Wegener Cp (WGNR) - Description of business


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Company Description
Wegener ™ Corporation, the Registrant, together with its subsidiaries, is referred to herein as “we,” “our,” “us,” the “Company” or “Wegener.”

Wegener Corporation was formed in 1977 and is a Delaware corporation. We conduct our continuing business through Wegener Communications, Inc. (WCI), a wholly-owned subsidiary. WCI was formed in April 1978 and is a Georgia corporation. WCI is a leading provider of digital solutions for video, audio and Internet Protocol (IP) data networks. Applications include IP data delivery, broadcast television, cable television, radio networks, business television, distance education, business music and financial information distribution. COMPEL ® , our patented network control system, provides network flexibility to regionalize programming, commercials and file transfers.

Segment Information

Segment information contained in Note 11 to the consolidated financial statements contained in this report is incorporated herein by reference in response to this item.

MARKETS AND INDUSTRY OVERVIEW

The primary markets we serve are business and private networks, cable and broadcast television, broadcast radio and telecom.

Business/Private Networks

Business networks consist of corporations and enterprises distributing video, audio and/or data among their sites. Private networks consist of networks that target video, audio and/or data to a select group of subscribers or viewers. Our equipment is currently used for a large percentage of the horse racing video distribution in the United States and Sweden and we are continuing to expand that market. We also have a strong presence in faith-based networks. Our business and private network customers include Muzak LLC, Roberts Communications, Inc., Scientific Games-Autotote Communication Service Division, and Swedish companies ATG and TERACOM. In addition, we work through third-party integrators, such as Ascent Media and Globecomm, to reach this market space.

Business and private networks almost universally have bandwidth as one of their single largest operating expenses. Customers are typically willing to invest in large-scale replacement of their networks when they can find a satisfactory return on investment (ROI), such as in the case of MPEG-4/H.264 video compression and DVB-S2 modulation. Many private and business networks are also interested in store-forward technology to reduce their satellite bandwidth usage.

Cable and Broadcast Television

Cable television consists of (1) program providers that provide programming to cable, direct-to-home satellite and telecom companies for distribution to consumers, and (2) cable distribution companies, such as cable multiple system operators (MSOs) and other headends. Broadcast television consists of (1) broadcast networks: companies that broadcast television signals over satellite to local affiliate stations; and (2) broadcast stations: local stations that broadcast typically free-to-air television signals to local viewers. Cable television and broadcast television customers include FOX, HDNet, Time Warner, Comcast, Turner Broadcasting, and ION Media. In addition, we work through distributors, such as MegaHertz, AMT and Satellite Engineering Group.

Program providers continue to distribute their programming over satellite to cable, direct to home (DTH) satellite, and telecom companies. In addition, they are starting to offer programming directly to consumers via the Internet. Program providers continue to launch new services to compete for advertising dollars and are launching increasing numbers of high definition services, as well as distributing video-on-demand content. They are concerned about the effect that personal video recorders could potentially have on their advertising revenue as well as the security of their high value content being stored in consumers’ homes in a digital and potentially easy to copy format.

With the drop in costs of high definition televisions, more consumers have now seen high definition television and want a widescreen digital television to watch DVDs and the programming offered to them. This is increasing pressure on cable, satellite and telecom networks to offer high definition to their customers.

Cable, DTH satellite and telecom companies are all competing to provide consumers with television, telephone, high speed internet services and, in some cases, cell phone service. To gain and maintain subscribers, they continue to roll out high definition and video-on-demand services and personal video recording devices.

Broadcasters continue to launch local digital broadcast stations. Many are opting to provide high definition content only during primetime hours from their main satellite feed and multi-channel standard definition services during the day.

Satellite teleports are recovering from a global slowdown that affected satellite transponder use. They are increasingly looking at integrated video and data solutions for their customers. Many are expanding their distribution systems to include terrestrial delivery as well as satellite.

Broadcast Radio

Broadcast radio consists of companies that broadcast, typically free-to-air, radio signals to local listeners. Radio network customers include EMF Broadcasting, Jones Radio Networks, Christian Radio Consortium, Salem Radio Network and Horizon Christian Fellowship.

Broadcast radio operators are interested in regionalizing their broadcasts to give a local feel to the programming. They also want to shift their programming for time-zones so that “drive times” are able to be addressed with particular morning and afternoon shows and advertisements, which can demand higher advertising dollars. In addition, they are coming under increasing pressure from advertisers to ensure that affidavit information provided is accurate.

Telecom Operators

Telecom operators offer telephony and high speed internet access (DSL) to consumers. In growing numbers, they are now launching video service offerings to compete with cable and satellite DTH (direct-to-home) companies. Due to a decline in telephone subscribers, the telecom companies are anxious to find additional sources of revenue such as, the “triple play” offering of telephone, television and high speed internet service which has proven to reduce subscriber churn when subscribers receive at least two of the three service offerings from one company.

Unless the telecom company is using fiber infrastructure, their networks are more limited in bandwidth than their competitors. Therefore, they require the new video compression technology of MPEG-4/h.264 to enable a television programming line-up that can match their competition. Telecom operators are planning to purchase MPEG-4/h.264 products such as consumer settop boxes, which are predicted to be a rapidly growing market over the next several years.

PRODUCTS

Our products include: iPump ® Media Servers, UNITY ® Satellite Receivers, Compel ® Network Control System, MediaPlan ® Content Management and Ingest, Nielsen Media Research Products, DTV Digital Stream Processors, analog audio products, third-party uplink products and customized products.

iPump Media Servers

The iPump ® product line combines the features of our integrated receiver decoders (IRD) with advanced media server functionality and IP router capabilities. The iPump ® delivers and stores digital content into broadcast, cable and business operations utilizing store and forward technology compared to traditional real-time linear broadcasts. Store and forward technology allows network operators to store content at receive locations and then play back the content locally either based on schedules or on-demand user selection. Network operators with repetitive content in their programming line-up can reduce their satellite space segment costs by sending programming, advertising and playback schedules as stored files into the iPump ® for later playback according to the schedules. The network operator can then utilize limited satellite time to refresh the programming, advertising and play-out schedules without the necessity to maintain a constant signal on the satellite. A WEGENER iPump ® customer significantly reduced its satellite bandwidth expenses by switching to store forward network operations, which allows them to now spend less than 10% of their prior satellite bandwidth budget, which was one of their largest operating expenses.

There are three models of iPump ® that utilize store-forward technology. The iPump ® 6400 Professional Media Server is designed for broadcast television and private network customers. The iPump ® 622 Enterprise Media Server is designed specifically for private network and enterprise applications, such as distance learning. The new iPump ® 6420 Audio Media Server is designed specifically to meet the needs of broadcast radio and is a third generation store-forward product. The iPump ® 6420 began shipping in the first quarter of fiscal 2007.

The iPump ® 615 Streaming Media Decoder is a peripheral decoder for the iPump ® 6400 or 622. It is designed for high volume dynamic environments such as retail point-of-sale kiosks, point of purchase (POP) digital signs and advertisements, and corporate communications. It receives a video stream via Internet Protocol from the iPump ® 6400 or 622 and outputs high quality video to large video monitors for digital signage or classroom training applications. It supports high-definition video and advanced digital audio, in addition to standard definition video and audio to ensure quality media displays for such high visibility purposes.

We are targeting all of our core markets for the iPump ® product line. Within these markets, applications for the iPump ® products include:

Business and Private Networks

 


 

On-Demand Training

 


 

Distance Learning, Educational Purposes

 


 

Customized or Regionalized Training by Site

 


 

Retail Point-of-Sale Displays or Kiosks

 


 

Corporate Communications

 


 

Streaming Video/Audio/Data to the Desktop

 


 

Digital Signage

 


 

Reduction of Satellite Delivery Costs

 


 

Distribution of Additional Training Materials, such as manuals and exams

Television and Radio Broadcast

 


 

Regional Advertising and Content

 


 

Time Zone Shifted Programming

 


 

News Distribution

 


 

Reduction of Satellite Delivery Costs

Cable Television

 


 

Regional Ad Insertion

 


 

Segment Spot Distribution by Group or Region

 


 

Video on Demand

 


 

Digital File Creation from Linear Broadcast

 


 

Replacement for video tape recorders

Unity Receivers

The Unity ® 4600 receiver is a digital satellite receiver used primarily by program providers to distribute programming to cable and telecom headends. It offers analog and digital outputs to support analog and digital headends. Cable headends utilize the Unity ® 4600 to support digital high definition television distribution.

The Unity ® 4650 receiver is a digital receiver used primarily by broadcast television networks. The Unity ® 4650 receiver is a video and audio decoder that features MPEG 4:2:0 and 4:2:2 video for enhanced video quality in broadcast television network distribution.

The Unity ® 550 receiver is a new addition to the Unity product line. It is targeted to meet the needs of private and business television networks. Version 1 of the Unity 550 utilizes MPEG-2 for video distribution and version 2 will add MPEG-4 video and DVB-S2 demodulation. Version 1 of the Unity 550 was released during the fourth quarter of fiscal 2006 and version 2 is planned for release in the second half of fiscal 2007.

The Unity ® 201 audio receiver is designed for business music providers. It is a multichannel per carrier satellite music receiver and offers an optional audio storage card which adds a second stereo audio output and one hour of audio storage for ad insertion and disaster recovery. It is our first generation of store-forward receiver.

As MPEG-4 development continues, the Unity ® receiver product line will be updated with MPEG-4 video decompression technology.

Compel ® Network Control System

Compel ® Network Control System is our patented control system and has been a key differentiator to our products since 1989. Compel ® is used in over 150 networks controlling over 100,000 receivers. Compel ® has patented grouping and addressing controls that provide flexibility in network management. Receivers can be controlled as individual sites and as groups. Commands are synchronized with video and audio programming, which allows users to regionalize programming and blackout programming from nonsubscribers, as well as target commercials to subscribers.

Compel ® option modules include Web Access and Conditional Access. Web Access allows multiple users to access their Compel ® system across a LAN (local area network) using a standard Web browser. Conditional Access utilizes a secure microprocessor in every Unity ® receiver to deliver fast, secure conditional access to a network without the high cost of consumer smart card systems.

Unity ® satellite receivers and iPump media servers are controlled by Compel ® Network Control System, so the markets for Compel ® are the same as for iPump ® and Unity ® receivers.

MediaPlan

MediaPlan ® CM and MediaPlan ® i/o products are control and management system modules to our patented Compel ® Control System, which is discussed above. The MediaPlan ® products are crucial for customers in controlling iPump ® Media Server networks and are a competitive advantage for us in sales of iPump ® Media Servers.

MediaPlan ® Content Management (MediaPlan ® CM) is a powerful content management system used for managing media and other files and actively tracking their delivery throughout the iPump ® network. In a store-forward network, media is simultaneously stored in multiple iPumps ® in the field, rather than all in one repository at a central location, so management of the media becomes a crucial part of the network operation. Operators need easy ways to view the content on individual iPumps ® and automated mechanisms for updating/deleting media as it changes, and MediaPlan ® CM is designed to address those and many other specific needs of managing media files in a store-forward network. Operators can create libraries of assets, generate descriptive information, view content at each iPump ® , send requested content directly to targeted users and track file usage.

MediaPlan ® i/o is the media creation product for the iPump ® network. In traditional linear networks, network operators are required to compress the video, distribute it to remote locations and decompress it for broadcast, all within one or two seconds. This requires the use of real-time encoders to compress the video and audio as it is sent to the receivers at the remote locations. In store-forward networks, the paradigm changes and the process of video and audio compression, media distribution and decompression of the media for broadcast can be done at different times. Network operators can now prepare the media files containing the compressed video and audio ahead of airtime. As well, they can distribute the media files any time before airing, so they can optimize the use of their bandwidth. When it is time for the program to be broadcast, it merely needs to be played from the local hard drive on the iPump ® , not transported through the network. As the media creation tool, MediaPlan ® i/o handles the first part of the process, the creation of media files containing compressed video and audio which will be sent to iPumps ® .

The MediaPlan ® product line is an integral part of an iPump ® network, so the same markets and applications exist for MediaPlan ® as were described in the iPump ® section above.

Nielsen Media Research Products

We offer two products to encode Nielsen Media Research identification tags into media for Nielsen program ratings: the NAVEIIc and SpoTTrac Encoders.

The NAVE IIc watermarks program audio with tagging information that identifies the television program and the television station that originated the program. The watermarks are used by Nielsen devices to automate the process of cataloging viewers’ television viewing habits which ultimately translate into Nielsen ratings. The NAVE IIc makes advances over prior units in that it inserts the watermarks for audio in the digital domain and can simultaneously insert watermarking on the entire transport stream of multiple programs. Alternatively, stations have to down-convert to analog audio to insert Nielsen data.

The SpoTTrac Encoder is a turnkey workstation that will encode both the audio and video of television commercials, Public Service Announcements and other spots with Nielsen Media Research content identification information as they are being produced and distributed. This multi encoding system is revolutionary and the only one of its kind. The tracked data is collected and integrated into Nielsen Tracking Service’s reporting and performance management tools. The SpoTTrac Encoder was released in the fourth quarter of fiscal 2006.

DTV Digital Stream Processors

The DTV Digital Stream Processor product line is designed for cable and telecom headends. It allows them to integrate local off-air high definition broadcast video signals and digital programs and easily insert them onto their networks. Our products provide for multiple signals to be inserted with one unit. Models include DTV 720, DTV 742 and DTV 744. During fiscal 2006, WEGENER expanded the feature set for the DTV 720 to include a multicaster function, which is particularly needed for telecom operators to allow easy integration into their networks.

Analog Audio

Our legacy analog products are sold primarily to the cable television market. These products consist of Series 1600 and 1700 mainframes, sub carrier modulators, demodulators and decoders, which are used for cable audio distribution. Our Series 2046 network communications and control system cards allow cable operators to insert local commercials which increase their advertising revenues.

Uplink Equipment

We offer our customers complete system solutions for video and audio distribution. The complete system solution requires us to resell components, such as encoders, modulators and IP encapsulators from other manufacturers, such as Harmonic, Inc. and Thompson.

Customized Products

We offer our customers the option to create custom products for their needs when they cannot find off-the-shelf products to satisfy their requirements. They pay non-recurring engineering expenses through product pricing and/or up-front milestone payments. Typically the products are based on WEGENER’s standard products and require modifications to fit particular customer needs. This is an area of competitive advantage for WEGENER.

MARKET OPPORTUNITY

Growth opportunities are most significant in the technologies in which we have been making significant R&D investments, including store-forward technology, MPEG-4 technology and DVB-S2. See “Research and Development Activities” below.

Currently we have completed shipments of iPump ® networks, including Compel ® and MediaPlan ® , in multiple markets for different applications: private networks for virtual channel applications, broadcast television, broadcast radio, broadcast news and private networks for training and digital signage. In some cases, we have multiple orders for a particular application. The breadth of the applications for iPump ® networks represents many market opportunities in multiple applications and across multiple markets. The broad appeal of the iPump ® is due to the diversification of the iPump ® ’ store-forward technology.

The virtual channel application of the iPump ® allows a current private network customer to reduce their budget for satellite bandwidth by greater than 90% of what they had been spending prior to the upgrade to the iPump ® . Satellite bandwidth utilization was one of the customers’ largest operating expenses, so this reduction represents a sizable savings for them. This network used to run continuously, utilizing satellite bandwidth the entire time; now they use bandwidth only twice a month to update the iPumps ® with new content and playout schedules. This example demonstrates the significant savings that potential customers may achieve with the iPump ® .

A broadcast television customer utilized the iPump ® store-forward technology to offer extended services to its customers. This television channel is often featured in museums and schools. Our customer can send additional

educational materials and digital videos along with the broadcast video. All the video files and additional materials are stored locally on the iPump ® so that the museums or schools can have easy access to the materials. The distribution is possible without an increase in satellite bandwidth utilization (which would be costly), since with store-forward, the operator can manage bandwidth use more effectively and send repetitive video only once to the iPump ® , rather than sending it each time the video is scheduled for broadcast.

IPump ® audio customers are interested in store-forward technology to update their operations and enable localization of broadcasts. It will allow them to send repetitive material to their affiliates a single time and provide an easy interface for affiliates to access the audio files. Additionally, in some radio broadcasting operations, they have a manual process for verifying that advertisements are playing as scheduled and providing affidavits of the advertisement playback to their advertisers. The iPump ® provides an automated interface for verifying the advertisements and providing that information back to the radio broadcaster. Radio broadcasters are seeing the operational improvements available to them with the iPump ® .

A broadcast news customer is converting to iPump ® to streamline the operations of its affiliates. Previously, the news broadcaster used different mechanisms to distribute video and script information to affiliates. Video was distributed on a linear feed and the affiliate had to track the schedule and manually record any video that was of interest to them. If affiliates missed the linear broadcast, then the broadcaster had to do a “re-feed” and use additional costly satellite bandwidth to redistribute the video to the affiliate. With the iPump ® , the broadcaster sends all the video as files that are stored for the affiliate on the hard drive of the iPump ® . This eliminates manual recording by the affiliate and removes the need for re-feeds. Additionally, the broadcaster will send scripts and other descriptive information to the iPump ® so the affiliate can access all the related information from a single location on the iPump ® hard drive. The iPump ® provides additional valuable features to our customer’s affiliates, while lowering their operational costs.

A private network customer for digital signage and distance training is using the iPump ® for both signing and training applications simultaneously. This allows the customer to install, field and manage a single iPump ® at each location. This reduces the network complexity at the receiver locations since the iPump ® can optionally generate two networks out of a single unit. The customer is generating a back-room training center for their employees at each site and they can create customized training schedules at each location depending on the viewers’ availability, or the viewer can watch the materials on demand. The other output is being used for advertising at the point of sale by outputting high quality video advertisements to large video monitors in a retail environment. Within six months of deployment, the customer generated a positive return on equipment expenses through advertising revenue.

Our iPump ® , MediaPlan ® and Compel ® products create systems that directly address the next generation needs of the distance learning, corporate training, digital signage advertising, broadcast radio, broadcast news and broadcast television markets and represent significant opportunities for growth.

Another area for growth relates to our development of our MPEG-4 and DVB-S2 products (see “Research and Development Activities” below for addition information). The second version of the Unity ® 550 product is currently under development and takes advantage of MPEG-4 and DVB-S2 technology. The MPEG-4 standard is the next evolutionary step in video compression and DVB-S2 is the newest technology in satellite modulation. The two technologies combined reduce the bandwidth requirements of satellite media distribution in half. This reduction in bandwidth utilization is significant, as bandwidth utilization is one of the largest operating costs for customers. This new technology can drive growth in two ways. First, existing satellite operators will replace their existing equipment with new MPEG-4/h.264 and DVB-S2 capable equipment. Additionally, the lower operating expenses will allow additional networks to launch that cannot currently support the high operating expenses of the older technology.

We are also developing a settop box utilizing MPEG-4 and high definition video for telecom operators. The settop box would allow them to provide video offerings to their customers and complete the “triple-play” of telephony, high speed internet connectivity and television services. The typical architecture of telecom distribution networks has more limited available bandwidth than cable networks, so MPEG-4 video compression enables the telecom operators to compete more effectively. The settop is also relevant for many of our private network customers to expand the reach of their video networks throughout their faciltities.

SALES AND MARKETING

Domestically, we sell our products principally through our own direct sales force, which is organized geographically. We have sales representatives in Atlanta, Eastern Canada, Silicon Valley and Southern California, as well as a key account executive in North Carolina. We use a major domestic value added reseller for additional sales coverage in the cable market. We have relationships with a few key integrators as an additional sales channel. Internationally, we sell primarily through independent distributors and integrators, mostly in North America, South America and Europe. We are exploring further international expansion in sales. The majority of our sales have payment terms of net 30 days. Due to the technical nature of our business, both sales application engineering and system integration engineering support sales.

Our marketing organization develops strategies for product lines and provides direction to product development on product feature requirements. Marketing is also responsible for setting price levels and general support of the sales force, particularly with major proposal responses, presentations and demonstrations. We strive to further establish Wegener’s brand within the industry, including participation on technical committees, publication of articles in industry journals, speaking opportunities at industry events and exhibitions at trade shows.

Manufacturing and Suppliers; Sources and Availability of Raw Materials

During fiscal 2006 and fiscal 2005, we contracted with offshore manufacturers for a significant amount of our finished goods. We are currently working with two offshore manufacturers with facilities located in Taiwan. Raw materials consist of passive electronic components, electronic circuit boards and fabricated sheet metal. Approximately 20% of our raw materials are purchased directly from manufacturers and the other 80% are purchased from distributors. Passive and active components include parts such as resistors, integrated circuits and diodes. We use approximately ten distributors and two contract manufacturers to supply our electronic components. We often use a single contract manufacturer or subcontractor to supply a total subassembly or turnkey solution for higher volume products. Direct suppliers provide sheet metal, electronic circuit boards and other materials built to specifications. We maintain relationships with approximately 20 direct suppliers. Most of our materials are available from a number of different suppliers; however, certain components used in existing and future products are currently available from a single or a limited number of sources. Although we believe that all single-source components currently are available in adequate quantities, there can be no assurance that shortages or unanticipated delivery interruptions will not develop in the future. Any disruption or termination of supply of certain single-source components or agreements with contract manufacturers could have an adverse effect on our business and results of operations. Our manufacturing operations consist primarily of final assembly and testing of our products, utilizing technically trained personnel, electronic test equipment and proprietary test programs.

Intellectual Property

We hold five U.S patents currently, the most significant of which is a patent covering advanced receiver grouping techniques in Compel ® which will expire on January 15, 2008. We hold eight active trademarks, such as Compel ® , iPump ® , Wegener ® and Unity ® . Currently we have 12 patent applications pending and two trademark applications pending.

Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements and other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patent and trademark applications will be issued. We also cannot assure you that others will not develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own. In order to develop and market successfully certain of our planned products for digital applications, we may be required to enter into technology development or licensing agreements with third parties. Although many companies are often willing to enter into such technology development or licensing agreements, we cannot assure you that such agreements will be negotiated on terms acceptable to us, or at all. The failure to enter into technology development or licensing agreements, when necessary, could limit our ability to develop and market new products and could cause our

business to suffer. Third parties have in the past claimed, and may in the future claim, that we have infringed their current or future intellectual property rights. There can be no assurance that we will prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Even if we prevail in litigation, such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results, financial position and cash flows.

Although we believe that the patents and trademarks we own are of value, we believe that success in our industry will be dependent upon new product introductions, frequent product enhancements, and customer support and service. However, we intend to protect our rights when, in our view, these rights are infringed upon. Additionally, we license certain analog audio processing technology to several manufacturing companies which generated royalty revenues of approximately $82,000, $58,000, and $87,000 in fiscal 2006, 2005 and 2004, respectively. These royalty license agreements renew annually unless cancelled by the licensee on the expiration date.

During the second quarter of fiscal 2003, we entered into a license agreement with StarGuide Digital Networks, Inc., a Nevada corporation. This agreement granted to Wegener a number of limited licenses of StarGuide patents related to delivering IP data by satellite and store/forward audio. These licenses extend to and conclude upon the last to expire of any licensed patent. We have agreed to pay StarGuide a running royalty on certain of our products. We believe that these royalties will not have a material adverse effect on our financial condition or results of operations. In addition, as of September 1, 2006, we have entered into eight other license agreements for utilization of various technologies. These agreements currently require royalty payments, or may require future royalties for products under development, none of which are expected to have a material adverse effect on our financial condition or results of operations.

Seasonal Variations in Business

There do not appear to be any seasonal variations in our business.

Working Capital Practices

Information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) section of this report is incorporated herein by reference in response to this item.

Dependence upon a Limited Number of Customers

We sell to a variety of domestic and international customers on an open-unsecured account basis. These customers principally operate in the cable television, broadcast business music, private network and data communications industries. Sales to Muzak, Nielsen Media Research and BBC World Services accounted for approximately 21.8%, 10.7% and 10.5% of revenues in fiscal 2006, respectively. Sales to Muzak, Ascent Media Systems & Technology Services, Educational Media Foundation and Roberts Communications Network accounted for approximately 22.5%, 14.1%, 13.0% and 10.3%, of revenues in fiscal 2005, respectively. Sales to Muzak accounted for approximately 39.6% of revenues in fiscal 2004. At September 1, 2006 and September 2, 2005, two customers accounted for more than 10% of our accounts receivable. Sales to a relatively small number of major customers have typically comprised a majority of our revenues. This trend is expected to continue in fiscal 2007. The loss of one or more of these customers would likely have, at least in the near term, a material adverse effect on our results of operations.

Backlog of Orders

Our backlog is comprised of undelivered, firm customer orders, which are scheduled to ship within 18 months. Our eighteen month backlog was approximately $10,700,000 at September 1, 2006, $10,100,000 at September 2, 2005, and $12,010,000 at September 3, 2004. Three customers accounted for 76.0% of the backlog at September 1, 2006. Reference is hereby made to the information contained in MD&A, which is incorporated herein by reference in response to this item. The total multi-year backlog at September 1, 2006 was approximately $19,452,000 compared to approximately $23,964,000 at September 1, 2005.

Approximately $9,527,000 of the September 1, 2006, backlog is expected to ship during fiscal 2007. Three customers accounted for 73.7% of the backlog expected to ship during fiscal 2007.

Competitive Conditions

We compete both with companies that have substantially greater resources and with small specialized companies. Competitive forces generally change from year to year for the markets we serve. Through relationships with component and integrated solution providers, we believe we are positioned to provide complete end-to-end digital video and audio systems to our customers.

Cable Television

Competition for our Unity ® products in the cable television market is from large and well-established companies, such as Motorola and Scientific Atlanta, a Cisco company. Our Unity ® products have a competitive advantage with our advanced Compel ® control, so we focus on opportunities where that advantage is of value to the customer.

Competition for our DTV products is mostly from smaller companies that are not as well established in the cable television market. Our products in this area offer technical advantages over competing offerings. Significant orders for this product line will depend on the overall growth of broadcast and telecom HDTV offerings and possible legislative decisions by the FCC in the future.

Broadcast Television

Competition for our Unity ® products in the broadcast television market is from large and well-established companies such as Tandberg, Motorola and Scientific Atlanta, a Cisco company. Our Unity ® products have a competitive advantage with our advanced Compel ® control, so we focus on opportunities where that advantage is of value to the customer. In addition, since the revenue opportunities in broadcast television are smaller than cable, our competitors do not compete for all of those opportunities as aggressively.

Broadcast Radio

Competition is currently limited to a few smaller companies for our iPump ® Media Server in the broadcast radio market. Compel ® Network Control and Medial Plan CM are competitive advantages in broadcast radio, as well as our full-featured iPump ® 6420 product.

Business and Private Networks

Competition in the business and private networks market generally comes from smaller companies with unique products tailored to the needs of the customer. Competition in this field is increasing, although still limited, and we expect to be among the industry key players. Our products are well positioned for this market and have competitive advantages, such as our powerful network control and targeting capabilities.

Research and Development

Our research and development activities are designed to strengthen and enhance our existing products and systems and to develop new products and systems. Our development strategy is to identify features, products and systems which are, or are expected to be, needed by a number of customers. A major portion of the fiscal 2006 research and development expenses were spent on new product development of our iPump ® 6400 and 6420, Compel ® , MediaPlan ® CM, IPTV and Unity ® 550 products. WCI’s research and development expenses totaled $3,052,000 in fiscal 2006, $3,493,000 in fiscal 2005, and $3,095,000 in fiscal 2004. Additional information contained on pages 2-7 and in MD&A is incorporated herein by reference in response to this item.

Technological advances occur frequently in our industry and our product offerings must be upgraded with the advances to continue to remain current with industry trends and attract potential customers. During fiscal 2006, we invested heavily in new technologies since the industry is in a transitional period between technologies and new technologies are emerging and becoming viable. We have the opportunity to invest in new technologies now while they are still very innovative and of high value to customers. During fiscal 2006, we invested in MPEG-4 technology, store-forward technology and network management. We anticipate that we will continue to invest in all of these technologies in the coming years as they are all at the beginnings of their life cycles.

MPEG-4/H.264 video compression is a new technology that is just becoming viable for our products. It will drive a new cycle of purchases throughout our industry, and we want to ensure that we have products available as soon as the technology is ready for deployment. MPEG-4/H.264 compression reduces bandwidth utilization by almost half, which is a significant cost reduction for our customers since bandwidth utilization is one of their largest operating expenses. We believe this reduction in operating expenses will contribute to an increase in purchases by our customers. Alternately, the customers can upgrade their video to high definition and significantly increase its quality while maintaining similar bandwidth utilization to their current MPEG-2 standard definition networks. We are working on the second version of the Unity ® 550 receiver to incorporate MPEG-4 technology, as well as exploring applications within the telecom industry for consumer settop boxes.

In addition to MPEG-4, we also continue to invest in the diversification of the iPump ® Media Server product line to alternate markets, such as broadcast radio and broadcast news.

Network control and management has long been a differentiator for our Unity ® receivers and iPump ® media servers. Through fiscal 2006, we continued to invest in network control for our products which allows customers to create dynamic environments with their receivers and to gain additional advertising revenue by regionalizing broadcasts and advertisements. When network control is included in a store-forward network, it becomes a very complex operation to manage the media content and data files on iPumps ® throughout the network. It is imperative to customers that it is managed properly, as the content often has limited viewing rights, so it must be deleted when rights have expired or replaced by newer versions over time. Network control and management products, such as Compel ® and MediaPlan ® , manage such operations.

Employees

As of September 1, 2006, we had 92 full-time employees employed by WCI and no employees employed by Wegener Corporation. No employees are parties to a collective bargaining agreement and we believe that employee relations are good.

Available Information

Our Web site is http://www.wegener.com . Information contained on our Web site should not be considered incorporated by reference in this Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, for purposes of section 401(b) of Regulation S-K, are as follows:

Name and Business Experience
   Age   

Office Held

Robert A. Placek

President and Chief Executive Officer of the Company since August 1987 and Director of the Company since July 1987. Chairman of the Board since 1995. Chairman and Chief Executive Officer and Director of WCI since 1979. President of WCI from October 1979 to June 1998 and from March 2002 to January 2005.
   68   

Chairman of the Board, President and Chief Executive Officer of the Company

Ned L. Mountain

President and Chief Operating Officer of WCI since January 2005 and Director of the Company since May 2003. Executive Vice President of WCI from March 2002 to January 2005. Senior Vice President of Business Development of WCI from 1996 to 2002. Vice President European Operations of WCI from 1994 to 1995. Numerous sales and marketing positions from 1981to 1994. Corporate Senior Engineer of UA-Columbia Cablevision from 1979 to 1981.
   58   

President and Chief Operating Officer of WCI

C. Troy Woodbury, Jr.

Treasurer and Chief Financial Officer of the Company since June 1988 and Director since 1989. Treasurer and Chief Financial Officer of WCI since 1992. Senior Vice President of Finance of WCI since March 2002. Executive Vice President of WCI from July 1995 to March 2002. Chief Operating Officer of WCI from September 1992 to June 1998. Group Controller for Scientific-Atlanta, Inc. from March 1975 to June 1988.
   59   

Treasurer and Chief Financial Officer of the Company and WCI

ITEM 1A. RISK FACTORS

(See also “Outlook : Issues and Uncertainties”)

Our business, financial condition and operating results can be affected by a number of factors, including those listed below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. Any of these risks could also materially and adversely affect our business, financial condition or the price of our common stock.

We have a limited history of profitability and may need additional capital in the future, which we may not be able to secure on terms acceptable to us. In addition, our line of credit has borrowing availability limits as well as a maximum credit limit.

Over the past five fiscal years, we have reported positive operating income only in fiscal year 2002. As a consequence, we had an accumulated deficit of $14,976,000 at September 1, 2006. There can be no certainty

regarding our ability to achieve or sustain profitability in the future. At September 1, 2006, our cash and cash equivalents balances were $959,000 and our borrowing availability under our current line of credit advance formulas was $585,000 net of the outstanding letters of credit in the amount of $3,242,000. Whether or not we are able to operate profitably, we may require additional capital to finance our operations. We may need to raise additional funds to fund our operations, to take advantage of unanticipated strategic opportunities or to strengthen our financial position. Our ability to raise funds, if required, may be adversely affected by a number of factors relating to Wegener, as well as factors beyond our control, including conditions in capital markets and the cable, telecom and satellite industries. There can be no assurance that such financing will be available on terms acceptable to us, if at all.

Our future operating results are difficult to predict and may fluctuate materially.

Our future operating results are difficult to predict and may be materially affected by a number of factors, including: the timing of purchasing decisions by our customers, the timing of new product announcements or introductions by us or our competitors, competitive pricing pressures, adequate availability of components and offshore manufacturing capacity. Additional factors affecting our operating results include our ability to hire, retain and motivate adequate numbers of engineers and other qualified employees, changes in product mix, and the effect of adverse changes in economic conditions in the United States and international markets. In addition, our markets have historically been cyclical and subject to significant economic downturns. Our business is subject to rapid technological changes and there can be no assurance, depending on the mix of future business, that products stocked in inventory will not be rendered obsolete before we ship them. As a result of these and other factors, there can be no assurance that we will not experience material fluctuations in future operating results on a quarterly or annual basis.

Our fluctuations in bookings and revenues affect our ability to borrow due to collateral advance formulas on our credit facilities. In addition, our credit facility imposes debt covenants and maximum borrowing limits.

At September 1, 2006, our cash and cash equivalents balances were $959,000 and our borrowing availability under our current line of credit advance formulas was $585,000 net of the outstanding letters of credit in the amount of $3,242,000. Currently our bank allows 50% of the value of letters of credit as collateral while reducing borrowing availability by the full amount of outstanding letter of credit balances. As a result, we may at various times during fiscal 2007, require overadvances to the bank’s collateral formula until the letter of credit inventory commitments convert to receivables, against which the bank will allow 80% as available collateral. There is no assurance the bank will grant overadvances in sufficient amounts and for the duration of time required to support operations until the inventory is sold. At September 1, 2006 and September 2, 2005, we were in violation of our tangible net worth covenants, as to which the bank granted waivers. A breach of these covenants or our inability to maintain the debt covenants could result in a default on our indebtedness. If a default occurs, the bank could increase the interest rate or declare any outstanding indebtedness, together with accrued interest and other fees, to be immediately due and payable, and could proceed against our assets that secure that indebtedness.

We have in the past experienced delays in product development and introduction, and there can be no assurance that we will not experience further delays in connection with our current product development or future development activities.

Delays in development, testing, manufacture and/or release of new products or features, including digital receivers, Compel ® network control software, MediaPlan ® content management software, streaming media, and other products could adversely affect our sales and results of operations. In addition, there can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

Our lengthy and variable qualification and sales cycles make it difficult to predict the timing of a sale or whether a sale will be made.

As is typical in our industry, our customers may expend significant efforts in evaluating and qualifying our products. This evaluation and qualification process frequently results in a lengthy sales cycle, typically ranging from three to six months and sometimes longer. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales, marketing, and research and development expenses, expend significant management efforts, increase manufacturing capacity and order long-lead-time supplies prior to receiving an order. Even after this evaluation process, it is possible that a potential customer will not purchase our products.

Our customer base is concentrated and the loss of one or more of our key customers would harm our business.

Sales to a relatively small number of major customers have typically comprised a majority of our revenues, and that trend is expected to continue throughout fiscal 2007 and beyond. In fiscal 2006, three customers accounted for approximately 21.8%, 10.7% and 10.5% of revenues, respectively. Three customers accounted for 76.0% of the backlog at September 1, 2006 and 73.7% of the backlog scheduled to ship during fiscal 2007. The loss of any significant customer or any reduction in orders by any significant customer would adversely affect our business and operating results and potentially our liquidity.

We rely on third-party subcontractors, certain suppliers and offshore manufacturers.

We use two offshore manufacturers for a significant amount of finished goods or component inventories. Certain raw materials, video sub-components and licensed video processing technologies used in existing and future products are currently available from a single source or limited sources. Any disruption or termination of supply of certain single-source components or technologies, or interruption of supply from offshore manufacturers, would likely have a material adverse effect on our business and results of operations, at least in the near term.

Our intellectual property rights may be insufficient to protect our competitive position. In addition, our pending or future intellectual property applications may not be issued.

We hold five U.S patents currently, the most significant of which is a patent covering advanced receiver grouping techniques in Compel ® which will expire on January 15, 2008. We hold eight active trademarks, such as Compel ® , iPump ® , Wegener ® and Unity ® . Currently we have 12 patent applications pending and two trademark applications pending. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements and other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patent and trademark applications will be issued. We also cannot assure you that others will not develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own.

We may not be able to license necessary third-party technology or it may be expensive to do so. In addition, claims that we infringe third-party intellectual property rights could result in significant expenses and restrictions on our ability to sell our products in particular markets.

In order to develop and market successfully certain of our planned products for digital applications, we may be required to enter into technology development or licensing agreements with third parties. Although many companies are often willing to enter into such technology development or licensing agreements, we cannot assure you that such agreements will be negotiated on terms acceptable to us, or at all. The failure to enter into technology development or licensing agreements, when necessary, could limit our ability to develop and market new products and could cause our business to suffer. Third parties have in the past claimed, and may in the future claim, that we have infringed their current or future intellectual property rights. There can be no assurance that we will prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Even if we prevail in litigation, such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results, financial position and cash flows.

Competition in our industry is intense and can result in reduced sales and market share.

We compete with companies which have substantially larger operations and greater financial, engineering, marketing, production and other resources than we have. These competitors may develop and market their products more quickly, devote greater marketing and sales resources, or offer more aggressive pricing, than we can. As a result, this could cause us to lose orders or customers or force reductions in pricing, all of which would have a material adverse impact on our financial position and results of operations.

Our business is subject to rapid changes in technology and new product introductions.

The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent product introductions. Product introductions are generally characterized by increased functionality and better quality, sometimes at reduced prices. The introduction of products embodying new technology may render existing products obsolete and unmarketable. Our ability to successfully develop and introduce on a timely basis new and enhanced products that embody new technology, and achieve levels of functionality and price acceptable to the market, will be a significant factor in our ability to grow and to remain competitive. If we are unable, for technological or other reasons, to develop competitive products in a timely manner in response to changes in the industry, our business and operating results will be materially and adversely affected.

There is no assurance of a continued trading market in our stock.

Our common stock is traded on the Nasdaq Capital Market. There is no assurance that a public market for our stock will continue to be made or that persons purchasing our common stock will be able to avail themselves of a public trading market for the common shares in the future. There can be no assurance that we will remain in compliance with Nasdaq's continued listing requirements. If the common stock is delisted by Nasdaq, the trading market for the common stock will be adversely affected, as price quotations for the common stock will not be as readily obtainable, which would likely have a material adverse effect on the market price of the common stock.

Our stock price is subject to volatility.

Our common stock has experienced substantial price volatility and such volatility may occur in the future, particularly as a result of quarter to quarter variations in the actual or anticipated financial results of the Company or other companies in the satellite communications industry or in the markets we serve. These and other factors may adversely affect the market price of the common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable


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