-----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, LfI14u38h2EnRMnz1j/T3HD+olNZ+qZmK5wXKdcbagEtYYZgh87+wekyHirlH4Xb bYVPbOcjCky4kKM4wvp07Q== 0000891554-99-001009.txt : 19990518 0000891554-99-001009.hdr.sgml : 19990518 ACCESSION NUMBER: 0000891554-99-001009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADYNE COMSTREAM INC CENTRAL INDEX KEY: 0000718573 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 112569467 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11685 FILM NUMBER: 99626309 BUSINESS ADDRESS: STREET 1: 3138 EAST ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6024379620 MAIL ADDRESS: STREET 1: 3138 EAST ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85034 FORMER COMPANY: FORMER CONFORMED NAME: RADYNE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three month period ended March 31, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11685-NY RADYNE COMSTREAM INC. (Exact name of registrant as specified in its charter) NEW YORK (State or other jurisdiction of incorporation or organization) 11-2569467 (IRS EMPLOYER IDENTIFICATION NO.) 3138 East Elwood Street, Phoenix, AZ 85034 (Address of principal executive offices) 602-437-9620 (Registrant's Telephone number) Indicate by check mark whether the registrant (1) 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements, for the past 90 days. YES _X_ NO ___ Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES _X_ NO ___ The registrant had 5,934,340 shares of its common stock, par value $.002, outstanding as of March 31, 1999. 1 PART I - FINANCIAL INFORMATION RADYNE COMSTREAM INC. CONSOLIDATED BALANCE SHEETS
March 31, 1999 December 31, 1998 ITEM 1 Unaudited Audited Current Assets: Cash & cash equivalents $ 1,723,876 $ 254,956 Accounts receivable - trade, net of allowance for doubtful accounts of $789,069 and $632,815 respectively 7,104,573 7,270,732 Other receivable 73,000 1,265,000 Inventories, net 9,022,375 9,380,478 Prepaid expenses 682,807 590,161 ---------------------------- Total current assets 18,606,631 18,761,327 ---------------------------- Property and equipment, net 4,937,329 5,533,645 Other assets: Purchased technology, net of accumulated amortization of $183,332 and $105,000, respectively 2,316,668 2,395,000 Goodwill, net of accumulated amortization of $106,070 and $35,960, respectively 2,208,190 2,278,300 Deposits and other 151,862 222,442 ---------------------------- Total other assets 4,676,720 4,895,742 ---------------------------- $ 28,220,680 $ 29,190,714 ============================ Liabilities and stockholders' capital deficiency Current liabilities: Notes payable under line of credit agreement $ 9,000,000 $ 8,000,000 Note payable 7,000,000 7,000,000 Current installments under capital leases 97,566 124,891 Accounts payable, trade 2,642,951 3,291,915 Accounts payable, affiliates 1,200 8,150 Accrued expenses 8,177,971 9,140,341 ---------------------------- Total Current Liabilities 26,919,688 27,565,297 Notes payable to affiliates 15,618,272 15,618,272 Obligations under capital leases, excluding current installments 73,326 88,588 Accrued stock option compensation 1,155,477 1,155,477 ---------------------------- Total Liabilities 43,766,763 44,427,634 ---------------------------- Stockholders' capital deficiency: Common Stock, $.002 par value, 20,000,000 shares authorized; Shares issued and outstanding, 5,934,340 at March 31, 1999 and 5,931,346 at December 31, 1998 11,868 11,862 Additional Paid-In Capital 5,702,300 5,694,806 Accumulated deficit (21,260,251) (20,943,588) ---------------------------- Total stockholders' capital deficiency (15,546,083) (15,236,920) ---------------------------- $ 28,220,680 $ 29,190,714 ============================
The accompanying notes are an integral part of these consolidated financial statements. 2 Radyne Comstream Inc Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1999 March 31, 1998 Net Sales $ 12,318,705 $ 3,948,501 Cost of Sales 6,772,429 2,754,829 ---------------------------- Gross Profit 5,546,276 1,193,672 ---------------------------- Operating expenses: Selling, general and administrative 3,000,690 847,166 Research and development 2,307,475 658,944 ---------------------------- Total operating expenses 5,308,165 1,506,110 ---------------------------- Income (loss) from operations before interest expense 238,111 (312,438) Interest expense, net 554,774 177,602 ---------------------------- Net loss $ (316,663) $ (490,040) ============================ Basic net loss per common share $ (0.05) $ (0.08) ============================ Diluted net loss per common share $ (0.05) $ (0.08) ============================ Weighted average number of common shares outstanding 5,931,968 5,931,346 ============================
The accompanying notes are an integral part of these consolidated financial statements. 3 RADYNE COMSTREAM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 1999 March 31, 1998 OPERATING ACTIVITIES: Net Loss $ (316,663) $ (490,040) Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation and Amortization 773,668 128,975 Increase (decrease) in cash resulting from changes in: Accounts receivable 1,358,159 (879,033) Inventories 358,103 82,402 Prepaid expenses and other current assets (92,646) (18,016) Deposits and other 70,580 -- Accounts payable, trade (648,964) 157,250 Accounts payable, affiliates (6,950) (16,062) Accrued expenses (962,370) (55,417) Taxes payable -- (27,956) ------------------------------- Net cash provided by (used in) operating activities 532,917 (1,117,897) ------------------------------- Cash flows from investing activities: Capital expenditures (28,910) (26,606) ------------------------------- Net cash used in investing activities (28,910) (26,606) ------------------------------- Cash flows from financing activities: Net borrowing (payments on) notes payable under line of credit agreements 1,000,000 (4,500,000) Proceeds from notes payable to affiliates -- 5,118,272 Notes receivable from employees -- 23,819 Net proceeds from exercise of stock options 7,500 -- Principal payments on capital lease obligations (42,587) (32,486) ------------------------------- Net cash provided by financing activities 964,913 609,606 ------------------------------- Net increase (decease) in cash 1,468,920 (534,897) Cash and cash equivalents, beginning of year 254,956 569,692 ------------------------------- Cash and cash equivalents, end of period $ 1,723,876 $ 34,795 =============================== Supplemental disclosure of cash flow information: Interest paid $ 179,025 $ 243,250 ===============================
The accompanying notes are an integral part of these consolidated financial statements. 4 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements (Information for March 31, 1999 and March 31, 1998 is Unaudited) 1 Business Radyne Comstream Inc. (the "Company") was incorporated on November 25, 1980 and commenced operations on May 22, 1981. On August 12, 1996 the Company became a majority owned subsidiary of Singapore Technologies Pte Ltd ("STPL"), through its wholly-owned subsidiary, Stetsys US, Inc. ("ST"). On October 15, 1998, Radyne purchased all of the outstanding shares of common stock of Comstream Holdings, Inc. ("Comstream") for an aggregate purchase price of $17 million, of which $10 million was paid in cash at the closing, using funds borrowed from its controlling stockholder, and the balance of which was in the form of a $7 million note (the "Note"), payable nine months from the purchase date. The Note is convertible into Radyne common stock under certain circumstances. This acquisition was recorded in accordance with the "purchase method" of accounting. The excess of the purchase price over the net assets acquired was approximately $8.7 million of which $3.9 million was allocated to in-process research and development, $2.5 million was valued as purchased technology, which is being amortized over 6.25 years, and $2.3 million has been recorded as goodwill, which is being amortized over ten years. Comstream operates primarily in North America in the satellite communications industry. Comstream designs, markets and manufacturers satellite interactive modems and earth stations. Additionally, Comstream manufacturers and markets full-transponder satellite digital audio receivers for music providers and has designed and developed a PC broadband satellite receiver card which is an Internet and high-speed data networking product. In March 1999, Radyne Corp. changed its name to Radyne Comstream Inc. The Company has locations in Phoenix, Arizona and San Diego, California. The Company designs, manufactures, and sells products, systems and software used for the transmission and reception of data over satellite and cable communication networks. The following summary, prepared on a pro forma basis, combines the consolidated results of operations (unaudited) as if the acquisition had taken place on January 1, 1998. Such pro forma amounts are not necessarily indicative of what the actual results of operations might have been if the acquisition had been effective on January 1, 1998: Three Months ended March 31, ------------------------------------- 1998 -------- (In thousands, except per share data) Net Sales $ 12,741 ======== Gross profit $ 3,447 ======== Net loss $ (4,874) ======== Net loss per common share $ (0.82) ======== 5 2 Summary of Significant Accounting Policies (a) Basis of Presentation The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position as of March 31, 1999 and the results of operations and cash flows for the three months ended March 31, 1999 and March 31, 1998. Such adjustments are of a normal recurring nature. This information should be read in conjunction with the consolidated financial statements included in the Company's Form 10-K for the twelve month period ended December 31, 1998. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. (b) 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 and disclosure of contingent assets and liabilities as of the financial statement date and the reported amounts of revenue and expenses during the reporting period. The industry in which the Company operates is characterized by rapid technological change and short product life cycles. As a result, estimates are required to provide for product obsolescence and warranty returns as well as other matters. Actual results could differ from those estimates. (c) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in the consolidation. (d) Cash Equivalents The Company considers all money market accounts with a maturity of 90 days or less to be cash equivalents. (e) Revenue Recognition The Company recognizes revenue upon shipment of product and transfer of ownership. (f) Inventories Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market. (g) Property and Equipment Property and equipment are stated at cost. Equipment held under capital leases is stated at the present value of future minimum lease payments. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements which extend the useful lives of the assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over an estimated useful life of three to ten years. Equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the assets. (h) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over ten years. (i) Purchased Technology In connection with the acquisition of Comstream, value was assigned to purchased technology. Purchased technology is being amortized on a straight-line basis over the expected period to be benefited of 6.25 years. (j) Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. 6 Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (k) Warranty Costs The Company provides limited warranties on certain of its products and systems for periods generally not exceeding two years. The Company accrues estimated warranty costs for potential product liability and warranty claims based on the Company's claim experience. Such costs are accrued as cost of sales at the time revenue is recognized. (l) Research and Development The cost of research and development is charged to expense as incurred. (m) Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (n) Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, are principally accounts receivable. The Company maintains ongoing credit evaluations of its customers and generally does not require collateral. The Company provides reserves for potential credit losses and such losses have not exceeded management's expectations. (o) Net Loss Per Common Share Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the earnings or loss of the Company. Assumed exercise of outstanding stock options and warrants for all periods have been excluded from the calculations of diluted net loss per common share as their effect is antidilutive. (p) Fair Value of Financial Instruments The fair value of accounts receivable, accounts payable, and accrued expenses approximates the carrying value due to the short-term nature of these instruments. Management has estimated that the fair values of the notes payable, approximate the current balances outstanding, based on currently available rates for debt with similar terms. (q) Employee Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options and to adopt the "disclosure only" alternative treatment under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 requires the use of fair value option valuation models that were not developed for use in valuing employee stock options. Under SFAS No. 123, deferred compensation is recorded for the excess of the fair value of the stock on the date of the option grant, over the exercise price of the option. The deferred compensation is amortized over the vesting period of the option. 7 (r) Segment Reporting The Company has only one operating business segment, the sale of equipment for satellite and cable communications networks. (s) Rights Offering (1999) In October 1998 the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholders, ST and Stetsys Pte Ltd, of subscription rights for the purchase of up to 444,276 shares of the Company's common stock at a price of $3.73 per share. The Board of Directors further approved the distribution of subscription rights to Stetsys Pte Ltd to purchase up to 4,300,800 shares of the Company's common stock at a price of $3.73 per share. This Rights Offering will become effective upon approval by the Securities Exchange Commission of the amended Form S-2 Registration Statement which was filed on May 5, 1999 or an amendment to the Form S-2 Registration Statement to be filed in the future. Stetsys Pte Ltd has given assurances to the Company that it will fully exercise its rights under the Rights Offering.
3 Inventories March 31, 1999 December 31, 1998 Inventories consist of the following: Raw materials and components $ 6,611,250 $ 6,065,751 Work in process 2,680,362 4,319,338 Finished goods 1,549,204 546,858 -------------------------------- 10,840,816 10,931,947 Valuation Allowance (1,818,441) (1,551,469) -------------------------------- Total $ 9,022,375 $ 9,380,478 ================================
4 Property and Equipment March 31, 1999 December 31, 1998 Property and Equipment consist of the following: Machinery and equipment $ 3,730,482 $ 3,598,732 Furniture and fixtures 2,469,458 2,661,195 Leasehold improvements 398,358 312,425 -------------------------------- 6,598,298 6,572,352 Less accumulated depreciation & amortization (1,660,969) (1,038,707) -------------------------------- Total $ 4,937,329 $ 5,533,645 ================================
5 Accrued Liabilities March 31, 1999 December 31, 1998 Accrued liabilities consist of the following: Wages and related payroll taxes $ 1,298,774 $ 1,355,316 Interest expense 1,179,678 803,929 Professional fees 265,008 378,817 Warranty reserve 698,514 679,964 Severance 578,625 1,282,761 Lease buyout 1,233,890 2,443,110 Other 2,923,482 2,196,444 -------------------------------- Total $ 8,177,971 $ 9,140,341 ================================
8 6 Related Party Transactions Sales to Engineering and Technical Services, Inc. and Agilis Communication Technologies Pte Ltd, companies under common control with Radyne Comstream Inc., for the periods ended March 31, 1999 and March 31, 1998 were $1,200 and $38,181 respectively. Cost of such sales for the same periods were $1,150 and $11,459 respectively. Notes payable to ST and affiliates outstanding at March 31, 1999 and December 31, 1998 were $15,618,000. These notes bear interest at rates from 6.625% to 6.844% and mature on March 31, 2000. Interest expense on notes payable to affiliates was $255,000 for the current period ended March 31, 1999 compared to $74,000 for the period ended March 31, 1998. Accrued interest on notes payable to affiliates was $837,000 at March 31, 1999 compared to $581,000 at December 31, 1998. 7 Notes Payable The Company has a $20,500,000 credit agreement with Citibank, N.A. that includes $20,000,000 available under an uncommitted line of credit facility and facilities for bank guarantees and/or standby letters of credit up to $500,000. An affiliate of ST has issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest at a fluctuating rate equal to LIBOR plus 1% per annum or an alternative Citibank Quoted Rate plus 1% per annum (rates varied from 5.97 % to 6.125% on balances owed at December 31, 1998). The credit agreement requires the Company to maintain certain financial leverage ratios. At March 31, 1999, the Company was in violation of one such covenant, which was waived by the bank. The availability of additional borrowings under the credit agreement expires September 29, 1999 and is renewable annually at the option of the bank. The Company owed principal of $9,000,000 under the line of credit as of March 31, 1999 and $8,000,000 as of December 31, 1998. Notes payable to parent (ST) outstanding at March 31, 1999 and December 31, 1998 were $15,618,272. These notes bear interest at rates from 6.375% to 6.844% and mature on March 31, 2000. Of this amount, $10,000,000 was borrowed in September 1998 for the acquisition of ComStream Holdings, Inc. Stetsys Pte Ltd has committed to purchase approximately $16,000,000 of the Company's Common Stock in the below described rights offering, the proceeds of which will be used to retire these notes. The Company also has a note payable to Spar Aerospace Limited in the amount of $7,000,000. This note was issued on October 15, 1998 as partial consideration for the acquisition of ComStream Holdings, Inc. The note matures on July 15, 1999 with interest at 8% per annum. At any time prior to July 15, 1999, the holder of the note has the option to convert 20% of the original principal balance into shares of the Company's common stock and at any time after July 15, 1999, prior to payment in full, the holder of the note has the option to convert the outstanding balance into shares of the Company's common stock at $3.73 per share. The Company intends to finance the repayment of debt incurred for the ComStream acquisition, certain planned restructuring costs and its ongoing working capital needs through (i) a rights offering pursuant to which it will offer approximately $17,700,000 of Common Stock to its existing stockholders and (ii) the existing bank line of credit. This offering will be made strictly by means of a prospectus which will be distributed to stockholders of record as of April 16, 1999. The purpose of all of the above described loans has been to finance or refinance the capital needs associated with the Company's acquisition of ComStream Holdings, Inc., recent rapid sales and backlog growth and the cost of research and development. To date, the Company's capital resources (as supplemented by loans from ST and its affiliates) have been sufficient to fund its operations and increased level of business. Stetsys Pte Ltd has confirmed its ability and intent to provide working capital necessary to ensure that Radyne ComStream remains a going concern, with this support, the Company believes that its bank credit lines and cash from operations are likely to be sufficient to fund its planned future operations and capital requirements for continued growth through the end of 1999, as well as repayment of the above described notes. 9 8 Loss Per Share A summary of the reconciliation from basic loss per share to diluted loss per share follows:
Quarter ended March 31, --------------------------------------------------- 1999 1998 ----------------------- ------------------------ Income (loss) available to common stockholders $ (316,663) (490,040) ======================= ======================== Basic EPS-weighted average shares outstanding 5,931,968 5,931,346 ======================= ======================== Basic loss per share (.05) (.08) ======================= ======================== Basic EPS-weighted average shares outstanding 5,931,968 5,931,346 Effect of dilutive securities -- -- ----------------------- ------------------------ Dilutive EPS-weighted average shares outstanding 5,931,968 5,931,346 ======================= ======================== Diluted loss per share (.05) (.08) ======================= ======================== Stock options not included in diluted EPS since 616,228 222,951 antidilutive ======================= ========================
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition for the year ended December 31, 1998 contained in the Company's 1998 Annual Report on Form 10-K. Except for the historical information contained herein, the following discussion contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Radyne ComStream Inc., or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: loss of, and failure to replace, any significant customers; timing and success of new product introductions; product developments, introductions and pricing of competitors; timing of substantial customer orders; availability of qualified personnel; the impact of local political and economic conditions and foreign exchange fluctuations on international sales; performance of suppliers and subcontractors; market demand and industry and general economic or business conditions; availability, cost and terms of capital; 10 Radyne ComStream's level of success in effectuating its strategic plan, including realization of all of the anticipated benefits of the integration of Radyne and the recently acquired ComStream Holdings, Inc.; and other factors to which this report refers or to which the Company's 1998 Annual Report on Form 10-K refers. Results of Operations The Company's net sales increased 212% to $12,319,000 during the period ended March 31, 1999 from $3,949,000 during the period ended March 31, 1998 primarily as a result of the Company's acquisition and integration of Comstream Holdings into the operations of the Company. The Company's cost of sales as a percentage of net sales decreased to 55% during the period ended March 31, 1999 from 70% during the fiscal period ended March 31, 1998. Start-up costs associated with the delivery of new products to the market place accounted for the higher prior period costs. Selling, general and administrative costs increased to $3,001,000 (24% of sales) during the current period from $847,000 (21% of sales) during the fiscal period ended March 31, 1998. The increased level of expenses as a percentage of sales for the period was a result of the increase in the Company's base business level during the period as a result of the Company's acquisition and integration of Comstream Holdings into the operations of the Company. Marketing expenses have remained high, based on the Company's attempts to position itself to compete head-to-head with larger competitors without giving up margin advantages. Research and development expenditures increased to $2,307,000 (19% of sales) during the current period from $659,000 (17% of sales) during the period ended March 31, 1998. The increased level of expenses for the period is a result of the increase in the Company's base business level during the period as a result of the Company's acquisition and integration of Comstream Holdings into the operations of the Company. Net interest expense increased to $555,000 in the current period ended March 31, 1999 from $178,000 in the prior period ended March 31, 1998 due mainly to an increase in the Company's debt level as a result of the acquisition of Comstream. Based on above, the Company experienced net operating income of $238,000 for the three month period ended March 31, 1999 as compared to a net operating loss of ($312,000) for the three month period ended March 31, 1998. The Company's new-orders-booked (Bookings) increased by 176% to $13,607,000 for the current period from $4,936,000 for the period ended March 31, 1998. This increase was primarily due to the acquisition of Comstream. The Company's level of unfilled-orders-to-ship (Backlog) increased 71% to $9,894,000 for the current period from $5,801,000 at March 31, 1998 primarily due to the acquisition of Comstream. Liquidity and Capital Resources The Company's working capital deficit was ($8,313,000) at March 31, 1999, a decrease in the working capital deficit of $491,000 from ($8,804,000) at December 31, 1998. This change is primarily a result of reductions in current assets of ($155,000), primarily made up of an increase in cash of $1,469,000 and in prepaid expenses of $93,000 as offset by decreases in accounts and other receivables of ($1,358,000) and a reduction in inventories of ($358,000) and a reduction of current liabilities of ($646,000), primarily made up of an increase in notes payable of $1,000,000 and offset by a decrease in accounts payable of ($656,000) and other accrued expenses of ($962,000). Net cash supplied by operating activities was $533,000 for the current period, as compared to ($1,118,000) used in the three-month period ended March 31, 1998. Cash used in investing activities, consisting of additions to equipment, was $29,000 for the current period as compared to the prior period amount of $27,000. 11 The Company derived net cash from financing activities of $965,000 and $610,000 during the periods ended March 31, 1999 and March 31, 1998, respectively. As a result of the foregoing, the Company increased its cash balances by $1,469,000 during the current period, compared to a decrease in cash balances of ($535,000) for the three month period ended March 31, 1998. Year 2000 Compliance The Year 2000 issue concerns the fact that certain computer systems and processors may recognize the designation "00" as the year 1900 when it is intended to mean the Year 2000, resulting in system failure or miscalculations. Other potential date related errors may result from computer systems' inability to recognize the year 2000 as a "leap year", and such dates as 9 September 1999 (9-9-99), 1 January 2001 (1-1-01) may cause errors. All of these "date related issues" are commonly referred to as the "Year 2000" issue or "Y2K problem". Commencing in 1997, we began a comprehensive review of our information technology systems, upon which our day to day business operations depend, in order to determine the adequacy of those systems in light of future business requirements. Year 2000 readiness was one of the factors considered in the review process. We have completed that review and determined that all mission critical systems at our Phoenix facility are Year 2000 compliant, whereas certain systems used at our San Diego facility require upgrading. We purchased and expensed the upgrades in 1998 and expect their installation to be completed in the third quarter of this year. Our Year 2000 readiness plan also involves the review of our non-information technology systems, a review which we consider to be approximately 60% complete. The only noncompliance which we have discovered to date relates to certain date functions in diagnostic equipment, which functions we do not employ. We have no expectation of encountering any more serious Y2K noncompliance during the remainder of our review. However, it is possible that the scope of the Year 2000 problem could be greater than originally believed and that our efforts could prove inadequate. As part of our comprehensive review, we are continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom Radyne ComStream has material relationships. This is a particular concern in light of our reliance on overseas assembly operations. A Year 2000 readiness survey was recently sent to all of our material vendors and customers. We have received approximately 70% of the survey responses. The remaining 30% are being contacted in an effort to accelerate their responses or to determine if there may be a likeliness of their not becoming compliant. We have also created a data base to track responses, problems and follow-up plans. Our Y2K plan contemplates that we will consider replacement of any critical vendor that does not satisfy us by June 30, 1999 that it will be Y2K compliant by September 30, 1999. While our assessments of the readiness of our vendors are necessarily dependent upon their survey responses, we intend to test their stated compliance where we determine that to be a necessary and feasible step. In evaluating the potential impact of vendor Y2K noncompliance, we believe that the two worst case scenarios would likely be as follows. First, if the electric utility at either of our principal facilities were to black out, operations at that facility could essentially cease for the duration of the problem. At this point those utilities have provided reasonable assurances of their own Y2K compliance, although they are not in a position to rule out potentially relevant problems elsewhere on the power grid. Second, if one of our major circuit board suppliers were to report Y2K compliance, but then surprise us with a shut-down, our delivery schedule would be adversely affected. However, since our contingency plan includes maintenance of a three-month inventory of critical parts, we would expect to be able to replace the noncompliant vendor timely enough to avoid a product delivery delay of more than 30 days. However, we are not able to precisely determine the effect on results of operations, liquidity and financial condition in the event our material vendors and customers are not Year 2000 compliant. Our inability to accurately forecast such effects may prevent Radyne ComStream from taking necessary steps to rectify any Year 2000 problems in advance. Moreover it is impossible to predict the extent, if any, to which customers may allocate funds to the solution of their own Year 2000 problems instead of purchasing our products. We will continue to monitor the progress of our material vendors and customers and formulate a contingency plan if and when we conclude that a material vendor or customer may not be compliant. We have completed a review of our products and determined that all but one older ComStream product are Year 2000 ready. We are notifying purchasers and potential purchasers of this product, relatively few of which have been sold, and we are working on a Year 2000 revision which, if successful, we can make available to any 12 customers who require that this product be Y2K compliant. We do not anticipate that this will involve a material expense to Radyne ComStream. While we believe our efforts to date are adequate to prevent any Year 2000 problem from having a material adverse effect on Radyne ComStream, our assessment may turn out to be inaccurate.
Year 2000 Readiness Costs Project Statistics: Cost to date (labor) $ 50k Estimated cost to completion $100k to $150k - ------------------------------------------------------------------------------------------------- Inventory Assessment Remediation Unit Testing System Testing - ------------------------------------------------------------------------------------------------- Percentage 100% 90% 50% 20% 20% Completed Completion Date 4/30/99 6/30/99 7/31/99 8/31/99 9/30/99 - -------------------------------------------------------------------------------------------------
Item 3 - Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. Increases in market interest rates would not have a substantial adverse effect on profitability. Our financial instruments consist primarily of short-term variable rate revolving credit lines, and fixed rate debt. Our debt at March 31, 1999 consisted of notes payable to affiliates, notes payable under a line of credit agreement and a note payable. PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders During the three months ended March 31, 1999, the Company submitted one matter to a vote of security holders. Pursuant to written consent, dated as of February 9, 1999, the majority holders of the Company's common stock agreed to amend the Company's 1996 Incentive Stock Option Plan to provide that the total number of shares of common stock issuable upon the exercise of outstanding options and the total number of shares of common stock provided for under any stock bonus or similar plan of the Company may not exceed 35% of the outstanding shares of common stock, as calculated in accordance with Rule 260.140.45 of Title 10, California Code of Regulations. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit Description - --- ------- ----------- 3.1* Restated Certificate of Incorporation 3.2** Bylaws, as amended and restated 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter covered by this report. * Incorporated by reference from Registrant's report on Form 10-Q, filed March 11, 1997. ** Incorporated by reference from Registrant's Form 10-K, filed April 15, 1999. 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 14, 1999 RADYNE COMSTREAM INC. By: /s/ Robert C. Fitting ------------------------------------- Robert C. Fitting Chief Executive Officer and President By: /s/ Garry D. Kline ------------------------------------- Garry D. Kline Vice President, Finance (Chief Financial Officer and Accounting Officer) 14 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q FOR THE QUARTER ENDED 3-31-99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,723,876 0 7,966,642 789,069 9,022,375 18,606,631 6,598,298 (1,660,969) 28,220,680 26,919,688 0 0 0 11,868 (15,557,951) 28,220,680 12,318,705 12,318,705 6,772,429 6,772,429 5,308,165 0 554,774 (316,663) 0 (316,663) 0 0 0 (316,663) (0.05) (0.05)
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