank a Patent, Trademark and License Mortgage. (G) PAYABLES: Borrower shall bring all of its payables to within sixty days (60) as of the date that Bank makes its initial disbursement under this Agreement. (H) CREDIT INSURANCE: Borrower shall assign to Bank as Collateral the proceeds of Borrower's Credit Insurance Policy to the extent such insurance is maintained by Borrower. PAGE 9 (I) MORTGAGEE'S WAIVER: Borrower shall cause to be executed in favor of Bank and delivered to Bank a Mortgagee's Waiver from each mortgagee of Borrower's owned real property set forth on Exhibit B. (J) ATTORNEY'S OPINION LETTER: Borrower shall cause to be executed and delivered to Bank an Attorney's Opinion Letter. EX-23 3 EXHIBIT 23 Exhibit 23. CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Wegener Corporation Duluth, Georgia We hereby consent to the incorporation by reference in the Registration Statements (File No. 33-45390, No. 33-62849, No. 333-08017 and No. 33-42007) of our reports dated November 19, 1996 relating to the consolidated financial statements and schedule of Wegener Corporation and Subsidiaries appearing in the Company's Annual Report on Form 10-K for the year ended August 30, 1996. Atlanta, Georgia BDO Seidman, LLP November 27, 1996 40 EX-27 4 EXHIBIT 27
5 YEAR AUG-30-1996 SEP-2-1995 AUG-30-1996 171,687 0 7,163,896 (57,912) 12,694,823 21,150,490 12,260,118 (7,532,459) 27,736,700 7,140,068 7,365,416 0 0 92,319 12,863,897 27,736,700 23,195,052 23,195,052 15,721,320 21,958,784 (68,323) 0 696,513 608,078 (848,000) 0 0 0 0 1,456,078 .16 .16
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