-----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, B/SQP4JkZwOEwbn5DsVQ7Ui+v+kL24XqNaFER8PFsxc0GK5N6sw8dVoHwFiWlECQ JpwqvnNGRGUX9grwFpUQ0g== 0000891554-99-001724.txt : 19990830 0000891554-99-001724.hdr.sgml : 19990830 ACCESSION NUMBER: 0000891554-99-001724 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990827 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: S-2/A SEC ACT: SEC FILE NUMBER: 333-70403 FILM NUMBER: 99700455 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 S-2/A 1 AMENDMENT NO. 2 TO FORM S-2 As filed with the Securities and Exchange Commission on August __, 1999 Registration No. 333-70403 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT No. 2 to FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 __________ RADYNE COMSTREAM INC. (Exact name of Registrant as specified in its charter) NEW YORK 3665 11-2569467 (State or jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification No.) organization Code Number) __________ 3138 East Elwood Street Phoenix, Arizona 85034 (602) 437-9620 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) __________ Robert C. Fitting, Chief Executive Officer Radyne ComStream Inc. 3138 East Elwood Street Phoenix, Arizona 85034 (602) 437-9620 (Name, address, including zip code, and telephone number, including area code, of agent for service) __________ Copy to: John B. Wade, III, Esq. Dorsey & Whitney LLP 250 Park Avenue New York, NY 10177 (212) 415-9311/(212) 953-7201 (Telecopy) Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. | | If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to item 11(a)(1) of this form, check the following box. | | If this Form is filed to register additional securities pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. | | If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. | | If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. | | If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.| | ---------- Calculation of registration fee
Proposed Proposed maximum maximum Amount of Title of each class of Amount to offering aggregate registration securities to be registered be price per offering price fee registered unit - ------------------------------------------------------------------------------------------------ Common stock, par value 4,745,076 $3.73 $17,699,133 $4,921 $.002 Shares(1) ================================================================================================ Subscription rights to 4,745,076 purchase common stock Subscription $0.00 $0.00 $0.00 rights - ------------------------------------------------------------------------------------------------ TOTAL $17,699,133 $4,921(2)
(1) Issuable upon exercise of rights which are being distributed to shareholders of Radyne ComStream Inc. (2) Previously paid. - ---------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. Radyne ComStream Inc. Cross Reference Sheet (Pursuant to Item 501(b) of Regulation S-K)
S-2 Item Number and Caption Location or Caption in Prospectus - --------------------------- --------------------------------- 1. Forepart of the Registration Statement and outside front cover page of prospectus ..................... Outside front cover page 2. Inside front and outside back cover pages of Prospectus .... Inside front and outside back cover page 3. Summary information, risk factors and ratio of earnings to fixed charges .............................................. Prospectus summary; risk factors 4. Use of proceeds ............................................ Prospectus summary; purpose of the rights offering and use of proceeds 5. Determination of offering price ............................ Purpose of the rights offering and use of proceeds 6. Dilution ................................................... Dilution 7. Selling security holders ................................... Not applicable 8. Plan of distribution ....................................... Outside front cover page; the rights offering 9. Description of securities to be registered description of capital stock .............................................. Outside front cover page; the rights offering 10. Interest of named experts and counsel ...................... Not applicable 11. Information with respect to the registrant ................. Outside front cover page; prospectus summary; risk factors; purpose of rights offering and use of proceeds; price range of common stock; shares eligible for future sale; description of capital stock 12. Incorporation of certain information by reference .............................................. Where you can find more information 13. Disclosure of commission position on indemnification for securities act liabilities ................................ Not applicable
Prospectus Radyne ComStream Inc. 4,745,076 shares of common stock, par value $.002 per share and 4,745,076 subscription rights ---------- =============================================================================== Per share Total --------- ----- Subscription price $3.73 $17,699,133 Underlying discount N/A N/A ----- ----------- Total proceeds to Radyne $3.73 $17,699,133 ================================================================================ The subscription rights o Each Radyne ComStream shareholder of record on April 16, 1999 will be entitled to purchase four shares of common stock for every five shares currently owned. o The purchase price per share is $3.73. o The subscription rights expire at 5:00 p.m. New York time on September 30, 1999, unless extended. The common stock o One share is issuable upon the exercise of one subscription right. o Voting rights for the new shares will be equal to the voting rights of shares currently outstanding. The offering o You cannot revoke a decision to exercise. Radyne ComStream's common stock is currently traded over the counter and is not listed on any securities exchange or quoted on Nasdaq. ---------- The information contained in this document is subject to completion and amendment. You should carefully consider the risk factors on page 8 before purchasing any of the common stock. These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission, nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. ---------- The date of this prospectus is August __,1999 Where you can find more information Radyne ComStream Inc. is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and files reports and other information with the Securities and Exchange Commission. You may read and copy any reports or other information concerning Radyne ComStream at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may also request copies of these documents upon payment of a duplicating fee, by writing to the SEC's Public Reference Section. Please call the SEC at l-800-SEC-0330 for further information on the public reference rooms. Radyne ComStream's SEC filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at "http://www.sec.gov." Information concerning Radyne ComStream is not available from any securities exchange as our common stock is not traded on any securities exchange. Radyne ComStream filed a registration statement with respect to the shares of common stock and rights to purchase the common stock we are offering. Pursuant to SEC rules and regulations, this prospectus does not contain all of the information that you can find in such registration statement. You may read and copy this information in the same way as any other information that Radyne ComStream files with the SEC. Statements in this document concerning any document filed as an exhibit to the registration statement summarize all material provisions. Each of those statements is qualified in its entirety by reference to the complete document. For more detailed information, you should refer to the copy of the complete document filed as an exhibit to the registration statement. These documents, filed with the SEC, may be inspected and copied, and obtained by mail, from the SEC as set forth above and will be available for inspection and copying at the principal executive offices of Radyne ComStream at 3138 East Elwood Street, Phoenix, AZ 85034 during regular business hours by any interested securityholder of Radyne ComStream or his or her representative who has been so designated in writing. The SEC allows us to "incorporate by reference" information into this document, which means that we can disclose important information to you by referring you to another document filed separately with the SEC, including Radyne ComStream's annual, quarterly and current reports. The information incorporated by reference is deemed to be part of this document, except for any information superseded by information in this document. The information incorporated by reference is an important part of this prospectus. This document incorporates by reference the documents set forth below which Radyne ComStream previously filed with the SEC. These documents contain important information about Radyne ComStream and its finances. Radyne ComStream incorporates by reference into this Prospectus: o its Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1998, which contains audited consolidated financial statements for Radyne ComStream's latest fiscal year; o its quarterly report on Form 10-Q for the quarter ended June 30, 1999; o its quarterly report on Form 10-Q/A for the quarter ended March 31, 1999; o its quarterly report on Form 10-Q/A for the quarter ended June 30, 1998; o its report on Form 8-K/A filed on May 5, 1999, which contains audited financial statements of ComStream Holdings, Inc. for its fiscal years ended December 31, 1995, 1996 and 1997, unaudited financial statements of ComStream Holdings, Inc. for the nine months ended September 30, 1998, and pro forma financial information for the year ended December 31, 1997 and the nine months ended September 30, 1998 as if the acquisition of ComStream Holdings, Inc. took place effective January 1, 1997; and o the description of Radyne ComStream's common stock, $.002 par value, as contained in its registration statement on Form 8-A, filed with the SEC on March 8, 1984, as amended on July 25, 1988. Copies of our Annual Report on Form 10-K/A for the year ended December 31, 1998 and our quarterly report on Form 10-Q for the quarter ended June 30, 1999 accompany this prospectus. Other documents incorporated by reference may be obtained through the SEC and are available from Radyne ComStream without charge, other than exhibits, unless we have specifically incorporated by reference an exhibit in this document. You may obtain documents incorporated by reference in this document by making a request to Radyne ComStream by telephone at (602) 437-9620 or in writing at the following address: Director of Administration Radyne ComStream Inc. 3138 East Elwood Street Phoenix, AZ 85034. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that differs from such information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents. 2 Prospectus Summary The following summary is qualified in its entirety by reference to the more detailed information and financial statements and notes thereto appearing elsewhere in this prospectus. Radyne ComStream Inc. Radyne ComStream Inc. and its subsidiaries design, manufacture and sell equipment used to receive data from, and transmit data to, satellites. We have engaged in the advanced design and production of digital data communications equipment for satellite telecommunications systems for over seventeen years. Singapore Technologies Pte Ltd through its wholly owned subsidiary, Stetsys Pte Ltd, and the latter's wholly owned subsidiary, Stetsys US, Inc., collectively, ST, owns approximately 91% of Radyne ComStream's common stock. Consistent with our new growth strategy, on October 15, 1998 we acquired ComStream Holdings, Inc. from Spar Aerospace Limited, a Canadian company. ComStream is an international provider of digital transmission solutions for voice, data, audio and video applications with offices in the United States, Singapore, Indonesia, China and the United Kingdom. We acquired ComStream in an effort to expand our core business, supplement our product lines and take advantage of ComStream's trademark and distribution channels, and based on our belief that the combined companies could realize certain synergies. Purpose of the rights offering and use of proceeds We intend to raise approximately $17,700,000 in gross proceeds from the rights offering to repay ST for the $10,000,000 of financing which it provided in connection with the ComStream acquisition and approximately $5,618,000 in principal amount from earlier working capital loans, plus interest. We expect to receive approximately $16.1 million of the aggregate $17,700,000 gross proceeds of the offering from ST upon the exercise of its rights. If we complete the rights offering, the maximum gross proceeds to Radyne ComStream would be approximately $17,700,000 before payment of related fees and expenses estimated to be $300,000. However, although ST informed us that it intends to fully exercise its rights, we do not know the extent to which others will exercise the rights that they receive. We will not reoffer shares underlying any unexercised rights to the public or otherwise reissue them. Therefore, the actual proceeds from the rights offering could be somewhat less. The Board of Directors has established the subscription price at $3.73 per share, which the Board determined to be the fair market value of the common stock based on the negotiated conversion price of the convertible note issued to Spar in connection with the ComStream acquisition. See "Purpose of the Rights Offering and Use of Proceeds." 3 Summary of the rights offering The rights ........................ Radyne ComStream will issue to you four rights for every five shares of common stock that you held on the record date. We will distribute an aggregate of approximately 4,745,076 rights. Holders of the rights may purchase one share of common stock for each right that they exercise at the subscription price. We will not issue any fractional rights. Each right will entitle a shareholder to purchase one share of common stock at $3.73 per share. Subscription price ................ $3.73 per share of common stock. Record date ....................... April 16, 1999 Transferability of shareholder rights ............................ The rights will be transferable, but we do not anticipate that there will be a market in the rights or that any exchange will list them for trading. Expiration date ................... 5:00 p.m., New York time, on September 30, 1999 unless the Board of Directors determines that a material event has occurred that necessitates one or more extensions of the expiration date to permit adequate disclosure of information concerning such event. 4 Procedure for exercising rights ................. You may exercise rights by properly completing the subscription certificate evidencing your rights and forwarding the subscription certificate to the subscription agent or Radyne ComStream on or prior to the expiration date, together with payment in full of the subscription price with respect to your rights. In the alternative, you may use the guaranteed delivery procedures described below. If you use the mail to forward subscription certificates, we recommended that you use insured, registered mail. If time does not permit a holder of a right to deliver a subscription certificate to the subscription agent or Radyne ComStream on or before the expiration date, such person should make use of the guaranteed delivery procedures described under "Purpose of the Rights Offering and Use of Proceeds-Exercise of rights." The exercise of rights is irrevocable once made. Radyne ComStream will not pay interest on the money delivered in payment of the subscription price. If paying by uncertified personal check, please note that the funds paid thereby may take at least five business days to clear. Accordingly, we urge persons who wish to pay the subscription price by means of uncertified personal check to make payment sufficiently in advance of the expiration date to ensure that such payment reaches the subscription agent or Radyne ComStream and clears by such date. We urge you to consider payment by means of certified or cashier's check or money order. You may not exercise a right in part, and Radyne ComStream will not issue any fractional shares. Persons holding shares, or wishing to exercise rights, through others .... Persons who hold their Radyne ComStream Inc. shares and rights with a broker, dealer, commercial bank, trust company or other nominee should contact the appropriate institution or nominee and request it to effect the transactions for them. Issuance of common stock ........... Radyne ComStream will cause the delivery of certificates representing shares of common stock issuable upon exercise of rights to the holder of such rights as soon as practicable after valid exercise of such rights. The subscription agent will hold funds received thereby until the issuance of the related shares. 5 Subscription agent ................. Continental Stock Transfer & Trust Company Information ........................ Please direct any questions regarding this offering, including the procedure for exercising rights, and requests for additional copies of this prospectus, the subscription certificate or the notice of guaranteed delivery to Radyne ComStream Inc. at 3138 East Elwood Street, Phoenix, Arizona 85034, Attention: Director of Administration. Telephone: (602) 437-9620. Maximum Shares of common stock outstanding after the rights offering .................... 10,704,954 shares based on 5,959,878 shares outstanding on June 30, 1999. Does not give effect to the 2,040,461 shares reserved for issuance upon the exercise of options previously granted or available for grant from time to time under our 1996 Incentive Stock Option Plan, 1,000,000 shares reserved for issuance under our 1999 Employee Stock Purchase Plan or the possible conversion of an outstanding convertible note into an additional 968,843 shares. For more information regarding this offering, including the procedure for exercising rights, see "The Rights Offering." 6 Federal income tax consequences The holders of common stock will not recognize taxable income for federal income tax purposes upon receipt of the rights and holders of the rights will not recognize any gain or loss upon exercise of the rights. See "Federal Income Tax Consequences" for a discussion of tax consequences that investors should consider in connection with this offering. Risk factors The purchase of common stock in the rights offering or the purchase of rights in the secondary market involves investment risks relating to Radyne ComStream, to the satellite data communications equipment industry in general and to this offering. Investors should read and consider carefully the information set forth under the heading "Risk Factors". Exercise of rights The Board of Directors of Radyne ComStream makes no recommendation to holders as to whether a holder should exercise rights to purchase shares of common stock in the rights offering. In addition, the Board makes no recommendation as to whether you should purchase rights. 7 Risk Factors An investment in the common stock or rights is highly speculative and involves a high degree of risk. You should invest in these securities only if you can afford the loss of your entire investment. Prior to making an investment decision, you should carefully consider, together with the other matters referred to in this prospectus, or incorporated by reference, the following risk factors. We have a history of operating losses and we may never become profitable Radyne ComStream incurred losses from operations of $13,362,000 during the year ended December 31, 1998, $1,080,000 during the year ended December 31, 1997, $1,814,000 during the six months ended December 31, 1996 and $2,368,000 during the twelve months ended June 30, 1996. The Company's predecessor, Radyne Corp., had emerged from Chapter 11 protection in December 1994. Radyne ComStream has been largely dependent upon loans from controlling shareholders to satisfy its working capital requirements. Accordingly, one must consider the likelihood of Radyne ComStream's future success in light of Radyne Corp.'s bankruptcy in 1994 and the possibility of future operating losses, as well as the problems, expenses, difficulties, risks and complications frequently encountered in connection with similarly situated companies. In addition, our future plans for Radyne ComStream are subject to known and unknown risks and uncertainties that may cause Radyne ComStream's actual results in future periods to differ materially from any future performance implied in this Prospectus or in our Annual Report. We are dependent on ST for capital and some of our loans are callable Radyne ComStream has been largely dependent on a succession of short-term loans and guarantees from its controlling shareholder, ST, and affiliates of ST since it emerged from Chapter 11 protection on December 16, 1994. Prior to its acquisition by us, ComStream had been dependent on borrowings facilitated by Spar. At present, Radyne ComStream has short-term indebtedness to ST of $15,618,272, plus interest, payable on March 31, 2000, and has a $20,500,000 bank line of credit on which it owes approximately $9,420,000. In addition, Radyne ComStream owes Spar up to $3,614,000 plus interest in connection with the ComStream acquisition. We will use the proceeds from this offering to repay the loans from ST. Although Radyne ComStream's indebtedness to the bank or Spar is not supported by a guarantee or any other form of binding agreement, ST has provided the bank with a letter of awareness. All loans pursuant to the bank line of credit are demand loans. The bank could demand repayment at an inopportune time for Radyne ComStream and ST may not continue indefinitely to assist Radyne ComStream in maintaining such financing. Moreover, pending receipt of the proceeds of this rights offering, Radyne ComStream is in violation of a covenant under its bank line requiring Radyne ComStream to limit its indebtedness to twice its tangible net worth. Failure to realize substantially the anticipated net proceeds of this offering, could materially adversely affect Radyne ComStream's ability to repay its overall indebtedness, including its indebtedness to ST, and its financial condition. See "Purpose of the Rights Offering and Use of Proceeds." 8 Necessary additional financing may not be available Based on our operating plan, we believe that in addition to the net proceeds of this offering, Radyne ComStream will require substantial additional financing in the next year. Specifically, we will need to pay up to $3,614,000 plus interest to Spar in connection with the ComStream acquisition. Accordingly, there can be no assurance that our resources will be sufficient to satisfy our capital requirements for such period. In addition to repaying debt, we anticipate that we may require additional financing in order to meet our current plans for expansion. Such financing may take the form of the issuance of common or preferred equity securities or debt securities, or may involve additional bank financing. We may be unable to obtain such additional capital on a timely basis, on favorable terms, or at all. Our heavy dependence on international sales entails potential volatility Radyne ComStream has dedicated substantial resources to penetrating markets in Europe, the Middle East, Canada, Latin America and Asia. While this activity fits with Radyne ComStream's long-term strategy, recent market volatility in Latin America and Asia may cause short-term problems which may have longer term negative effects. Export sales, as a percentage of net sales, were approximately 50% for the year ended December 31, 1998. As a result, the possibility of substantial future disruptions and the impact of events to date could have a material adverse effect on our business, financial condition and results of operations. We depend heavily on key personnel which we may not be able to recruit or retain Our future performance is significantly dependent on the continued active participation of Robert C. Fitting, President and Chief Executive Officer, and Steve Eymann, Executive Vice President and Chief Technical Officer. Should either of these key employees leave or otherwise become unavailable to us, Radyne ComStream's business and results of operations could suffer. Our continued ability to attract and retain highly skilled personnel is critical to the operations and expansion of Radyne ComStream. To date, we have been able to attract and retain the personnel necessary for our operations. However, we may not be able to do so in the future, particularly as we expand the business. Any inability to attract and retain personnel with the necessary skills when needed could materially adversely affect our business and expansion plans. There is a risk of obsolescence of our products from rapid technological change The technology used in modems, converters and related equipment changes rapidly. Radyne ComStream's competitors may succeed in developing or marketing products or technologies that are more effective and/or less costly and which render our products obsolete or non-competitive. In addition, new technologies could emerge that replace or reduce the value of our products. For example, as more fiber cables come into service, the use of satellites for international telephony is slowing. Our success will depend in part on our ability to respond quickly to technological changes through the development and improvement of our products. Accordingly, we believe that we will need to allocate a substantial amount of capital to research and development activities in the future. There can be no assurance that Radyne ComStream's 9 product development efforts will be successful. Failure to improve our existing products and develop new products could have a material adverse effect on our business, financial condition and results of operations. The high cost of research and development reduces our profitability ComStream's future growth depends on increasing the market share for its new products, adapting existing satellite communications products to new applications and introducing new communications products that will find market acceptance and benefit from Radyne ComStream's established international distribution channels. Accordingly, we are actively applying our communications expertise to design and develop new hardware and software products and enhance existing products. We expended $4,296,000 in the year ended December 31, 1998, on research and development activities. However, Radyne ComStream may not continue to have access to sufficient capital to fund the necessary research and development and such efforts, even if adequately funded, may not prove successful. Competition in our industry is intense and can lead to reduced sales and market share We have a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC and California Microwave which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne ComStream. We believe that we have been able to compete by concentrating our sales efforts in the international market and by emphasizing product features and quality. However, most of our competitors offer products which have one or more features or functions similar to those offered by Radyne ComStream. We believe that the quality, performance and capabilities of our products, our ability to customize certain network functions and the relatively lower overall cost of our products, as compared to the costs generally offered by Radyne ComStream's major competitors, have contributed to Radyne ComStream's ability to compete successfully. However, our major competitors have the resources available to develop products with features and functions competitive with or superior to those offered by us. Such competitors may successfully develop such products, which may prevent us from maintaining a lower cost advantage for our products. Moreover, we may experience increased competition in the future from these, other currently unknown competitors or future entrants to the business. Our products could infringe on other's technology or vice versa, which could be costly Because patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and because patent applications require public disclosure of information which may otherwise be subject to trade secret protection, Radyne ComStream has been cautious in obtaining patents on existing products. We have a number of patents, copyrights and other intellectual property rights in the form of software and integrated circuit designs. However, if our technology impermissibly utilizes the intellectual property of others, Radyne could experience material restrictions or prohibitions on the use of the technology. In such event, we might need to obtain licenses from third parties to utilize the patents or proprietary rights of others. We might be unable to obtain such licenses on 10 acceptable terms or at all. In addition, in such event, we could incur substantial costs in defending against infringement claims made by third parties or in enforcing our own intellectual property rights. It should also be noted that some foreign countries in which Radyne ComStream's products are sold provide less protection to intellectual property than do the laws of the United States. Any misappropriation of Radyne ComStream's products could adversely affect our business. Integrating a new corporate entity, such as ComStream, can be expensive and disruptive In pursuit of our business strategy, we recently acquired ComStream. The successful integration of ComStream is subject to risks commonly encountered in making acquisitions of companies or their services and technologies. Such risks include, among other things: o the difficulty associated with assimilating the operations and personnel of ComStream o the potential disruption of our ongoing business, o the inability of management to maximize our financial and strategic position through the successful integration of acquired customers, network facilities, technology and distribution networks, o additional expenses associated with the amortization of acquired intangible assets, o the inability to maintain uniform standards, controls, procedures and policies, and o the impairment of relationships with employees as a result of the integration of new management personnel. ST's control of Radyne ComStream may make our stock less attractive Upon the closing of this offering, ST, which currently owns approximately 91% of Radyne ComStream's outstanding common stock, will continue to maintain a substantially similar level of control. ST will, therefore, continue to have the ability to elect all of Radyne ComStream's directors and to control the outcome of all issues submitted to a vote of Radyne ComStream's stockholders. As a result of ST's substantial ownership interest in the common stock, it may be more difficult for a third party to acquire Radyne ComStream. A potential buyer would likely be deterred from any effort to acquire Radyne ComStream absent the consent of ST or its participation in the transaction. We are subject to Section 912 of the New York Business Corporation Law, which restricts certain business combinations that are not approved by a corporation's board of directors. You will experience immediate and substantial dilution in light of our net tangible book value deficiency 11 Upon the closing of this offering, investors will incur immediate and substantial dilution in the per share net tangible book value of their common stock. At December 31, 1998, after giving effect to the receipt by Radyne ComStream of the maximum net proceeds of the rights offering, Radyne ComStream, would have had a pro forma net tangible book value (deficit) of approximately ($0.24) per share. Net tangible book value is the amount of Radyne ComStream's total assets minus intangible assets and liabilities. See "Dilution." To the extent that other shareholders exercise their rights, those shareholders who do not exercise their rights in full will realize a dilution in their percentage voting interest and ownership interest in future net earnings, if any, of Radyne ComStream. Radyne ComStream cannot predict the effect, if any, this offering will have on the market price of the common stock. Radyne ComStream currently has outstanding under the 1996 Incentive Stock Option Plan options exercisable to purchase an aggregate of 731,976 shares of common stock at an exercise price of $2.50 per share (in the case of 626,476 of such options, the optionee/employee would be entitled to a bonus of $1.72 per share upon exercise), 86,500 shares at $3.125 per share, 50,000 shares at $3.25 per share and 147,375 shares at $3.75 per share. Options on an additional 784,125 shares will become exercisable at between $2.50 and $3.75 per share over the next three years, assuming that the grantees' employment does not terminate prematurely. An additional 240,485 shares are available for options yet to be granted under the Plan. Exercise of the options granted under the 1996 Incentive Stock Option Plan would further reduce a shareholder's percentage voting and ownership interest. Moreover, up to 1,000,000 shares may be sold to employees at 85% of fair market value, pursuant to our 1999 Employee Stock Purchase Plan. The large number of shares eligible for future sale may adversely affect our market price The sale, or availability for sale, of a substantial number of shares of common stock in the public market subsequent to this offering pursuant to Rule 144 under the Securities Act ("Rule 144") or otherwise could materially adversely affect the market price of the common stock and could impair Radyne ComStream's ability to raise additional capital through the sale of its equity securities or debt financing. Upon completion of this offering, if all rights are fully exercised, there would be approximately 10,704,954 shares of common stock issued and outstanding. Of these shares, Radyne ComStream believes that approximately 1,028,154 would be freely transferable. The remaining 9,676,800 shares would be held by ST and would be eligible for resale subject to the volume and manner of sale limitations of Rule 144 under the Securities Act. 12 Disclosures relating to low priced stocks may negatively affect liquidity Radyne ComStream's securities are subject to Rule 15g-9 under the Exchange Act which imposes additional sales practice requirements for broker-dealers which sell penny stocks to persons other than established customers and accredited investors as defined in Regulation D under the Securities Act. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The SEC regulations define a "penny stock" to be any equity security not registered on a national securities exchange or for which quotation information is disseminated on Nasdaq that has a market price (as therein defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Unless exempt, the rules require delivery, prior to a transaction in a penny stock, of a disclosure schedule prescribed by the SEC relating to the penny stock market. There are disclosure requirements relating to commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, there is a requirement for monthly statements disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, such rule may adversely affect the ability of broker-dealers to sell Radyne ComStream's securities and may adversely affect the ability of purchasers in this offering to sell any of the securities acquired hereby in the secondary market. The market price of our shares has been volatile Radyne ComStream cannot predict the effect that this offering will have on the trading price of the common stock. There can be no assurance that the market price of the common stock will not remain below the subscription price or that, following the exercise of rights, a rights holder will be able to sell shares acquired in this offering at a price equal to or greater than the subscription price. Since Radyne ComStream emerged from bankruptcy, the price of the common stock, which trades in the over-the-counter market under the OTC Bulletin Board symbol "RADN", has varied widely and the price of the common stock or the shareholder rights may be subject to significant fluctuation in the future. There has been no prior market for the rights. Parties on which we rely may have year 2000 technology problems that disrupt our business 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 13 the review process. We have completed that review and we believe 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 complete. The only noncompliance which we discovered relates to certain date functions in diagnostic equipment, which functions we do not employ. 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 sent to all of our material vendors and customers. We have received acceptable responses from all of our mission critical vendors. We expect to receive responses from 70% to 80% of our non-critical vendors. Efforts continue to obtain as many responses as possible. In any event, we may increase some inventory levels to mitigate any risk of inventory supply problems. We have also created a database to track responses, problems and follow-up plans. 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 in a timely enough manner 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. 14 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. 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) $ 80,000 Estimated cost to completion $75,000 to $125,000 ----------------------------------------------------------------------------------------------------- Inventory Assessment Remediation Unit Testing System Testing ----------------------------------------------------------------------------------------------------- Percentage 100% 100% 90% 50% 50% Completed Completion Date 4/30/99 6/30/99 7/31/99 8/31/99 9/30/99 -----------------------------------------------------------------------------------------------------
Purpose of the Rights Offering and Use of Proceeds Establishment of subscription price The Board of Directors independently established the subscription price at $3.73 per share, which the Board determined to be the fair market value of the common stock at the time of its determination to conduct the rights offering. The Board made this determination based on the conversion price fixed in the convertible note issued to Spar in connection with the ComStream acquisition. Through arms length negotiations, the parties set this price at fifty cents below the average trading price of the common stock for the five trading days following the announcement of the ComStream acquisition and this offering. Use of proceeds The maximum net proceeds we will receive from the sale of the rights, net of estimated expenses payable by Radyne ComStream, are estimated to be approximately $17,400,000. We intend to use substantially all of the net proceeds of this offering to repay indebtedness to ST. The indebtedness to ST which we intend to repay with the proceeds of this offering equals $15,618,272 in principal amount, with interest and maturities as follows: Date of Note Principal Interest Rate Maturity January 5, 1998 $ 500,000 6.84375% March 31, 2000 January 5, 1998 $ 4,618,272 6.84375% March 31, 2000 April 14, 1998 $ 250,000 6.625% March 31, 2000 August 13, 1998 $ 250,000 6.75% March 31, 2000 August 28, 1998 $ 10,000,000 6.375% March 31, 2000 15 Of this indebtedness, we borrowed $10,000,000 for the ComStream acquisition and the balance for short-term working capital purposes or to repay other indebtedness incurred for such purposes. Dilution The net tangible book value (deficit) of Radyne ComStream at December 31, 1998, was approximately $(19,910,000), or $(3.36) per share of common stock. Net tangible book value per share of common stock represents the tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to the sale of the rights and the common stock issuable pursuant to the rights, and the application of the net proceeds from such transactions, the net tangible book value (deficit) of the common stock at December 31, 1998 on a pro forma basis would have been approximately $(2,510,000) or $(0.24) per share. This represents an immediate increase in net tangible book value of $3.12 per share to existing shareholders and an immediate dilution to purchasers of common stock through the exercise of rights of $3.97 (106%) per share.
Per share ---------------------- Rights offering price $ 3.73 Net tangible book value (deficit) at December 31, 1998 $(3.36) Increase attributable to sale of common stock pursuant to rights $ 3.12 Pro forma net tangible book value after this offering(1) $(0.24) ------ Dilution to new investors $ 3.97 ====== (1) After deducting offering expenses of approximately $300,000 payable by Radyne ComStream.
The foregoing computations exclude (i) 825,476 shares of common stock issuable upon exercise of outstanding stock options at an exercise price of $2.50 per share, 50,000 shares under options with an exercise price of $3.25 per share, another 335,000 shares under options with an exercise price of $3.125 per share and another 589,500 shares under options with an exercise price of $3.75 per share, as well as (ii) 1,240,485 shares reserved for future grants under Radyne ComStream's 1996 Incentive Stock Option Plan and 1999 Employee Stock Purchase Plan. The Rights Offering Subscription rights Shareholders will receive four rights for every five shares of common stock held on the record date, an aggregate of approximately 4,745,076 rights. Holders may purchase at the subscription price one share of common stock for each right held. The rights will expire on the expiration date. The rights will be transferable. Radyne ComStream will not issue any fractional rights. 16 Expiration date The rights will expire at 5:00 p.m., New York time, on September 30, 1999, except that Radyne ComStream reserves the right to extend the exercise period on one or more occasions if the Board of Directors determines that the occurrence of a material event necessitates an amendment of the Registration Statement or recirculation of this Prospectus in order to permit time for the distribution of such information. After the expiration date, unexercised rights will be null and void. Radyne ComStream will have no obligation to honor any purported exercise of such rights received by the subscription agent or Radyne ComStream after the expiration date, regardless of the mailing date of the documents relating to such exercise, except pursuant to the guaranteed delivery procedures described below. If Radyne ComStream elects to extend the expiration date, it will issue a press release to such effect not later than the first business day following the most recently announced expiration date. In the event that Radyne ComStream elects to extend the expiration date by more than 14 calendar days, we will, in addition, provide prompt written notice of such extension to all rights holders of record. Exercise of rights You may exercise rights by delivering to the subscription agent or Radyne ComStream at or prior to 5:00 p.m., New York time, on the expiration date: o the properly completed and executed subscription certificate evidencing such rights with any required signatures guaranteed, and o payment in full of the subscription price for each right exercised. Such payment in full must be by check drawn upon a U.S. bank or postal, telegraphic or express money order payable to Continental Stock Transfer & Trust Company, as subscription agent; provided, however, that checks or money orders that you send directly to Radyne ComStream should be payable to Radyne ComStream Inc. Payment of the subscription price will be complete only upon o clearance of any uncertified check, or o receipt by the subscription agent or Radyne ComStream, as the case may be, of any certified check drawn upon a United States bank or of any postal, telegraphic or express money order. If paying by uncertified personal check, please note that such funds may take at least five business days to clear. Accordingly, holders of rights who wish to pay the subscription price by 17 means of uncertified personal check should make payment sufficiently in advance of the expiration date to ensure that such payment arrives and clears by such date and should consider payment by means of certified or cashier's check or money order. The address for delivery of subscription certificates and payment of the subscription price with respect to rights to the subscription agent is set forth below under "Subscription agent." If a holder of rights wishes to exercise rights, but cannot deliver the subscription certificate(s) to the subscription agent or Radyne ComStream prior to the expiration date, such holder may nevertheless exercise the rights if all of the following conditions (the "Guaranteed Delivery Procedures") are met: o the subscription agent receives payment in full of the subscription price for each rights share being subscribed for (in the manner set forth above) on or prior to the expiration date; o the subscription agent receives, on or prior to the expiration date, a Notice of Guaranteed Delivery from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or from a commercial bank or trust company having an office or correspondent in the United States (each, an "Eligible Institution"), substantially in the form available upon request from the subscription agent whose address and telephone numbers appear under "Subscription agent" below. The Notice of Guaranteed Delivery must provide: o the name of the exercising holder of rights, o the number of rights represented by the subscription certificate(s) held by such exercising holder of rights, o the number of shares of common stock for which the holder subscribes, and o a guarantee of the delivery to the subscription agent of any subscription certificate(s) evidencing such rights within three business days following the date of the Notice of Guaranteed Delivery; and o the subscription agent receives the properly completed subscription certificate(s), with any required signatures guaranteed, within three business days following the date of the Notice of Guaranteed Delivery relating thereto. Holders may deliver the Notice of Guaranteed Delivery to the subscription agent in the same manner as subscription certificates at the address set forth under "Subscription 18 agent" below, or transmit it to the subscription agent by facsimile transmission (telecopy no. (212) 616-7610). A holder of rights who holds shares of common stock for the account of others, such as a broker, a trustee or a depository for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the rights. If the beneficial owner so instructs, the record holder of such rights should complete the subscription certificate and submit it to the subscription agent with the proper payment. In addition, the beneficial owner of common stock or rights held through such a holder of record should contact the rights holder and request the rights holder to effect transactions in accordance with the beneficial owner's instructions. Signatures on the subscription certificate must be guaranteed by an Eligible Institution, unless the subscription certificate: o provides for delivery of the shares of common stock issuable upon exercise of the rights represented thereby to the holder, or o is submitted for the account of an Eligible Institution. If the subscription certificate does not specify the number of shares of common stock being subscribed for, or the funds delivered are not enough to pay the subscription price for the number of shares specified, we will assume that the number of shares of common stock subscribed for is the maximum number that could be purchased with such funds. Holders should read these instructions carefully and follow them in detail. The method of delivery of subscription certificates and payment of the subscription price to the subscription agent or Radyne ComStream will be at the election and risk of the rights holder. We recommend that those who elect to mail such certificates and payments use registered mail, properly insured, with return receipt requested, with a sufficient number of days allowed to ensure delivery to the subscription agent or Radyne ComStream and clearance of payment prior to 5:00 p.m., New York time, on the expiration date. Because uncertified personal checks may take at least five business days to clear, rights holders should pay, or arrange for payment, by means of certified or cashier's check or money order. We will determine all questions concerning the timeliness, validity, form and eligibility of any exercise of rights, and our determinations will be final and binding. Radyne ComStream, in its reasonable discretion, may waive any defect or irregularity, or permit the correction of a defect or irregularity within such time as it may determine, or reject the purported exercise of any right. Subscriptions will not be acceptable until all irregularities have been waived or cured within such time as Radyne ComStream determines. Neither Radyne ComStream nor the subscription agent will be under any duty to give notification of any defect or irregularity in connection with the submission of subscription certificates or incur any liability for failure to give such notification. 19 Please direct any questions or requests for assistance concerning the method of exercising rights or requests for additional copies of this prospectus or the Notice of Guaranteed Delivery to Radyne ComStream at 3138 East Elwood Street, Phoenix, Arizona 85034, Attention: Director of Administration, telephone: (602) 437-9620. No revocation A holder of rights who has exercised those rights may not revoke such exercise. Fractional shares Radyne ComStream will not distribute fractional rights, and a holder may not exercise a right in part. Method of transferring rights You may transfer all rights evidenced by a single subscription certificate by endorsing the subscription certificate for transfer in accordance with the accompanying instructions. You may transfer a portion of the rights evidenced by a single subscription certificate (but only in units to purchase whole shares) by delivering to the subscription agent a subscription certificate properly endorsed for transfer, with instructions to register such portion of the rights in the name of the transferee (and to issue a new subscription certificate to the transferee evidencing such transferred rights). In such event, we will issue a new subscription certificate evidencing the balance of the rights to the holder of the rights or, if the holder of the rights so instructs, to an additional transferee. Holders of rights wishing to transfer all or a portion of their rights (but only in units to purchase whole shares) should allow a sufficient amount of time prior to the expiration date for: o receipt of the transfer instructions and processing by the subscription agent, o issuance of a new subscription certificate and transmittal to the transferee or transferees with respect to transferred rights, and to the transferor with respect to retained rights, if any, and 20 o exercise or sale of the rights evidenced by such new subscription certificates by the recipients of such rights. If time does not permit a transferee of a right who wishes to exercise its right to deliver its subscription certificate to the subscription agent on or before the expiration date, such transferee should make use of the Guaranteed Delivery Procedure described under "Exercise of rights" above. Neither Radyne ComStream nor the subscription agent shall have any liability to a transferee or transferor of rights who does not receive subscription certificates or new subscription certificates in time for exercise or sale prior to the expiration date. Radyne ComStream does not anticipate that anyone will make a market in the rights or that they will trade on any exchange. There is no assurance that any market will develop for the rights. In any event, trading in the rights will cease at the close of business on the business day preceding the expiration date. Fees and expenses Except for the fees charged by the subscription agent (which Radyne ComStream will pay as described below), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase or sale of rights will be for the account of the transferor of the rights, and neither Radyne ComStream nor the subscription agent will pay any of such commissions, fees or expenses. All fees and other expenses incurred in connection with the exercise of rights will be for the account of the holder of such rights, neither Radyne ComStream nor the subscription agent will pay any of such fees or expenses. Subscription agent Radyne ComStream has appointed Continental Stock Transfer & Trust Company as subscription agent for this offering. The subscription agent's address, which is its address for delivery of subscription certificates and payment of the subscription price, as well as the address for delivery of any Notice of Guaranteed Delivery, is: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 (212) 509-4000 The subscription agent will hold subscription price payments pending the application or return of such payments in accordance with the terms of this offering. 21 Radyne ComStream will pay the subscription agent reasonable and customary compensation for its services in connection with this offering and will reimburse it for its reasonable out-of-pocket expenses. The Board of Directors of Radyne ComStream makes no recommendation to holders of rights with respect to whether a holder of rights should exercise rights to purchase shares of common stock or to investors with respect to whether an investor should purchase shares of common stock, or to persons with respect to whether a person should purchase rights. Federal Income Tax Consequences In the opinion of Dorsey & Whitney LLP, counsel to Radyne ComStream, the following are the material federal income tax consequences of the rights offering to the holders of the rights (other than certain holders of the rights described in the following paragraph) upon the issuance, exercise, transfer and lapse of the rights. The following is based on the Internal Revenue Code of 1986, as amended, the Treasury Regulations promulgated thereunder, judicial authority and current administrative rulings and practice, all of which are subject to change on a prospective or retroactive basis, and on the accuracy of certain representations of Radyne ComStream. The following does not address tax consequences of this offering under state, local and foreign law. Moreover, special considerations not described herein may apply to certain taxpayers, such as financial institutions, broker-dealers, life insurance companies, regulated investment companies, foreign entities, individuals who are not citizens or residents of the United States for federal income tax purposes, tax-exempt organizations or accounts and corporations affiliated with Radyne ComStream. The following is limited to those who have held the common stock, and will hold the rights and any common stock acquired upon the exercise of rights as capital assets (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code. Capital assets held for longer than one year may give rise to long-term capital gain or loss. Issuance of the rights. Holders of common stock will not recognize taxable income for federal income tax purposes in connection with the receipt of the rights. Basis and holding period of the rights. Except as described below, the basis of the rights received by a shareholder as a distribution with respect to such shareholder's common stock will be zero. If either: o the fair market value of the rights on the date of distribution is equal to 15% or more of the fair market value on such date of the common stock with respect to which the rights are received, or o the shareholder properly elects, in the shareholder's federal income tax return for the taxable year in which the shareholder receives the rights, to allocate part of the basis of such common stock to the rights, then upon exercise or transfer of the rights, the shareholder will allocate the basis in such common stock between the common stock and the rights exercised or transferred in proportion 22 to the fair market values of each on the date of distribution. For example, a holder of 100 shares of common stock would receive rights to purchase 80 shares. If the shares were trading at $5.00 on the distribution date and the rights were trading at $1.00, the rights would have a fair market value of $80, which would be 16% of the shares' $500 fair market value. In this case, the holder would allocate the basis in the shares between the rights and the shares in proportion to such fair market value, i.e. 80/580 to the rights and 500/580 to the shares. The holding period of a shareholder with respect to rights received as a distribution on such shareholder's common stock will include the shareholder's holding period for that common stock in addition to the actual holding period of the rights. In the case of a purchaser of rights, the tax basis of such rights will be equal to the purchase price paid therefor, and the holding period for such rights will commence on the day following the date of the purchase. Transfer of the rights. A shareholder who sells the rights prior to exercise will recognize gain equal to any excess of the amount realized from the sale over such shareholder's basis (if any) in the rights sold. Conversely, if the shareholder's basis in the rights sold exceeds the amount realized on the sale, the shareholder will recognize a loss equal to that excess. Such gain or loss will be capital gain or loss if gain or loss from a sale of the underlying shares would be characterized as capital gain or loss at the time of such sale. Any gain or loss recognized on a sale of rights acquired by purchase will be capital gain or loss if the underlying shares would be a capital asset in the hands of the seller. Lapse of the rights. Shareholders who allow the rights received by them to lapse will not recognize any gain or loss, and no adjustment will be made to the basis of the common stock, if any, owned by such shareholders. Purchasers of the rights will be entitled to a loss equal to their tax basis in the rights, if such rights expire unexercised. Any loss recognized on the expiration of the rights acquired by purchase will be a capital loss if the underlying rights shares would be a capital asset in the hands of the purchaser. Exercise of the rights; basis and holding period of common stock. Holders of rights will not recognize any gain or loss upon the exercise of rights. The basis of the common stock acquired through exercise of the rights will be equal to the sum of the subscription price paid therefor and the holder's basis in such rights (if any). The holding period for the common stock acquired through exercise of the rights will begin on the date the rights are exercised. 23 Information reporting and withholding. Under the backup withholding rules of the Internal Revenue Code, a holder of the rights may be subject to backup withholding at the rate of 31 percent with respect to payments made pursuant to this offering, unless such rights holder o is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or o provides a correct taxpayer identification number and certifies under penalties of perjury that the taxpayer identification number is correct and that the holder of rights is not subject to backup withholding because of a failure to report all dividends and interest income. Any amount withheld under these rules will be a credit against such person's federal income tax liability. Radyne ComStream may require holders of the rights to establish exemption from backup withholding or to make arrangements satisfactory to Radyne ComStream with respect to the payment of backup withholding. The foregoing is for general information only. Accordingly, each holder is urged to consult with his or her own tax advisor with respect to the tax consequences of the rights offering applicable to his or her own particular tax situation, including the application and effect of federal, state and local income and other tax laws. Price Range of Common Stock Radyne ComStream's common stock trades in the over-the-counter market under the OTC Bulletin Board symbol "RADN". However, there is no established trading market as actual transactions are infrequent. The following table sets forth the range of high and low trading prices as reported by the National Quotation Bureau, Inc. for the periods indicated. At April 16, 1999, Radyne ComStream had approximately 443 shareholders of record. Radyne ComStream believes that the number of beneficial owners is actually in excess of 1,600, due to the fact that a large number of shares are held in street name. High Low ---- --- 1997: First Quarter 6 3-1/8 Second Quarter 3-1/4 3 Third Quarter 10-3/4 5 Fourth Quarter 10-1/2 4 24 High Low ---- --- 1998: First Quarter 5-1/4 2-7/64 Second Quarter 5 3 Fourth Quarter 5 2-1/2 1999: First Quarter 4-1/4 2-1/4 Second Quarter 3-3/4 2-1/2 On August 11, 1999 the last sale price of the common stock as reported by the OTC Bulletin Board was $2-7/8 per share. Description of Capital Stock Common stock The following summary description of the common stock is qualified in its entirety by reference to Radyne ComStream's Certificate of Incorporation. Radyne ComStream is authorized to issue up to 20,000,000 shares of common stock, par value $.002 per share, of which 5,959,878 shares are outstanding as of the date hereof. Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. There is no cumulative voting for election of directors. Holders of common stock are entitled to receive dividends ratably when, as and if declared by the Board of Directors out of funds legally available therefor and, upon the liquidation, dissolution or winding up of Radyne ComStream, are entitled to share ratably in all assets remaining after payment of liabilities. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. The outstanding common stock is validly authorized and issued, fully paid and nonassessable. Transfer agent Radyne ComStream has appointed Continental Stock Transfer & Trust Company as transfer agent for the common stock. 25 Shares Eligible for Future Sale The sale, or availability for sale, of a substantial number of shares of common stock in the public market subsequent to this offering pursuant to Rule 144 under the Securities Act ("Rule 144") or otherwise could materially adversely affect the market price of the common stock and could impair Radyne ComStream's ability to raise additional capital through the sale of its equity securities or debt financing. Upon completion of the rights offering, if all rights are fully exercised, there would be approximately 10,704,954 shares of common stock issued and outstanding. Of these shares, Radyne ComStream believes that approximately 1,028,154 would be freely transferable immediately. ST would hold the remaining approximately 9,676,800 shares, which would be eligible for resale, subject to the volume and manner of sale limitations of Rule 144 under the Securities Act. The holders of options outstanding under our 1996 Incentive Stock Option Plan may purchase up to an aggregate of 1,799,976 shares of common stock. All of the shares issuable upon exercise of such options are covered by a currently effective registration statement on Form S-8. Of these options, 1,015,851 are presently exercisable and the remaining 784,125 will become exercisable over the next three years. In addition, up to 968,843 shares would be issuable in the event of conversion of the note held by Spar, and Spar would be entitled to certain registration rights which would require Radyne ComStream to file a registration statement for such shares. If Radyne ComStream were to register all of the shares underlying the Spar note and all of the optionees under our 1996 Incentive Stock Option Plan were to fully exercise their options, an additional 2,768,819 shares would be freely tradeable. Prior to this offering, there has been no established public market for Radyne ComStream's securities as trading in the common stock has been infrequent. Following this offering, Radyne ComStream cannot predict the effect, if any, that sales of shares of common stock pursuant to Rule 144 or otherwise, or the availability of such shares for sale, will have on the market price from time to time. Nevertheless, sales by the current stockholders of a substantial number of shares of common stock in the public market could materially adversely affect market prices for the common stock. In addition, the availability for sale of a substantial number of shares of common stock acquired through the exercise of rights or outstanding options under the Plan could materially adversely affect market prices for the common stock. 26 Legal Matters Dorsey & Whitney LLP, New York, New York will pass upon certain legal matters for Radyne ComStream. Experts The restated consolidated financial statements for Radyne ComStream Inc. at December 31, 1998 and for the year then ended have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, which is incorporated herein by reference, and upon the authority of said firm as experts in accounting and auditing. The financial statements of Radyne ComStream Inc. at December 31, 1997, for the year then ended, for the six months ended December 31, 1996 and for the year ended June 30, 1996, incorporated by reference in this Prospectus from our Report on Form 10-K for the year ended December 31, 1998, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Ernst & Young LLP, independent auditors, have audited the consolidated financial statements of ComStream Holdings, Inc. at December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, included in our Report on Form 8-K/A filed with the Securities and Exchange Commission on May 5, 1999, as set forth in their report, which is included and incorporated by reference in this prospectus. The consolidated financial statements of ComStream Holdings, Inc. are included and incorporated by reference in reliance on the report of Ernst & Young LLP, given on their authority as experts in accounting and auditing. Special Note Regarding Forward-looking Statements Certain statements in the Prospectus Summary and under the captions "Risk Factors," "Purpose of the Rights Offering and Use of Proceeds", and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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, 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 general economic and business conditions: the loss of, or the failure to replace, any significant customers; changes in business strategy or development plans; the timing and success of new product introductions; the quality of management; the availability, terms and deployment of capital; the business abilities and judgments of personnel; the availability of qualified personnel; and other factors referenced in this Prospectus. These forward-looking statements speak only as of the date of this Prospectus. Radyne ComStream expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Radyne ComStream's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 27 ================================================================================ No dealer, salesman, or any other person has been authorized to give any information or to make any representation not contained in this Prospectus in connection with this offering. If given or made, you should not rely upon such information or representation as having been authorized by Radyne ComStream Inc. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. You should not assume based on the delivery of this Prospectus or the execution of sales under this Prospectus that the information in this document remains current. ---------- TABLE OF CONTENTS Where You Can Find More Information Summary of the Rights Offering ................................................. Risk Factors ................................................................... Purpose of the Rights Offering and Use of Proceeds ............................. Dilution ....................................................................... The Rights Offering ............................................................ Federal Income Tax Consequences ................................................ Price Range of Common Stock .................................................... Description of Capital Stock ................................................... Shares Eligible for Future Sale ................................................ Legal Matters .................................................................. Experts ........................................................................ Special Note Regarding Forward-looking Statements .............................. 4,745,076 Shares RADYNE COMSTREAM INC. common stock --------------- PROSPECTUS ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by Radyne ComStream Inc. in connection with the issuance and distribution of the securities being offered hereby (items marked with an asterisk (*) represent estimated expenses): SEC Registration Fee ................................ $ 4,921 Legal Fees and Expenses ............................. 150,000* Blue Sky Fees (including counsel fees) .............. 20,000* Accounting Fees and Expenses ........................ 55,000* Transfer Agent and Registrar Fees ................... 7,500* Printing and Engraving Expenses ..................... 50,000* Miscellaneous ....................................... 12,579* -------- Total ............................................... 300,000 ======== ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS New York Business Corporation Law, Article 7, enables a corporation in its original certificate of incorporation, or an amendment thereto validly approved by stockholders, to eliminate or limit personal liability of members of its Board of Directors for violations of a director's fiduciary duty of care. However, the elimination or limitation shall not apply where there has been bad faith, intentional misconduct or a knowing violation of law, the payment of a dividend or approval of a stock repurchase which is deemed illegal, any other violation of Section 719 of the New York Business Corporation Law, or a financial profit or other advantage to which the director was not legally entitled. Radyne Corp's Certificate of Incorporation includes the following language: "SEVENTH: A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty as a director; provided that, except as hereinafter provided, this Article SEVENTH shall neither eliminate nor limit liability: (a) if a judgment or final adjudication adverse to the director establishes that (i) the director's acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law, (ii) the director personally gained in fact a financial profit or other advantage to which the director was not legally entitled, or (iii) the director's acts violated Section 719 of the New York Business Corporation Law; or (b) for any act or omission prior to the effectiveness of this Article SEVENTH. If the Corporation hereafter may by law be permitted to further eliminate or limit the personal liability of directors, then pursuant hereto the liability of a director of the Corporation shall, at such time, II-2 automatically be further eliminated or limited to the fullest extent permitted by law. Any repeal of or modification to the provisions of this Article SEVENTH shall not adversely affect any right or protection of a director of the Corporation existing pursuant to this Article SEVENTH immediately prior to such repeal or modification. EIGHTH: The Corporation may, to the fullest extent permitted by Section 721 through 726 of the Business Corporation Law of New York, indemnify any and all directors and officers whom it shall have power to indemnify under the said sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by such section of the Business Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which the persons so indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his/her official capacity and as to action in another capacity by holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person." ITEM 16. EXHIBITS (a) The following exhibits are filed herewith: EXHIBIT NO. -----------
2.1* Stock Purchase Agreement dated August 28, 1998 between Spar Aerospace Limited and Radyne ComStream Inc. 5.1 Opinion of Dorsey & Whitney LLP 8.1 Opinion of Dorsey & Whitney LLP 10.1** 1996 Incentive Stock Option Plan 10.2*** Employment Agreement with Robert C. Fitting (Radyne Termsheet) 10.3**** Lease for facility in Phoenix, Arizona 10.4***** Amendment to 1996 Incentive Stock Option Plan 10.5+ Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 1997 10.6+ First Amendment to lease between ADI Communication Partners L.P. and ComStream dated July 16, 1997 10.7+ Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated November 18, 1998 10.8+ Indemnity Agreement between Pacific Bell Corporation and ComStream dated November 18, 1998 10.9+ Letter Agreement between Spar and Radyne ComStream Inc. dated November 18, 1998 13.1 Annual Report on Form 10-K/A for the year ended December 31, 1998 13.2 Report on Form 10-Q for the quarter ended June 30, 1999 23.1 Consent of KPMG LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of Dorsey & Whitney LLP (contained in the opinion filed as Exhibit 5.1)
II-3
23.5 Consent of Dorsey & Whitney LLP (contained in the opinion filed as Exhibit 8.1) 24.1+ Power of Attorney
- ---------- * Incorporated by reference from Registrant's Form 8-K filed on August 28, 1998. ** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997 (File No. 333-23159). *** Incorporated by reference from Registrant's amended Registrant Statement on Form S-1, dated May 8, 1997 and declared effective on May 12, 1997 (File No. 333-18811). **** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year Ended December 31, 1997. ***** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 18, 1998 (File No. 333-67469). + Previously filed. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers of sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(30) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;" II-4 PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statements. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer and the terms of any subsequent reoffering thereof. (5) The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. (6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Phoenix, Arizona on August 19, 1999. RADYNE COMSTREAM INC. By: /s/ Robert C. Fitting ------------------------------------ Robert C. Fitting, President and Chief Executive Officer By: /s/ Garry Kline ------------------------------------ Garry Kline, Vice President-Finance (Principal Financial and Accounting Officer) II-6 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Robert C. Fitting Chief Executive Officer, President August 19, 1999 ---------------------------------- Robert C. Fitting /s/ Garry D. Kline Vice President-Finance August 19, 1999 ---------------------------------- Garry D. Kline /s/ Robert A. Grimes* Director August 19, 1999 ----------------------------------- Robert A. Grimes /s/ Lim Ming Seong* Chairman of the Board of Directors August 19, 1999 ----------------------------------- Lim Ming Seong /s/ Lee Yip Loi* Director August 19, 1999 ----------------------------------- Lee Yip Loi /s/ Dennis Elliot* Director August 19, 1999 ----------------------------------- Dennis Elliot * By: /s/ Robert C. Fitting ----------------------------------- Robert C. Fitting Attorney-in-Fact
II-7 EXHIBIT INDEX EXHIBIT NO. ----------- 5.1 Opinion of Dorsey & Whitney LLP 8.1 Opinion of Dorsey & Whitney LLP 13.1 Annual Report to Security Holders on Form 10-K/A for the year ended December 31, 1998 13.2 Report on Form 10-Q for the period ended June 30, 1999 23.1 Consent of KPMG LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of Dorsey & Whitney LLP (contained in the Opinion filed as Exhibit 5.1) 23.5 Consent of Dorsey & Whitney LLP (contained in the Opinion filed as Exhibit 8.1) II-8 EX-5.1 2 OPINION OF DORSEY & WHITNEY LLP Exhibit 5.1 Radyne ComStream Inc. 3138 East Elwood Street Phoenix, AZ 85034 August 17, 1999 Ladies and Gentlemen: We have acted as special counsel to Radyne ComStream Inc. (the "Company"), a New York corporation, in connection with the preparation and filing of the Company's Registration Statement on Form S-2 (the "Registration Statement") under the Securities Act of 1933, as amended, relating to the proposed offering by the Company of up to 4,745,076 shares of its Radyne common stock, par value $.002 per share (the "Common Stock") issuable upon exercise of 4,745,076 rights (the "Rights") to purchase Common Stock of the Company. We have made such investigation and examined such documents and records (including certificates of certain public officials and certificates furnished by officers of the Company) as we have deemed necessary, and on that basis we are of the following opinion: The shares of the Company's Common Stock issuable upon exercise of the Rights which will be offered by the Company to the public pursuant to the Registration Statement have been duly authorized and, when issued and paid for in the manner described in the Registration Statement, will be validly issued and fully paid and nonassessable. The Rights, when issued and distributed in the manner described in the Registration Statement, will be validly issued and will be binding obligations of the Company. We consent to the use of our name under the caption "Legal Matters" in the prospectus constituting a part of the Registration Statement and to the use of this opinion for filing as exhibit 5.1 to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Dorsey & Whitney LLP DORSEY & WHITNEY LLP EX-8.1 3 OPINION OF DORSEY & WHITNEY LLP Exhibit 8.1 Radyne ComStream Inc. 3138 East Elwood Street Phoenix, AZ 85034 August 17, 1999 Dear Sir or Madam: We have acted as counsel for Radyne ComStream Inc, (the "Company") in connection with the preparation and filing under the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations promulgated thereunder (the "Rules"), of a Registration Statement on Form S-2 (the "Registration Statement"), filed with the Securities and Exchange Commission in connection with a proposed rights offering of the Company's common stock. You have asked us to render our opinion as to matters hereinafter set forth. We have examined originals and copies, certified or otherwise identified to our satisfaction, of all such agreements, certificates and other documents as we have deemed necessary as a basis for this opinion. In such examination we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies. We have, when relevant facts material to our opinion were not independently established by us, relied to the extent we deemed such reliance proper upon written or oral statements of officers and other representatives of the Company. Based on and subject to the foregoing, the opinion attributed to us in the section entitled "Certain Federal Income Tax Consequences" in the prospectus constituting Part I to the Registration Statement (the "Prospectus") accurately states our opinion with respect to the matters discussed. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to our name under the captions "Certain Federal Income Tax Consequences" and "Legal Matters" in the Prospectus. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required by the Securities Act or the Rules. Very truly yours, /s/ Dorsey & Whitney LLP DORSEY & WHITNEY LLP EX-13.1 4 AMENDMENT TO 10K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File December 31, 1998 Number 0-11685 - -------------------------------------------------------------------------------- RADYNE COMSTREAM INC. (Exact name of Registrant as specified in its charter) NEW YORK 11-2569467 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3138 East Elwood Street, Phoenix, Arizona 85034 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (602) 437-9620 Securities Registered Under Section 12(b) of the Exchange Act: None Securities Registered Under Section 12(g) of the Exchange Act: Common Stock, $.002 Par Value - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates (deemed by the registrant to be persons, along with members of their families, known to the registrant to beneficially own, exclusive of shares subject to options, less than 5% of the outstanding shares of the registrant's common stock) of the registrant as of March 22, 1999 was approximately $1,877,000 Indicate by check mark whether the registrant has 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[_] As of March 22, 1999, there were 5,932,346 shares of the registrant's common stock outstanding. ================================================================================ PART I DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS Certain statements under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "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: o loss of, and failure to replace, any significant customers; o timing and success of new product introductions; o product developments, introductions and pricing of competitors; o timing of substantial customer orders; o availability of qualified personnel; o the impact of local political and economic conditions and foreign exchange fluctuations on international sales; o performance of suppliers and subcontractors; o market demand and industry and general economic or business conditions; o availability, cost and terms of capital; o 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 o other factors to which this report refers. ITEM 1. BUSINESS Overview Radyne ComStream Inc. designs, manufactures and sells equipment used to receive data from, and transmit data to, satellites. We have engaged in the advanced design and production of digital data communications equipment for satellite telecommunications systems for over seventeen years. Our products include: o satellite modulators and demodulators and earth stations used to receive data from and send data to orbiting satellites; o satellite broadcast receivers, used to receive communications from satellites; 1 o frequency converters, used to channel higher frequency transmissions into lower frequency transmissions and vice versa; o ancillary products; o equipment racks containing integrated modems and supporting equipment for data, audio, and television communications; and o an integrated modem and router product for the Internet service provider market. Radyne Corp., our predecessor which was incorporated in 1980, was forced to file for Chapter 11 bankruptcy protection in April 1994. It successfully emerged from bankruptcy in December 1994 upon the acquisition of approximately 91% of its common stock by Engineering and Technical Services, Inc., then a major customer. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect wholly owned subsidiaries, Stetsys US, Inc. and Stetsys Pte Ltd (collectively, "ST"). As a result, approximately 91% of Radyne ComStream's common stock is now held by ST. In 1995, we installed a new management team, which moved our operations from New York to Phoenix, Arizona. As part of this management change, we hired an almost all new staff of engineering, sales and support personnel. Recent trends and developments Consistent with our new growth strategy, we recently acquired ComStream Holdings, Inc. from Spar Aerospace Limited, a Canadian advanced technology company. ComStream is an international provider of digital transmission solutions for voice, data, audio and video applications with offices in the United States, Singapore, Indonesia, China and the United Kingdom. Revenues of ComStream for 1998 were approximately $37 million. We acquired ComStream in an effort to expand our core business, and supplement our product lines with a number of viable developed products and superior quality products in the design phase, some of which have since been released for production. In addition, we based our decision to acquire ComStream on the strategic belief that the combined companies could compete more effectively and realize certain synergies. We believe that Radyne's acquisition of ComStream will have a number of positive effects, including the following: 1. The combined annual revenues of Radyne ComStream should approximate $50 million versus Radyne Corp.'s stand-alone revenues of about $13 million. This dramatic difference in size should provide us with better control over prices and margins and enable us to compete in larger markets. It should also increase the likelihood that our common stock can be qualified for trading on the Nasdaq Stock Market, our exchange of choice. 2. We also anticipate the combination to produce synergistic effects by combining Radyne's newer product lines with ComStream's worldwide sales channels. We expect the introduction of newer and more numerous products into the ComStream distribution channels to have positive effects on our revenues commencing in the first calendar quarter of 1999 and continuing in the second calendar quarter as more products in development are completed and released to production. We also expect positive results from the ComStream sales force as compared to our historic reliance on independent sales representatives. 3. While we viewed ComStream's gross margins as excellent, its profitability had suffered from extremely high expenses. Since closing the acquisition in October, 1998 we have reduced ComStream's recurring expenses by approximately $1,000,000 per month. We expect continued efficiencies and restructuring of our product lines to result in additional cost savings. As a combined entity, Radyne ComStream has an expanded product line and a worldwide sales and service organization with international offices in Beijing, Singapore, London, Jakarta, and Amsterdam. Radyne ComStream is currently addressing four markets/businesses as follows: 2 o satellite modems and earth stations, including Intelsat equipment; o digital video and high-speed modems; o military and government data modems; and o data, audio, and video broadcast equipment. Operating strategy Radyne ComStream's operating strategy is to: o continue to build on the experience, skills and customer access of its management team; o maintain a strong international position in the earth station business and capitalize on its dominant position of supplying satellite broadcast receivers while beginning to supply Internet access providers with a personal computer receiver card; o continue to find new military and government market niches; o complete the integration and restructuring of ComStream and Radyne so as to maximize cost savings and the benefits of ComStream's product lines and sales channels; and o continue to expand our special offerings in market segments, such as Internet communications, rural telephone, private network services, government network services and compressed television transmission. Radyne ComStream's engineering staff and support facilities are dedicated to: o maintaining the state-of-the-art status of Radyne ComStream's core products for the satellite ground equipment segment of the market; o designing and enhancing products for high-growth markets, such as Internet communications, rural telephony for developing areas, high-speed satellite communications, government data equipment and the growing private network market; and o providing special configurations to satisfy customers' individual needs. Radyne ComStream has shipped commercial volumes of its products for rural telephony and private network applications and has shipped units to several government data equipment customers. Radyne ComStream has fulfilled a contract with AT&T, one of the world's largest telephone and data service providers, to develop a new line of satellite modems with a higher frequency L-Band interface which will be used to replace aging equipment in existing earth stations. The use of L-Band as an interface mechanism has the advantage of requiring fewer conversions, thereby improving reliability of communication. This equipment is designed to substantially reduce the space and power requirements in these earth stations, and to improve reliability and permit lower maintenance costs. Management believes this equipment will be the future standard for major earth stations. We are a major supplier of satellite broadcast receivers for data and audio, with an installed base of more than 100,000 receivers. Broadcast receivers are used to receive financial data, audio and video. We have also supplied more than 1,000,000 set-top television receivers on an original equipment manufacturer basis. Additionally, we have a line of personal computer receiver cards which function as satellite receivers used to receive Internet information and private network data in personal computers. This receiver card is capable of delivering multimedia communications to personal computers and local area networks at speeds up to 1,000 times faster than conventional telephone modems, opening a new realm of practical and efficient distribution of data intensive applications. Radyne ComStream's satellite modems can receive communications with a large range of data rates, from 2.4 kilobytes per second to 155 megabytes per second. Our modems can be used in applications ranging from data and audio to telephony and high definition television. Radyne ComStream's line of frequency converter products can be used in many types of earth stations to convert intermediate frequencies into microwave frequencies for satellite transmission. These converters are competitively priced, small in size and accommodate either single or dual bands used in the satellite industry. We believe that most of our current line of modems and converters are 3 smaller and lower priced than the previous generation of products, facilitating the installation of large systems in significantly less space than the products of our competitors. We also market redundancy switches which operate in conjunction with satellite modems and converters and provide automatic fault monitoring. In the event of a failure, such standby equipment takes over. Radyne ComStream also manufactures a line of small earth stations that are used worldwide for private phone and data systems. The earth stations receive, transmit and convert data in both C-Band and Ku-Band, which are analogous to AM and FM radio frequencies, and are the most widely used frequencies for satellite transmission. We have recently begun shipping the new lower cost earth station using an L-Band interface. Unlike the C-Band and Ku-Band, which must be converted prior to use in a final application, the use of L-Band signals eliminates this step, thereby reducing costs and increasing reliability. These earth stations include an indoor mounted modem, which is common to all frequency bands, and an outdoor mounted power amplifier and antenna. Radyne ComStream's newer products include a low cost modem with expanded features and small size, making it attractive for use in both private networks and rural telephone systems offered in China, Indonesia and India. Radyne ComStream also manufactures a line of satellite frequency translators presently used for testing satellite earth stations. The development of digital compression technology has allowed the transmission of television in a smaller bandwidth than would otherwise be possible using existing technology, which has made television transmission by satellite more economical than ever before. Video compression allows many times more channels on a satellite than was previously the case, thus producing a new market for our products of major interest. This compression technology is used for transmission of television to network facilities and homes, distribution of cable television to cable companies, high definition television distribution and video teleconferencing. To meet the demands of this industry, Radyne ComStream has developed a modulator and demodulator, also known as a modem, product to be used in conjunction with compression equipment and has been shipping this product for the past two and one-half years. Radyne ComStream has developed a line of modems used in government and defense systems. This equipment is interoperable with certain existing equipment in use by the U.S. Army. Our customers are replacing older equipment with our newer technology to enable the military to communicate with ships and ground units. Radyne ComStream has also developed a new product for use by Internet access providers which integrates our core satellite modem technologies with a router. Notwithstanding the foregoing, investors should be aware that Radyne ComStream's future plans are subject to a number of variables outside of its control, and there can be no assurance that Radyne ComStream will be able to implement any or all of such plans or that such plans, when and if implemented, will be successful. Industry overview There are more than 190 major commercial communications satellites in orbit today, almost 60 of which were launched in the past two years. Over 65 more of these expensive geosynchronous earth-orbiting satellites (GEO's) will be deployed in the near future. (Source: VIA Online 1998 Global Satellite Survey). The ways in which satellites are used continue to shift over time. Satellites are principally used today in television distribution, international telephone service, data and audio broadcasting, Internet service and private networks. As more fiber cables are laid under the oceans, the use of satellites for international telephony is slowing. However, satellites represent a sizable investment and a unique communications medium which will continue to be used in other ways. For example, the use of this satellite resource is already shifting towards domestic telephony in countries, such as China and India, which are seriously lacking in infrastructure. In addition, technological advances, such as voice compression, have made it economical for third world countries to have more telephone service. Moreover, television distribution is going through a technological revolution in which ten times as many programs can be transmitted through satellites than was possible 5 years ago. A typical satellite can deliver 250 or more channels today compared to 24 channels before. This technological and economical breakthrough has created many new markets. For example, it is now cost-effective for many relatively small market segments to have their own 4 television networks, such as the networks for regional college sports. In addition, satellites are an ideal medium to distribute high definition television. Finally, the lowering of international barriers and privatization are allowing the expansion of more private networks. Almost anyone who uses a satellite as a means of transmission has the need for equipment of the sort produced by Radyne ComStream. Radyne ComStream expects to continue operating within the satellite ground equipment segment of the market for the next several years, while continuing to expand into various new markets. For example, additional needs for Internet service, new data broadcast requirements, and communications directly to computers are areas in which Radyne ComStream expects to realize the greatest growth potential. Although the telecommunications industry is rapidly changing, becoming more complex and requiring new technology, we do not expect the transformation and evolution of the industry to cause satellite data equipment to become obsolete, at least within the near future. Industry trends Several major trends in the telecommunications industry should provide opportunities for Radyne ComStream. o Telecommunications needs in the Pacific Rim, South America, and the Eastern European countries and an increase in the number of satellites orbiting over the Pacific and Indian Oceans will produce a substantial need for satellite data communications equipment. o The requirement for increased dissemination of financial data increases the requirements for broadcast receivers. o If the United States defense budget continues to shrink, more commercial off-the-shelf products may be purchased from suppliers, such as Radyne ComStream, who can offer these products for much less than the government would pay to develop or produce the products. Radyne ComStream anticipates being able to and has already begun to supply commercial versions of military equipment. o As digital television and high-definition television become available, the need for satellite equipment for distribution to cable companies and homes will increase. Satellite modems and earth stations Satellite communication has been established as a key element in the growth of the telecommunications industry. Although the emergence of fiber cable, which industry prefers for certain applications, created competition for satellite communications, satellite communications enjoy advantages in many markets for several reasons: o It is not cost-effective to utilize fiber cable in all areas of the world, especially emerging countries where telecommunications capabilities are just beginning to develop. o Although fiber cable has performance advantages, it has a tendency to break, resulting in the need for satellite capabilities as a back-up. o Fiber cable is utilized mainly for point-to-point communications. Satellite transmission, on the other hand, is superior for distribution communications, for example, distribution of financial market information or video broadcasting on major television networks. Thus, although fiber cable can be viewed as a competitor of satellite communications, it has not historically reduced, nor is it anticipated to reduce, the need for satellite modem equipment. Moreover, in the opinion of management, there should be "niche" requirements that can be satisfied only with satellite communications for a long time to come. An example of the continued need for satellite communications is evident in the difficulty of providing telecommunications services in certain areas. For instance, it is not cost-effective to lay fiber cable in mountainous terrain or in nations composed of many islands, a geographical feature which is relatively common in the Pacific region. Sparsely populated areas are generally not conducive to fiber cable on a cost-effective basis. Moreover, fiber 5 cable is not suitable for portable communications, such as personal communications systems, commonly referred to as PCS, news gathering, emergency services and other mobile communication requirements. Rural telephony and private network demand assigned multiple access ("DAMA") products require special communications equipment which is efficient for low traffic volume in many different locations. DAMA products allow many users to access the same channel on demand. Rural telephony can be described as an intra-country telecommunications network linking many small villages or islands in a country like the Philippines, for example, ultimately allowing the villages to communicate with each other and with the world. In a typical rural telephony service, a small village might designate a post office as the location of telephone service. Residents could use this location to communicate throughout the country. Communications outside of the country are frequently enabled by the use of a central hub in such countries. All international traffic from within such a country would be routed through such a hub. A private network, on the other hand, can be described as a network in the commercial world. For example, banks and other financial institutions, airlines, and large and multi-unit corporations all have the need for satellite communications and may be linked by a private satellite-based network. Radyne ComStream serves the DAMA products and rural telephony market segments with its DMD-2401 modem and related products. Radyne ComStream sells these products to system integrators who make a business of supplying turnkey earth station operations, as components of systems that they have designed, as well as directly to end users. The RCS-10 represents the newest generation system used in major earth stations, combining modems and redundancy switching in a single unit. Up to 30 modems can be combined in a single rack and each redundancy switch can control up to 10 modems. The compact design, which eliminates more than 1500 parts and cables from prior systems, offers improved transmission and reception reliability and rapid installation. In addition to an expanded data rate range, the RCS-10 offers an improved display and more options. The newest version, under development through a contract from a major international communications supplier, is the RCS-10L. The RCS-10L is a version with an L-Band interface, allowing substantially lower power consumption. In addition, the L-Band interface has a 500MHz bandwidth instead of the usual 36 MHZ bandwidth, reducing the number of frequency converters required by 60%. The CM-701 modem has been the workhorse of the industry for 8 years. The CM-701 is used in Intelsat applications, digital video and small earth station applications. Radyne ComStream offers 3 different earth stations. The DT-7000 is primarily used for C-Band applications. The DMD-2401 LB/ST is a low cost version that can be used in either the C-Band or Ku-Band applications. The newest version, the DT-8000, is used in Ku-Band applications. Radyne ComStream also has a complete line of converters which synthesize frequencies either up or down. Radyne ComStream also offers a full line of loop test translators, including C-Band, Ku-Band, X-Band and Tri-Band models. Loop back testing involves the sending of data which is subsequently received by the same equipment. Our products consist of self contained frequency converters which perform transmit-to-receive loopback testing of earth station equipment. Augmenting these product offerings is the Star Network Management System. The Star Network Management System consists of a Windows NT point and click system used to monitor and maintain the functioning of a system remotely. The Star system allows for the monitoring and control of an entire network of modems, earth stations, and ancillary equipment from a single location, thereby eliminating the need to travel to each remote location. It provides local and remote modem management, control of the equipment connected to the modems and earth stations, collection of network status and alarm information, remote channel monitoring and dial-up control. 6 Digital video and high-speed modems Compressed digital video is the latest frontier in satellite communications technology. Several aspects of this market are of particular interest to Radyne ComStream: o Television broadcasters have requirements for efficient and economic distribution. o Compressed video encoding and decoding are available for the less demanding business video teleconferencing and distance learning markets. o Expanding Internet usage should produce demand for high-speed satellite transmission for connecting to the Internet. International connections are relayed to the United States by satellite. The economics of the new compressed video allows the use of satellite transmission for long-distance teaching applications. o Digital cinema distribution is emerging as a viable means of film distribution. As movie theaters get smaller and thereby proliferate, the costs of making and distributing copies of films becomes proportionally greater. Using satellite distribution, movies can be distributed directly to thousands of theaters simultaneously. We expect the digital cinema market to become substantial over the next five years. Radyne ComStream has entered the high-speed satellite, cable and microwave communications market with various products that have been designed to incorporate the most advanced technologies available to condense a large amount of data into small bandwidths. Communications equipment in this segment possesses higher data rate capabilities, allowing much more data to be transmitted than in traditional equipment, and supports distribution of digital video, high definition television and Internet traffic. The DD-45 demodulator and DM-45 modulator are multi-purpose solutions for digital video broadcast and high-speed data transmission. Radyne ComStream's newest high-speed entrants are the DM-160 and MM-160 microwave modem that offer excellent solutions for applications requiring high data rates, such as high definition television. These products also allow an increase in the number of television channels that can be transmitted by satellite. In addition, our new MM-155 microwave modem in conjunction with commercial off-the-shelf microwave radios is ideal for high throughput service requirements, such as transmission of video, data and voice. The DVB-3030 digital video broadcast modulators are flexible and programmable, and fully compatible with digital video standards. They are principally used in digital video hub uplinks, mobile satellite news gathering, video distribution and one-way data distribution. They are also high speed and frequency agile and, thus, ideal for use in digital video hub uplinks, flyaway and mobile satellite news gathering applications. In addition, Radyne ComStream manufactures the QAM-256 which is used for distribution of digital video and high definition television over cable and microwave links. Government and military modems The United States Government has provided a significant market opportunity for Radyne ComStream as the defense budget shrinks and it becomes cost prohibitive for the government to develop its own products. Radyne ComStream has an agreement with a major government supplier and has recently been awarded a contract to provide a modem for use in the Special Forces Terminal for the US Army. We have also been awarded a contract from Datapath to provide modems that can be used in conjunction with other Army modems. Radyne ComStream is currently supplying two different modems of this type and is working on a third. The DMD-15G/FM is a universal modem used in the US Army Special Forces Terminal in support of military operations. This modem interoperates with military equipment that can no longer be procured by the military because of price and age. A second modem is the DMD-15G which can operate with thousands of military modems that are deployed throughout the world and operate within the defense communication system, perhaps the largest phone system in the world. 7 Integrated modem and router for Internet access We have recently developed a product which combines our standard L-Band modem and a wide area network router. This product will enable Internet access providers, particularly those in remote areas or in locations with undeveloped telecommunications systems, to receive a high speed Internet feed from a satellite. For many smaller Internet access providers, the integrated modem and router product offers the convenience of an all-in-one solution. This product will help Radyne ComStream move into the fast-growing Internet connectivity solution market. Data, audio and video broadcast products Radyne ComStream is a major supplier of satellite broadcast receivers and associated equipment for data and audio, having manufactured more than 100,000 units. Satellites are an ideal transmission medium for broadcast services as a single satellite has the ability to communicate with ground locations spread across up to one-third of the surface of the earth. Satellite broadcast receivers are used to provide music and other audio services as well as to distribute financial data and other digital services. The new DBR-202 receiver is a low cost platform handling audio, data, Internet Protocol data, and MPEG video and audio. There is an emerging market to provide data and video directly to the personal computer. Towards that end, Radyne ComStream has developed a very low cost receiver card for use in personal computers. The card has successfully passed trials in a private network, resulting in an order for 2,000 cards, and we expect to receive additional orders. Our data broadcast networks consist of a single data uplink, multiple receivers and the Star Network Management System for security, monitoring and control. The receivers can be configured for C-band and Ku-band transmissions and can be located anywhere within the range of a satellite. The DBR401VR variable rate commercial data receiver provides a low-cost alternative for transmitting data across a wide range of data rates. Our DBR801 high speed receiver is an ideal solution for high speed transmission of digital audio, video or data. Manufacturing Radyne ComStream's products are to a certain extent assembled and tested at its Phoenix, Arizona and San Diego, California facilities using subsystems and circuit boards supplied by subcontractors. Some products are completely assembled and tested at subcontractors, including subcontractors in Thailand and in Wales, UK. Although Radyne ComStream believes that it maintains adequate stock to reduce the procurement lead time for certain components, Radyne ComStream's products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In the event that such suppliers were to be unable or unwilling to fulfill Radyne ComStream's requirements, Radyne ComStream could experience an interruption in production until an alternative supply source was developed. Radyne ComStream maintains an inventory of certain chips and components and subassemblies to limit the potential for such an interruption. Radyne ComStream believes that there are a number of companies capable of providing replacements for the types of unique chips and customized components and subassemblies used in its products. Sales and marketing Radyne ComStream sells its products through an international sales force with sales and/or service offices in San Diego, Phoenix, Boca Raton, Beijing, Singapore, London, Amsterdam and Jakarta. Additionally, international representatives, distributors and systems integrators sell our products, supported by Radyne ComStream's sales and marketing personnel. Radyne ComStream's direct sales force is comprised of 14 individuals supported by systems and applications engineers. We focus direct sales activities on expanding Radyne ComStream's international sales by identifying emerging markets and establishing new customer accounts. Additionally, Radyne ComStream directly targets certain major accounts which may provide entry into new markets or lead to subsequent distribution arrangements. Such major accounts tend to be telecommunications agencies and major corporations in new international markets. Radyne ComStream has a customer service and support group, which primarily supports 8 customers and distributors and is responsible for after-sale support and installation supervision. In certain instances, Radyne ComStream uses third party companies for installation and maintenance. During 1998, no customers represented greater than 10 percent of net sales. During 1997, one customer represented 14.5 percent of net sales. For the six-month period ended December 31, 1996, two different customers represented 18.3 percent and 15.6 percent of net sales; the latter customer represented 12.7 percent of net sales for the year ended June 30, 1996. Radyne ComStream's sales in its principal foreign markets for the periods indicated consisted of the following percentages of total sales.
Year ended Year ended Six months ended Year ended Region 12-31-98 12-31-97 12-31-96 6-30-96 - ------ ---------- ---------- ---------------- ---------- Asia 7% 32% 30% 23% Latin America 9% 12% 24% -- Europe 31% 7% -- 19% Others* 3% 5% 12% 8% -------- -------- --------- ----- Total Exports 50% 55% 66% 50%
* For the six months ended December 31, 1996, "Other" includes Europe. For the year ended June 30, 1996, "Other" includes Latin America. Radyne ComStream believes that the above total export figure may rise in subsequent periods. We consider our ability to continue to deliver products in developing markets to be important to our growth potential. However, we may not succeed in our efforts to cultivate such markets. Research and development Radyne ComStream's research and development efforts to date have been devoted to the design and development of new products for the satellite communications and telecommunications industries. Radyne ComStream's future growth depends on increasing the market shares of its new products, adaptation of its existing satellite communications products to new applications, and the introduction of new communications products that will find market acceptance and benefit from Radyne ComStream's established international distribution channels. Accordingly, Radyne ComStream is actively applying its communications expertise to design and develop new hardware and software products and enhance existing products. However, there is no assurance that Radyne ComStream will continue to have access to sufficient capital to fund the necessary research and development or that such efforts, even if adequately funded, will prove successful. Research and development expenses amounted to $4,296,000 in the year ended December 31, 1998, $2,262,000 in the year ended December 31, 1997, $808,000 in the six months ended December 31, 1996 and $1,795,000 in the year ended June 30, 1996. A number of new products were either launched or reached an advanced stage of development during these periods. In connection with the acquisition of ComStream, we recorded a one-time charge of approximately $3.9 million, which represents the value assigned to purchased in-process research and development. 9 Competition The Satellite Industry Association estimates the global market for satellite ground communications equipment to be in excess of $11 billion per annum. Radyne ComStream estimates that its addressable markets are in excess of $350 million. Radyne ComStream has a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC and the EFData division of California Microwave, which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne ComStream. Radyne ComStream estimates that the major competitors in the main markets in which it operates have the following market shares as compared to Radyne ComStream's share:
Satellite Modems Digital Video & Gov't & Military Data & Audio & Earth Stations High Speed Modems Modems Broadcast ---------------- ----------------- ---------------- ------------ Competitor - ---------- California Microwave/EF Data 33% 20% 15% 5% Hughes Network Systems 10% -- -- -- SSE Telecom 5% -- 10% -- NEC 20% -- -- -- Wegener -- -- -- 15% IDC -- -- -- 15% Radyne ComStream 15% 25% 15% 30%
We do not believe that any other single competitor has a greater than 10% market share for any of these product classes. However, the foregoing market share figures represent estimates based on the limited information available to us, and there can be no assurance of precision. We believe that we have been able to compete by concentrating our sales efforts in the international market, utilizing the resources of local distributors, and by emphasizing product features. However, most of Radyne ComStream's competitors offer products which have one or more features or functions similar to those offered by Radyne ComStream. Radyne ComStream believes that the quality, performance and capabilities of its products, its ability to customize certain network functions and the relatively lower overall cost of its products, as compared to the costs generally offered by Radyne ComStream's major competitors, have contributed to Radyne ComStream's ability to compete successfully. However, Radyne ComStream's major competitors have the resources available to develop products with features and functions competitive with those offered by Radyne ComStream. There can be no assurance that such competitors will not successfully develop such products or that Radyne ComStream will be able to maintain a lower cost advantage for its products. Moreover, there can be no assurance that Radyne ComStream will not experience increased competition in the future from these or other competitors currently unknown. Employees As of March 1, 1999, Radyne ComStream had 197 full time employees, including 7 executive officers, 173 in engineering, manufacturing and marketing operations, and 17 in administration. None of Radyne ComStream's employees are represented by a union or governed by a collective bargaining agreement, and Radyne ComStream believes that its relationships with its employees are satisfactory. Technology While Radyne ComStream has a number of patents, copyrights and other intellectual property rights in the form of software and integrated circuit designs, it has been cautious in obtaining patents on existing products. In general, we believe that improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Furthermore, patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and patent applications require public disclosure of information which may otherwise be subject to trade secret protection. However, Radyne 10 ComStream's technology could be found to infringe upon the intellectual property of others. If Radyne ComStream's technology should be found to impermissibly utilize the intellectual property of others, our ability to utilize the technology could be materially restricted or prohibited. In such event, Radyne ComStream might be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. Any licenses required may not be obtainable on terms acceptable to Radyne ComStream or at all. In addition, in such event, Radyne ComStream could incur substantial costs in defending itself against infringement claims made by third parties or in enforcing its own intellectual property rights. ITEM 2. PROPERTIES Radyne ComStream's primary facilities consist of a leased 76,000 square foot lab, office and manufacturing facility in Phoenix, Arizona and a leased 66,400 square foot lab, office and manufacturing facility in San Diego, California. These leases expire in September 2008 and February 2005, respectively, and both leases provide options for renewal. The Company's plans include subleasing a certain amount of space in both of these facilities until such time as the space is required for internal use. We believe that these facilities will provide for expected growth for the foreseeable future. Radyne ComStream also has regional sales offices in the U.K., Singapore, Boca Raton, Florida, China, the Netherlands and Indonesia and customer service centers in China, the U.K., and Indonesia. All such facilities are leased. ITEM 3. LEGAL PROCEEDINGS Radyne ComStream is involved in litigation and claims arising in the normal course of operations. In the opinion of management based on consultation with legal counsel, losses, if any, from this litigation are expected to be covered by insurance or to be immaterial. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended December 31, 1998, the Company submitted two items to a vote of security holders. Pursuant to written consents, dated as of November 5 and November 25, 1998, respectively, the majority holders of the Company's common stock agreed to: 1. Amend the Company's 1996 Incentive Stock Option Plan to make another 900,000 shares of Common Stock available for grants of options under the Plan and to accelerate the vesting of options previously granted; and 2. Change the name of the Company to "Radyne ComStream Inc." and amend the Company's By-Laws to (a) clarify that either the directors or the stockholders may resolve to vary the number of directors between three and ten, (b) eliminate limitations on the forms of compensation which the Company may provide to non-employee directors, and (c) permit record date and notice periods for stockholder meetings and other proceedings to be as long as sixty (60) days, in conformity with a recent amendment of New York law. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Radyne ComStream's Common Stock is traded in the over-the-counter market under the OTC Bulletin Board symbol "RADN". However, there is no established trading market as actual transactions are infrequent. The following table sets forth the range of high and low trading prices as reported by the National Quotation Bureau, Inc. for the periods indicated. At December 31, 1998, Radyne ComStream had approximately 448 stockholders of record. Radyne ComStream believes that the number of beneficial owners is actually in excess of 1,600, due to the fact that a large number of shares are held in street name. High Low 1997: First Quarter.................................... 6 3-1/8 Second Quarter................................... 3-1/4 3 Third Quarter.................................... 10-3/4 5 Fourth Quarter................................... 10-1/2 4 1998: First Quarter.................................... 5-1/4 2-7/64 Second Quarter................................... 5 2-3/4 Third Quarter.................................... 5 3-3/16 Fourth Quarter................................... 5 2-1/2 On March 22, 1999 the last sale price of the Common Stock as reported by the OTC Bulletin Board was $3-3/8 per share. The Company has not paid dividends on the Common Stock since inception and does not intend to pay any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. ITEM 6. SELECTED FINANCIAL DATA The following selected statement of operations data for the years ended December 31, 1998 and December 31, 1997, the six month period ended December 31, 1996, the year ended June 30, 1996, the six and one-half month period ended June 30, 1995 and the ten and one-half month period ended December 16, 1994, and the selected balance sheet data at those dates, are derived from the consolidated financial statements of the Company and notes thereto audited by KPMG LLP (in the case of the year ended December 31, 1998, restated) and Deloitte & Touche LLP (in the case of the year ended December 31, 1997, the six moths ended December 31, 1996, the year ended June 30, 1996, the six and one-half months ended June 30, 1995 and the ten and one-half months ended December 16, 1994), independent auditors for the Company. Per share data and shares outstanding reflect an adjustment for the effects of the 1-for-5 reverse split of the Company's common stock, which became effective on January 9, 1997. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company and notes thereto included elsewhere in this 10-K Annual Report. 12 STATEMENT OF OPERATIONS DATA
TEN-AND- SIX-AND- ONE-HALF SIX MONTHS ONE-HALF MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED MONTHS ENDED DECEMBER DECEMBER DECEMBER JUNE ENDED DECEMBER 31, 31, 31, 30, JUNE 30, 16, 1998 1997 1996 1996 1995 1994(1) ------------ ------------ ------------ ------------ ------------ ------------ Net Sales .......................... $ 21,111,704 $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262 2,569,396 Cost of Sales ...................... 15,808,459 8,022,262 4,052,433 2,559,350 1,228,747 2,229,329 Gross Profit ....................... 5,303,245 5,424,590 852,626 1,270,173 632,515 340,067 Selling, general and Administrative expense .......... 5,531,213 4,242,138 1,437,971 1,843,576 961,162 1,658,388 Asset impairment charge(2) ......... 262,935 -- 421,000 -- -- -- Professional fees related to Reorganization .................. -- -- -- -- -- 600,198 Research and development ........... 4,296,268 2,262,066 808,025 1,794,823 -- -- Stock option compensation expense .. 1,566,075 -- -- -- -- -- In process research and development ..................... 3,909,000 -- -- -- -- -- Restructuring costs ................ 3,100,000 -- -- -- -- -- Total operating expenses ........ 18,665,491 6,504,204 2,666,996 3,638,399 961,162 2,258,586 Operating loss ..................... (13,362,246) (1,079,614) (1,814,370) (2,368,226) (328,647) (1,918,519) Interest expense ................... 1,198,777 677,102 255,604 256,871 36,209 118,235 Other .............................. (23,480) -- -- -- -- -- Loss before fresh start adjustments and extraordinary items ............. (14,537,543) (1,756,716) (2,069,974) (2,625,097) (364,856) (2,036,754) Fresh start adjustments ............ -- -- -- -- -- 1,598,841 Loss before extraordinary items and taxes on income ....... (14,537,543) (1,756,716) (2,069,974) (2,625,097) (364,856) (437,913) Extraordinary items(3) ............. -- -- -- -- -- 2,699,156 Income (loss) before taxes ......... (14,537,543) (1,756,716) (2,069,974) (2,625,097) (364,856) 2,261,243 Net loss per share before Extraordinary items ............. (2.45) (0.35) (0.55) (0.70) (0.10) (1.33) Net income (loss) per share after extraordinary items ........................... (2.45) (0.35) (0.55) (0.70) (0.10) 6.87 Weighted average number of outstanding shares ........... 5,931,346 5,012,664 3,750,699 3,742,227 3,729,721 329,020
13 BALANCE SHEET DATA
12/31/98 12/31/97 12/31/96 6/30/96 6/30/95 12/16/94(1) -------- -------- -------- ------- ------- ----------- Cash and cash equivalents .......... $ 254,956 $ 569,692 $ 186,488 $ 971 $ 2,109 $ 256,398 Working capital (deficit) .......... (8,803,970) 1,654,857 (5,851,527) (4,082,987) (1,343,018) (977,678) Total assets ....................... 29,190,714 10,231,617 6,572,917 3,272,686 3,452,999 3,084,394 Long-term liabilities .............. 16,862,337 4,649,404 161,968 130,414 168,304 192,603 Total liabilities .................. 44,427,634 11,381,678 11,019,543 5,669,338 3,264,554 2,531,093 Stockholder equity (deficit) ...... (15,236,920) (1,150,061) (4,446,626) (2,396,652) 188,445 553,301
- ---------- (1) The Company's predecessor petitioned for bankruptcy protection in April 1994 and operated as a debtor-in-possession until December 16, 1994. (2) Consists of the writedown of designs and drawings in light of the introduction of replacement products. (3) Consists of $1,062,667 gain on exchange of debt for common stock and $1,636,489 gain on debt forgiveness. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In reviewing the following material, the reader should take note of the fact that the respective periods being compared are of various duration. This is due to several changes in the Company's fiscal year. Upon emergence from bankruptcy on December 16, 1994, the predecessor company's fiscal year ended on that date. The adoption of the fiscal year of the Company's new parent (ETS) at that time created a fiscal period from December 17, 1994 through June 30, 1995, followed by a full year ended June 30, 1996. Upon becoming a subsidiary of ST in August of 1996, the Company adopted ST's fiscal year (the calendar year), creating a stub fiscal period from July 1 through December 31, 1996. Acquisition. On October 15, 1998, the Company completed the purchase of ComStream Holdings, Inc. from Spar Aerospace Limited, a Canadian advanced technology company. ComStream is an international provider of digital transmission solutions for voice, data, audio and video applications with offices in the United States, Singapore, Indonesia, China and the United Kingdom. Revenues of ComStream for 1998 were approximately $37 million. We acquired ComStream in an effort to expand our core business, and supplement our product lines with a number of viable developed products and superior quality products in the design stage, some of which have since been released for production. The acquisition was recorded in accordance with the "purchase method" of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of 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. The results of operations of ComStream have been included in the Company's combined statement of operations from the acquisition date. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1997 The Company's net sales increased 57% to $21,112,000 during the year ended December 31, 1998 from $13,447,000 during the year ended December 31, 1997. This increase is primarily attributable to the increased product sales resulting from our purchase of ComStream. The Company's cost of sales as a percentage of net sales increased to 75% during the year ended December 31, 1998 from 60% for the year ended December 31, 1997. During the year ended December 31, 14 1998, we recorded adjustments to inventory of approximately $911,000 (4.3% of sales) to write off excess and obsolete inventory as well as start-up costs associated with the introduction of new products. This included approximately $280,000 of inventory associated with the DMD-5000 and DMD-4500 modem product lines and approximately $30,000 of inventory associated with the initial DVB-3000 video broadcast products, all of which were essentially rendered obsolete by the introduction of newer products. The start-up costs (approximately $601,000) related principally to the following product lines in the following approximate amounts: the DD-45 and DM-45 high-speed modem products ($75,000), the DD-160 and DM-160 high speed modem products ($80,000), Ku band converters ($110,000), C-band converters ($40,000), L-band modem line ($100,000), the DMD-15G government FM order wire products ($90,000), upgrade and enhancements on digital video broadcast lines ($20,000) and upgrade and enhancements on the DMD-2401 modem line ($10,000). These start-up costs included production line personal learning curve costs, short-lived diagnostic and measurement equipment, set-up fees, expedited product delivery costs, low volume pricing for purchased parts on initial production runs and the costs of reworking early circuit board designs. In addition, the Company increased its inventory obsolescence reserve by $1,261,000 during the year ended December 31, 1998. The principal components of this reserve were approximately $700,000 in parts for the Company's DT-7000 earth station product and $500,000 in parts for the DT-8000 Au band product, both of which were rendered slow moving or obsolete by the introduction of the superior and more popular DT-8000 Ku band product around December 1, 1998. These adjustments are not anticipated to have an impact on the Company's future results of operations. Selling, general and administrative costs increased to $5,531,000 or 26% of sales during the year ended December 31, 1998 from $4,242,000 or 32% of sales for the year ended December 31, 1997. The decrease in expenses as a percentage of sales was primarily attributable to the sales growth as explained above. The increase in pure dollars is mainly attributable to the purchase of our San Diego operation in October, 1998. The Company recorded an "asset impairment charge" of $263,000 during the year ended December 31, 1998, to reflect a valuation adjustment to Designs and Drawings which were fully impaired by the introduction of competing product lines due to the purchase of ComStream. Impairment was determined by comparing the amount of undiscounted projected cash flows attributable to each product using the related technology to the carrying value of the asset. Research and development expenditures increased to $4,296,000 (20% of sales) from $2,262,000 (17% of sales) during the year ended December 31, 1997. The increase in expenses was primarily attributable to major development programs instituted during 1997 and to the inclusion of the research and development expenses from our San Diego facility due to the purchase of ComStream in October, 1998. It is anticipated that the Company will continue to experience high research and development expenses as it positions itself, through the introduction of new products, to gain market share. Stock option compensation expense of $1,566,000 was recorded to reflect the bonus and related expenses to be incurred as a result of the vesting of 657,000 incentive stock options under the Incentive Stock Option Plan of 1996. These options carry the right to a cash bonus of $1.72 per purchased share, payable upon exercise. These options were fully vested by action of the Board of Directors effective October 15, 1998. Restructuring costs of $3,100,000 were recorded in connection with a corporate restructuring cost-cutting initiative. $1,100,000 of the total costs was reserved for additional costs expected in connection with the termination of approximately 25% of the work force. $2,000,000 was reserved for costs related to the termination of a lease for a 125,000 square foot facility in San Diego. This included $700,000 in leasehold improvements, which were abandoned. In connection with the acquisition of ComStream Holdings, Inc., Radyne allocated $3,909,000 of the purchase price to in-process research and development projects. This allocation represents the estimated fair value based on risk-adjusted future cash flows related to the incomplete projects. At the date of the acquisition, the development of these projects had not yet reached technological feasibility and the research and development in process had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. There are three generally accepted valuation methodologies useful for valuing intellectual property and intangible assets: market approach, cost approach, and income approach. The market approach is the most direct and easily understood appraisal technique, utilizing data on comparable assets. The cost approach seeks to measure the future benefits of ownership by quantifying the amount of money that would be required to replace the future 15 service capability of the subject property. The income approach steps away from the cost of constructing or creating a new asset and focuses on a consideration of the income-producing capability of the asset. The assets appraised in the valuation analysis included in-process technology, developed technology and assembled workforce. Based upon the nature of the assets, the income approach was considered most appropriate for analyzing both the developed and in-process technologies. This valuation approach considers the commercial profits and growth prospects of the products as well as the relative investment risk of the required complementary assets. Products-in-development at ComStream at the time of the acquisition were classified as in-process technology. These include the following products with their respective estimated completion dates: Description Estimated Completion Date ----------- ------------------------- o A 2MB card Jan-99 o "CM601" modem modifications Mar-99 o "DT 8000" - a Ku-band 2 Watt earth station Dec-98 o "DBR 2000" - a new data broadcast receiver Jun-99 o "ABR 202" - a new audio receiver Nov-98 o Set Top Box Jun-99 o MediaCast Card Receiver Mar-99 Revenue streams associated with these products-in-development were used to estimate fair value using the discounted cash flow method within the income approach. In the classification of these assets as in-process, the following were considered: The products in development at ComStream had not attained "technological feasibility", as that term is defined in Financial Accounting Statement No. 86, as of the acquisition date. In other words, either the research projects were incomplete or major technical uncertainties remained. Technological feasibility was expected to be achieved, for a few of the products in the fourth quarter of 1998 and the remaining products within 1999. The 16 nature, amount, and timing of the costs required to complete the in-process technology are presented in the following chart:
---------------------------------------- Estimated Estimated Total Cost Product Started Cost To Cost To at Base Line (Month Completion Date Complete Completion Description Technology Applicability -Year) Date $000's $000's $000's - ---------------------------------------------------------------------------------------------------------------------------------- 2 MB Card QPSK,FEC Modems 01-98 01-99 $ 1,100 $ 700 $ 1,800 Coding "CM 601" Low Cost Modem Coding Modems 05-97 03-99 600 900 1,500 Modulation "DT8000" Ku-band Modulation Earth Stations 03-97 12-98 1,950 800 2,750 2 Watt Earth Station Coding Transmission "DBR 2000" Data L-Band Broadcast 06-98 06-99 100 300 400 Broadcast Receiver Receivers Data Packet Protocol "ABR 202" Audio Receiver L-Band Broadcast 11-98 600 150 750 Receivers Audio Multiplexing Set Top Box Receiver DTH TV Satellite TV 03-97 06-99 1,400 200 1,600 Cable TV Cable TV Proprietary IC's - MPEG Decoders MediaCast Card Receiver Proprietary Internet 03-97 03-99 1,600 300 1,900 IC's - Internet Receiver Protocol DVB Video MPEG Receiver Decoders $ 7,350 $ 3,350 $ 10,700 ========================================
It was determined that there was no alternative future use for the in-process technology as of the acquisition date. Consideration was given to possible other projects in which the hardware and software products could have been put to use, but none of these projects had yet attained "technological feasibility", and so they themselves were considered to be in-process technology. The discounted cash flow method began with estimates of future cash flow using ComStream management's forecasts. In deriving these cash flows, estimates of ComStream's future revenues, cost of goods sold, sales and marketing, general and administrative, and research and development expenses on a stand-alone basis were used to estimate a baseline measure of earnings attributable to the products. By adding back non-cash charges and deducting projected capital expenditures, a measure of debt-free cash flow, useful for valuing ComStream's in-process technology, was derived. From the debt-free cash flow forecasts, which represent the cash flow return on all of ComStream's assets, returns were deducted for the use of certain other assets: developed technology, net fixed assets, working capital, and assembled workforce and goodwill. For this purpose, the annual charge for core technology included in the products under development was calculated by multiplying the unamortized book value of the developed technology for that year by the required rate of return on developed technology. The opening value of core technology was calculated using a residual income approach similar to the methodology employed to calculate the value of in-process research and development. The remaining book value of the developed technology was calculated by amortizing its opening fair value over 6.25 years. The total charge was allocated to the in-process technology based on the in-process technology projects' share of total revenue. The cash flow returns attributable to the products (debt-free cash flow) were reduced by the return requirement for each of the other assets employed. The resulting residual cash flows represent the expected cash flows attributable to the in-process technologies. A factor, based on the stage of completion of the in-process 17 projects, was applied to these expected cash flows to isolate the value relating to development efforts completed at the acquisition date. These cash flows were then discounted at a rate of 36 percent. The Company believes that the assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected product sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the projected results. Within the satellite communications equipment industry, there are several specific technologies incorporated within a single product. It is therefore difficult to relate specific revenue streams to individual technologies or projects. As a result, instead of attempting to model each individual project or technology, the cash flow generated by ComStream's products in the aggregate was examined. We allocated the aggregate revenues to developed, in-process and future technology, in a manner which we believe is reasonable. Interest expense net of interest income increased to $1,199,000 (6% of sales) during the year ended December 31, 1998 from $677,000 (5% of sales) for the year ended December 31, 1997. The large increase in expense was primarily attributable to the increased debt of the Company, which in turn, is primarily attributable to the acquisition of ComStream Holdings, Inc. For the year ended December 31, 1998, the Company did not provide for income taxes, due to the current period net loss and its net operating loss carryforwards. The Company also did not provide for income taxes for the prior period due to net operating losses. For the year ended December 31, 1998, the Company had a net loss of $14,538,000 as compared with a net loss of $1,757,000 for the year ended December 31, 1997. The increase in net loss was primarily attributable to the restructuring costs, acquired in-process research and development, increased research and development expense, the stock option compensation expense and the asset impairment charge. "New Orders Booked" (firm, fixed orders from customers) for the year ended December 31, 1998 were $24,904,000 as compared to $15,788,000 for the year ended December 31, 1997. The increase is primarily attributable to the "bookings" included in the fourth quarter for the acquired ComStream products. The Company's "Backlog" of orders to be shipped (unshipped orders from the prior period plus new orders booked less orders shipped during the period) was $8,606,000 as of December 31, 1998, an increase of 79% over the $4,814,000 in Backlog as of December 31, 1997. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1996 The Company's net sales increased 174% to $13,447,000 during the twelve month period ended December 31, 1997 from $4,905,000 during the six months ended December 31, 1996. This increase was primarily attributable to the increased time frame of the later period relative to the prior period and to the introduction of the Company's new product lines which experienced exceptional market acceptance. The Company's cost of sales as a percentage of net sales decreased to 60% during the twelve months ended December 31, 1997 from 83% for the six months ended December 31, 1996. During the six months ended December 31, 1996, adjustments to inventory of approximately $491,000 (10% of sales) for obsolescence, of which $364,000 was related to the introduction of new products (which essentially rendered one entire older product line obsolete), and $340,000 (7% of sales) for start-up costs related to the introduction of new products were included in the cost of sales as old product lines were replaced with new product lines. These products included a new generation modem sub-system which makes use of the Company's proprietary technology from older products while adding features and reducing future manufacturing costs. Also, the Company introduced and shipped new "digital video broadcast" modems which experienced exceptional acceptance in the marketplace. The Company was obligated to pay royalties to Merit Microwave, Inc. on sales of certain translator products developed by Merit. The royalty rate ranges from five to ten percent of the selling price. During the 18 period ended December 31, 1997, the Company accrued $5,600 for royalty expenses, which were included in direct cost of goods sold. Selling, general and administrative costs increased to $4,242,000 or 32% of sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of sales for the six months ended December 31, 1996. The increase in expenses as a percentage of sales was primarily attributable to growth and expenses incurred for market penetration. The increase in pure dollars was also attributable to the increased time frame of the later period over the prior period. The Company recorded an "asset impairment charge" of $421,000 during the six months ended December 31, 1996, to reflect a valuation adjustment to designs and drawings which were partially impaired due to the introduction of new product lines. The valuation of designs and drawings was the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and represents the excess reorganization value that was applied to the acquired technology supporting the Company's products. Amortization of designs and drawings was computed using the straight-line method over an estimated useful life of four to seven years. The remaining asset carried a net book value of $472,000, amortized using the straight-line method over the remaining estimated useful life of one to four years. Research and development expenditures increased to $2,262,000 (17% of sales) during the twelve months ended December 31, 1997 from $808,000 (16% of sales) for the six months ended December 31, 1996. The increase in expenses was primarily attributable to the increased time frame of the later period over the prior period and to major development programs instituted during the fiscal year ended December 31, 1997. It was anticipated that the Company will continue to experience high R&D expenses as it positions itself, through the introduction of new products, to gain market share. As of the last day of the fiscal period, the Company held approximately $600,000 worth of inventory, in the form of finished goods in a ready-to-ship status, on the shipping dock for two orders placed with the Company which were to be purchased with funds underlying international letters of credit. Due to unexpected difficulties, the letters of credit were not received by the end of the period and so the products were not shipped. The impact of these delayed letters of credit was to delay shipment, and revenue recognition, of approximately $945,000 in sales. Interest expense net of interest income increased to $677,000 (5% of sales) during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for the six months ended December 31, 1996. The large increase in expense was primarily attributable to the increased time frame of the later period over the prior period. For the period ended December 31, 1997, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes, for the six months ended December 31, 1996, due to net operating losses. For the twelve month period ended December 31, 1997, the Company had a net loss of ($1,757,000) as compared with a net loss of ($2,070,000) in the six month period ended December 31, 1996. The decrease was primarily attributable to increased sales with a lower percentage of cost of sales. "New Orders Booked" (firm, fixed orders from customers) for the twelve months ended December 31, 1997 were $15,788,000 as compared to $5,939,000 for the six months ended December 31, 1996. This increase was as a result of the increased time frame of the later period over the prior period coupled with the increased effort, on the part of the Company, to rejuvenate its marketing strategy. The Company's "Backlog" of orders to be shipped (unshipped orders from the prior period plus new orders booked less orders shipped during the period) was $4,814,000 as of December 31, 1997, an increase of 19 95% over the $2,473,000 in Backlog as of December 31, 1996. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. Approximately $945,000 of this amount was due to the effect of the late letters of credit from two orders. One of these orders was from South America and subsequently shipped. The other order was from Indonesia and has not shipped to date. SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996. The Company's net sales increased 28% to $4,905,000 during the six month period ended December 31, 1996 from $3,830,000 during the twelve months ended June 30, 1996. This increase was primarily attributable to the introduction of the Company's new product lines which experienced exceptional market acceptance. Sales of products introduced since July 1, 1995 increased from $434,000 for the period ended June 30, 1996 to $3,477,000 for the period ended December 31, 1996. The Company's cost of sales as a percentage of net sales increased to 83% during the six months ended December 31, 1996 from 67% for the fiscal year ended June 30, 1996. There were two primary reasons for this increase in percentage. First, there were adjustments to inventory of $491,000 (10% of sales) for obsolescence. Of this amount, $364,000 was related to the introduction of new products which essentially rendered one entire product line obsolete, $110,000 was related to ongoing product development and $17,000 was related to the valuation of excess materials on hand. Second, $340,000 (7% of sales) of start-up costs related to the introduction of new products were included in the cost of sales for the period ended December 31, 1996. These products included a new generation modem sub-system which makes use of the Company's proprietary technology from older products while adding features and reducing future manufacturing costs. Also, the Company introduced and shipped the new "Digital Video Broadcast" modem which experienced exceptional market acceptance. Also contributing to the increase in cost of sales as a percentage of sales were freight charges related to international sales (2% of sales) and higher than anticipated warranty expense on some of the Company's older products (1% of sales). The Company was obligated to pay royalties to Merit on sales of certain translator products developed by Merit. The royalty rate ranges from five to ten percent of the selling price. During the period ended December 31, 1996, the Company paid $2,200 for royalty expenses, which were included in direct cost of goods sold. Selling, general and administrative costs decreased to $1,438,000 or 29% of sales during the six months ended December 31, 1996 from $1,844,000 or 48% of sales for the fiscal year ended June 30, 1996. The decrease in expenses was primarily attributable to the decreased time frame of the latter period over the prior period (approximately $922,000) and partially offset by increased costs related to the higher level of business that the Company experienced during the latter period (approximately $516,000). The Company recorded an "asset impairment charge" of $421,000 during the six month period ended December 31, 1996 to reflect a valuation adjustment to Designs and Drawings which were partially impaired due to the introduction of new product lines. Research and development expenditures decreased to $808,000 (16% of sales) during the six months ended December 31, 1996 from $1,795,000 (47% of sales) for the twelve months ended June 30, 1996. The decrease in expenses was primarily attributable to the decreased time frame of the latter period relative to the prior period (approximately $808,000). Additionally, the Company had embarked on a major development program during the fiscal year ended June 30, 1996, in order to regain a competitive posture after two fiscal periods during which the Company had made no development effort (approximately $897,000). Interest expense net of interest income decreased to $256,000 (5% of sales) during the six months ended December 31, 1996 from $257,000 (7% of sales) for the fiscal year ended June 30, 1996. The small decrease in expense was primarily attributable to the decreased time frame of the latter period as compared to the prior period (approximately $250,000), offset by additional interest from the Company's increased debt level (approximately $250,000). 20 For the six month period ended December 31, 1996, the Company did not provide for income taxes, due to the net loss and net operating loss carryforwards from prior periods. The Company also did not provide for income taxes for the twelve month period ended June 30, 1996, for the same reasons. For the six month period ended December 31, 1996, the Company had a net loss of ($2,070,000) as compared with a net loss of ($2,625,000) in the twelve month period ended June 30, 1996. The decrease was primarily attributable to the decreased time frame of the latter period relative to the prior period as partially offset by the increase in cost of sales as a percentage of sales and the expenses of increased business activity, and the $421,000 asset impairment charge as discussed above. "New Orders Booked" (firm, fixed orders from customers) for the six months ended December 31, 1996 were $5,939,000 as compared to $4,184,000 for the year ended June 30, 1996. The Company's "Backlog" of orders to be shipped (orders from the prior period which had not yet been shipped plus new orders booked less orders shipped during the period) was $2,473,000 as of December 31, 1996, an increase of 72% over the $1,439,000 in Backlog as of June 30, 1996. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of ($8,804,000) at December 31, 1998, as compared to working capital of $1,655,000 at December 31, 1997 and a deficit of ($5,852,000) at December 31, 1996 and ($4,083,000) at June 30, 1996. The current working capital deficit is attributable principally to the increase in short-term debt associated with ongoing operations ($3,000,000) and the ComStream acquisition ($7,000,000), and increases in accounts payable (approximately $2,625,000) and accrued expenses (approximately $8,239,000) associated with the ComStream acquisition, as partially offset by increases in receivables (approximately $6,176,000) and inventory (approximately $3,991,000) associated with the ComStream acquisition. Net cash used in operating activities was $3,850,000 for the twelve month period ended December 31, 1998, as compared to $4,945,000 for the twelve month period ended December 31, 1997, and $3,546,000 for the six months ended December 31, 1996 and $2,581,000 used in the year ended June 30, 1996. Cash used in investing activities was $10,551,000 for the period ended December 31, 1998, $593,000 for the period ended December 31, 1997, $255,000 for the period ended December 31, 1996 and $389,000 for period ended June 30, 1996. The current year's increase of almost $10,000,000 relates to the purchase of ComStream. The Company has no material commitments to make capital expenditures in 1999 or thereafter. The Company derived net cash from financing activities of $14,086,000 during the year ended December 31, 1998, $5,922,000 during the year ended December 31, 1997, $3,986,000 during the six month period ended December 31, 1996 and $2,969,000 during the year ended June 30, 1996. During the current period net cash from financing activities was composed primarily of line of credit borrowings ($3,000,000), loans from affiliates ($15,618,000) and line of credit repayments ($4,500,000). As a result of the foregoing, the Company decreased its cash balance by $315,000 for the twelve month period ended December 31, 1998, increased its cash balance by $383,000 for the twelve month period ended December 31, 1997, increased its cash balance by $186,000 for the six months ended December 31, 1996 and decreased its cash balance by $1,000 for the year ended June 30, 1996. 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 of 6.125% and 6.938% on balances owed at December 31, 1998 and 1997, respectively). The credit agreement requires the Company to maintain certain financial leverage ratios. 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 $8,000,000 under the line of credit as of December 31, 1998. Subsequent to the end of the period reported on 21 herein, the Company borrowed another $1,500,000 under the credit agreement at rates ranging from 5.97% to 6.06%. Notes payable to parent (ST) outstanding at 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. ST 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., matures on July 15, 1999 with interest at 8% per annum and is convertible under certain circumstances into Common Stock of the Company. 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., growth in backlog 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. ST 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 $7,000,000 note. SUPPLEMENTARY INFORMATION YEAR 2000 COMPLIANCE The Company recognizes the potential business impacts related to the Year 2000 computer system issue and has implemented a plan to assess and improve the Company's state of readiness with respect to such issues. The year 2000 issue is one where computer systems may recognize the designation "00" as the year 1900 when it is intended to mean the year 2000, resulting in system failure or miscalculations. The Company has undertaken a comprehensive review of its information technology systems, which the Company is dependent upon to conduct day to day business operations, 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. The Company is in the process of formalizing its Year 2000 plan. This plan document should be completed by April 30, 1999. The plan provides for the completion of efforts to assess, test and verify, remediate and develop contingency plans for all internal systems, both IT and non-IT, for Year 2000 compliance by September 30, 1999. The Company's review of internal systems is in process. The majority of the Company's application software programs are purchased from and maintained by vendors. The Company will work with these software vendors to verify these applications are, or will become, year 2000 compliant. The Company presently believes that all mission critical systems are or will timely become Year 2000 compliant and therefore the Year 2000 issue will not pose significant operational problems for the Company's internal systems. All Year 2000 costs to date have been expensed and the Company does not expect to incur any future costs in excess of $100,000 related to the Year 2000 issue. We anticipate that future costs related to bringing the Company into compliance will be written off in the period incurred. However, the Company may choose to upgrade certain existing software that is already Year 2000 compliant and, if it does, the costs related to those upgrades will be capitalized in the normal course of business. 22 As part of the Company's comprehensive review, it is continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom the Company has material relationships. The Company is not able to determine the effect on the Company's results of operations, liquidity and financial condition in the event the Company's material vendors and customers are not Year 2000 compliant. The Company will continue to monitor the progress of its material vendors and customers and formulate a contingency plan if and when the Company concludes that a material vendor or customer may not be compliant. During the year ended December 31, 1998, a Year 2000 readiness survey was sent to all of the Company's material vendors and customers. The readiness surveys are currently being collected for review and analysis. The Company has undertaken to advise all of its customers as to the Company's Year 2000 state of readiness with regard to its products. There can be no assurance that the Company will be able to completely resolve all Year 2000 issues or that the ultimate cost to identify and implement solutions to all Year 2000 problems will not be material to the Company. IMPACT OF INFLATION The Company does not believe that inflation has had a material impact on revenues or expenses during the last four fiscal periods reported on herein. ACCOUNTING MATTERS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) which became effective for the Company January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS No. 130 had no effect on the Company. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) which became effective for the Company January 1, 1998. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim reports issued to stockholders. The adoption of SFAS No. 131 did not have a material impact on the Company. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132) which became effective for the Company on January 1, 1998. SFAS No. 132 establishes standards for the information that public enterprises report in annual financial statements. The adoption of SFAS No. 132 did not have a material impact on the Company. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) which becomes effective for the Company on July 1, 1999. Management does not expect the adoption of SFAS No. 133 to have a material impact on the Company. 23 ITEM 7A. 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 December 31, 1998 consisted of notes payable to affiliates, notes payable under a line of credit agreement and a note payable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's restated consolidated financial statements as of December 31, 1998, December 31, 1997, December 31, 1996 and June 30, 1996 are included in this report as listed in the Index to Financial Statements in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. See our report on Form 8-K/A, filed on July 31, 1998. 24 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors and executive officers of the Company, their positions held with the Company, and their ages are as follows: NAME AGE POSITION - ----------------------- --- ------------------------------------------------- Lim Ming Seong......... 51 Director, Chairman of the Board Chan Wee Piak.......... 43 Director Lee Yip Loi ........... 55 Director Robert A. Grimes....... 46 Director Dennis W. Elliott...... 57 Director Robert C. Fitting...... 64 Director, Chief Executive Officer and President Steven W. Eymann....... 46 Executive Vice President, Chief Technical Officer Garry D. Kline......... 49 Vice President of Finance Each director is elected for a period of one year at the Company's annual meeting of stockholders and serves until the next meeting and until his successor is duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors. The following is a brief summary of the background of each director, executive officer and certain key employees of the Company: DIRECTORS AND EXECUTIVE OFFICERS: LIM MING SEONG has a been a Director and Chairman of the Board of the Company since August 13, 1996 and is chairman of its Compensation Committee. He is the Chairman of ST and of Vertex Management, Inc., a member of the Singapore Technologies group, and he has been Group Director of Singapore Technologies Pte Ltd, the parent of ST since February of 1995. From March 1992 until February 1995, he was Executive Director of Singapore Technologies Ventures Pte Ltd and from February 1990 to March 1992, he was Group President of Singapore Technologies Holdings Pte Ltd. Prior to that time he held various corporate and government positions, including Deputy Secretary in the Singapore Ministry of Defense from 1979 to 1986. Mr. Lim is a director of 41 subsidiary companies of Singapore Technologies. LEE YIP LOI has been a Director of the Company since August 13, 1996 and is chairman of the Audit Committee and a member of the Compensation Committee of the Board. He was Regional Director (America) of Singapore Technologies Pte Ltd from March 1994 until December 1998, and from May 1990 to January 1997 he was President of its affiliate, Metheus Corporation. Prior to that time he held a number of managerial positions with such corporations as Morgan Guaranty Trust and Singapore Technologies Pte Ltd and government positions with the Singapore Ministries of Education, Defense, Culture and Home Affairs. Mr. Lee is currently a director of Stetsys Pte Ltd, Stetsys US Inc., California Avitron Corporation, Tritech Microelectronics Ltd, Chartered Semiconductor Manufacturing Inc., ST Assembly and Test Services, Inc. and Vertex Management, Inc. CHAN WEE PIAK has been a Director since August 13, 1996 and is a member of the Compensation Committee of the Board. He is a director of ST and has been General Manager of Agilis Communication Technologies Pte Ltd, also a member of the Singapore Technologies group, since January 1992. From November 1989 to February 1992, he was General Manager of Chartered Microwave Pte Ltd. Prior to that time, he held various managerial positions in the Singapore Ministry of Defense and with Singapore Electronic and Engineering. 25 ROBERT A. GRIMES, who is a member of the Audit and Compensation Committees of the Board, has served as a member of the Board of Directors since December, 1994. He has been President of Pinkerton Systems Integration since 1998. From 1991 to 1998 Mr. Grimes served as a member of the Board of Engineering and Technical Services, Inc. of which he was President until December 31, 1997. He was also the President of Stetsys US, Inc. from February 24, 1997 to January 23, 1998. DENNIS W. ELLIOTT has been a Director and a member of the Audit and Compensation Committees since October 1998. He is the President of Elliott Communications Co., a technology/marketing consulting concern involved in advising companies on strategy and developing operating ventures in telecommunications, data networking, digital television/HDTV and multimedia. Until September 1998, Mr. Elliott was a Director of STM Wireless, Inc. and a member of its Compensation Committee from January to September 1998. Mr. Elliott is currently a director of Firetalk, Inc. He has also held executive positions at Pacific Telecom, Inc., RCA American Communications (now GE American Communications) and RCA Global Communications. ROBERT C. FITTING has been Chief Executive Officer of the Company since October 1998 and has been President of the Company since February 1995. He became a Director of the Company in March 1995. Mr. Fitting has a Master of Electrical Engineering degree from New York University and a Bachelors with distinction from Penn State University. His professional career began at Bell Laboratories in 1962 where he spent six years developing innovative communication technologies. Mr. Fitting then joined the Motorola Government Electronics Division where he was an engineering manager. He published more than a dozen technical papers and was awarded a number of patents. He left Motorola in 1978 to build a new company under an agreement with Comtech Telecommunications. The new company was named Comtech Data Corporation, currently known as Fairchild Data Corporation. Mr. Fitting was the General Manager and President of Comtech Data Corporation from 1978 to 1984. He left Comtech to start a new company called EFData Corporation. As co-founder, CEO and President of EFData Corporation, Mr. Fitting built the company into a worldwide market leader in satellite communications equipment. While at EFData, Mr. Fitting won the "Arizona Entrepreneur of the Year" award in 1993 in the manufacturing/high technology category. STEVEN EYMANN has been Chief Technical Officer of the Company since October 1998 and has been its Executive Vice President since February 1995. Mr. Eymann graduated with honors and a Bachelor of Science in Electrical Engineering from the University of Nebraska. His professional career began at the Motorola Government Electronics Division where he was a design engineer, task leader and finally a project leader for the DSU-23/29B fuse development program. As project leader, he was responsible for project management, budgets, schedules, and design and testing of the fuse. He designed the computer-controlled automatic test set for factory testing based on an HP 9825 computer. The DSU-23/29B is an L-Band PN radar for accurate, low-cost altitude direction. In June of 1981, Mr. Eymann joined Comtech Data Corporation where he was Director of Product Development. He was responsible for budget, schedule and technical aspects of all new product development within Comtech. Prior to becoming the Director of Product Development, he served as a senior engineer with program and technical design responsibility. He left Comtech in 1984 to begin a new company called EFData Corporation. As co-founder and Vice President of EFData, Mr. Eymann was responsible for new product development and engineering management in the design and manufacture of high technology, military and commercial communications equipment. GARRY D. KLINE, Vice President of Finance, Chief Financial Officer and Secretary, joined the Company in September of 1995. From that time until July 1997 he was Secretary and Controller of the Company. From 1987 through 1995, Mr. Kline served as CFO and Controller of EFData Corporation. Prior to 1987, Mr. Kline served in various positions, including Vice President of Finance for Megatronics Inc., a publicly held printed circuit board manufacturer, Vice President of Operations for Vernal Lodging Associates, a hospitality management company, and General Partner of Tax and Accounting Computer Service, an accounting firm. 26 CERTAIN KEY EMPLOYEES: ALAN POTTER has been the Vice President of Marketing for the Company since December 1995. His duties include market research, neoteric product concepts, new corporate alliances and distribution systems in Europe and the Middle East. He joined Radyne after ten years with EFData as Sales Manager. Mr. Potter graduated from the University of Houston with honors, holding a Bachelor of Arts in Communications. After post graduate studies at the University of Massachusetts, Amherst, he began his professional career as an Associate Professor of Communications at the University of Texas at Houston. While there, in 1973, he developed and operated the first practical bi-directional coaxial cable network to simultaneously carry voice, data and video communications. He then designed, developed and managed a series of broadband cable television and data networks for Columbia Cable Television, Michelson Media and Cox Cable Communications. Mr. Potter joined Comtech Data in 1984 and, two years later, he followed Messrs. Fitting and Eymann to initiate the Sales and Marketing Department at EFData. He is currently an MBA candidate at the University of Phoenix. DAVE KOBLINSKI has been the Vice President of Operations for the Company since March, 1995. His duties presently include general management of the Phoenix facility. Mr. Koblinski has a Bachelor of Science in Business Administration from Arizona State University. He also holds a degree in Electronics Technology from Mesa Community College. His professional career began in 1982 at Comtech Data Corporation where he held the position of Customer Service Representative. He was responsible for repairs, field and telephone support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the Senior Product Manager for EFData Corporation. His general responsibilities at EFData included relating customer requests and concerns to the factory. His direct responsibilities included the customer service, technical publication and order entry departments. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the registrant during the period from January 1, 1998 to December 31, 1998, none of the officers or directors of the registrant or the beneficial owners of its equity securities failed to file reports on Forms 3, 4 or 5 required to be filed during such period or prior thereto, except that a Form 3 Report was filed late by Dennis Elliott and Form 4 Reports were filed late on three occasions by Robert Grimes. ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION Radyne ComStream's policy has been to pay no compensation to directors who are employees of the Company or ST affiliates for their service as directors. On October 6, 1998 the Board of Directors resolved that outside directors will be paid $4,000 per meeting attended and $500 if attendance is via telephone. Moreover, commencing in March 1999, all directors will be eligible to receive stock options, if granted. Expenses will continue to be reimbursed. The following table sets forth the compensation for services in all capacities to the Company for the period from the year ended June 30, 1996 through December 31, 1998 of the Company's Chief Executive Officer and Executive Vice President. No other executive officer or employee received total annual salary and bonus of more than $100,000. 27 SUMMARY COMPENSATION TABLE
YEAR ALL OTHER NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS(#) COMPENSATION(2) - --------------------------- -------- ------ ---------- --------------- Robert C. Fitting, CEO........... 12/31/98 $144,234 30,000 $1,186 12/31/97 116,529 0 1,165 12/31/96 40,000 279,085 435 06/30/96 80,000 0 738 Steven Eymann, Exec. Vice Pres... 12/31/98 $133,543 30,000 $1,174 12/31/97 11,162 0 1,112 12/31/96 40,000 279,085 435 06/30/96 80,000 0 738
(1) The Company's fiscal year was changed to the calendar year, so the figures shown for the year ended December 31, 1996 reflect a period of six months. (2) Matching 401(k) plan contributions. OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF TOTAL OPTIONS OPTIONS GRANTED TO EMPLOYEE IN EXERCISE EXPIRATION START DATE PRESENT NAME GRANTED FISCAL YEAR PRICE DATE VALUE(1) - ---- ------- ----------- ----- ---- -------- Robert C. Fitting ... 15,000 3% $2.50 2/5/08 $3.37 15,000 3% $3.125 10/15/08 $2.48 Steven Eymann........ 15,000 3% $2.50 2/5/08 $3.37 15,000 3% $3.125 10/15/08 $2.48
- ---------- (1) Based on the Black-Scholes option pricing model, assuming that one-fourth of the options will be exercisable on the grant date and each of the first three anniversaries thereof, no dividend yield, expected volatility of 105% and a risk-free interest rate of 6.125%. 28 AGGREGATE OPTION EXERCISES IN 1998 AND HOLDINGS AT YEAR END The following table sets forth information concerning option exercises and option holdings for the year ended December 31, 1998 with respect to Robert C. Fitting, the Chief Executive Officer and President of the Company and Steven Eymann, the Executive Vice President. AGGREGATE OPTIONS EXERCISED IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED, IN-THE-MONEY NUMBER HELD AT OPTIONS AT SHARES OF DECEMBER 31, 1998 DECEMBER 31, 1998(1) ACQUIRED ON VALUE ------------------------------ ------------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- -------- -------- ----------- ------------- ----------- ------------- Robert C. Fitting...... 0 $0.00 182,585 62,500 $157,418 $47,656 Steven Eymann.......... 0 0.00 182,585 62,500 157,418 47,656
- ---------- (1) Based on the December 31, 1998 closing price of the Common Stock of $3.375 per share on the OTC Bulletin Board, less the per share exercise price. EMPLOYMENT AGREEMENTS Under the employment agreement between the Company and Messrs. Fitting and Eymann, they will serve as President and Vice President of the Company until the earlier of June 30, 2000 or such time as the Company's adjusted earnings before interest and taxes exceeds $6,000,000 for a period of four calendar quarters. Pursuant to the agreement, the Company presently pays Mr. Fitting and Mr. Eymann annual salaries of $160,000 and $140,000, respectively, and has granted them certain of the stock options described in the above table. Each of Mr. Fitting and Mr. Eymann has also agreed that if he exercises any of such stock options, he will not engage in any business which competes with the Company until after the second anniversary of his termination of employment with the Company, except in the case of involuntary termination without cause. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Lim, Chan, Lee, Grimes and Elliott. There were no interlocking relationships between the Company and other entities that might affect the determination of the compensation of the executive officers of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of the date hereof, the ownership of the Common Stock by (i) each person who is known by the Company to own of record or beneficially more than 5% of the outstanding Common Stock, (ii) each of the Company's directors and its Chief Executive Officer and Executive Vice President, and (iii) all directors and executive officers of the Company as a group. Except as otherwise indicated, the Stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. 29
NUMBER OF PERCENTAGE NAME AND ADDRESS SHARES OF CLASS - ---------------- ------ -------- Stetsys US, Inc.......................................................... 1,180,000 19.88% c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie, Singapore Science Park Singapore 118258 Stetsys Pte Ltd.......................................................... 5,376,000(1) 90.59% c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie, Singapore Science Park Singapore 118258 Dennis W. Elliott........................................................ -- -- c/o Radyne ComStream Inc. 3138 East Elwood Street Phoenix, Arizona 85034 Steven Eymann............................................................ 230,335(2) 3.74% c/o Radyne ComStream Inc. 3138 East Elwood Street Phoenix, Arizona 85034 Robert C. Fitting........................................................ 226,335(2) 3.67% c/o Radyne ComStream Inc. 3138 East Elwood Street Phoenix, Arizona 85034 Robert A. Grimes......................................................... -- -- c/o Radyne ComStream Inc. 3138 East Elwood Street Phoenix, Arizona 85034 Lee Yip Loi.............................................................. -- -- c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie, Singapore Science Park Singapore 118258 Chan Wee Piak............................................................ 10,000 * c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie, Singapore Science Park Singapore 118258
30
NUMBER OF PERCENTAGE NAME AND ADDRESS SHARES OF CLASS - ---------------- ------ -------- Lim Ming Seong........................................................... -- -- c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie, Singapore Science Park Singapore 118258 All directors and executive officers of the Company as a group ................................................. 446,670(2) 7.31%
- ---------- * Less than one percent. (1) The shares reported as owned by Stetsys Pte Ltd include the shares reported as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is sole stockholder. 100% of the stock of Stetsys US, Inc. and Stetsys Pte Ltd is ultimately owned by the Minister for Finance (Incorporated) of Singapore. (2) Includes 226,335 shares underlying exercisable options held by each of Messrs. Eymann and Fitting. - ---------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Sales to ETS for the twelve month period ended December 31, 1998, were $50,000. Until October 1998, ETS was a wholly owned subsidiary of ST. During the fiscal year ended December 31, 1998, the Company made sales to Agilis Communication Technologies Pte Ltd, another member of the Singapore Technologies group, of $65,000. The General Manager of Agilis, Chan Wee Piak, is a Director of the Company. ST loaned $10 million to the Company in connection with the ComStream acquisition. Under the terms of this loan, the Company is required to repay ST with interest at 6.375% per annum out of the proceeds of a rights offering of its Common Stock. In turn, Stetsys Pte Ltd has agreed to purchase approximately $16,040,000 of Common Stock at $3.73 in the rights offering. As of December 31, 1998, the Company owed ST another $5,618,272, plus interest at rates ranging from 6.625% to 6.844% per annum. Interest expense on notes payable to affiliates was $581,000 for the year ended December 31, 1998. Management believes that all of the foregoing transactions were on terms no less favorable to Radyne ComStream than it could have obtained in arms length transactions with unaffiliated third parties. 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) The following is an index of financial statements of Radyne ComStream Inc., financial statement schedules and exhibits included in Part IV, Item 14: FINANCIAL STATEMENTS Independent Auditors' Reports.......................................................................... F-1 Consolidated Balance Sheets as at December 31, 1998 (Restated) and 1997................................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998 (Restated) and 1997, the Six- Month Period Ended December 31, 1996 and the Year Ended June 30, 1996......................... F-4 Consolidated Statements of Stockholders' Capital Deficiency for the Years Ended December 31, 1998 (Restated) and 1997, the Six-Month Period Ended December 31, 1996 and the Year Ended June 30, 1996 ................................................................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 (Restated) and 1997, the Six- Month Period Ended December 31, 1996 and the Year Ended June 30, 1996......................... F-6 Notes to Consolidated Financial Statements............................................................. F-7 Unaudited Pro Forma Condensed Combined Statement of Operations for the Year ended December 31, 1998........................................................................... F-24 Notes to Unaudited Pro Forma Condensed Combined Statement of Operations................................ F-25
FINANCIAL STATEMENT SCHEDULES Schedules for the years ended December 31, 1998 and December 31, 1997, the six months ended December 31, 1996, and the year ended June 30, 1996 - Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not required, or are not applicable, or the information is included in the consolidated financial statements or notes to consolidated financial statements. EXHIBITS
NO. - --- 2.1* Stock Purchase Agreement dated August 28, 1998 between Spar Aerospace limited and Radyne Corp. 3.1** Restated Certificate of Incorporation 3.2 By-Laws, as amended and restated (previously filed as Exhibit 3.2 of the 1998 Form 10-K) 4.1*** Convertible Promissory Note between Spar Aerospace Inc. and the Company dated October 15, 1998 with the form of Registration Rights Agreement included as Appendix A thereto. 10.1**** 1996 Incentive Stock Option Plan 10.2***** Employment Agreement with Robert C. Fitting (Radyne Termsheet)
32 10.3+ Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 1997 10.4+ First Amendment to lease between ADI Communication Partners L.P. and ComStream dated July 16, 1997 10.5+ Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated November 18, 1998 10.6+ Indemnity Agreement between Pacific Bell Corporation and ComStream dated November 18, 1998 10.7+ Letter Agreement between Spar and Radyne Corp. dated November 18, 1998 10.8****** Lease for facility in Phoenix, Arizona 10.9++ Amendment to 1996 Incentive Stock Option Plan 16.1+++ Letter regarding change in certifying accountants 21.1 Subsidiaries of the Registrant (previously filed as Exhibit 21.1 of the 1998 Form 10-K) 23.1 Consent of KPMG LLP 23.2 Consent of Deloitte & Touche LLP 27.0 Financial Data Schedule
- ---------- * Incorporated by reference from Registrant's Form 8-K filed on August 28, 1998. ** Incorporated by reference from Registrant's report on Form 10-Q filed on March 11, 1997. *** Incorporated by reference from Registrant's report on Form 8-K filed on October 30, 1998. **** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997 (File No. 333-23159). ***** Incorporated by reference from Registrant's amended Registrant Statement on Form S-1, dated May 8, 1997 and declared effective on May 12, 1997 (File No. 333-18811). ****** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year Ended December 31, 1997. + Incorporated by reference from Registrant's Registration Statement on Form S-2, filed January 11, 1999 (File No. 333-70403). ++ Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 18, 1998 (File No. 333-67469). +++ Incorporated by reference from Registrant's Form 8-K/A filed on July 31, 1998. (b) Registrant filed the following reports on Form 8-K during the period of October 1 through December 31, 1998: Current Report on Form 8-K dated October 30, 1998, Item 2, as amended on December 24, 1998. Financial Statements included with respect to ComStream Holdings, Inc.'s Consolidated Balance Sheets for the Years ended December 31, 1997 and 1996, and Consolidated Statements of Operations Stockholders Equity (Deficits) and Cash Flows for the Years ended December 31, 1997, 1996 and 1995; ComStream Holdings, Inc.'s Unaudited Condensed Interim Balance Sheet for the Nine Months ended September 30, 1998, Unaudited Condensed Consolidated Statements of Operations for the Nine Months ended September 30, 1998 and 1997 and Unaudited Condensed Consolidated Statement of Cash Flows for the Nine Months ended September 30, 1998 and 1997; and Radyne Corp.'s Pro Forma Condensed Combined Balance Sheet as of September 30, 1998, Pro Forma 33 Condensed Combined Statement of Operations for the Nine Months ended September 30, 1998 and Pro Forma Condensed Combined Statement of Operations for the Year ended December 31, 1997. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. RADYNE COMSTREAM INC. --------------------- (Registrant) By: /s/ Robert C. Fitting ------------------------------------------ Robert C. Fitting, Chief Executive Officer and President Dated: August 12 , 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ Lim Ming Seong Chairman of the Board of Directors August 12, 1999 - ---------------------- Lim Ming Seong /s/ Robert C. Fitting Chief Executive Officer, President August 12, 1999 - --------------------- and Director Robert C. Fitting /s/ Garry D. Kline Vice President, Finance August 12, 1999 - ---------------------- (Principal Financial and Garry D. Kline Accounting Officer) /s/ Robert A. Grimes Director August 12, 1999 - ---------------------- Robert A. Grimes /s/ Lee Yip Loi Director August 12, 1999 - ---------------------- Lee Yip Loi /s/ Dennis Elliot Director August 12, 1999 - ---------------------- Dennis Elliot Independent Auditors' Report The Board of Directors and Stockholders Radyne Comstream Inc.: We have audited the accompanying restated consolidated balance sheet of Radyne Comstream Inc. and subsidiaries (the Company) (a 90.6%-owned subsidiary of Singapore Technologies Pte Ltd) as of December 31, 1998, and the related restated consolidated statements of operations, stockholders' capital deficiency, and cash flows for the year then ended. These restated consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these restated consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the restated consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed further in Note 4, the 1998 consolidated financial statements have been restated to reflect additional stock option compensation expense. /s/ KPMG LLP Phoenix, Arizona March 19, 1999, except for Note 4, which is as of August 4, 1999 F-1 Independent Auditors' Report Board of Directors and Stockholders Radyne ComStream Inc. Phoenix, Arizona We have audited the accompanying balance sheets of Radyne ComStream Inc. (formerly Radyne Corp.) (the "Company") as of December 31, 1997, and the related statements of operations, stockholders' capital deficiency, and cash flows for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997, and the results of its operations and its cash flows for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Phoenix, Arizona February 4, 1998 F-2 RADYNE COMSTREAM INC. Consolidated Balance Sheets
December 31, -------------------------------- 1998 Restated 1997 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 254,956 569,692 Accounts receivable - trade, net of allowance for doubtful accounts of $632,815 and $15,000, respectively 7,270,732 2,359,443 Other receivable 1,265,000 -- Inventories, net 9,380,478 5,389,920 Prepaid expenses 590,161 68,076 ------------ ------------ Total current assets 18,761,327 8,387,131 ------------ ------------ Property and equipment, net 5,533,645 1,322,551 Other assets: Designs and drawings, net of accumulated amortization of $705,404 at December 31, 1997 -- 471,935 Purchased technology, net of accumulated amortization of $105,000 at December 31, 1998 2,395,000 -- Goodwill, net of accumulated amortization of $35,960 at December 31, 1998 2,278,300 -- Deposits and other 222,442 50,000 ------------ ------------ Total other assets 4,895,742 521,935 ------------ ------------ $ 29,190,714 10,231,617 ============ ============ Liabilities and Stockholders' Capital Deficiency Current liabilities: Note payable under line of credit agreement $ 8,000,000 5,000,000 Note payable 7,000,000 -- Current installments of obligations under capital leases 124,891 109,258 Accounts payable, trade 3,291,915 667,202 Accounts payable, affiliate 8,150 16,062 Accrued expenses 9,140,341 901,032 Taxes payable -- 38,720 ------------ ------------ Total current liabilities 27,565,297 6,732,274 Notes payable to affiliates 15,618,272 -- Note payable under line of credit agreement -- 4,500,000 Obligations under capital leases, excluding current installments 88,588 93,543 Accrued stock option compensation 1,155,477 -- Taxes payable -- 55,861 ------------ ------------ Total liabilities 44,427,634 11,381,678 ------------ ------------ Commitments, contingent liabilities and subsequent events (notes 2, 9, 10, 11 14, 18, 19 and 20) Stockholders' capital deficiency: Common stock; $.002 par value - authorized, 20,000,000 shares; issued and outstanding, 5,931,346 shares at December 31, 1998 and 1997 11,862 11,862 Additional paid-in capital 6,105,404 5,694,806 Accumulated deficit (21,354,186) (6,816,643) Notes receivable from stockholders -- (40,086) ------------ ------------ Total stockholders' capital deficiency (15,236,920) (1,150,061) ------------ ------------ $ 29,190,714 10,231,617 ============ ============
See accompanying notes to consolidated financial statements. F-3 RADYNE COMSTREAM INC. Consolidated Statements of Operations
Year ended Six-month December 31, Year ended period ended Year ended 1998 December 31, December 31, June 30, Restated 1997 1996 1996 ------------ ------------ ------------ ------------ Net sales $ 21,111,704 13,446,852 4,905,059 3,829,523 Cost of sales 15,808,459 8,022,262 4,052,433 2,559,350 ------------ ------------ ------------ ------------ Gross profit 5,303,245 5,424,590 852,626 1,270,173 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 5,531,213 4,242,138 1,437,971 1,843,576 Research and development 4,296,268 2,262,066 808,025 1,794,823 Stock option compensation expense 1,566,075 -- -- -- In-process research and development 3,909,000 -- -- -- Restructuring costs 3,100,000 -- -- -- Asset impairment charge 262,935 -- 421,000 -- ------------ ------------ ------------ ------------ Total operating expenses 18,665,491 6,504,204 2,666,996 3,638,399 ------------ ------------ ------------ ------------ Loss from operations (13,362,246) (1,079,614) (1,814,370) (2,368,226) Other (income) expense: Interest expense, net 1,198,777 677,102 255,604 256,871 Other (23,480) -- -- -- ------------ ------------ ------------ ------------ Net loss $(14,537,543) (1,756,716) (2,069,974) (2,625,097) ============ ============ ============ ============ Basic net loss per common share $ (2.45) (0.35) (0.55) (0.70) ============ ============ ============ ============ Diluted net loss per common share $ (2.45) (0.35) (0.55) (0.70) ============ ============ ============ ============ Weighted average number of common shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 RADYNE COMSTREAM INC. Consolidated Statements of Stockholders' Capital Deficiency Years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996
Notes Common Stock Additional receivable ------------------------- paid-in Accumulated from Shares Amount capital Deficit stockholders Total ----------- ----------- ----------- ----------- ------------ ----------- Balances, June 30, 1995 3,729,721 $ 7,459 545,842 (364,856) -- 188,445 Shares issued to Merit Microwave 20,000 40 39,960 -- -- 40,000 Net loss -- -- -- (2,625,097) -- (2,625,097) ----------- ----------- ----------- ----------- ----------- ----------- Balances, June 30, 1996 3,749,721 7,499 585,802 (2,989,953) -- (2,396,652) Additional shares issued to Merit Mircrowave 10,000 20 19,980 -- -- 20,000 Net loss -- -- -- (2,069,974) -- (2,069,974) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1996 3,759,721 7,519 605,782 (5,059,927) -- (4,446,626) Issuance of common stock, net of issuance cost of $335,696 2,171,625 4,343 5,089,024 -- -- 5,093,367 Promissory notes received in connection with issuance of stock -- -- -- -- (40,086) (40,086) Net loss -- -- -- (1,756,716) -- (1,756,716) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1997 5,931,346 11,862 5,694,806 (6,816,643) (40,086) (1,150,061) Payments received on promissory notes -- -- -- -- 40,086 40,086 Stock option plan, restated -- -- 410,598 -- -- 410,598 Net loss, restated -- -- -- (14,537,543) -- (14,537,543) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1998, restated 5,931,346 $ 11,862 6,105,404 (21,354,186) -- (15,236,920) =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 RADYNE COMSTREAM INC. Consolidated Statements of Cash Flows
Year ended Six-month December 31, Year ended period ended Year ended 1998 December 31, December 31, June 30, Restated 1997 1996 1996 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss $(14,537,543) (1,756,716) (2,069,974) (2,625,097) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of assets 961,069 2,122 -- -- Depreciation and amortization 1,041,088 454,183 177,535 276,913 Asset impairment charge 262,935 -- 421,000 -- Stock option compensation 1,566,075 -- -- -- Write-off of in-process research and development 3,909,000 -- -- -- Increase (decrease) in cash resulting from changes in: Accounts receivable (915,154) 374,459 (2,450,031) 251,806 Prepaid expenses and other current assets (179,931) 26,222 (73,872) 73,581 Employee relocation incentives and advances -- -- -- 112,353 Inventories 2,833,811 (3,398,560) (840,691) (247,843) Deposits and other 242,787 (34,338) (7,650) -- Accounts payable, trade (985,095) (138,077) 339,848 (113,243) Accounts payable, affiliate 113,682 (420,300) 436,362 -- Accrued expenses 1,932,071 (25,924) 545,990 (253,337) Taxes payable (94,581) (28,487) (24,053) (56,063) ------------ ------------ ------------ ------------ Net cash used in operating activities (3,849,786) (4,945,416) (3,545,536) (2,580,930) ------------ ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (543,630) (593,072) (255,118) (388,770) Purchase of Comstream, net of cash acquired (10,007,369) -- -- -- ------------ ------------ ------------ ------------ Net cash used in investing activities (10,550,999) (593,072) (255,118) (388,770) ------------ ------------ ------------ ------------ Cash flows from financing activities: Net borrowings from notes payable under line of credit agreement 3,000,000 7,506,180 1,993,820 -- Payments on notes payable under line of credit agreement (4,500,000) -- -- -- Proceeds from notes payable to affiliates 15,618,272 4,600,000 6,600,000 3,052,912 Payments on note payable to affiliate -- (11,200,000) (4,594,696) -- Net proceeds from sale of common stock -- 5,053,281 -- -- Payments received on promissory notes issued in connection -- with common stock 40,086 -- -- -- Principal payments on capital lease obligations (72,309) (37,769) (12,953) (84,350) ------------ ------------ ------------ ------------ Net cash provided by financing activities 14,086,049 5,921,692 3,986,171 2,968,562 ------------ ------------ ------------ ------------ Net increase (decrease) in cash (314,736) 383,204 185,517 (1,138) Cash and cash equivalents, beginning of period 569,692 186,488 971 2,109 ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 254,956 569,692 186,488 971 ============ ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 568,812 687,626 72,258 3,996 ============ ============ ============ ============ Supplemental disclosures of noncash investing and financing activities: In December 1996, the Company issued an additional 10,000 shares of common stock in conjunction with the asset purchase from Merit Microwave, Inc. During 1997, the Company incurred capital lease obligations of $106,512 for new machinery and equipment. In October 1998, the Company made an acquisition for $17,000,000 plus $300,000 of other costs incurred in connection with the acquisition. A summary of the acquisition was as follows: Purchase price $ 17,000,000 Costs incurred 300,000 Less issuance of note payable (7,000,000) Less cash acquired (292,631) ------------ Cash invested $ 10,007,369 ============
See accompanying notes to consolidated financial statements. F-6 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (1) Organization and Acquisition Radyne Corp., a New York corporation, ("Radyne") was incorporated on November 25, 1980. On August 12, 1996, Radyne became a 90.6%-owned subsidiary of Singapore Technologies Pte Ltd ("STPL"), through its wholly-owned subsidiary, Stetsys US, Inc. ("ST"). In 1996, Radyne changed its fiscal year-end to December 31. 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. In addition, the Company accrued $1.6 million of severance costs as a result of the acquisition (note 7). 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. The results of operations of Comstream have been included in the accompanying consolidated statement of operations from October 15, 1998. The allocation to in-process research and development, for which management was primarily responsible, represents the estimated fair value based on risk-adjusted future cash flows related to the incomplete projects. At the date of the acquisition, the development of these projects had not yet reached technological feasibility and the research and development in process had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. The assets appraised in the valuation analysis included in-process technology, developed technology and assembled workforce. Based upon the nature of the assets, the income approach was considered most appropriate for analyzing both the developed and in-process technologies. This valuation approach considers the commercial profits and growth prospects of the products as well as the relative investment risk of the required complementary assets. Products-in-development at ComStream at the time of the acquisition were classified as in-process technology. These include the following products with their respective estimated completion dates: Description Estimated Completion Date ----------- ------------------------- o A 2MB card Jan-99 o "CM601" modem modifications Mar-99 o "DT 8000" - a Ku-band 2 Watt earth station Dec-98 o "DBR 2000" - a new data broadcast receiver Jun-99 o "ABR 202" - a new audio receiver Nov-98 o Set Top Box Jun-99 o MediaCast Card Receiver Mar-99 F-7 Revenue streams associated with these products-in-development were used to estimate fair value using the discounted cash flow method. The products in development at ComStream had not attained "technological feasibility", as that term is defined in Financial Accounting Statement No. 86, as of the acquisition date. In other words, either the research projects were incomplete or major technical uncertainties remained. Technological feasibility was achieved, as expected, for two of the products in the fourth quarter of 1998, and was expected to be achieved for the remaining products within 1999. It was determined that there was no alternative future use for the in-process technology as of the acquisition date. Consideration was given to possible other projects in which the hardware and software products could have been put to use, but none of these projects had yet attained "technological feasibility", and so they themselves were considered to be in-process technology. The discounted cash flow method began with estimates of future cash flow using ComStream management's forecasts. In deriving these cash flows, estimates of ComStream's future revenues, cost of goods sold, sales and marketing, general and administrative, and research and development expenses on a stand-alone basis were used to estimate a baseline measure of earnings attributable to the products. By adding back non-cash charges and deducting projected capital expenditures, a measure of debt-free cash flow, useful for valuing ComStream's in-process technology, was derived. From the debt-free cash flow forecasts, which represent the cash flow return on all of ComStream's assets, returns were deducted for the use of certain other assets: developed technology, net fixed assets, working capital, and assembled workforce and goodwill. For this purpose, the annual charge for core technology included in the products under development was calculated by multiplying the unamortized book value of the developed technology for that year by the required rate of return on developed technology. The opening value of core technology was calculated using a residual income approach similar to the methodology employed to calculate the value of in-process research and development. The remaining book value of the developed technology was calculated by amortizing its opening fair value over 6.25 years. The total charge was allocated to the in-process technology based on the in-process technology projects' share of total revenue. The cash flow returns attributable to the products (debt-free cash flow) were reduced by the return requirement for each of the other assets employed. The resulting residual cash flows represent the expected cash flows attributable to the in-process technologies. A factor, based on the stage of completion of the in-process projects, was applied to these expected cash flows to isolate the value relating to development efforts completed at the acquisition date. These cash flows were then discounted at a rate of 36 percent. The Company believes that the assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected product sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the projected results. Within the satellite communications equipment industry, there are several specific technologies incorporated within a single product. It is therefore difficult to relate specific revenue streams to individual technologies or projects. As a result, instead of attempting to model each individual project or technology, the cash flow generated by ComStream's products in the aggregate was examined. We allocated the aggregate revenues to developed, in-process and future technology, in a manner which we believe is reasonable. F-8 Comstream operates primarily in North America in the satellite communications industry. Comstream designs, markets and manufacturers satellite interactive modems and earth stations. Additionally, Comstream manufactures 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 changed its name to Radyne Comstream Inc. 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, 1997. 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, 1997: Years ended December 31, ------------------------ 1998 Restated 1997 -------- ------- (In thousands, except per share data) Net Sales $ 50,965 69,369 ======== ======= Gross profit $ 13,788 28,723 ======== ======= Net loss $(19,908) (6,826) ======== ======= Net loss per common share $ (3.36) (1.36) ======== ======= (2) Liquidity The Company has incurred significant losses from operations and has a stockholders' accumulated deficit of $21.4 million and a working capital deficiency of $8.8 million at December 31, 1998 and has been unable to generate a positive cash flow from operations. These matters raise doubt about the Company's ability to continue as a going concern. Stetsys Pte Ltd, the Company's majority stockholder, has confirmed its ability and intent to provide such working capital as may be necessary to ensure that the Company will continue to operate for a reasonable period into the future. Since August 1996, the Company has been dependent on STPL to provide cash for day-to-day operations. Management believes that, as a result of the acquisition of Comstream and the resultant increase in revenues, the Company can begin to generate profits. Management also believes that with the rights offering (see note 20) expected to be finalized in the second quarter of 1999, and through additional funding sources, the Company will be a viable going concern. Therefore, the accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. F-9 (3) Summary of Significant Accounting Policies (a) 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. (b) 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. (c) Cash Equivalents The Company considers all money market accounts with a maturity of 90 days or less to be cash equivalents. (d) Revenue Recognition The Company recognizes revenue upon shipment of product. (e) Inventories Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market. (f) 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. (g) Designs and Drawings Amortization of designs and drawings was computed using the straight-line method over an estimated useful life of four to seven years. During 1996, the Company recognized a design and drawing impairment charge of $421,000, with no associated tax benefit. During 1998, the Company recognized a design and drawing impairment charge of $262,935, with no associated tax benefit as a result of technology used in new products. F-10 (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. 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 amortization of certain designs and drawings and 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. F-11 (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. Per share amounts have been adjusted to reflect a 1-for-5 reverse stock split that occurred on January 9, 1997. (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. (r) Segment Reporting The Company has only one operating business segment, the sale of equipment for satellite and cable communications networks. (s) Reclassifications Certain reclassifications have been made to the prior years' financial statement amounts to conform to the current year presentation. (t) Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) which became effective for the Company January 1, 1998. SFAS No. 130 established standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The Company had no items of comprehensive income. Therefore the adoption of SFAS No. 130 had no effect on the Company. F-12 (4) Restatement In October 1998, the Company amended the terms of certain stock options to accelerate the vesting of those stock options, discussed more fully in Note 15, which established a new compensation measurement date for such options. The Company had originally recognized $1,155,477 of stock compensation expense pertaining to the options' cash bonus component coincident with the date of the amendment. Generally accepted accounting principles require that, upon establishing a new measurement date, compensation cost be determined based upon the market price of the underlying stock. Accordingly, the Company has restated the accompanying 1998 consolidated financial statements to record an additional $410,598 of compensation expense in 1998, reflecting the measurement of compensation cost based upon the market price of the underlying stock as of the amendment date. The net loss of the Company was increased from $14,126,945 to $14,537,543 and basic and diluted net loss per share was increased from $2.38 to $2.45. Additionally, accumulated deficit was increased from $20,943,588 to $21,354,186. (5) Inventories Inventories at December 31 consist of the following: 1998 1997 ------------ ------------ Raw materials and components $ 6,065,751 2,605,397 Work-in-process 4,319,338 1,124,929 Finished goods 546,858 1,950,594 ------------ ------------ 10,931,947 5,680,920 Obsolescence reserve (1,551,469) (291,000) ------------ ------------ $ 9,380,478 5,389,920 ============ ============ (6) Property and Equipment Property and equipment at December 31 consist of the following: 1998 1997 ----------- ----------- Machinery and equipment $ 3,598,732 1,298,715 Furniture and fixtures 2,661,195 373,548 Leasehold improvements 312,425 -- ----------- ----------- 6,572,352 1,672,263 Less accumulated depreciation and amortization (1,038,707) (349,712) ----------- ----------- Property and equipment, net $ 5,533,645 1,322,551 =========== =========== F-13 (7) Accrued Expenses Accrued expenses at December 31 consist of the following: 1998 1997 ---------- ---------- Wages, vacation and related payroll taxes $1,355,316 486,840 Interest 803,929 183,968 Professional fees 378,817 85,500 Warranty reserve 679,964 105,000 Severance 1,282,761 -- Lease buyout (notes 10 and 16) 2,443,110 -- Other 2,196,444 39,724 ---------- ---------- Total accrued expenses $9,140,341 901,032 ========== ========== The severance balance included in accrued expenses at December 31, 1998 consists of approximately $688,000 associated with the restructuring charge in the fourth quarter of 1998, discussed in note 16, and the remaining $595,000 of severance (for 16 technical staff and management) related to the Company's acquisition of ComStream in October 1998. This $595,000 is part of a termination benefits cost totaling $1,600,000 (note 1); the Company paid $1,005,000 of these termination benefits prior to December 31, 1998. (8) Notes Payable In 1997, the Company had a note payable under a line of credit agreement with a bank that permitted outstanding borrowings of $4,500,000. At December 31, 1997, outstanding borrowings against the line were $4,500,000 plus accrued interest. In 1998, the Company repaid the note and accrued interest with proceeds from affiliated debt (note 17). The Company has a $20,500,000 credit agreement with a bank expiring September 29, 1999. STPL 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 or the bank's Quoted Rate plus 1 percent per annum (6.125 percent and 6.938 percent as of December 31, 1998 and 1997, respectively). At December 31, 1998 and 1997, outstanding borrowings against the line were $8,000,000 and $5,000,000, respectively, plus accrued interest. This credit facility is an uncommitted line of credit which the bank may modify or cancel without prior notice. As of December 31, 1998, the Company violated one debt covenant which was waived by the bank. In connection with the purchase of Comstream, the Company executed a $7,000,000 note payable to the former owner of Comstream. The note bears interest at a rate of 8.0 percent per annum and is payable in full on July 15, 1999. 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. F-14 (9) Obligations Under Capital Leases The Company leases machinery and equipment under capital leases. The cost and accumulated depreciation of the equipment was $501,494 and $181,645, respectively, at December 31, 1998 and is included in property and equipment in the accompanying balance sheets and is being depreciated over the estimated useful lives of the machinery and equipment. Payments on capital lease obligations due after December 31, 1998 are as follows: 1999 $ 131,807 2000 55,516 2001 37,498 2002 9,952 --------- Total minimum lease payments 234,773 Less amount representing interest at rates of 4.6% to 12.3% (21,294) --------- Present value of minimum lease payments 213,479 Less current installments 124,891 --------- Capital lease obligations due after one year $ 88,588 ========= (10) Commitments Rent expense was approximately $517,853, $94,000, $44,000 and $95,000 for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996, and the year ended June 30, 1996. Future minimum rentals under leases after December 31, 1998 are as follows: 1999 $ 1,701,129 2000 1,636,703 2001 1,646,834 2002 1,712,539 2003 1,919,934 Thereafter 4,797,014 ----------- $13,414,153 =========== Prior to October 15, 1998, Comstream leased two buildings (of different size) from the same landlord under a single lease. The entire lease remained in effect after Radyne's acquisition of the stock of ComStream from Spar Aerospace Limited. However, Spar and Radyne agreed that ComStream would occupy only the larger of the two buildings, while Spar would seek to divide the lease into two separate building leases with Spar as lessor of the smaller building. Spar agreed to indemnify Radyne ComStream from all costs associated with the lease of the smaller building. However, after the closing of the acquisition, a new tenant was found for the larger building. This permitted both Spar and Radyne ComStream to realize substantial cost savings. Accordingly on November 18, 1998, the landlord and ComStream agreed that ComStream would (i) retain the smaller building, (ii) vacate the larger building no later than December 15, 1998, (iii) pay $2,000,000 to the landlord, and (iv) commence paying rent on the smaller building alone as of March 1, 1999. Additionally, the Company negotiated a cost reimbursement of $1,265,000 from Spar, which was netted against the restructuring cost discussed in note 16, resulting in a net F-15 restructuring cost of $1.3 million for the lease buyout. The recovery is recorded as other receivable as of December 31, 1998. The $2,000,000 cash buyout is due in two equal installments of $1,000,000 on March 1, 1999 and September 1, 1999. At December 31, 1998, accrued expenses included this $2,000,000, plus $140,000 in related real estate commissions, $273,000 of rent on the larger building through March 1999 and $30,000 of related legal and miscellaneous expenses. The Company generally has commitments with certain suppliers and subcontract manufacturers to purchase certain components and estimates its non-cancelable obligations to be approximately $5,000,000 to $8,000,000 at any give time. (11) Income Taxes Income tax expense amounted to $0 for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996. The actual tax expense (benefit) for these periods differs from "expected" tax expense for those periods as follows:
Year ended Six-month December 31, Year ended period ended Year ended 1998 December 31, December 31, June 30, Restated 1997 1996 1996 ----------- ----------- ----------- ----------- Computed "expected" tax expense $(4,943,000) (597,000) (704,000) (893,000) State tax benefit (541,000) (64,000) (75,000) (95,000) Change in valuation allowance 5,190,000 613,000 775,000 988,000 Other adjustments 294,000 48,000 4,000 -- ----------- ----------- ----------- ----------- Total $ -- -- -- -- =========== =========== =========== ===========
Deferred tax assets at December 31 consisted of the following:
1998 1997 ------------ ------------ Deferred tax assets: Cumulative tax effect of net operating loss carryforwards $ 8,459,000 4,620,000 Tax credits 155,000 210,000 Temporary differences 3,734,000 (107,000) Valuation allowance (12,348,000) (4,723,000) ------------ ------------ $ -- -- ============ ============
The net change in the total valuation allowance for the years ended December 31, 1998 and 1997 was $7,625,000 and $613,000, respectively. At December 31, 1998, the Company has net operating loss carryforwards of approximately $22,608,000 expiring in various years through 2013 and general business credit carryforwards of $155,000 expiring in various years through 2004 for utilization against taxable income/taxes payable of future periods, if any. Approximately $6,200,000 of the Company's net operating F-16 loss and tax credit carryforwards are subject to an annual limitation under Internal Revenue Code Section 382, in future years, as a result of changes in ownership of the Company's stock. Management believes that the inability to utilize net operating loss and tax credit carryforwards to offset future taxable income within the carryforward periods under existing tax laws and regulations is more likely than not. Accordingly, a 100 percent valuation allowance has been recorded against the net deferred tax assets as of December 31, 1998 and 1997. (12) Significant Customers and Export Sales During 1998, no customers represented greater than 10 percent of net sales. During 1997, one customer represented 14.5 percent of net sales. For the six-month period ended December 31, 1996, two different customers represented 18.3 percent and 15.6 percent of net sales; the latter customer represented 12.7% of net sales for the year ended June 30, 1996. Export sales were 50 percent, 55 percent, 66 percent and 50 percent of net sales for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996, and the year ended June 30, 1996, respectively. Export sales (based on shipping destination) are comprised of the following:
Six-month period Year ended Year ended ended December 31, Year ended June 30, December 31, 1998 December 31, 1997 1996 1996 ------------------- ------------------- -------------------- -------------------- Europe 63% 13% -- 38% Latin America 18% 22% 37% -- Asia 14% 58% 46% 46% Other 5% 7% 17% 16% ------------------- ------------------- -------------------- -------------------- 100% 100% 100% 100% =================== =================== ==================== ====================
The Company does not track sales by customer by country. Therefore, this information is not available. The Company has two primary product lines: 1) satellite modems and earthstations, and 2) broadcast products. The sales of satellite modems and earthstations accounted for approximately 75% of 1998 net sales. Information concerning the breakout of sales by these two product lines for periods prior to 1998 is not available. F-17 (13) Loss Per Share A summary of the reconciliation from basic loss per share to diluted loss per share follows:
Years ended December 31, Six-month Year ------------------------ period ended ended 1998 December 31, June 30, Restated 1997 1996 1996 ---------- ---------- ---------- ---------- Income (loss) available to common stockholders $4,537,543) (1,756,716) (2,069,974) (2,625,097) ========== ========== ========== ========== Basic EPS-weighted average shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227 ========== ========== ========== ========== Basic loss per share $ (2.45) (.35) (.55) (.70) ========== ========== ========== ========== Basic EPS-weighted average shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227 Effect of dilutive securities -- -- -- -- ---------- ---------- ---------- ---------- Dilutive EPS-weighted average shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227 ========== ========== ========== ========== Diluted loss per share $ (2.45) (.35) (.55) (.70) ========== ========== ========== ========== Stock options not included in diluted EPS since antidilutive 691,559 169,818 72,563 -- ========== ========== ========== ==========
(14) Employee Benefit Plan The Company has a qualified contributory 401(k) plan that covers all employees in Phoenix, Arizona, who have attained the age of 18 and are employed at the enrollment date. Matching contributions were $31,690, $30,230, $8,576 and $11,606 for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996, and the year ended June 30, 1996, respectively. Each participant may elect to contribute up to 15 percent of his or her gross compensation up to the maximum amount allowed by the Internal Revenue Service. The Company matches up to 1 percent of the employee's salary. The Company has a qualified contributory 401(k) plan that covers all full-time employees in San Diego, California, who have been employed continuously for at least 30 days before enrollment date. Matching contributions were $30,450 for the period October 15, 1998 through December 31, 1998. Each participant may elect to contribute up to 15 percent of his or her gross compensation up to the maximum amount allowed by the Internal Revenue Service. The Company matches $.35 for every dollar up to 7 percent of the participant's contribution. F-18 (15) Stock Options In November 1996, the Board of Directors adopted the 1996 Incentive Stock Option Plan (the "Plan"), which was approved by the stockholders on January 8, 1997. The Plan provided for the grant of options to employees of the Company to purchase up to 1,282,042 shares of common stock. The option price per share under the Plan may not be less than the fair market value of the stock (110 percent of the fair market value for an optionee who is a 10 percent stockholder) on the day the option is granted. In November 1998, the Plan was amended to increase the options available by 900,000, providing a total of 2,182,042 options available to purchase shares of common stock. Rights Offering - In November 1996, the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholder, ST, of subscription rights for the purchase of up to 215,833 shares of the Company's common stock at a price of $2.50 per share. The Board of Directors further approved the distribution of subscription rights to an affiliate of ST to purchase up to 2,040,000 shares of the Company's common stock at a price of $2.50 per share. This Rights Offering became effective on May 12, 1997 and was concluded in June 1997. ST's affiliate exercised 1,976,000 of its rights and individuals associated with such affiliate exercised another 34,000. An additional 51,525 rights issued to stockholders other than ST were exercised. In a related offering under the Company's Incentive Stock Option Plan, 110,100 shares of the Company's common stock were purchased by employees at $2.50 per share. Total proceeds received from the Rights Offering were partially offset by approximately $336,000 of associated costs. The proceeds from the exercise of these rights were used, in part, to satisfy notes payable to affiliates shown on the accompanying consolidated balance sheet at December 31, 1996. At December 31, 1997, the Company had 690,665 options outstanding at an exercise price of $2.50 per share. 30,500 options were exercisable at the rate of 25 percent per year on each of the first four anniversaries of the grant date and expire on the tenth anniversary of the grant date. During 1998, 3,208 of these stock options were forfeited. The remaining 656,957 options have been allocated among a group of 30 key employees. These options carry the right to a cash bonus of $1.72 per purchased share, payable upon exercise. These options were originally exercisable, if and when the Company's earnings before interest and taxes (calculated without regard to any charge for compensation paid or payable under the Plan) exceeded certain levels. The 656,957 options receive variable plan accounting that requires the Company to recognize compensation cost based upon the market price of the underlying stock when those specific earnings levels are probable of being achieved or at certain other measurement dates. In October 1998, the Company amended the terms of the 656,957 stock options to accelerate vesting of the awards, thereby creating a new compensation measurement date and, accordingly, recognized compensation costs amounting to $1,566,075 (restated). The Company recognized no compensation cost relative to these stock options in 1997 or 1996. At December 31, 1998, the Company had 1,205,957 options outstanding at exercise prices ranging from $2.50 to $3.125 per share. The Company applies APB Opinion 25 in accounting for its Plan, and accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company F-19 determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below:
December 31, ------------------------------- 1998 Restated 1997 ------------- ------------ Net loss As reported $(14,537,543) $(1,756,716) Pro forma $(15,293,957) $(2,028,121) Loss per Share-Basic As reported $ (2.45) $ (.35) Pro forma $ (2.58) $ (.40) Loss per Share-Diluted As Reported $ (2.45) $ (.35) Pro forma $ (2.58) $ (.40)
The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of three years. The fair value of options granted under the Plan was estimated on the date of grant with vesting periods ranging from one to three years using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 105 percent - 118 percent, risk free interest rate of 6.125 percent - 5.87 percent, and expected lives of five years. A summary of the aforementioned stock plan activity follows: Weighted Average Price Per Number Share ---------- ----- Balance, December 31, 1996 684,395 $2.50 Granted 15,500 2.50 Forfeited (9,230) 2.50 ---------- ----- Balance, December 31, 1997 690,665 2.50 Granted 553,000 2.89 Forfeited (37,708) 2.50 ---------- ----- Balance, December 31, 1998 1,205,957 $2.68 ========== ===== F-20 A summary of stock options granted at December 31, 1998 follows:
Options Outstanding Options Exercisable ---------------------------------------------------------- -------------------------------- Weighted- Weighted- Weighted- Number Average Average Number Average Range of Outstanding at Remaining Exercise Exercisable at Exercise Exercise Prices 12/31/98 Contractual Life Price 12/31/98 Price --------------------- ---------------- ---------------- -------------- --------------- ------------- $ 2.50 676,957 1 years 2.50 591,957 2.50 $ 2.50 6,500 2 years 2.50 3,250 2.50 $ 2.50 to 3.125 522,500 3 years 2.91 130,375 2.90 --------- ------ ------- ----- 1,205,957 $ 2.82 725,582 $2.57 ========= ====== ======= =====
(16) Restructuring Costs In November 1998, the Company announced a corporate restructuring cost-cutting initiative, and provided a restructuring charge of approximately $3,100,000. Included in this restructuring charge was approximately $1,100,000 in termination benefits for 38 technical, sales and administrative staff. The Company paid $412,000 of these termination benefits prior to December 31, 1998 and $688,000 is included in accrued expenses as of December 31, 1998. The remaining $2,000,000 was comprised of $1,300,000 for the net cost of the lease buyout discussed in note 10 and $700,000 of leasehold improvements that were abandoned upon movement to a new building in San Diego, California. At December 31, 1998, the remaining balance in the accrued expenses related to the restructuring costs comprises remaining termination benefits and costs associated with the lease buyout. (17) Related Party Transactions Sales to a subsidiary of STPL for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996 were $50,000, $152,500, $307,300 and $311,600, respectively. Sales to Agilis Communication Technologies Pte Ltd ("Agilis"), an affiliate of ST, amounted to $65,000, $540,000, $375,000 and $118,900 for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively. Prior to 1997, a former majority stockholder of the Company provided management services to the Company, for which it charged the Company $60,000 and $120,000 for the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively. Interest expense on notes payable to affiliates was $581,000, $148,000, $205,900 and $248,400 for the years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively, of which $581,000, $0 and $152,400 were included in accrued expenses in the accompanying balance sheet as of December 31, 1998, 1997 and 1996, respectively. During 1998, an ST affiliate made loans of $5,618,272 to the Company. The loans bear interest at rates ranging from 6.625 percent to 6.844 percent per annum with the principal and accrued interest due in March 2000. The proceeds of the loans were used in part by the Company to repay a note payable under a line of credit agreement which was outstanding at December 31, 1997 (note 8). During August 1998 the Company executed a note to ST for $10,000,000 the proceeds of which were used for the purchase of Comstream. This note bears interest at a rate of 6.375 percent per annum. The note, plus any accrued interest, is due March 31, 2000. F-21 The Company had notes receivable from stockholders totaling $40,086 at December 31, 1997. These notes had an interest rate of 4 percent and were paid in June 1998. (18) Contingencies The Internal Revenue Service is currently conducting examinations of the Company with respect to income tax for the calendar year ended December 31, 1995. The State of California Board of Equalization is currently conducting examinations with respect to personal property tax and sales tax for the calendar years ended December 31, 1995, 1996 and 1997. The examinations are currently in process and management does not expect a material adverse effect on the financial position of the Company resulting from the resolutions of the examinations. Accordingly, no provision has been made in the accompanying consolidated financial statements for losses, if any, that might ultimately result from the examinations. The Company is involved in litigation and claims arising in the normal course of operations. In the opinion of management based on consultation with legal counsel, losses, if any, from this litigation are covered by insurance or are immaterial; therefore, no provision has been made in the accompanying consolidated financial statements for losses, if any, that might result from the ultimate outcome of these matters. (19) Year 2000 Problem In 1998, the Company developed a plan to deal with the Year 2000 problem. The plan provides for the conversion efforts to be completed by September 30, 1999. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company has identified all internal mission critical systems and plans to begin remediation efforts, consisting of system upgrades, in the second quarter of 1999. The Company has also determined that its core products do not contain date-sensitive components; however, the Company expects to begin communicating with its customers on the status of its products in the second quarter of 1999. Management is currently assessing the Year 2000 remediation efforts of the Company's significant suppliers. Although management believes its efforts minimize the potential adverse effects on the Company of a supplier's failure to be Year 2000 compliant on time, there can be no absolute assurance that all its suppliers will become Year 2000 compliant on time or in a way that will be compatible with the Company's systems. The Company does not believe expenditures to be Year 2000 compliant will cost in excess of $100,000, and is expensing all costs associated with these systems changes as the costs are incurred. However, there can be no assurance that the Company will be able to completely resolve all Year 2000 issues or that the ultimate cost to identify and implement solutions to all Year 2000 problems will not be material to the Company. (20) Subsequent Events In January and February 1999, the Company had additional draws on the line of credit totaling $1,500,000 at interest rates ranging from 5.97% to 6.06%. In January 1999, the Company filed a Form S-2 with the Securities and Exchange Commission to register a rights offering of 4,745,076 shares of common stock at a price of $3.73 per share. Each stockholder of record will be entitled to purchase four shares of common stock for every five shares currently owned. F-22 (21) Quarterly Financial Data - Unaudited A summary of the quarterly data for the years ended December 31, 1998 and 1997 follows:
Fourth First Second Third Quarter Total Quarter Quarter Quarter Restated Restated ------- ------- ------- -------- -------- 1998: Total revenues $ 3,949 2,718 3,307 11,138 21,112 ======= ====== ===== ======= ======= Gross profit $ 1,194 48 1,027 3,034 5,303 ======= ====== ===== ======= ======= Operating expenses $ 1,506 1,577 1,384 14,198 18,665 ======= ====== ===== ======= ======= Loss before interest expense $ (312) (1,529) (357) (11,164) (13,362) ======= ====== ===== ======= ======= Net loss $ (490) (1,727) (550) (11,771) (14,538) ======= ====== ===== ======= ======= Basic loss per common share $ (.08) (.29) (.09) (1.99) (2.45) ======= ====== ===== ======= ======= Diluted loss per common share $ (.08) (.29) (.09) (1.99) (2.45) ======= ====== ===== ======= ======= 1997: Total revenues $ 2,741 2,812 4,434 3,460 13,447 ======= ====== ===== ======= ======= Gross profit $ 1,061 1,158 2,036 1,170 5,425 ======= ====== ===== ======= ======= Operating expenses $ 1,363 1,499 1,788 1,854 6,504 ======= ====== ===== ======= ======= Income (loss) before interest expense $ (302) (341) 248 (684) (1,080) ======= ====== ===== ======= ======= Net income (loss) $ (474) (504) 86 (865) (1,757) ======= ====== ===== ======= ======= Basic loss per common share $ (.13) (.11) .01 (.12) (.35) ======= ====== ===== ======= ======= Diluted loss per common share $ (.13) (.11) .01 (.12) (.35) ======= ====== ===== ======= =======
F-23 RADYNE COMSTREAM INC PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the year ended December 31, 1998 (Unaudited) (in thousands except per share data).
Radyne ComStream ComStream Pro Forma Audited Unaudited Adjustments Notes Combined ------- --------- ----------- ----- -------- Sales $21,112 $29,853 $ $ 50,965 Cost of sales 15,809 21,368 37,177 -------- -------- -------- Gross profits 5,303 8,485 13,788 Operating expenses Selling, general & administrative 5,531 9,493 (787) a 14,868 Research and development 4,296 7,227 11,523 Stock option compensation expense 1,566 1,566 In-process research and 3,909 (3,909) b development Restructuring costs 3,100 3,100 Asset impairment charge 263 263 -------- -------- -------- Total operating expenses 18,665 16,720 (4,065) 31,320 -------- -------- -------- Operating loss (13,362) (8,235) (4,065) (17,532) Interest expense 1,199 3,240 (3,240) c 2,399 1,200 c Other (24) (24) -------- -------- -------- Net loss $(14,537) $(11,475) $(6,105) $(19,907) ======== ======== ======= ======== Basic net loss per common share $(2.45) d $(3.36) ======== ======== Diluted net loss per common share $(2.45) d $(3.36) ======== ======== Weighted average number of common shares outstanding 5,931,346 5,931,346
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements F-24 Radyne ComStream Inc. Notes to Unaudited Pro Forma Condensed Combined Financial Statements (1) Basis of Accounting On October 15, 1998, Radyne Corp. ("Radyne") completed the acquisition of all of the outstanding shares of common stock of ComStream Holdings, Inc. ("ComStream") from Spar Aerospace Limited ("Spar") for an aggregate purchase price of $17.0 million consisting of $10.0 million in cash and a $7.0 million convertible promissory note. The pro forma unaudited condensed combined statement of operations for the year ended December 31, 1998 is presented using the Radyne ComStream Inc. audited statement of operations for the year ended December 31, 1998 combined with the ComStream unaudited consolidated statement of operations for the period from January 1, 1998 through October 14, 1998, as if the transaction had taken place on January 1, 1998. The pro forma condensed combined financial statement should be read in conjunction with the audited financial statements and notes thereto of Radyne ComStream Inc. for the year ended December 31, 1998. The pro forma combined statement of operations is not necessarily indicative of the future results of operations of Radyne ComStream or the results of operations which would have resulted had Radyne and ComStream been combined during the period presented. In addition, the pro forma results are not intended to be a projection of future results. (2) Pro Forma Condensed Combined Statement of Operations The accompanying pro forma adjustments reflect adjustments for the following items: a) Amortization expense related to goodwill on ComStream's balance sheet has been eliminated. Amortization of purchased technology and goodwill related to the ComStream acquisition has been recorded based on estimated useful lives of 6.25 years and 10 years, respectively. b) The fair value of acquired in-process research and development of $3,909,000 was expensed in the period in which the acquisition was completed. This amount was shown as an increase in the accumulated deficit and not as an expense in the accompanying pro forma condensed combined statement of operations. c) Interest expense incurred by ComStream, primarily relating to borrowings pursuant to a revolving line of credit arrangement with Spar has been eliminated. Interest expense has been recorded as if the companies had been combined during the same periods after giving effect to the $7,000,000, 8% convertible promissory note due to Spar and the $10,000,000, 6.375% note payable to Stetsys US, Inc. Interest expense has also been adjusted to reflect the 1.0% facility fee payable to Citibank, N.A. in connection with the increase in the uncommitted line of credit facility with Citibank, N.A. from $5,500,000 to $20,500,000. d) At December 31, 1998 pro forma loss per share would have been $1.90 after giving effect to the use of proceeds of the previously announced rights offering, where the Company will capitalize approximately $15.6 million of debt now owed to its majority stockholder and issue 4,300,800 additional shares of common stock to that stockholder. F-25
Radyne Comstream Schedule II - Valuation and Qualifying Accounts For the Years ended December 31, 1998 and 1997, the six-month period ended December 31, 1996 And the year ended December 31, 1996 Balance at Charged to Charged to Balance at Beginning of costs and other end of Period expenses accounts Deductions period Allowance for doubtful Receivables: Year ended December 31, 1998 $ 15,000 155,000 462,815* -- 632,815 =========== ========= ======= ======= ========= Year ended December 31, 1997 $ 13,000 2,000 -- -- 15,000 =========== ========= ======= ======= ========= Six-month period ended December 31, 1996 $ 13,000 -- -- -- 13,000 =========== ========= ======= ======= ========= Year ended June 30, 1996 $ 13,829 -- -- 829 13,000 =========== ========= ======= ======= ========= Reserve for obsolescence: Year ended December 31, 1998 $ 291,000 1,260,469 -- -- 1,551,469 =========== ========= ======= ======= ========= Year ended December 31, 1997 $ 486,000 -- -- 195,000 291,000 =========== ========= ======= ======= ========= Six-month period ended December 31, 1996 $ 76,907 409,093 -- -- 486,000 =========== ========= ======= ======= ========= Year ended June 30, 1996 $ 76,907 -- -- 76,907 =========== ========= ======= ======= =========
* Balance represents allowance acquired during purchase of Comstream Holdings, Inc. F-26 EX-13.2 5 FORM 10-Q 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 six month period ended June 30, 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 E. 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 5,959,878 shares of its common stock, par value $.002, outstanding as of June 30, 1999. 1 PART I - FINANCIAL INFORMATION RADYNE COMSTREAM INC. CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 December 31, 1998 ITEM 1 Unaudited Audited Current assets: Cash & cash equivalents $ 1,143,737 $ 254,956 Accounts receivable - trade, net of allowance for doubtful accounts of $784,958 and $632,815 6,490,048 7,270,732 Other receivable -- 1,265,000 Inventories, net 8,348,689 9,380,478 Prepaids and other current assets 838,465 590,161 --------------------------------------- Total current assets 16,820,939 18,761,327 --------------------------------------- Property and equipment - net 4,475,089 5,533,645 --------------------------------------- Other assets 4,591,361 4,895,742 --------------------------------------- Total assets $ 25,887,389 $ 29,190,714 ======================================= Liabilities and stockholders' capital deficiency Current liabilities: Notes payable under lines of credit agreement $ 6,000,000 $ 8,000,000 Note payable 7,000,000 7,000,000 Notes payable to affiliates 15,618,272 0 Current installments of obligations under capital leases 81,141 124,891 Accounts payable - trade 2,128,471 3,291,915 Accounts payable - affiliates -- 8,150 Accrued expenses 8,950,212 9,140,341 --------------------------------------- Total current liabilities 39,778,096 27,565,297 ======================================= Notes payable to affiliates 0 15,618,272 Obligations under capital leases, excluding current installments 61,185 88,588 Accrued stock option compensation 1,108,807 1,155,477 --------------------------------------- Total liabilities 40,948,088 44,427,634 ======================================= Stockholders' capital deficiency: Common stock, $.002 par value, 20,000,000 shares authorized, Shares issued and outstanding, 5,959,878 at June 30, 1999 and 5,931,346 at December 31, 1998 11,919 11,862 Additional paid-in capital 6,176,692 6,105,404 Accumulated deficit (21,249,310) (21,354,186) --------------------------------------- Total stockholders' capital deficiency (15,060,699) (15,236,920) --------------------------------------- Total $ 25,887,389 $ 29,190,714 =======================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 RADYNE COMSTREAM INC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 Net sales $12,943,629 $ 2,717,965 $25,262,334 $ 6,666,465 Cost of sales 7,022,695 2,669,607 13,795,124 5,424,435 ------------------------------------------------------------------ Gross profit 5,920,934 48,358 11,467,210 1,242,030 ------------------------------------------------------------------ Operating expenses: Selling, general and administrative 2,748,038 868,070 5,748,728 1,737,556 Research and development 2,208,099 708,700 4,515,574 1,367,644 ------------------------------------------------------------------ Total operating expenses 4,956,137 1,576,770 10,264,302 3,105,200 ------------------------------------------------------------------ Income (loss) from operations 964,797 (1,528,412) 1,202,908 (1,863,170) Interest expense, net 543,255 198,217 1,098,029 375,818 ------------------------------------------------------------------ Net income (loss) $ 421,542 $(1,726,629) $ 104,879 $(2,238,988) ================================================================== Basic net income (loss) per common share $ 0.07 $ (0.29) $ 0.02 $ (0.38) ================================================================== Diluted net income (loss) per common share $ 0.06 $ (0.29) $ 0.02 $ (0.38) ================================================================== Weighted average shares used in computation Basic 5,944,574 5,931,340 5,938,303 5,931,340 ================================================================== Diluted 6,552,574 5,931,340 6,550,417 5,931,340 ==================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3
RADYNE COMSTREAM INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 OPERATING ACTIVITIES: Net income (loss) $ 104,879 $(2,238,988) Adjustments to reconcile net income/(loss) to cash flows used in operating activities: Depreciation and amortization 1,483,926 261,603 Changes in operating assets and liabilities: Accounts and other receivable 2,045,684 738,128 Inventories 1,031,789 696,411 Prepaids and other current assets (248,304) 16,837 Other assets (1,918) -- Accounts payable - trade (1,163,444) 23,711 Accounts payable - affiliates (8,150) (16,062) Accrued expenses (190,129) 162,614 Accrued stock option compensation (46,670) -- Taxes payable -- (34,223) ----------------------------------- Net cash provided by (used in) operating activities 3,007,663 (389,969) ----------------------------------- Cash flows from investing activities: Capital Expenditures (119,074) (215,468) ----------------------------------- Net cash used in investing activities (119,074) (215,468) ----------------------------------- Cash flows from financing activities: Net borrowing (payment) on notes payable under Line of credit agreements (2,000,000) (4,500,000) Proceeds from notes payable to affiliate -- 5,368,272 Notes receivable - employees -- 40,086 Net proceeds from sale of common stock 71,345 -- Principal payments on capital lease obligations (71,153) (58,965) ----------------------------------- Net cash (used in) provided by financing activities (1,999,808) 849,393 ----------------------------------- Net increase in cash 888,781 243,956 Cash and cash equivalents, beginning of year 254,956 569,692 =================================== Cash and cash equivalents, end of period $ 1,143,737 $ 813,648 =================================== Supplemental disclosure of cash flow information: Interest paid $ 378,145 $ 313,602 ===================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 RADYNE COMSTREAM INC. Notes to Condensed Financial Statements (Information for June 30, 1999 and June 30, 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 ComStream 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 manufactures 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 Six Months Ended June-30-1998 June-30-1998 (in thousands except per share data) Net sales $ 12,690 25,431 ====== ====== Gross profit 3,925 7,372 ===== ===== Net loss (4,607) (9,481) ======= ======= Net loss per common share $ (0.78) (1.60) ====== ====== 5 2 Summary of Significant Accounting Policies (a) Basis of Presentation The interim unaudited condensed consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position as of June 30, 1999 and the results of operations for the three and six months ended June 30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998. Such adjustments are of a normal recurring nature. This information should be read in conjunction with the restated consolidated financial statements included in the Company's Form 10-K/A 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. (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 is 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 6 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. 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 Income/(Loss) Per Common Share Basic income/(loss) per share is computed by dividing income/(loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income/(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 income/(loss) of the Company. Assumed exercise of outstanding stock options and warrants for the three and six months ended June 30, 1998 have been excluded from the calculations of diluted net income/(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. 7 (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. (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. (t) Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130) which became effective for the Company January 1, 1998. SFAS No. 130 established standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The Company had no items of comprehensive income. Therefore, the adoption of SFAS No. 130 had no effect on the Company. 8
3 Inventories June 30, 1999 December 31, 1998 Unaudited Audited Inventories consist of the following: Raw materials and components $ 5,545,263 $ 6,065,751 Work in process 3,088,764 4,319,338 Finished goods 1,229,922 546,858 ------------------------------------- 9,863,949 10,931,947 ------------------------------------- Obsolescence reserve (1,515,260) (1,551,469) ------------------------------------- Total $ 8,348,689 $ 9,380,478 ===================================== 4 Property and Equipment June 30, 1999 December 31, 1998 Unaudited Audited Property and equipment consist of the following: Machinery and equipment $ 3,702,558 $ 3,598,732 Furniture and fixtures 2,408,302 2,661,195 Leasehold improvements 445,127 312,425 ------------------------------------- 6,555,987 6,572,352 ------------------------------------- Less accumulated depreciation & amortization (2,080,898) (1,038,707) ------------------------------------- Total $ 4,475,089 $ 5,533,645 =====================================
5. Restructuring Cost The accrued restructuring costs in the accompanying condensed consolidated balance sheet at June 30, 1999 which are included in the accrued liabilities include the cost of involuntary employee termination benefits for certain employees of the Company and costs associated with the lease buyout of a building located in San Diego, California. These accrued restructuring costs at June 30, 1999 principally consist of the following; Total Accrued Restructuring Costs --------------------------------- Balance at December 31, 1998 $ 3,130,166 Cash paid for lease buyout (1,312,239) Cash paid for employee termination benefits (508,174) ----------- Unaudited balance at June 30, 1999 $ 1,309,753 =========== Of the $1,310,000 accrued restructuring charge remaining at June 30, 1999, approximately $179,000 consists of severance costs (termination of 38 of the technical, sales and administrative staff completed in December 1998) and $1,131,000 consists of lease buyout costs, all of which the Company expects to be paid out by the fourth quarter of 1999. 9 6. Accrued Liabilities June 30, 1999 December 31, 1998 Unaudited Audited Accrued liabilities consist of the following: Wages and related payroll taxes $1,288,836 $1,355,316 Interest expense 1,619,441 803,929 Professional fees 355,208 378,817 Warranty reserve 732,930 679,964 Severance 355,689 1,282,761 Lease buyout 1,130,871 2,443,110 Customer deposits 939,764 306,462 Other 2,527,468 1,889,982 --------------------------- Total $8,950,212 $9,190,341 =========================== The severance balance included in accrued expenses at June 30, 1999 consists of approximately $179,000 associated with the restructuring charge in the fourth quarter of 1998, discussed in Note 5, and the remaining $177,000 of severance (for 16 technical staff and management) related to the Company's acquisition of ComStream in October 1998. This $179,000 is part of a termination benefits cost totaling $1,600,000; the Company paid $1,005,000 of these termination benefits prior to December 31, 1998 and $418,000 prior to June 30, 1999. 7. Related Party Transactions Sales to Agilis Communication Technologies Pte Ltd, a company under common control with Radyne ComStream, for the three months ended June 30, 1999 and 1998 were $88,000 and $112,000, respectively. Cost of such sales for the same periods were $31,000 and $70,000, respectively. For the six months ended June 30, 1999 and 1998 sales were $89,000 and $150,000, respectively. Cost of such sales for the same periods were $32,000 and $82,000, respectively. Accounts receivable from affiliates at June 30, 1999 and December 31,1998 was $36,000 and $52,000, respectively. Notes payable to ST and affiliates outstanding at June 30, 1999 and December 31, 1998 were $15,618,000. These notes bear interest at rates from 6.375% to 6.844% and mature on March 31, 2000. Interest expense on notes payable to affiliates was $284,000 and $74,000 for the three months ended June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999 and 1998, interest expense on notes payable to affiliates was $513,000 and $166,000, respectively. Accrued interest on notes payable to affiliates was $1,095,000 at June 30, 1999 compared to $581,000 at December 31, 1998. 8. 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 6.06% on balances owed at June 30, 1999). The credit agreement requires the Company to maintain certain financial leverage ratios. At June 30, 1999, the Company was in violation of one such covenant, pending the closing of the rights offering described below. 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 10 principal of $6,000,000 under the line of credit as of June 30, 1999 and $8,000,000 as of December 31, 1998. Subsequent to June 30, 1999, the Company borrowed an additional $2,920,000 on this line of credit. Notes payable to parent (ST) outstanding at June 30, 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 had 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 matured on July 15, 1999 with interest at 8% per annum. 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. Subsequent to June 30, 1999, the Company paid to Spar $3,591,644, which included $205,431 of accrued interest. The balance of the loan has been withheld, in accordance with the terms of the Comstream Holdings Purchase Agreement, pending claims for purchase price adjustments. The Company intends to finance the repayment of debt incurred for the ComStream acquisition 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. Income/(loss) Per Share A summary of the reconciliation from basic income/ (loss) per share to diluted income/ (loss) per share follows:
Three Months Six Months Ended Ended June 30 June 30 -------------------------------------------------------------- 1999 1998 1999 1998 -------------------------------------------------------------- Net Earnings (Loss) $ 421,542 (1,726,629) 104,879 (2,238,988) -------------------------------------------------------------- Basic EPS- Weighted Average Shares Outstanding 5,944,574 5,931,340 5,938,303 5,931,340 -------------------------------------------------------------- Basic Earnings (Loss) Per Share $ 0.07 (0.29) 0.02 (0.38) -------------------------------------------------------------- Basic Weighted Average Shares 5,944,574 5,931,340 5,938,303 5,931,340 Effect of diluted stock options 608,000 -- 612,114 -- -------------------------------------------------------------- Diluted EPS-Weighted Average Shares Outstanding 6,552,574 5,931,340 6,550,417 5,931,340 -------------------------------------------------------------- Diluted Earnings (Loss) Per Share $ 0.06 (0.29) 0.02 (0.38) ============================================================== Stock Options not included in Diluted EPS Since Antidilutive 634,000 206,014 634,500 246,991 --------------------------------------------------------------
11 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 restated consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1998 contained in the Company's 1998 Annual Report on Form 10-K/A. 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; other factors to which this report refers or to which the Company's 1998 Annual Report on Form 10-K/A refers. Year 2000 readiness Results of Operations Results of operations for the three month period ended June 30, 1999 compared to the three month period ended June 30, 1998, were as follows: The Company's net sales increased 376% to $12,944,000 during the period ended June 30, 1999 from $2,718,000 during the period ended June 30, 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 increased to $7,023,000 (54% of sales) during the period ended June 30, 1999 from $2,670,000 (98% of sales) during the period ended June 30, 1998. Start-up costs associated with the delivery of new products to the market place accounted for the high period costs in 1998. The Company expensed 12 $911,000 during the three months ended June 30, 1998 to write off these start-up costs and to increase the obsolescence reserve for slow-moving and obsolescent parts. The Company expenses start-up costs in the period in which they occur. Selling, general and administrative costs increased to $2,748,000 (21% of sales) during the current period from $868,000 (32% of sales) during the period ended June 30, 1998. The increase in terms of real dollars was primarily due to the Company's acquisition and integration of Comstream Holdings into the operations of the Company. The decrease in terms of percentage of expense to sales was due to the successful company-wide cost reduction efforts. Research and development expenditures increased to $2,208,000 (17% of sales) during the current period from $709,000 (26% of sales) during the period ended June 30, 1998. The increase was primarily due to the Company's acquisition and integration of Comstream Holdings into the operations of the Company. In connection with the acquisition of ComStream Holdings, Inc., Radyne allocated $3,909,000 of the purchase price to seven in-process research and development projects. This allocation represents the estimated fair value based on risk-adjusted future cash flows related to the incomplete projects. At the date of the acquisition, the development of these projects had not yet reached technological feasibility and the research and development in process had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. This allocation was based on a number of assumptions, including those regarding estimated project completion dates and costs. As of July 31, 1999, six of those projects have been completed and the other remains essentially on schedule. The original cost estimates remain essentially accurate and no other material variations in the assumptions have appeared. Therefore, management continues to regard the $3,909,000 valuation as correct. 13 The nature, amount, and timing of the costs required to complete the in-process technology are presented in the following chart:
------------------------------------- Estimated Estimated Base Product Started Cost To Cost To Costs at Description Technology Line (Month Completion Date Complete Completion Applicability -Year) Date $000's $000's $000's - ------------------------------------------------------------------------------------------------------------------- 2 MB Card QPSK,FEC Modems 01-98 08-99 $ 1,780 $ 20 $ 1,800 Coding "CM 601" Low Cost Modem Coding Modems 05-97 03-99 1,400 0 1,400* Modulation "DT8000" Ku-band Modulation Earth 03-97 12-98 2,850 0 2,850** 2 Watt Earth Station Coding Stations Transmission "DBR 2000" Data L-Band Broadcast 06-98 06-99 400 0 400 Broadcast Receiver Receivers Data Packet Protocol "ABR 202" Audio Receiver L-Band Broadcast 12-98 750 0 750 Receivers Audio Multiplexing Set Top Box Receiver DTH TV Satellite TV 03-97 07-99 1,600 0 1,600 Cable TV Cable TV Proprietary IC's - MPEG Decoders MediaCast Card Receiver Proprietary Internet 03-97 03-99 1,900 0 1,900 IC's - Receiver Internet Video Protocol Receiver DVB MPEG Decoders $ 10,680 $ 20 $ 10,700 =======================================
* Estimated at $1,500 in the Company's Form 10-K/A for the year ended 12/31/98. ** Estimated at $2,750 in the Company's Form 10-K/A for the year ended 12/31/98. Net interest expense increased from $198,000 in the period ended June 30, 1998 to $543,000 in the current period due mainly to an increase in the Company's debt level. Based on the increases in margins and lower operating costs as a percentage of sales, the Company recorded net income of $422,000 during the period ended June 30, 1999 as compared with a net loss of ($1,727,000) during the period ended June 30, 1998. 14 The Company's new-orders-booked (Bookings) increased 280% to $11,860,000 for the current period from $3,119,000 for the period ended June 30, 1998, due primarily to the integration of ComStream Holdings into the operations of the Company. The Company's level of unfilled-orders-to-ship (Backlog) increased 78% to $11,036,000 for the current period from $6,202,000 at June 30, 1998 primarily due to the record level of Bookings received during prior periods. Results of operations for the six month period ended June 30, 1999 compared to the six-month period ended June 30, 1998, were as follows: The Company's net sales increased 279% to $25,262,000 during the period ended June 30, 1999 from $6,666,000 during the six month period ended June 30, 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 June 30, 1999 from 81% during the six month period ended June 30, 1998. Start-up costs associated with the delivery of new products to the market place accounted for the high period costs in 1998. The Company expensed $911,000 during the six months ended June 30, 1998 to write off these start-up costs and to set up a provision for obsolescence. The Company expenses start-up costs in the period in which they occur. Selling, general and administrative costs increased to $5,749,000 (23% of sales) during the current period from $1,738,000 (26% of sales) during the six month period ended June 30, 1998. The increase in real costs and the reduction, in terms of percentage of sales, is primarily a result of the higher expense levels and sales amounts due to the Company's acquisition and integration of Comstream Holdings into the operations of the Company. Research and development expenditures increased to $4,516,000 (18% of sales) during the period ended June 30, 1999 from $1,368,000 (21% of sales) during the six month period ended June 30, 1998. These expenses reflect the Company's continued commitment to invest in its future through technological advances and its efforts to improve our older product lines for manufacturability and lower costs. The increase in real costs and the reduction, in terms of percentage of sales, is primarily a result of the higher expense levels and sales amounts due to the Company's acquisition and integration of Comstream Holdings into the operations of the Company. Net interest expense increased from $376,000 (6% of sales) in the six month period ended June 30, 1998 to $1,098,000 (4% of sales) in the current period due to an increase in the Company's debt level. Based on the decreases in costs and expenses as a percentage of sales, outlined above, the Company recorded net income of $105,000 during the period ended June 30, 1999 as compared with a net loss of ($2,239,000) during the six month ended June 30, 1998. The Company's new-orders-booked (Bookings) increased 216% to $25,467,000 for the six month period ended June 30, 1999 from $8,055,000 for the period ended June 30, 1998. This increase was primarily a result of the Company's acquisition and integration of Comstream Holdings into the operations of the Company. The Company's level of unfilled-orders-to-ship (Backlog) increased 78% to $11,036,000 at June 30, 1999 from $6,202,000 at June 30, 1998 primarily due to the Company's acquisition and integration of Comstream Holdings into the operations of the Company. Liquidity and Capital Resources The Company's working capital deficit was ($22,957,000) at June 30, 1999, a decrease in the working capital of $14,153,000 from ($8,804,000) at December 31, 1998. This change was primarily a result of a change in notes due to affiliates of $15,618,000 (previously classified as a long term liability) and was further affected by reductions in current assets of ($1,940,000), primarily made up of an increase in cash of $889,000 and prepaids of $248,000 as offset by decreases in accounts and other receivables of ($2,046,000) and a reduction in inventories of ($1,032,000), notes payable of ($2,000,000) and accounts payable of ($1,163,000). The Company believes that its bank credit lines, support from Stetsys Ptc Ltd 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. 15 Net cash supplied by operating activities was $3,008,000 for the current period, as compared to ($390,000) used in the six month period ended June 30, 1998. Cash used in investing activities, consisting of additions to equipment, was $119,000 for the current period as compared to the prior period amount of $215,000. The Company's net cash from financing activities was ($2,000,000) and $849,000 during the periods ended June 30, 1999 and June 30, 1998, respectively. As a result of the foregoing, the Company increased its cash balances by $889,000 during the current period, compared to an increase in cash balances of $244,000 for the six month period ended June 30, 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", the "Y2K problem" or the "Millenium Bug". 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 believe 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 complete. The only noncompliance which we discovered relates to certain date functions in diagnostic equipment, which functions we do not employ. 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 sent to all of our material vendors and customers. We have received acceptable responses from all of our mission critical vendors. We expect to receive responses from 70% to 80% of our non-critical vendors. Efforts continue to obtain as many replies as possible. In any event, we plan to increase some inventory levels to mitigate any risk of inventory supply problems. We have also created a database to track responses, problems and follow-up plans. 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 shutdown, 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 in a timely enough manner 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 16 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. 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) $ 80,000 Estimated cost to completion $ 75,000 to $125,000
- --------------------------------------------------------------------------------------------------------- Inventory Assessment Remediation Unit Testing System Testing - --------------------------------------------------------------------------------------------------------- Percentage 100% 100% 90% 50% 50% 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 June 30, 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 The annual meeting of shareholders was held on June 15, 1999. Proxies were neither solicited nor given. 5,377,500 shares were represented at the meeting. The following matters were voted on at the meeting: (1) The board of directors was elected in its entirety by all 5,377,500 shares represented at the meeting. (2) Ratification of the selection of KPMG LLP as the Company's independent accountants for the fiscal years ended December 31, 1998 and December 31, 1999. All 5,377,500 shares represented at the meeting were voted in favor of ratification. 17 Pursuant to written consents, dated as of April 30, 1999 and June 30, 1999, the majority holders of the Company's common stock agreed to amend the Company's 1996 Incentive Stock Option Plan to make non-employee directors eligible to receive options under that plan and to adopt the Company's 1999 Employee Stock Purchase Plan, which provides for the purchase of up to 1,000,000 shares of the Company's common stock by employees. 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) Registrant filed the following report on Form 8-K during the period of April 1 through June 30, 1999. Current Report on Form 8-K/A dated October 15, 1998, Item 2, as amended on May 6, 1999. Financial Statements included with respect to ComStream Holdings, Inc.'s Consolidated Balance Sheets for the Years ended December 31, 1997 and 1996, and Consolidated Statements of Operations Stockholders Equity (Deficits) and Cash Flows for the Years ended December 31, 1997, 1996 and 1995; ComStream Holdings, Inc.'s Unaudited Condensed Interim Balance Sheet for the Nine Months ended September 30, 1998, Unaudited Condensed Consolidated Statements of Operations for the Nine Months ended September 30, 1998 and 1997 and Unaudited Condensed Consolidated Statement of Cash Flows for the Nine Months ended September 30, 1998 and 1997; and Radyne Corp.'s Pro Forma Condensed Combined Balance Sheet as of September 30, 1998, Pro Forma Condensed Combined Statement of Operations for the Nine Months ended September 30, 1998 and Pro Forma Condensed Combined Statement of Operations for the Year ended December 31, 1997. * 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. 18 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: August 13, 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) 19 EX-23.1 6 CONSENT OF KPMG LLP Exhibit 23.1 Independent Auditors' Consent The Board of Directors and Stockholders Radyne ComStream Inc.: We consent to the incorporation by reference in the registration statement (No. 333-70403) on Amendment No. 2 to Form S-2 of Radyne ComStream Inc. of our report dated March 19, 1999, except for Note 4, which is as of August 4, 1999, relating to the restated consolidated balance sheet of Radyne ComStream Inc. and subsidiaries as of December 31, 1998 and the related restated consolidated statements of operations, stockholders' capital deficiency and cash flows for the year then ended, which report appears in the December 31, 1998, annual report on Form 10-K/A of Radyne ComStream Inc. and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP KPMG LLP Phoenix, Arizona August 19, 1999 EX-23.2 7 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.2 Independent Auditors Consent We consent to the incorporation by reference in this Amendment No. 2 to the Registration Statement No. 333-70403 of Radyne ComStream Inc. (formerly Radyne Corp.) on Form S-2 of our report dated February 4, 1998, appearing in the Annual Report on Form 10-K/A of Radyne ComStream Inc. (formerly Radyne Corp.) for the year ended December 31, 1998, and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Phoenix, Arizona August 25, 1999 EX-23.3 8 CONSENT OF ERNST & YOUNG LLP Exhibit 23.3 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 2 to the Registration Statement (Form S-2 No. 333-70403) and related Prospectus of Radyne ComStream Inc. for the registration of 4,745,076 shares of its common stock and to the use and incorporation by reference therein of our report dated February 16, 1998 (except for Note 11, as to which the date is April 16, 1998), with respect to the consolidated financial statements of ComStream Holdings, Inc. included in Radyne ComStream Inc.'s Report on Form 8-K/A filed with the Securities and Exchange Commission on May 5, 1999. /s/ Ernst & Young LLP ERNST & YOUNG LLP San Diego, California August 17, 1999 -----END PRIVACY-ENHANCED MESSAGE-----