-----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, B3FSoPh0jgwLiboWTCK1IRWJDViwb+cHfe5aHNT1fgiqnKTb7Eb3i3xtNr592LVE J+NOfGXOgLLzKYboEYugsA== 0000950117-00-000220.txt : 20000208 0000950117-00-000220.hdr.sgml : 20000208 ACCESSION NUMBER: 0000950117-00-000220 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000207 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: 333-90731 FILM NUMBER: 525635 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 RADYNE COMSTREAM INC. S-2/AM#3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000 REGISTRATION NO. 333-90731 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 3 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 OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION 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) ------------------- COPIES TO: JOHN B. WADE, III, ESQ. ROBERT S. KANT, ESQ. KEVIN T. COLLINS, ESQ. JERE M. FRIEDMAN, ESQ. DORSEY & WHITNEY LLP GREENBERG TRAURIG, LLP 250 PARK AVENUE ONE EAST CAMELBACK ROAD, SUITE 1100 NEW YORK, NEW YORK 10177 PHOENIX, ARIZONA 85012 (212) 415-9200 (602) 263-2300
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: [x] 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 for an offering pursuant to Rule 462(b) 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(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest 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 earliest 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: [ ] (cover continued on next page) ================================================================================ (cover continued from previous page) CALCULATION OF REGISTRATION FEE
=================================================================================================== PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF SECURITIES AMOUNT TO BE OFFERING OFFERING REGISTRATION TO BE REGISTERED REGISTERED PRICE(1) PRICE(1) FEE - --------------------------------------------------------------------------------------------------- Units, each consisting of one share of Common Stock, $.002 par value, and one Common Stock Purchase Warrant........ 460,000 Units(2) $7.00 per Unit $3,220,000 $850 Common Stock, $.002 par value, constituting part of the Units......................... 460,000 Shares (3) (3) (3) Common Stock Purchase Warrants, constituting part of the Units......................... 460,000 Warrants (3) (3) (3) Common Stock, $.002 par value, underlying Common Stock Purchase Warrants............. 460,000 Shares $8.75 per Share $4,025,000 $1,063 Representative's Purchase Option, to purchase shares of Common Stock(4)............... 40,000 Options $.00067 per Option $0.00 $0 Common Stock, $.002 par value, issuable upon exercise of the Representative's Share Purchase Option(5)............ 40,000 Shares $11.55 per Share $462,000 $122 Total(6).................... $2,035(7) ===================================================================================================
(1) Estimated in accordance with Rule 457 solely for the purpose of calculating the registration fee. (2) Including 60,000 Units that may be purchased by the underwriters to cover over-allotments. (3) In accordance with rule 457, no separate registration fee is required. (4) To be issued to the representative of the underwriters in this offering. (5) Issuable upon exercise of the representative's purchase option at a price of 165% of the initial public offering price. (6) Pursuant to Rule 416, this registration statement also covers such indeterminable additional shares as may become issuable as a result of anti-dilution adjustments in accordance with the terms of the warrants and the representative's purchase option. Total registration fee is rounded up to the nearest whole dollar. (7) On November 12, 1999 a filing fee of $4,805, determined in accordance with Rule 457, was paid with respect to 1,725,000 Units, each comprised of one share of Common Stock and one Common Stock Purchase Warrant, 1,725,000 shares of Common Stock underlying the Common Stock Purchase Warrants, 150,000 Representative's Purchase Options and 150,000 shares of Common Stock underlying the Representative's Purchase Options. An additional filing fee of $2,329, determined in accordance with Rule 457, was paid on January 12, 2000 with respect to 575,000 Units, each comprised of one share of Common Stock and one Common Stock Purchase Warrant, 575,000 shares of Common Stock underlying the Common Stock Purchase Warrants, 50,000 Representative's Purchase Options and 50,000 shares of Common Stock underlying the Representative's Purchase Option. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT NOTICE. RADYNE COMSTREAM INC. MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND RADYNE COMSTREAM INC. IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY JURISDICTION WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2000 PROSPECTUS 2,400,000 UNITS [RADYNE LOGO] RADYNE COMSTREAM INC. Radyne ComStream Inc. is offering 2,400,000 units, each consisting of one share of its common stock and one warrant to purchase one share of common stock at a price of $ per share, subject to adjustment in certain circumstances. The warrants will be exercisable at any time after they are issued, until five years from the date of this prospectus. Although the common stock and warrants are being sold to investors as units, they will not trade as units, and the common stock and warrants will be separately transferable immediately. Commencing one year from the date of this prospectus, or earlier with the consent of HD Brous & Co. Inc., we may redeem the warrants for $0.01 per warrant upon not less than 30 days' nor more than 60 days' notice mailed within five days after the closing sales price of our common stock has equaled or exceeded $ for each of 20 consecutive trading days. On February 4, 2000, our common stock closed at $10.875 per share on the OTC Bulletin Board. Prior to this offering, there has been no market for the warrants. Our common stock and warrants have been approved for listing on the Nasdaq SmallCap Market under the symbols 'RADN' and 'RADNW,' respectively. ------------------- THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. YOU SHOULD NOT INVEST IN OUR SECURITIES UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. PLEASE SEE 'RISK FACTORS' BEGINNING ON PAGE 6 OF THIS PROSPECTUS. -------------------
===================================================================================================== PER UNIT TOTAL - ----------------------------------------------------------------------------------------------------- Public Offering Price................................ - ----------------------------------------------------------------------------------------------------- Underwriting Discount................................ - ----------------------------------------------------------------------------------------------------- Proceeds, before expenses, to Radyne ComStream....... =====================================================================================================
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We have granted the underwriters an option to purchase up to an additional 360,000 units at the public offering price, less the underwriting discount, to cover over-allotments. The underwriters may exercise this option at any time within 45 days of the date of this prospectus. We expect that the units of common stock and warrants will be ready for delivery in New York, New York on or about February , 2000. HD BROUS & CO., INC. ------------------- THE DATE OF THIS PROSPECTUS IS FEBRUARY , 2000 [Color picture consisting of four samples of our print advertising, including depictions of our products.] TRADEMARKS Each trademark, trade name or service mark appearing in this prospectus belongs to its respective holder. Our trademarks include ComStream'TM', MediaCast'TM', IP Sat'TM' and IntelliCast'TM'. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. All references to 'we,' 'us,' the 'company,' and 'Radyne ComStream' mean Radyne ComStream Inc., including subsidiaries and predecessors, except where it is clear that the term refers only to Radyne ComStream Inc. Unless otherwise indicated, all information contained in this prospectus assumes that the underwriters will not exercise their over-allotment option, HD Brous will not exercise its representative's purchase option, and that none of the warrants included in the units and no other outstanding options will be exercised. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under 'Risk Factors' and elsewhere in this prospectus. RADYNE COMSTREAM INC. We design, manufacture, and sell equipment used in the ground-based portion of satellite communication systems to receive data from, and transmit data to, satellites. We also design, manufacture, and sell equipment used in cable television systems. Our products are used in applications for telephone, data, video and audio broadcast communications, private and corporate data networks, Internet applications, and digital cable television. We serve customers in over 80 countries, including customers in the television broadcast, international telecommunications, Internet service provider, and private communication networks industries, as well as the U.S. government. Our products have been utilized in major communications systems worldwide, including the following: The world's highest capacity domestic, digital satellite telephone network -- PT Telkom, Indonesia. Italy's first digital telephone/data network -- Telespacio, Italian Railways. Colombia's first alternate telecommunications network -- Americatel. Earth stations for the first international satellite links in China, India, Pakistan, Brazil, Haiti, and Zambia. The world's largest private satellite broadcast network -- Reuters. International Cablecasting Technologies -- utilizing 40,000 digital audio broadcast receivers. We believe that the demand for the types of products that we sell will increase as factors such as worldwide economic development, governmental policies aimed at improving the telecommunications infrastructure in developing countries, and the globalization of commerce contribute to an increased worldwide requirement for communications services. We believe these factors will continue to drive demand for communications systems, including those based on satellite technology. We also believe we are well-positioned to capitalize on this increased demand for satellite communications systems as a result of our ability to leverage our competitive advantages, which include the following: Our experienced management group, which has extensive technological and engineering expertise and excellent customer relationships. The members of our management team have an average of over 20 years of experience in the satellite communications industry. Our expansive line of well-known, well-respected, off-the-shelf, state-of-the-art equipment that enables us to meet our customers' requirements. Our ability to custom design products for our customers' special applications and to provide a one-stop shopping option to our customers. 1 Our ability to meet the complex satellite ground communications systems requirements of our customers in diverse political, economic, and regulatory environments in various locations around the world. Our worldwide sales and service organization with the expertise to successfully conduct business internationally through sales and service offices staffed by our employees in most of our major markets throughout the world, including Beijing, Singapore, London, Jakarta, and Amsterdam. Our October 1998 acquisition of a significant competitor, ComStream Holdings Inc., which: significantly expanded our product lines, enhanced our sales force, increased our market share, and increased our profitability. Our net sales increased to $21.1 million in the year ended December 31, 1998 from $13.4 million in the year ended December 31, 1997 and to $39.3 million in the nine months ended September 30, 1999 from $10.0 million in the nine months ended September 30, 1998. We had net income of approximately $914,000 in the nine months ended September 30, 1999 compared to a net loss of $2.8 million in the nine months ended September 30, 1998. These increases in sales and net income resulted in large part from our acquisition of ComStream and our ability to significantly reduce ComStream's operating expenses. Our last audited balance sheet as of December 31, 1998 showed an accumulated deficit of $21.4 million and a shareholders' deficit of $15.2 million. On December 1, 1999 we completed a rights offering to our shareholders to purchase an aggregate of up to 4,745,076 shares of our common stock. These rights were exercisable at a purchase price of $3.73 per share. Our shareholders purchased 4,520,264 shares of common stock in this rights offering at an aggregate purchase price of $16,860,585. Our controlling shareholder, Singapore Technologies Pte Ltd through its wholly-owned subsidiary, Stetsys Pte Ltd, and Stetsys Pte Ltd's wholly-owned subsidiary, Stetsys US, Inc. (Stetsys Pte, and Stetsys US, collectively, ST), purchased 4,300,800 shares of common stock issued in the rights offering at an aggregate purchase price of approximately $16,000,000. ST now owns approximately 90% of our outstanding common stock. We used the proceeds of the rights offering to retire approximately $15,600,000 in short-term debt plus accrued interest we owed to ST. MARKET OPPORTUNITY AND STRATEGY We believe that growth in demand for ground-based satellite system equipment is being driven by the growth of satellite-delivered communications services. According to the Satellite Industry Indicators Survey: Selected 1998 Survey Results conducted by the Satellite Industry Association and Futron Corporation, total revenues for providers of satellite communications services grew at an 18% compound annual growth rate to $26.2 billion in 1998, from $21.2 billion in 1997 and $15.9 billion in 1996. The Satellite Industry Association estimates that the global market for satellite ground equipment and integration services was $15.2 billion in 1998. We currently address a niche of the ground-based satellite equipment market that our management estimates currently generates worldwide revenues of $800 million. We intend to expand our share in this market by: targeting providers of broadcast communications services worldwide, exploiting new applications for our existing satellite technology, developing new products to exploit new market opportunities, providing high-margin customized products to niche markets, and pursuing future acquisitions of competitive or complementary companies. 2 We will use a significant portion of the net proceeds of this offering to fund our research and development program so that we can develop new products for satellite communications systems, including products designed to address transmission requirements for the Internet and digital television industries. Our corporate headquarters are located at 3138 E. Elwood Street, Phoenix, Arizona 85034. Our telephone number is (602) 437-9620. We maintain an Internet Website at www.radynecomstream.com. Information contained at our Website is not a part of this prospectus. THE OFFERING Securities offered by Radyne ComStream....... 2,400,000 units, each unit consisting of one share of common stock and one five-year common stock purchase warrant. Exercise of warrants......................... Each warrant is exercisable to purchase one share of common stock at a price of $ , subject to adjustment in certain circumstances, at any time after the warrants are issued, until five years from the date of this prospectus. The common stock and warrants included in the units will be separately transferable immediately. Redemption of warrants....................... Commencing one year from the date of this prospectus, or earlier with the consent of HD Brous & Co., Inc., we may redeem the warrants for $0.01 per warrant upon no less than 30 nor more than 60 days notice mailed within five days after the closing sales price of the common stock has equaled or exceeded $ for each of 20 consecutive trading days. Common stock outstanding prior to this offering................................... 10,733,977 shares(1) Securities to be outstanding after this offering................................... 13,133,977 shares of common stock and 2,400,000 warrants(1) Use of proceeds.............................. We intend to use the net proceeds of this offering to fund our research and development program as a part of our growth strategy, hire additional technical personnel, and for working capital. See 'Use of Proceeds.' Nasdaq SmallCap Market symbols: Common Stock............................. 'RADN' Warrants................................. 'RADNW'
- --------- (1) Based on 10,733,977 shares outstanding on December 31, 1999, the number of shares to be outstanding after the offering excludes the following: 2,400,000 shares of common stock reserved for issuance upon the exercise of the 2,400,000 warrants included in the units; 1,790,670 shares of common stock remaining reserved for issuance under our 1996 Incentive Stock Option Plan; 1,000,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; and 240,000 shares of common stock reserved for issuance under the representative's purchase option to be issued to HD Brous & Co. Inc. 3 SUMMARY CONSOLIDATED FINANCIAL DATA The summary consolidated financial data below should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the restated consolidated financial statements and the related notes included elsewhere in this prospectus.
NINE MONTHS ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------------- 1997 1998 1998 1999 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues.............................. $ 13,447 $ 21,112 $ 9,974 $ 39,262 Gross profit................................ 5,425 5,303 2,269 18,171 Selling, general and administrative expense................................... 4,242 5,531 2,544 9,139 Research and development expenses........... 2,262 4,296 1,945 6,730 Total operating expenses.................... 6,504 18,665 4,489 15,869 Operating income (loss)..................... (1,080) (13,362) (2,220) 2,302 Net income (loss) before extraordinary income and taxes.......................... (1,757) (14,538) (2,789) 914 EBITDA(1)(2)................................ (625) (12,298) (1,824) 4,303 Basic net income (loss) per share........... (0.35) (2.45) (0.47) 0.15 Diluted net income (loss) per share......... (0.35) (2.45) (0.47) 0.14 Shares used in computing income (loss) per common share:(3)(4) Basic................................... 5,012,664 5,931,346 5,931,340 5,961,937 Diluted................................. 5,012,664 5,931,346 5,931,340 6,401,161
- --------- (1) EBITDA consists of earnings (loss) before interest, income taxes, depreciation and amortization. EBITDA is a measure commonly used to assist in understanding our operating results. However, it is not intended to represent cash flow or results of operations in accordance with generally accepted accounting principles. (2) Net income figures for the year ended December 31, 1998 include a loss of $3,909,000 related to expenses for in-process research and development costs included in the ComStream acquisition. (3) See note 13 of the notes to the restated consolidated financial statements for a determination of the number of shares used in computing basic and diluted net income per share and note 1 of the notes to the restated consolidated financial statements for an explanation of the effect of the acquisition of ComStream Holdings Inc. on the consolidated financial statements. (4) Per share data and shares outstanding reflect an adjustment for the effects of the 1-for-5 reverse split of our common stock, which became effective on January 9, 1997. 4
AS OF SEPTEMBER 30, 1999 (UNAUDITED) -------------------------------------------------------- PRO FORMA AS ADJUSTED FOR PRO FORMA AS ADJUSTED COMPLETION OF FOR RIGHTS OFFERING AND ACTUAL(1) RIGHTS OFFERING(2) THIS OFFERING(2)(3) --------- ------------------ ------------------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and investments........ $ 1,622 $ 2,865 $17,390 Working capital (deficiency).................. (5,649) (4,407) 10,119 Total assets.................................. 24,968 26,210 40,736 Total shareholders' equity.................... 1,015 1,957 16,483
- --------- (1) Includes our sale of 4,187,205 shares of common stock and our receipt of proceeds of $15,618,272 in the rights offering through September 30, 1999. (2) Gives effect to our sale of an additional 333,059 shares of common stock in the rights offering subsequent to September 30, 1999, and our receipt of proceeds of $1,242,313 from the sale of such shares. Expenses associated with the rights offering were approximately $300,000 and were paid as of September 30, 1999. (3) Reflects our sale of 2,400,000 units (not including the shares underlying the warrants included in the units) offered by this prospectus at an assumed public offering price of $7.00 per unit, after deducting the underwriting discount and the estimated offering expenses that we will pay. See 'Use of Proceeds' and 'Capitalization.' 5 RISK FACTORS A purchase of units involves a high degree of risk. You should consider carefully the following risk factors, in addition to the other information contained in this prospectus, before purchasing any units. WE HAVE A HISTORY OF OPERATING LOSSES, ONLY RECENTLY BECAME PROFITABLE, AND COULD SUFFER FURTHER LOSSES IN THE FUTURE. We have incurred significant operating losses since our inception. Although we generated operating income of $2,302,000 and net income of $913,547 for the nine months ended September 30, 1999, we incurred operating losses 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 12 months ended June 30, 1996. Our last audited balance sheet as of December 31, 1998 showed an accumulated deficit of approximately $21.4 million and a shareholders' deficit of $15.2 million. Our predecessor, Radyne Corp., emerged from Chapter 11 bankruptcy protection in December 1994. Although the rights offering that we completed in December 1999 has eliminated our shareholders' deficit at September 30, 1999, our consolidated financial statements for the year ended December 31, 1998 included a note stating that our operating losses, working capital deficit, and shareholder's deficit at that time raised doubts about our ability to operate as a going concern. We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. Accordingly, you should consider the likelihood of our future success in light of our bankruptcy in 1994, the losses we have incurred since our bankruptcy, and the possibility that we may incur future operating losses. Our ability to expand our ground-based satellite systems market, penetrate new markets, such as Internet-related products, and generate additional revenues and future positive operating and net income depends, in large part, on our ability to sell our products to existing and new customers and the profitability of such sales. There can be no assurance that we will generate significant additional revenue or report positive quarterly or annual operating results. Based upon the matters set forth in this risk factor and the other risk factors contained in this prospectus, you should not invest in our securities unless you can afford to lose your entire investment. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' WE HAVE DEPENDED ON OUR CONTROLLING SHAREHOLDER FOR CAPITAL, AND WE HAVE SIGNIFICANT SHORT-TERM LOANS THAT COULD LEAD TO A CASH SHORTAGE. To meet our working capital requirements, we have depended on a succession of short-term loans from, and purchases of our common stock by, ST and its affiliates since we emerged from Chapter 11 protection on December 16, 1994. Prior to its acquisition by us, ComStream depended on borrowings facilitated by its parent company, Spar Aerospace Limited. ST has no obligation to continue to provide us with any financing and you should not assume that ST will provide us with any future financing. We have a $20,500,000 uncommitted bank line of credit on which we owed approximately $12,920,000 as of December 31, 1999. All loans pursuant to the bank line of credit are short-term loans with maturities no later than September 28, 2000. The bank could demand repayment at any time after the loans mature, in which case we might have to use the proceeds of this offering and seek additional sources of financing to repay our line of credit. The use of the proceeds of this offering to repay our bank debt instead of funding our research and development program would adversely affect our growth strategy. If we are required to seek additional sources of financing to repay our line of credit, such financing may not be available on terms that we consider acceptable or may not be available in sufficient amounts to enable us to repay our obligations to the bank. Any of these circumstances would have a material and adverse impact on our business, financial condition, and results of operations. We believe the bank's willingness to provide us with this line of credit is based in part on the bank's relationship with ST. ST has provided the bank with a letter of awareness of our debt in 6 which ST states it (1) will endeavor to ensure that we utilize sound financial and business practices in our operations and (2) will give the bank at least 60 days' prior written notice of any divestment of our shares held by ST. ST has not, however, guaranteed our indebtedness to the bank and is under no obligation to do so or to otherwise satisfy our debts if we fail to repay them when due. Additionally, ST has no obligation to and may not continue indefinitely to provide assurances to our lender or otherwise assist us in maintaining such financing. Our current credit agreement with our bank expires on September 28, 2000. We cannot assure you that a renewal agreement will be executed, when the current agreement expires. If a renewal agreement is not executed the bank is likely to demand repayment of our loan. If we are required to repay the loan it would have a material adverse impact on our financial condition. Since December 31, 1998, we have not been in compliance with the covenant in our prior and current credit agreements with the bank that requires us to limit our indebtedness to no more than twice our tangible net worth. Our failure to comply with this covenant or any other covenant contained in our loan agreement with the bank could cause the bank to demand repayment of our loan. Our current credit agreement does not require us to comply with this covenant until March 31, 2000. We expect to be in compliance with this covenant upon completion of this offering, but we cannot assure you that this will be the case. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.' WE DEPEND ON INTERNATIONAL SALES, WHICH COULD CAUSE OUR SALES LEVELS TO BE VOLATILE. Our export sales were approximately 55% of our net sales for the year ended December 31, 1997, 50% of our net sales for the year ended December 31, 1998 and 56% of our net sales for the nine months ended September 30, 1999. According to DTT Consulting, a satellite industry consulting and research firm, there has been significant growth in the use of satellites for Internet traffic in recent years. This growth has been centered on connecting Internet service providers, or ISPs, with Internet servers. ISPs rarely use satellites to provide point-to-point infrastructure for the Internet in the United States and, thus, we expect that our sales to this market will be primarily to customers located outside the United States. We anticipate that foreign sales will continue to account for a significant portion of our revenue in the near future. Our foreign sales are denominated in U.S. dollars. As a result, any decrease in the value of foreign currencies relative to the U.S. dollar may adversely affect the demand for our products by increasing their costs in the currency of those countries. For example, the economic crisis in the Pacific Rim region and other international markets decreased our bookings from these regions and adversely affected our results of operations in the fourth quarter of 1998 and in the first nine months of 1999. We expect these negative trends to continue in the near future. Additional risks in the international marketplace include the following: changing regulatory requirements, the availability of export licenses, political and economic instability, difficulties in staffing and managing foreign operations, tariffs and other trade barriers, complex foreign laws and treaties, and difficulty of collecting foreign account receivables. In addition, we are subject to the Foreign Corrupt Practices Act, which prohibits us from making payments to government officials and others in order to influence the granting of contracts we may be seeking. Our non-U.S. competitors are not subject to this law and this may give them a competitive advantage over us. See 'Business -- Customers.' 7 A DOWNTURN IN THE RAPIDLY EVOLVING TELECOMMUNICATIONS AND INTERNET INDUSTRIES COULD HARM OUR BUSINESS. Our success depends upon the continued growth of the telecommunications industry, particularly with regard to the Internet. The global telecommunications and Internet industries are evolving rapidly, and the potential growth rates or future trends in technology development are unpredictable. We cannot provide assurance that the deregulation, privatization and economic globalization of the worldwide telecommunications market that has resulted in demand for technologies and services will continue in a manner favorable to us or our business strategies. In addition, there is no assurance that the growth in demand for Internet services and the resulting need for high-speed or enhanced telecommunications products will continue at its current rate or at all. See 'Business -- Market Opportunities.' WE DEPEND ON DEVELOPING MARKETS AND THEIR UNCERTAIN GROWTH POTENTIAL COULD RESULT IN LOSSES. We believe a substantial portion of the growth in demand for our products will depend upon customers in developing countries. We cannot provide assurance that such increases in demand will occur or that prospective customers will accept our products. The degree to which we are able to penetrate potential markets in developing countries will be affected to a large extent by the speed with which other competing elements of the communications infrastructure, such as other satellite-delivered solutions, telephone lines, television cable, and land-based solutions, are installed in developing countries in which we sell our products. The failure to increase the sales of our products in developing countries would have a material adverse effect on our business, financial condition, and results of operations. See 'Business -- Market Opportunities.' THE LOSS OF THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR THE INABILITY TO ATTRACT OR RETAIN ADDITIONAL TECHNICAL PERSONNEL COULD IMPAIR OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS. Our future performance depends significantly on Robert C. Fitting, our President and Chief Executive Officer, and Steve Eymann, our Executive Vice President and Chief Technical Officer. Under the respective employment agreements we have with each of Messrs. Fitting and Eymann, they will serve as our Chief Executive Officer and President and our Executive Vice President, respectively, until the earlier of June 30, 2000 or such time as our adjusted earnings before interest and taxes exceeds $6,000,000 for a period of four calendar quarters. The loss of either of these key employees would adversely affect our operations. Our continued ability to attract and retain highly skilled personnel also is critical to the operation and expansion of our business. The market for skilled engineers and other technical personnel is extremely competitive, and recruitment and retention costs are high. Although we have been able to attract and retain the personnel necessary to operate our business, we may not be able to do so in the future, particularly as we expand our business into Internet-related products and other markets. The failure to attract and retain personnel with the necessary skills when needed could materially and adversely affect our business and expansion plans. See 'Management.' COMPETITION IN OUR INDUSTRY IS INTENSE AND CAN LEAD TO REDUCED SALES AND MARKET SHARE. The markets for ground segment systems are highly competitive. We have a number of major competitors in the satellite communications equipment field. These include large companies, such as Hughes Network Systems, Inc., NEC, and Adaptive Broadband Corp. (formerly California Microwave), which have significantly larger and more diversified operations and greater financial, marketing, personnel and other resources than we possess. As a result, these competitors may develop and expand their products more quickly, adapt more quickly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products than we can. 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 8 compared to the costs of the products generally offered by our major competitors, have contributed to our ability to compete. Most of our competitors offer products that have one or more features or functions similar to those that we offer. Competition from current competitors or future entrants in the markets in which we compete could cause us to lose orders or customers or could force us to lower the prices we charge for our products, all of which would have a material adverse impact on our business, financial condition, and results of operations. See 'Business -- Competition.' OUR PRODUCTS MAY BECOME OBSOLETE DUE TO RAPID TECHNOLOGICAL CHANGE. The telecommunications industry, including the ground-based satellite communications systems business, is characterized by rapid and continuous technological change. Future technological advances in the telecommunications industry may result in the introduction of new products or services that compete with our products or render them obsolete. Our success depends in part on our ability to respond quickly to technological changes through the improvement of our current products and the development of new products. Accordingly, we believe that we will need to allocate a substantial amount of capital to research and development activities in the future. We may not generate cash flow from operations or have access to outside financing in amounts that are sufficient to adequately fund the development of new products. Even if we are able to obtain the required funding to develop new products, we cannot assure you that we will be able to develop products that we will be able to sell successfully. Our inability to improve our existing products and develop new products could have a material adverse effect on our business, financial condition, and results of operations. See 'Business -- Research and Development.' THE HIGH COST OF RESEARCH AND DEVELOPMENT REDUCES OUR PROFITABILITY. Our future growth depends on penetrating new markets, adapting existing satellite communications products to new applications, and introducing new communications products that achieve market acceptance and benefit from our 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 and $6,730,000 in the nine months ended September 30, 1999 on research and development activities. This represents 20% of our net sales for the year ended December 31, 1998 and 17% for the nine months ended September 30, 1999. We intend to utilize a significant portion of the net proceeds of this offering to fund our research and development efforts. Since we account for our research and development as an operating expense, these expenditures will adversely affect our earnings in the near future. Additionally, even if adequately funded, our research and development program may not produce successful results, which would have a material adverse effect on our business, financial condition, and results of operations. See 'Business -- Research and Development.' RAPID GROWTH COULD STRAIN OUR PERSONNEL AND SYSTEMS. Our operations have expanded significantly as a result of our acquisition of ComStream. In order to pursue successfully the opportunities presented by the ground segment and emerging satellite-delivered communications and Internet/intranet-infrastructure markets, we will be required to continue to expand our operations. This expansion could place a significant strain on our personnel, management, and financial and other resources. In order to manage any future growth effectively, we will be required to: attract, train, motivate, and manage a significantly larger number of employees; conduct product engineering and management, sales and marketing efforts, and customer support activities; and manage higher capital requirements. Any failure to manage any further growth in an efficient manner and at a pace consistent with our business could have a material adverse effect on our growth and our business, financial 9 condition, and results of operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations.' OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY OF OTHERS. We rely on our proprietary technology and intellectual property to maintain our competitive position. Unauthorized parties could attempt to copy aspects of our technologies or to obtain information that we regard as proprietary. We may not be able to police unauthorized use of our intellectual property. Our failure to protect our proprietary technology and intellectual property could adversely affect our competitive position. We generally rely on confidentiality agreements with our employees and some of our suppliers to protect our proprietary technology. We also control access to and distribution of confidential information concerning our proprietary technology. We cannot guarantee that the other parties to these agreements will not disclose or misappropriate the confidential information concerning our proprietary technology, which could have a material adverse effect on our business. We rely on patents to protect certain of our proprietary technology. Patents, however, often provide only narrow protection that may not prevent competitors from developing products that function in a manner similar to those covered by our patents. In addition, some foreign countries in which we sell our products do not provide the same level of protection to intellectual property as the laws of the United States provide. We cannot assure you that any patents we currently own or control, or that we may acquire in the future, will prevent our competitors from independently developing products that are substantially similar or superior to ours. Third parties may in the future assert that our technology violates their intellectual property rights. As a result of such claims, we could be required to enter into licensing arrangements or develop non-infringing products, which could be prohibitively expensive or could divert a significant amount of resources from other aspects of our business. We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights or to defend against claims that our products or technologies infringe the rights of third parties. Litigation can be very expensive and can distract our management's time and attention, which could adversely affect our business. In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation. See 'Business -- Intellectual Property.' WE DEPEND UPON CERTAIN SUPPLIERS AND SUBCONTRACTORS, THE LOSS OF WHICH COULD CAUSE AN INTERRUPTION IN THE PRODUCTION OF OUR PRODUCTS. We rely on subcontractors to assemble and test some of our products. Additionally, our products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. We maintain limited inventories of these products and do not have long-term supply contracts with our vendors. In the event our subcontractors or suppliers are unable or unwilling to fulfill our requirements, we could experience an interruption in product availability until we are able to secure alternative sources of supplies. We are also subject to price increases by suppliers that could increase the cost of our products or require us to develop alternative suppliers, which could interrupt our business. It may not be possible to obtain alternative sources at a reasonable cost. Supply interruptions could cause us to lose orders or customers, which would result in a material adverse impact on our business, financial condition, and results of operations. See 'Business -- Manufacturing.' OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND WE ANTICIPATE THAT THEY COULD DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE. We may continue to experience significant quarter to quarter fluctuations in our operating results, which may result in volatility in the price of our common stock. These fluctuating operating results result from a variety of factors, including the following: timing of the initiation and completion of our purchase orders, demand for our products, introduction of new or enhanced products by us or our competitors, 10 growth of demand for Internet-based products and services in developing countries, timing of significant marketing programs we may implement, extent and timing of hiring additional personnel, competitive conditions in our industry, and general economic conditions in the United States and abroad. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations.' THE OWNERSHIP INTEREST OF OUR CONTROLLING SHAREHOLDER MAY MAKE OUR STOCK LESS ATTRACTIVE TO INVESTORS AND POTENTIAL ACQUIRORS. Upon the completion of this offering, ST will own approximately 74% of our outstanding common stock. ST will, therefore, continue to have the ability to elect all of our directors and to control the outcome of all issues submitted to a vote of our shareholders. It also would be impossible for a third party to acquire us without the consent or participation of ST. ST has signed a lock-in agreement required by certain state regulatory authorities that could, in certain circumstances, reduce the proceeds receivable by ST in the event of a sale or merger of our company during the term of the lock-in agreement. The lock-in agreement is for a term of two years, unless earlier terminated as provided in the agreement. This requirement might make ST less likely to consent to any sale or merger of our company during the term of this lock-in agreement. See 'Principal Shareholders.' YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION WHEN YOU PURCHASE UNITS IN THIS OFFERING. 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 September 30, 1999, after giving pro forma effect to our receipt of the net proceeds of our rights offering, we would have had a pro forma net tangible book value (deficit) of approximately $(0.17) per share. Net tangible book value is the amount of our total assets minus intangible assets and liabilities. At September 30, 1999, after giving pro forma effect to our receipt of the net proceeds of our rights offering and the net proceeds of this offering, we would have a pro forma net tangible book value of $0.99 per share. This represents a gain in our net tangible book value of $1.16 per share for the benefit of our current shareholders, and dilution of $6.01, or 85.8% of the public offering price, for investors in this offering. Investors in this offering will be subject to substantially more dilution upon the exercise of outstanding options. These options represent an additional 1,542,706 shares of common stock that could be issued in the future. See 'Dilution.' SHARES OF STOCK ISSUABLE PURSUANT TO OUR STOCK OPTION PLAN, STOCK PURCHASE PLAN, WARRANTS, AND THE REPRESENTATIVE'S PURCHASE OPTION MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As of December 31, 1999, we have outstanding under the 1996 Incentive Stock Option Plan options to purchase an aggregate of 1,542,706 shares of common stock at a weighted average exercise price of $3.10 per share (in the case of 398,756 of such options, the optionee/employee would be entitled to a bonus of $1.72 per share upon exercise). We may sell an additional 1,000,000 shares to employees at 85% of fair market value pursuant to our 1999 Employee Stock Purchase Plan. The exercise of the options granted under our stock option plan and the sales of stock under our purchase plan would further reduce a shareholder's percentage voting and ownership interest. See 'Management -- Employee Compensation Plans.' Upon completion of this offering, we will issue to the representative of the underwriters for nominal consideration an option to purchase up to 240,000 shares of common stock. This option will be exercisable for five years after the date of this prospectus at an exercise price of $ per share (165% of the offering price of the units). See 'Underwriting.' The options granted under our stock option plan and the representative's purchase option are likely to be exercised when our common stock is trading at a price that is higher than the exercise price of these options and we would be able to obtain a higher price for our common stock than 11 we will receive under such options. The exercise, or potential exercise, of these options could adversely affect the market price of our common stock and adversely affect the terms on which we could obtain additional financing. THE LARGE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. The sale, or availability for sale, of a substantial number of shares of common stock in the public market could materially adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of our equity securities. At the conclusion of this offering, there will be approximately 13,133,977 shares of common stock issued and outstanding. Of these shares, approximately 3,163,742 will be freely transferable. ST and certain of our officers hold 9,906,151 shares, which would be eligible for resale, subject to the volume and manner of sale limitations of Rule 144 of the Securities Act. An additional 64,084 shares are 'restricted shares' as that term is defined in Rule 144 and are eligible for sale under the provisions of Rule 144(k). The representative will have registration rights for purposes of reselling any shares purchased upon exercise of the representative's purchase option. We have registered the shares of common stock issuable pursuant to our stock option plan and stock purchase plan and shares issued under these plans will generally be freely transferable. In addition, the shares issuable upon the exercise of the warrants sold in this offering will be freely transferable. See 'Shares Eligible for Future Sale.' THE MARKET PRICE OF OUR SHARES HAS BEEN VOLATILE AND COULD RESULT IN LOSSES TO OUR SHAREHOLDERS. We cannot predict the effect that this offering will have on the trading price of our common stock. We cannot provide assurance that the market price of our common stock will not fall below the initial offering price or that, following the offering, a shareholder will be able to sell shares acquired in this offering at a price equal to or greater than the offering price. Since we emerged from bankruptcy, there has been a very limited trading market for our common stock. We believe that the low volume of trading in this market has been the primary reason that the market price of our common stock has varied widely. We cannot assure you that an active trading market will develop for our common stock following this offering. In addition, the market price of our common stock may continue to be volatile after this offering. The price of the common stock or the warrants may be subject to significant fluctuation in the future. There has been no prior market for the warrants and there can be no assurance that one will develop or be maintained after this offering. See 'Price Range of Common Stock.' WARRANTHOLDERS MAY SUFFER POTENTIAL ADVERSE EFFECTS FROM THE REDEMPTION OF THE WARRANTS AFTER THIS OFFERING. Commencing one year from the date of this prospectus, or earlier with the consent of HD Brous & Co., Inc. we may call the warrants for redemption at a price of $.01 per warrant upon not less than 30 days' nor more than 60 days' notice if the average closing price of our common stock is at least $ per share for each of the 20 consecutive trading days ending not earlier than five days from the date we call the warrants for redemption. If we call the warrants for redemption, the holders will have the right to: exercise the warrants and pay the exercise price at a time when it may be disadvantageous for the holder to do so, sell the warrants at the then-current market price, or accept the redemption price, which is likely to be substantially less than the market value of the warrants. See 'Description of Securities -- Common Stock Purchase Warrants.' 12 WE MUST MAINTAIN A CURRENT PROSPECTUS REGISTRATION FOR WARRANT HOLDERS TO EXERCISE WARRANTS. You will only be able to exercise the warrants if (a) a current prospectus under the Securities Act relating to the shares of common stock issuable upon exercise of the warrants is then in effect and (b) such securities are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the warrant holders reside. We have agreed with the underwriters to maintain the effectiveness of a current prospectus covering the common stock underlying the warrants and to use our best efforts to maintain the qualification for the sale of the shares of common stock underlying the warrants under certain state securities laws. However, there can be no assurance that we will be able to do this. Persons residing in states where the shares underlying the warrants are not qualified for sale may acquire the warrants, pursuant to 'secondary market' trading exemptions under the securities laws for those states. We will not accept payment for or issue common stock upon the exercise of any warrants unless (1) there is an effective and current registration statement covering the issuance of the common stock upon exercise of the warrants, and (2) such common stock is qualified for sale or exempt from qualification under the applicable securities laws of the state in which the exercising warrant holder resides. If either condition is not met, we will refund those payments to the warrant holder. The value of the warrants may be greatly reduced if we fail to meet our registration obligations. See 'Description of Securities -- Common Stock Purchase Warrants.' OUR SECURITIES COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH COULD LEAD TO LOSSES FOR INVESTORS. Our common stock and warrants have been approved for listing on the Nasdaq SmallCap Market. Prior to this offering, our common stock was listed on the OTC Bulletin Board. To qualify for continued inclusion in the Nasdaq SmallCap Market, we will have to maintain. either (1) $2,000,000 in net tangible assets (total assets minus total liabilities and goodwill), (2) market capitalization of $35,000,000, or (3) net income of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years; and a public float of at least 500,000 shares with a market value of at least $1,000,000. Public float is defined as shares not directly or indirectly held by any of our officers or directors or by any other person who is the beneficial owner of more than 10% of the total shares outstanding. In addition, continued inclusion requires two market-makers, a minimum bid price for the common stock of $1.00 per share, and at least 300 shareholders holding 100 shares or more. If we fail to meet the listing maintenance criteria of the Nasdaq SmallCap market in the future for any reason, Nasdaq may discontinue the inclusion of our securities in such market. In the event of delisting, trading in our securities may then continue to be conducted on the OTC Bulletin Board or in the over-the-counter market. In this event you may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our securities. WE HAVE PROVISIONS IN OUR CERTIFICATE OF INCORPORATION THAT SUBSTANTIALLY ELIMINATE THE PERSONAL LIABILITY OF MEMBERS OF OUR BOARD OF DIRECTORS FOR VIOLATIONS OF THEIR FIDUCIARY DUTY OF CARE AS A DIRECTOR AND THAT ALLOW US TO INDEMNIFY OUR OFFICERS AND DIRECTORS. THIS COULD MAKE IT VERY DIFFICULT FOR YOU TO BRING ANY LEGAL ACTIONS AGAINST OUR DIRECTORS FOR SUCH VIOLATIONS OR COULD REQUIRE US TO PAY ANY AMOUNTS INCURRED BY OUR DIRECTORS IN ANY SUCH ACTIONS. Pursuant to our certificate of incorporation, members of our Board of Directors will have no liability for violations of their fiduciary duty of care as a director, except in limited circumstances. This means that you may be unable to prevail in a legal action against our directors even if you believe they have breached their fiduciary duty of care. In addition, our certificate of incorporation allows us to indemnify our directors from and against any and all expenses or liabilities arising from or in connection with their serving in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they 13 otherwise would be required to pay. See 'Management -- Limitation of Directors' Liability and Indemnification of Directors and Officers.' SINCE SOME MEMBERS OF OUR BOARD OF DIRECTORS ARE NOT RESIDENTS OF THE UNITED STATES AND CERTAIN OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, YOU MAY NOT BE ABLE TO ENFORCE ANY U.S. JUDGMENT FOR CLAIMS YOU MAY BRING AGAINST SUCH DIRECTORS OR ASSETS. Two members of our board of directors are residents of Singapore, and an immaterial portion of our assets and a substantial portion of the assets of these directors are located outside the United States. As a result, it may be more difficult for you to enforce a lawsuit within the United States against these non-U.S. residents than if they were residents of the United States. Also, it may be more difficult for you to enforce any judgment obtained in the United States against our assets or the assets of our non-U.S. resident directors located outside the United States than if these assets were located within the United States. We cannot assure you that foreign courts would enforce: liabilities predicated on U.S. federal securities laws in original actions commenced in such foreign jurisdiction; or judgments of U.S. courts obtained in actions based upon the civil liability provisions of U.S. federal securities laws. PARTIES ON WHICH WE RELY MAY HAVE YEAR 2000 TECHNOLOGY PROBLEMS THAT COULD DISRUPT OUR BUSINESS. The Year 2000 issue concerns the fact that certain computer systems and processors may recognize the designation '00' as 1900 when it is intended to mean 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 the date January 1, 2001 (1-1-01). All of these date-related issues are commonly referred to as the Year 2000 issue. 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. Prior to December 31, 1999, we completed that review and believe that all mission critical systems at our Phoenix and San Diego facilities are Year 2000 compliant. Our Year 2000 readiness plan also involved the review of our non-information technology systems, a review that we consider to be complete. The only noncompliance that we discovered relates to certain date functions in diagnostic equipment, which functions we do not employ. To date, we have not encountered any significant problems in our information technology systems or non-information technology systems related to the Year 2000 issue, but we cannot assure you that we will not encounter such problems in the future. As part of our comprehensive review, we have verified the Year 2000 readiness of third parties (vendors and customers) with whom we have material relationships. This is a particular concern in light of our reliance on overseas assembly operations. We sent a Year 2000 readiness survey to all of our material vendors and customers. We have received acceptable responses from all of our mission critical vendors. We received responses from approximately 70% of our non-critical vendors. To date, we have not encountered any significant problems with our vendors related to the Year 2000 issue, but we cannot assure you that we will not encounter such problems in the future. While we believe our efforts to date are adequate to prevent any Year 2000 issue from having a material adverse effect on us, our assessment may turn out to be inaccurate. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance.' 14 USE OF PROCEEDS We estimate the net proceeds to us from the sale of the units in this offering will be approximately $14,525,000, or approximately $16,270,000 if the underwriters' over-allotment option is exercised in full, based on an assumed public offering price of $7.00 per unit and after deducting the underwriting discount and our estimated offering expenses. We intend to use the net proceeds from this offering for the following purposes and in the following order of priority:
PERCENTAGE OF PURPOSE AMOUNT NET PROCEEDS ------- ------ ------------ Research and development Internet-related products...................... $ 4,350,000 30% New telecommunications products................ $ 1,700,000 12% Digital audio, video, and data products........ $ 2,900,000 20% Hire additional technical personnel................ $ 3,675,000 25% Working capital.................................... $ 1,900,000 13% ----------- --- Total...................................... $14,525,000 100%
The planned research and development expenditures are intended to further the proposed expansion of our product lines. We also plan to use a portion of the proceeds to hire additional technical personnel to assist in determining practical applications for our design, engineering, and manufacturing capabilities in existing and developing market segments, to enhance our efforts to market both our newly developed and our existing product lines, and to pursue our growth strategy. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain any future earnings to fund the development and growth of our business. 15 CAPITALIZATION The following table summarizes our capitalization as of September 30, 1999 (a) on an actual basis giving effect to our sale of 4,187,205 shares of common stock and our receipt of proceeds of $15,618,272 in the rights offering through September 30, 1999, (b) on a pro forma basis as adjusted to give effect to our receipt of proceeds of $1,242,313 from our sale of an additional 333,059 shares of common stock in the rights offering subsequent to September 30, 1999, and (c) on a pro forma as adjusted basis to reflect our receipt of the net proceeds we received from the rights offering and the estimated net proceeds we will receive from the sale of 2,400,000 units offered by this prospectus at an assumed public offering price of $7.00 per unit, after deducting the underwriting discount and the estimated offering expenses we will pay.
AS OF SEPTEMBER 30, 1999 ------------------------------------------ PRO FORMA AS PRO FORMA AS ADJUSTED FOR ADJUSTED FOR RIGHTS RIGHTS OFFERING AND ACTUAL OFFERING THIS OFFERING ------ -------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Short-term debt....................................... $12,984,561 $12,984,561 $12,984,561 Long-term debt and capitalized lease obligations, less current portion..................................... 76,572 76,572 76,572 Accrued stock option compensation..................... 1,108,804 1,108,804 1,108,804 Shareholders equity: Common Stock, $.002 par value, 20,000,000 shares authorized, 10,151,026 shares outstanding, actual; 10,484,085 shares outstanding, pro forma as adjusted for the rights offering; 12,884,085 shares outstanding, pro forma as adjusted for the rights offering and this offering(1)........ 20,303 20,969 25,769 Additional paid-in capital........................ 21,435,312 22,376,959 36,897,716 Retained earnings (accumulated deficit)........... (20,440,639) (20,440,639) (20,440,639) ----------- ----------- ----------- Total shareholders' equity........................ 1,014,976 1,957,289 16,482,846 ----------- ----------- ----------- Total capitalization.................................. $15,184,913 $16,127,226 $30,652,783 ----------- ----------- ----------- ----------- ----------- -----------
- --------- (1) The number of shares issued and outstanding and the additional paid-in capital exclude (a) 2,400,000 shares of common stock reserved for issuance upon the exercise of 2,400,000 common stock purchase warrants included in the units, (b) 1,790,670 shares of common stock remaining reserved for issuance under our 1996 Incentive Stock Option Plan, of which options to purchase 1,542,706 shares were outstanding as of December 31, 1999 at a weighted average exercise price of $3.10 per share, (c) 249,892 shares issued upon the exercise of options subsequent to September 30, 1999, and (d) 1,000,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan. See 'Management -- Employee Compensation Plans.' 16 PRICE RANGE OF COMMON STOCK Prior to this offering our common stock traded on the OTC Bulletin Board under the symbol 'RADN.' Our common stock and warrants have been approved for listing on the Nasdaq SmallCap Market under the symbols 'RADN' and 'RADNW,' respectively. There currently is no established trading market for our common stock as actual transactions are infrequent and we cannot assure you that an active trading market will develop after this offering. The following table sets forth the range of high and low trading prices as reported by the OTC Bulletin Board for the periods indicated. At December 31, 1999, we had 418 shareholders of record and approximately 1,400 beneficial owners of our common stock.
HIGH $ LOW $ ------ ----- 1997: First Quarter......................................... 6 3 1/8 Second Quarter........................................ 5 3/4 1 1/8 Third Quarter......................................... 10 3/4 1 5/8 Fourth Quarter........................................ 10 1/2 3 1/8 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 3/8 1999: First Quarter......................................... 4 1/4 2 1/4 Second Quarter........................................ 3 3/4 2 5/8 Third Quarter......................................... 3 9/16 2 1/4 Fourth Quarter........................................ 8 1/2 2 1/2
On February 4, 2000 the last sale price of the common stock as reported by the OTC Bulletin Board was $10.875 per share. 17 DILUTION Purchasers of units in this offering will be diluted to the extent of the difference between the public offering price per unit and the net tangible book value per share of our common stock after this offering. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma, adjusted net tangible book value per share of common stock immediately after completion of this offering. Our pro forma, adjusted net tangible book value (deficit) as of September 30, 1999, after giving pro forma effect to the common stock issued in the rights offering subsequent to September 30, 1999 and the application of the net proceeds from such transaction, would have been $(1,736,005) or $(0.17) per share of common stock. Pro forma net tangible book value (deficit) per share as of a specified date is determined by dividing our tangible book value (deficit) (total tangible assets less total liabilities) by the number of outstanding shares of common stock at such date. After giving effect to our sale of the 2,400,000 units offered hereby (based upon an assumed public offering price of $7.00 per unit, assuming that no portion of the unit offering price is allocated to the warrant included in the unit and after deducting the underwriting discount and our estimated offering expenses), our pro forma net tangible book value as of September 30, 1999 would have been $12,789,552, or $0.99 per share of common stock. This represents an immediate increase in pro forma net tangible book value to existing shareholders of $1.16 per share, and an immediate dilution to new investors of $6.01 per share, or 85.8% of the public offering price of the units offered in this offering. The following table illustrates the per share dilution: Assumed public offering price per share..................... $7.00 Pro forma net tangible book value (deficit) per share as of September 30, 1999 (giving effect to the rights offering)................................................. $ (0.17) Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering...... 1.16 Pro forma net tangible book value per share as of September 30, 1999 after this offering.............................. 0.99 Pro forma net tangible book value dilution per share to new investors in this offering................................ $6.01
Investors in this offering will be subject to substantially more dilution upon the exercise of outstanding options. As of December 31, 1999, these options represent an additional 1,542,706 shares that could be issued in the future. 18 SELECTED FINANCIAL DATA The following selected statement of operations data for the years ended December 31, 1998 and December 31, 1997, the six months 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 our consolidated financial statements and notes thereto audited by our independent auditors: 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 months 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). The statement of operations data for the nine months ended September 30, 1999 and September 30, 1998 are unaudited. Per share data and shares outstanding reflect an adjustment for the effects of the 1-for-5 reverse split of our 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 consolidated financial statements and notes thereto included elsewhere in this prospectus. The variations in the duration of the respective periods in the table on the following page are due to a series of changes in our fiscal year. Upon our emergence from bankruptcy on December 16, 1994, our fiscal year ended. We then adopted the fiscal year of our new parent, which ran through June 30, 1995, followed by a full year ended June 30, 1996. We then became a subsidiary of ST in August 1996 and adopted its fiscal year (the calendar year), which created a stub fiscal period from July 1, 1996 through December 31, 1996. 19 STATEMENT OF OPERATIONS DATA
10 1/2 MONTHS 6 1/2 MONTHS ENDED ENDED YEAR ENDED 12/16/1994(1) 6/30/1995 6/30/1996 ------------- --------- --------- Net sales...................................... $ 2,569,396 $1,861,262 $ 3,829,523 Cost of sales.................................. 2,229,329 1,228,747 2,559,350 Gross profit................................... 340,067 632,515 1,270,173 Selling, general and administrative expense.... 1,658,388 961,162 1,843,576 Asset impairment charge(2)..................... -- -- -- Professional fees related to reorganization.... 600,198 -- -- Research and development expense............... -- -- 1,794,823 Stock option compensation expense.............. -- -- -- In-process research and development expense.... -- -- -- Restructuring costs............................ -- -- -- Total operating expenses....................... 2,258,586 961,162 3,638,399 Operating income (loss)........................ (1,918,519) (328,647) (2,368,226) Interest expense............................... 118,235 36,209 256,871 Other.......................................... -- -- -- Income (loss) before fresh start adjustments and extraordinary items....................... (2,036,754) (364,856) (2,625,097) Fresh start adjustments........................ 1,598,841 -- -- Income (loss) before extraordinary items and taxes on income............................... (437,913) (364,856) (2,625,097) Extraordinary items............................ 2,699,156 (3) -- -- ----------- ---------- ----------- Income (loss) before taxes..................... 2,261,243 (364,856) (2,625,097) Basic earnings (loss) per share: Income (loss) before extraordinary item..... (1.33) (0.10) (0.70) Extraordinary item.......................... 8.20 0.00 0.00 ----------- ---------- ----------- Net income (loss)........................... 6.87 (0.10) (0.70) Diluted earnings (loss) per share: Income (loss) before extraordinary item..... (1.33) (0.10) (0.70) Extraordinary item.......................... 8.20 0.00 0.00 ----------- ---------- ----------- Net income (loss)........................... 6.87 (0.10) (0.70) Weighted average shares used in computation Basic....................................... 329,020 3,729,721 3,742,227 Diluted..................................... 329,020 3,729,721 3,742,227 6 MONTHS 9 MONTHS 9 MONTHS ENDED YEAR ENDED YEAR ENDED ENDED ENDED 12/31/1996 12/31/1997 12/31/1998 9/30/1998 9/30/1999 ---------- ---------- ---------- --------- --------- (UNAUDITED) (UNAUDITED) Net sales...................................... $4,905,059 $13,446,852 $ 21,111,704 $ 9,973,611 $39,261,814 Cost of sales.................................. 4,052,433 8,022,262 15,808,459 7,704,856 21,090,713 Gross profit................................... 852,626 5,424,590 5,303,245 2,268,755 18,171,101 Selling, general and administrative expense.... 1,437,971 4,242,138 5,531,213 2,543,986 9,138,897 Asset impairment charge(2)..................... 421,000 -- 262,935 -- -- Professional fees related to reorganization.... -- -- -- -- -- Research and development expense............... 808,025 2,262,066 4,296,268 1,944,809 6,730,223 Stock option compensation expense.............. -- -- 1,566,075 -- -- In-process research and development expense.... -- -- 3,909,000 -- -- Restructuring costs............................ -- -- 3,100,000 -- -- Total operating expenses....................... 2,666,996 6,504,204 18,665,491 4,488,795 15,869,120 Operating income (loss)........................ (1,814,370) (1,079,614) (13,362,246) (2,220,040) 2,301,981 Interest expense............................... 255,604 677,102 1,198,777 568,592 1,561,616 Other.......................................... -- -- (23,480) -- -- Income (loss) before fresh start adjustments and extraordinary items....................... (2,069,974) (1,756,716) (14,537,543) (2,788,632) 740,365 Fresh start adjustments........................ -- -- -- -- -- Income (loss) before extraordinary items and taxes on income............................... (2,069,974) (1,756,716) (14,537,543) (2,788,632) 740,365 Extraordinary items............................ -- -- -- -- 188,182 ---------- ----------- ------------ ----------- ----------- Income (loss) before taxes..................... (2,069,974) (1,756,716) (14,537,543) (2,788,632) 913,547 Basic earnings (loss) per share: Income (loss) before extraordinary item..... (0.55) (0.35) (2.45) (0.47) 0.12 Extraordinary item.......................... 0.00 0.00 0.00 0.00 0.03 ---------- ----------- ------------ ----------- ----------- Net income (loss)........................... (0.55) (0.35) (2.45) (0.47) 0.15 Diluted earnings (loss) per share: Income (loss) before extraordinary item..... (0.55) (0.35) (2.45) (0.47) 0.11 Extraordinary item.......................... 0.00 0.00 0.00 0.00 0.03 ---------- ----------- ------------ ----------- ----------- Net income (loss)........................... (0.55) (0.35) (2.45) (0.47) 0.14 Weighted average shares used in computation Basic....................................... 3,750,699 5,012,664 5,931,346 5,931,340 5,961,937 Diluted..................................... 3,750,699 5,012,664 5,931,346 5,931,340 6,401,161
BALANCE SHEET DATA
AS OF AS OF AS OF AS OF AS OF AS OF AS OF 12/16/94(1) 6/30/95 6/30/96 12/31/96 12/31/97 12/31/98 9/30/99 ----------- ------- ------- -------- -------- -------- ------- (UNAUDITED) Cash and cash equivalents......... $ 256,398 $ 2,109 $ 971 $ 186,488 $ 569,692 $ 254,956 $ 1,622,256 Working capital (deficit)........... (977,678) (1,343,018) (4,082,987) (5,851,527) 1,654,857 (8,803,970) (5,649,048) Total assets......... 3,084,394 3,452,999 3,272,686 6,572,917 10,231,617 29,190,714 24,968,155 Long-term liabilities......... 192,603 168,304 130,414 161,968 4,649,404 16,862,337 1,185,376 Total liabilities.... 2,531,093 3,264,554 5,669,338 11,019,543 11,381,678 44,427,634 23,953,179 Shareholders' equity (deficit)........... 553,301 188,445 (2,396,652) (4,446,626) (1,150,061) (15,236,920) 1,014,976
- --------- (1) Radyne ComStream'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. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under 'Risk Factors' and elsewhere in this prospectus. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus. GENERAL In reviewing the following discussion and analysis, the reader should take note of the fact that the respective periods being compared are of various durations. This is due to a series of changes in our fiscal year. Upon emergence from bankruptcy on December 16, 1994, our predecessor company's fiscal year ended on that date. At that time we adopted the fiscal year of our new parent, Engineering and Technical Services, Inc., or ETS. This created a fiscal period from December 17, 1994 through June 30, 1995, followed by a full year ended June 30, 1996. When we became a subsidiary of ST in August 1996, we adopted ST's calendar fiscal year, which created a stub fiscal period from July 1, 1996 through December 31, 1996. COMPANY HISTORY Radyne Corp., our predecessor, was incorporated in 1980 and filed 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 ETS, then a major customer. On August 12, 1996, ST acquired ETS through its indirect wholly owned subsidiary, Stetsys US, Inc. ST now holds approximately 90% of our common stock. 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 entirely new staff of engineering, sales and support personnel. On October 15, 1998, we purchased ComStream Holdings, Inc. (a corporation incorporated under the laws of the State of Delaware with an office currently located at 6340 Sequence Drive, San Diego, California) 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. ComStream recorded revenue of approximately $37 million in fiscal 1998. We acquired ComStream in an effort to expand our core business and to supplement our product lines with a number of viable developed products and superior quality products in the design stage, all 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 our acquisition of ComStream has had and will have a number of positive effects, including the following: 1. We expect the combined annual revenue of Radyne ComStream for fiscal 1999 will be approximately $55 million versus Radyne Corp.'s stand-alone revenue of approximately $13 million. This dramatic difference in size provides us with better control over prices and margins and enables us to compete in larger markets. 2. The acquisition has produced positive synergistic effects by combining Radyne's newer product lines with ComStream's established products and sales channels. We have experienced positive results from the efforts of the ComStream sales force as compared with our historic reliance on independent sales representatives. The addition of ComStream's technology in the satellite communications industry has strengthened our market share and provided new customers for our existing products. 21 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. The continued efficiencies and restructuring of our product lines have resulted in significant cost savings. We recorded the acquisition of ComStream under the 'purchase method' of accounting. Accordingly, we allocated the purchase price 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. As a result of the recent completion of our settlement negotiations with Spar, the amount of goodwill recorded in the transaction was reduced by $515,940 to $1,576,538 (after amortization of $223,649) in the fiscal quarter ended September 30, 1999. See ' -- Liquidity and Capital Resources.' We have included ComStream's results in our combined statement of operations from the acquisition date. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998. We increased our net sales by 294% to $39,262,000 during the nine months ended September 30, 1999 from $9,974,000 during the nine months ended September 30, 1998, primarily as a result of our acquisition and integration of ComStream into our operations. Our cost of sales as a percentage of net sales decreased to 54% during the nine months ended September 30, 1999 from 77% during the nine months ended September 30, 1998. Costs associated with the delivery of new products to the marketplace accounted for the high period costs in 1998. We expensed $911,000 during the nine months ended September 30, 1998 to write off these costs and to set up a provision for obsolescence. We expense costs in the period in which they occur. Selling, general and administrative costs increased to $9,139,000 (23% of sales) during the nine months ended September 30, 1999 from $2,544,000 (26% of sales) during the nine months ended September 30, 1998. The increase in real costs and the reduction, in terms of percentage of sales, was primarily a result of the higher expense levels and sales amounts due to our acquisition and integration of ComStream into our operations. Research and development expenditures increased to $6,730,000 (17% of sales) during the nine months ended September 30, 1999 from $1,945,000 (20% of sales) during the nine months ended September 30, 1998. These expenses reflect our continued commitment to invest in our future through technological advances and our 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, was primarily a result of the higher expense levels and sales amounts due to our acquisition and integration of ComStream into our operations. Based on the increases in our gross margins and our lower operating costs as a percentage of sales (40% for the nine months ended September 30, 1999 compared to 45% for the nine months ended September 30, 1998) we recorded earnings before interest and taxes ('EBIT') of $2,302,000 during the nine months ended September 30, 1999 compared to a loss before interest and taxes of ($2,220,000) for the nine months ended September 30, 1998. Net interest expense increased to $1,562,000 (4% of sales) in the nine months ended September 30, 1999 from $569,000 (6% of sales) in the nine months ended September 30, 1998 due to an increase in our debt level. We recorded extraordinary income of $188,000 during the nine months ended September 30, 1999 as a result of negotiated forgiveness of previously recorded and accrued interest expense in connection with the note payable to Spar. 22 We recorded income tax expense in the nine months ended September 30, 1999 of $15,000. We had not previously provided for income taxes. Based on all of the above we recorded net income of $914,000 or $0.14 per diluted weighted average share outstanding during the nine months ended September 30, 1999 as compared to a net loss of ($2,789,000) during the nine months ended September 30, 1998. Our new-orders-booked (Bookings) increased 282% to $43,849,000 for the nine months ended September 30, 1999 from $11,490,000 for the nine months ended September 30, 1998. This increase was primarily a result of our acquisition and integration of ComStream into our operations. Our level of unfilled-orders-to-ship (Backlog) increased 111% to $13,193,000 at September 30, 1999 from $6,253,000 at September 30, 1998, primarily due to the record level of bookings received during the current and immediately preceding reporting periods. In connection with the acquisition of ComStream, we 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. All of the seven projects have been completed. The original cost estimates remain essentially accurate and no other material variations in the assumptions have appeared. Therefore, we continue to regard the $3,909,000 valuation as correct. The nature, amount, and timing of the costs required to complete the in-process technology are presented in the following chart:
TOTAL COST AT PRODUCT LINE STARTED COMPLETION COMPLETION DESCRIPTION BASE TECHNOLOGY APPLICABILITY (MONTH-YEAR) DATE $000'S ----------- --------------- ------------- ------------ ---- ------ 2 MB Card QPSK, FEC Modems 01 - 98 11 - 99 1,820* Coding 'CM 601' Low Cost Coding Modulation Modems 05 - 97 03 - 99 1,400** Modem 'DT8000' Modulation Coding Earth Stations 03 - 97 12 - 98 2,850*** Ku-band 2 Watt Transmission Earth Station 'DBR 2000' Data L-Band Receivers Broadcast Data 06 - 98 06 - 99 400 Broadcast Receiver Packet Protocol 'ABR 202' Audio L-Band Receivers Broadcast Audio 03 - 98 12 - 98 750 Receiver Multiplexing Set Top Box Receiver DTH Television Satellite 03 - 97 07 - 99 1,600 Cable Television Television Cable Proprietary Television IC's -- MPEG Decoders MediaCast Card Proprietary Internet Receiver 03 - 97 03 - 99 1,900 Receiver IC's -- Internet Video Receiver Protocol DVB MPEG Decoders ------- $10,720 ------- -------
- --------- * Estimated at $1,800 in our Form 10-K/A for the year ended 12/31/98. ** Estimated at $1,500 in our Form 10-K/A for the year ended 12/31/98. *** Estimated at $2,750 in our Form 10-K/A for the year ended 12/31/98. 23 FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1997 We increased our net sales by 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 was primarily attributable to the increased product sales resulting from our purchase of ComStream. Our 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, 1998, we recorded adjustments to inventory of approximately $911,000 (4.3% of sales) to write off excess and obsolete inventory as well as 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 costs associated with the introduction of new products (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 costs included production line personnel training costs, short-lived diagnostic and measurement equipment, set-up costs, 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, we increased our 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 our 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 our 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 ComStream in October 1998. We recorded an asset impairment charge of $263,000 during the year ended December 31, 1998, to reflect a valuation adjustment to certain designs and drawings that were fully impaired by the introduction of competing product lines which we obtained in our 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 acquired in the purchase of ComStream in October 1998. We expect to continue to experience high research and development expenses as we position ourselves to gain market share through the introduction of new products. We recorded stock option compensation expense of $1,566,000 in 1998 to reflect the bonus and related expenses to be incurred as a result of the vesting of 657,000 incentive stock options under the 1996 Incentive Stock Option Plan. 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. We recorded restructuring costs of $3,100,000 in 1998 in connection with a corporate restructuring cost-cutting initiative. This amount included (a) $1,100,000 reserved for additional costs expected in connection with the termination of approximately 25% of the ComStream work force and (b) $2,000,000 reserved for costs related to the termination of a lease for a 125,000 24 square foot facility in San Diego, including $700,000 in leasehold improvements which were abandoned. In connection with the acquisition of ComStream, we 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. 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 our increased debt that, in turn, was primarily attributable to the acquisition of ComStream. For the year ended December 31, 1998, we did not provide for income taxes, due to the current period net loss and our net operating loss carryforwards. We also did not provide for income taxes for the prior period due to net operating losses. The tax examinations disclosed in Note 18 to the consolidated financial statements have been concluded without change. For the year ended December 31, 1998, we 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. Bookings 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. Our Backlog of orders to be shipped 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. Our 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 Our 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 fact that the more recent period was twelve months and the prior period was six months, and to the introduction of our new product lines, which experienced exceptional market acceptance. Our 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 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 our proprietary technology from older products while adding features and reducing future manufacturing costs, and new digital video broadcast modems. 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. We 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. 25 The valuation of designs and drawings was the result of adjustments made by us 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 our 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 is anticipated that we will continue to experience high research and development expenses as we position ourselves to gain market share through the introduction of new products. As of the last day of the fiscal period ended December 31, 1997, we 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 us 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, we did not provide for income taxes, due to the net loss. We also did not provide for income taxes, for the six months ended December 31, 1996, due to the net loss. For the twelve month period ended December 31, 1997, we 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. Bookings 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 a result of the increased time frame of the later period over the prior period coupled with our increased effort to rejuvenate our marketing strategy. Our Backlog of orders to be shipped was $4,814,000 as of December 31, 1997, an increase of 95% over the $2,473,000 in Backlog as of December 31, 1996. Approximately $945,000 of our Backlog as of December 31, 1997 was due to the effect of the late letters of credit from two orders as described above. One of these orders was from South America and was subsequently shipped. The other order was from Indonesia and was subsequently cancelled. SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996. Our 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 our new product lines which experienced exceptional market acceptance. Sales of products introduced since July 1, 1995 increased from $434,000 for the fiscal year ended June 30, 1996 to $3,477,000 for the six month period ended December 31, 1996. Our 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 26 (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 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 our proprietary technology from older products while adding features and reducing future manufacturing costs. Also, we 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 our older products (1% of sales). 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 fact that the more recent period was six months and the prior period was twelve months (approximately $922,000) and partially offset by increased costs related to the higher level of business that we experienced during the latter period (approximately $516,000). We 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 fact that the more recent period was six months and the prior period was twelve months (approximately $808,000). Additionally, we 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 we 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 fact that the more recent period was six months and the prior period was twelve months (approximately $250,000), offset by additional interest from our increased debt level (approximately $250,000). For the six month period ended December 31, 1996, we did not provide for income taxes, due to the net loss and net operating loss carryforwards from prior periods. We 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, we 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 fact that the more recent period was six months and the prior period was twelve months 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. Bookings 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. Our Backlog of orders to be shipped 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. LIQUIDITY AND CAPITAL RESOURCES During the past five years we have financed our working capital requirements, capital expenditures and the acquisition of ComStream through borrowings from our principal shareholder and banks and the sale of common stock to our shareholders through rights offerings. We had a working capital deficit of $5,649,000 at September 30, 1999, which represents an increase in our working capital of $3,155,000 from our working capital deficit of $8,804,000 at 27 December 31, 1998. Our working capital increased primarily as a result of a reduction in current liabilities of ($4,797,000), primarily made up of a reduction in short-term notes payable of ($2,080,000), a reduction in accounts payable of ($787,000), and in other accrued expenses and short term capital lease obligations of ($1,930,000), as offset by a reduction in current assets of ($1,643,000), made up of an increase in cash of $1,367,000 and decreases in accounts receivable of ($1,707,000), inventories of ($1,142,000) and prepaid expenses of ($160,000). Net cash provided by/(used in) operating activities was $2,879,000 for the nine months ended September 30, 1999; ($3,850,000) for the year ended December 31, 1998; and ($4,945,000) for the year ended December 31, 1997. Cash used in investing activities was $117,000 for the nine months ended September 30, 1999; $10,551,000 for the year ended December 31, 1998; and $593,000 for the year ended December 31, 1997. The increase of almost $10,000,000 in 1998 was related to the purchase of ComStream. We have no material commitments to make capital expenditures in 2000. Net cash (used in)/provided by financing activities was ($1,395,000) for the nine months ended September 30, 1999; $14,086,000 for the year ended December 31, 1998; and $5,922,000 for the year ended December 31, 1997. The net cash provided from financing activities in 1998 and 1997 resulted from borrowings under our bank credit line, as described below, and from ST, and in 1997 from the sale of shares of our common stock in a rights offering. In 1999, net cash used in financing activities resulted from payments made to the bank under our line of credit. We have a $20,500,000 uncommitted credit line with Citibank, N.A. that includes $20,000,000 available for borrowing and facilities of up to $500,000 for bank guarantees and/or standby letters of credit. All loans pursuant to the bank line of credit are short term loans with maturities no later than September 28, 2000. The bank could demand repayment at any time after the maturity date of the loans in which case we might have to use the proceeds of this offering and seek additional financing to repay our line of credit. If we are required to seek additional sources of financing to repay our line of credit, such financing may not be available on terms that we consider acceptable or may not be available in sufficient amounts to enable us to repay our obligations to the bank. Any of these circumstances would have a material and adverse impact on our business, financial condition, and results of operations. We believe the bank's willingness to provide us with the line of credit is based in part on the bank's relationship with ST. ST has provided the bank with a letter of awareness in which ST states it (1) will endeavor to ensure that we utilize sound financial and business practices in our operations and (2) ST will give the bank at least 60 days' prior written notice of any divestment of our shares held by ST or its affiliates. ST has not, however, guaranteed our indebtedness to the bank and is under no obligation to do so or to otherwise satisfy our debts if we fail to pay them when due. 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). Since December 31, 1998 we have not been in compliance with the covenant in our prior and current credit agreements with the bank which requires us to limit our indebtedness to no more than twice our tangible net worth. Our failure to comply with this covenant or any other covenant contained in our loan agreement with the bank could cause the bank to demand repayment of our loan. Our current credit agreement does not require us to comply with this covenant until March 31, 2000. We expect to be in compliance with this covenant upon completion of this offering, but we cannot assure you that this will be the case. Our current credit agreement expires on September 28, 2000. The credit agreement is renewable annually at the option of Citibank. We owed principal of approximately $12,920,000, at interest rates from 6.59% to 6.94%, under the line of credit as of December 31, 1999. During 1999, we 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. The note matured on July 15, 1999 with interest at 8% per annum. We negotiated a reduction in the note balance due to Spar for the following reasons: (i) a $521,000 reduction for 28 our assumption of $115,000 of liabilities from Spar and the waiver of Spar's obligation to indemnify us against a $406,000 claim by a product assembly contractor for costs incurred on ComStream's behalf prior to the acquisition, and (ii) a $516,000 reduction in the note for certain inventory, furniture, and equipment erronously carried on ComStream's pre-closing balance sheet. Because these discrepencies were identified prior to the purchase price allocation, no portion of our purchase price for ComStream was allocated to such inventory, furniture, and equipment. Therefore, this $516,000 reduction has resulted in a reduction in goodwill. We paid the note during the quarter ended September 30, 1999. In addition, we negotiated a $278,000 reduction in interest on the note ($188,000 of which had accrued in prior periods and has been reported as extraordinary income in the quarter ended September 30, 1999). We have financed the repayment of debt incurred for the ComStream acquisition, certain restructuring costs, and our ongoing working capital needs through (a) the rights offering pursuant to which we sold $16,860,584 of common stock to our existing shareholders of record as of April 16, 1999, and (b) the existing bank line of credit. In the rights offering, we issued rights to our shareholders entitling them to purchase an aggregate of up to 4,745,076 shares of our common stock at a purchase price of $3.73 per share. On September 30, 1999, ST instructed us to capitalize the entire $15,618,272 principal amount of the debt we owed to ST in partial exercise of its rights in the rights offering. In October 1999, ST exercised the balance of its rights by paying cash to us in the amount of $423,700. We used these funds, along with $932,200 of cash on hand, to pay the accrued interest due to ST as of September 30, 1999. The rights offering was concluded on December 1, 1999. Our shareholders purchased 4,520,264 shares at an aggregate purchase price of $16,860,585 in our rights offering, including ST's aggregate purchase of 4,300,800 shares at an aggregate purchase price of $16,041,984. We believe that the proceeds of this offering, our bank credit lines and cash from operations are likely to be sufficient to fund our planned future operations and capital requirements for continued growth through the end of 2000. YEAR 2000 COMPLIANCE The Year 2000 issue concerns the fact that certain computer systems and processors may recognize the designation '00' as 1900 when it is intended to mean 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 a date such as January 1, 2001 (1-1-01). All of these date-related issues are commonly referred to as the Year 2000 issue, the Y2K problem or the Millennium 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. Prior to December 31, 1999, we completed that review and certain upgrading and we believe that all of our mission critical systems are now Year 2000 compliant. Our Year 2000 readiness plan also involved the review of our non-information technology systems, a review that 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. To date, we have not encountered any significant problems in our information technology systems or non-information technology systems related to the Year 2000 issue, but we cannot assure you that we will not encounter such problems in the future. As part of our comprehensive review, we have verified the Year 2000 readiness of third parties (vendors and customers) with whom we have material relationships. 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 received responses from approximately 70% of our non-critical vendors. To date, we have not encountered any significant problems with our vendors related to the Year 2000 issue, but we cannot assure you that we will not encounter such problems in the future. 29 We have completed a review of our products and determined that all but one older ComStream product are Year 2000 ready. This product has a feature that sequences dates incorrectly after January 1, 2000. We are notifying purchasers and potential purchasers of this product, relatively few of which have been sold, that they may have to reset certain features to correct this problem or de-activate that particular feature. While we believe our efforts to date are adequate to prevent any Year 2000 issue from having a material adverse effect on us, our assessment may turn out to be inaccurate.
YEAR 2000 READINESS COSTS ------------------------- Project Statistics: Cost (labor)............................ $110,000
SYSTEM INVENTORY ASSESSMENT REMEDIATION UNIT TESTING TESTING --------- ---------- ----------- ------------ ------- Percentage Completed.................... 100% 100% 100% 100% 100% Completion Date......................... 4/30/99 6/30/99 7/31/99 11/15/99 11/15/99
IMPACT OF INFLATION We do 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 us on 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. We had no items of comprehensive income. Therefore, the adoption of SFAS No. 130 had no effect on us. 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 us on 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 us. 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 us 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 us. 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 became effective for us on July 1, 1999. The adoption of SFAS No. 133 did not have a material impact on us. 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 September 30, 1999 consisted of notes payable under a line of credit agreement. 30 BUSINESS OVERVIEW We design, manufacture, and sell equipment used in the ground-based portion of satellite communication systems to receive data from, and transmit data to, satellites. We also design, manufacture, and sell equipment used in cable television systems. Our products are used in applications for telephone, data, video and audio broadcast communications, private and corporate data networks, Internet applications, and digital television for cable. We serve customers in over 80 countries including customers in the television broadcast industry, international telecommunications companies, Internet service providers, private communications networks, and the United States government. Our products have been utilized in major communications systems worldwide, including the following: The world's highest capacity domestic, digital satellite telephone network -- PT Telkom, Indonesia. Italy's first digital telephone/data network -- Telespacio, Italian Railways. Colombia's first alternate telecommunications network -- Americatel. Earth stations for the first international satellite links in China, India, Pakistan, Brazil, Haiti and Zambia. The world's largest private satellite broadcast network -- Reuters. International Cablecasting Technologies -- utilizing 40,000 digital audio broadcast receivers. INDUSTRY OVERVIEW Satellite technology has been established as a key element in the growth of communications systems. Satellites enable high-speed communications service where there is no suitable alternative available. Unlike the cost of land-based networks, such as microwave and fiber cable, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. Satellite networks can be rapidly installed, upgraded, and reconfigured as compared with land-based networks, which require rights-of-way and are expensive and time consuming to install and upgrade. The three principal categories of satellite communications service applications are fixed satellite services, mobile satellite services, and direct broadcast services. Fixed Satellite Services. Fixed satellite services provide point-to-point and point-to-multipoint satellite communication of voice, data, and video between fixed ground-based earth stations. The introduction of high-power satellites has created additional growth within the fixed satellite services segment by enabling the use of smaller, less costly earth stations for applications such as corporate data networks, intranet access, and rural telephony. Mobile Satellite Services. Mobile satellite services operate between fixed earth stations and mobile user earth stations, or terminals. These services provide mobile voice and data transmission capability on land, sea, and air. New mobile satellite services are being developed to bring more extensive coverage and circuit reliability for mobile telephone and data services to underserved populations throughout the world. Direct Broadcast Services. Direct broadcast satellite services provide a direct transmission link from high-power satellites to customers over a wide geographic area. This includes direct-to-home television services, direct broadcast data services, and Internet access. Satellite communication systems used to provide these services consist of two elements: satellites (the 'space segment') and ground-based transmission and reception systems (the 'ground segment'). The space segment consists of a single satellite or a constellation of satellites in earth orbit, which typically provide continuous communications coverage over a wide geographic area. These satellites typically contain multiple transponders, each of which is capable of simultaneously 31 receiving and transmitting one or more signals to or from multiple users. The satellite ground segment consists principally of one or more earth stations. An earth station is an integrated system consisting of antennae, radio signal transmitting and receiving equipment, a satellite modem, a frequency controller, and voice, data, and video network interface equipment. Earth stations provide a communications link to the end user either directly or through land-based networks. We have participated principally in the ground segment products, systems, and networks portion of the market. The Satellite Industry Association estimates the global market for satellite ground equipment and integration services was $15.2 billion in 1998, of which our management estimates $800 million was for the type of equipment we develop, manufacture, and market. INDUSTRY GROWTH We believe that growth in demand for satellite system ground-based equipment has been and will continue to be driven by, among other things, the growth of satellite-delivered communications services such as the fixed, mobile, and direct broadcast services described above. According to the Satellite Industry Indicators Survey: Selected 1998 Survey Results conducted by the Satellite Industry Association and Futron Corporation, total revenues for providers of satellite communications services grew at an 18% compound growth rate to $26.2 billion in 1998, from $21.2 billion in 1997 and $15.9 billion in 1996. We believe that future growth in satellite communications services will be driven principally by the following major factors: Global deregulation and privatization of government-monopolized telecommunications carriers, which will stimulate growth in the communications industry in general. Growing worldwide demand for communications services in general, including data communications services over the Internet and corporate intranets. The relative cost-effectiveness of satellite communications for many applications, such as digital television delivery. Technological advancements that broaden applications for and increase the capacity in satellite networks. Deregulation and Privatization. Many developing countries that had previously not committed significant resources to or placed a high priority on developing and upgrading their communications systems are now doing so, primarily through deregulation and privatization. A significant number of these countries do not have the resources, or have large geographic areas or terrain that make it difficult, to install extensive land-based networks on a cost-effective basis. This provides an opportunity for satellite communications services systems to meet the requirement for communications services in these countries. Growing Worldwide Demand for Communications Services. Factors contributing to the growing demand for communications services include worldwide economic development and the increasing globalization of commerce. Businesses have a growing need for higher bandwidth services to communicate with their customers and employees around the world and are increasingly reliant upon Internet and multimedia applications. We expect demand for these kinds of higher bandwidth services to grow in both developed and developing countries. Cost-Effectiveness of Satellite Communications. The relative cost-effectiveness of satellite communications services is a major factor driving the growth of satellite communications services in areas with rapidly growing telecommunications infrastructures. Large geographic areas, where population concentrations are separated by significant distances, require a technology whose cost and speed of implementation is relatively insensitive to distance. Unlike the cost of land-based networks, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. Technological Advances. Technological advances continue to increase the capacity of a single satellite and reduce the overall cost of a system and the service it delivers. This increases the number of potential end-users for the services and expands the available market. We believe that 32 recent technological developments such as bandwidth on demand, digital television compression technology, and signal processing methods will continue to simulate the demand for the use of satellite communication services. MARKET OPPORTUNITIES Satellite communication systems provide a number of advantages over land-based networks for a variety for applications. We have identified several key markets and customer groups that we believe provide opportunities to sell our products. INTERNATIONAL AND RURAL TELEPHONY Satellite communication systems enjoy advantages in international telecommunications markets for several reasons: It is not cost-effective to utilize land-based networks in many areas of the world, especially developing countries where modern communications capabilities are just beginning to develop. All areas within a satellite beam receive the same level of service, making it highly attractive in rough terrain or underdeveloped regions. Satellites can be deployed much more rapidly to offer international services. We believe there are certain communication requirements that can be reasonably satisfied only with satellite systems. For example, satellite communications offer a cost-effective solution that can be installed relatively quickly to provide communications services in remote or sparsely populated areas, in rugged or in mountainous terrain, or in nations composed of many islands, a geographical feature which is relatively common in the Pacific region. The potential to reach areas of low subscriber density without costly construction of land-based networks makes satellite communication systems a viable solution for rural telephony systems. Rural telephony can be described as an intra-country telecommunications network linking many remote locations, such as small villages or islands in the Philippines. These networks allow villages to communicate with each other and with the world. In a typical rural telephony system, a small village might install a satellite earth station in a central location such as the local post office. Residents then use this convenient location to communicate throughout the country and the world. PRIVATE NETWORKS As businesses and other organizations expand into regions of the world where the telecommunications infrastructure is inadequate for land-based networks, the need for alternative communications connections among multiple facilities becomes evident. A private network is a dedicated communications and/or data transmission network. Such a network may link employees of a multiple-location business with co-workers located throughout the world. Users can consolidate multiple-applications over a single satellite network and receive the same quality of service at a lower over-all cost. We believe the satellite communications industry is poised to gain a foothold in this market by offering reliable high-speed connectivity. Satellite systems can bypass the complexity of land-based networks, multiple carriers, and varying price and billing schedules. INFORMATION AND RADIO BROADCASTS 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. Financial news providers, merchandise retailers, and others use satellite systems to provide financial data and other audio and video transmissions for a variety of applications, such as news wire services and supermarket in-store radio. 33 TELEVISION VIDEO DISTRIBUTION Compressed digital video is a recently developed technology that provides significant new market opportunities for the satellite communications industry. The development of digital compression technology allows the transmission of television signals via satellite in a smaller bandwidth than is currently possible through alternative technologies. This advance in communications technology is enabling a wider application of satellite solutions for television and video broadcast services, including the following: Satellites provide television broadcasters with an efficient and economical method to distribute their programming to cable service providers and direct broadcast satellite operators. Compressed video encoding and decoding make satellites available for less demanding video transmissions, including business teleconferencing, private business networks, and telemedicine. The economics of compressed video allow the use of satellite transmission for long-distance teaching applications. Digital cinema distribution is emerging as a viable alternative to the physical distribution of feature length films. There is an emerging market to provide data and video directly to the personal computer via satellite. INTERNET COMMUNICATIONS The Internet is evolving into a global medium, allowing millions of individuals throughout the world to communicate, share information, and engage in electronic commerce. According to International Data Corporation, the number of people worldwide accessing the Internet will grow from approximately 100 million at year end 1998 to 320 million by 2002. This growth is expected to be driven by the large and growing number of personal computers installed in homes and offices, the declining prices of personal computers, improvements in network infrastructure, the availability of faster and cheaper Internet access, and the increasing familiarity with and acceptance of the Internet by businesses and consumers. Internet usage also is expected to continue to grow rapidly due to unique characteristics that differentiate it from traditional media, such as real-time access to interactive content, real-time communication capabilities, and the absence of geographic or temporal limitations. According to DTT Consulting, a satellite industry consulting and research firm, there has been significant growth in the use of satellites for Internet traffic in recent years. This growth has been centered on connecting Internet service providers, or ISPs, with Internet servers. According to DTT Consulting estimates, there were 948 satellite ISP links in operation in January 1999, up from 222 at the same time in the prior year. Satellite capacity is being used for ISP links primarily where fiber cable is prohibitively expensive or rare, such as in underdeveloped or emerging countries or where there is insufficient transoceanic fiber. Although ISPs rarely use satellites to provide point-to-point infrastructure for the Internet within the United States, the following table sets forth data that indicates that nearly one in ten ISPs worldwide use satellite capacity to link with an Internet server for point-to-point traffic. 34 INTERNET SERVICE PROVIDERS CONNECTIONS BY REGION AS OF JANUARY 1999
% ISPS GEOGRAPHIC AREA NO. OF ISPS NO. SATELLITE LINKS CONNECTED VIA SATCOMS* --------------- ----------- ------------------- ---------------------- Western Europe.............................. 2,273 84 3.7% CEE and CIS**............................... 359 280 78.0 Sub-Saharan Africa.......................... 288 131 45.5 Latin America............................... 577 138 23.9 Middle East & North Africa.................. 156 48 30.8 Asia........................................ 825 85 10.3 Australasia................................. 748 86 11.5 North America............................... 4,512 96 2.1 ----- --- ---- Total................................... 9,738 948 9.7% ----- --- ---- ----- --- ----
Source: DTT Consulting - --------- * Satcoms are communications satellites. ** CEE stands for Central and Eastern Europe and CIS stands for the Commonwealth of Independent States. We expect satellite communications to continue to offer a cost-effective augmentation capability for Internet service providers, particularly in markets where land-based networks are unlikely to be either cost-effective or abundant, such as rural areas. Additionally, satellite broadcast architecture provides an attractive alternative for Internet service providers, which presently are dealing with the bottlenecks associated with rapid and uneven Internet growth. Satellite systems can relieve congestion by providing a low-cost means of selectively distributing content to sites closer to end-users. Today, only 1,000 Websites represent over 80% of the most frequently accessed content on the Internet. These Web pages can be transmitted via satellite at regular intervals to designated server destinations and then stored in servers for local users to access. This cached content reduces the need to retrieve the most popular data from the source, thus reducing delays and congestion on the Internet. Likewise, we expect Internet multicasting to serve as a solution for the distribution of large applications, such as database updates. GOVERNMENT AND MILITARY The United States government provides a significant market opportunity for satellite equipment manufacturers as the defense budget shrinks and government policies encourage the use of commercial off-the-shelf components whenever feasible. This provides us with the opportunity to configure our standard products for a customer that is sizable and likely to provide consistent business. STRATEGY Our business goals are to expand our market share in our ground-based satellite systems business and improve profitability. We intend to achieve these goals through the following strategies: Target Providers of Fixed, Mobile, and Direct Broadcast Communications Services Worldwide. We plan to target developing markets that we believe will account for a significant portion of the demand for satellite-based systems. These markets typically lack terrestrial infrastructure adequate to support demand for domestic and international communications services. We plan to target providers of rural telephony services and Internet service providers in developing markets because we believe they will rely extensively upon satellite communication solutions. In developed countries, we plan to target emerging satellite communications service providers such as those offering direct broadcast applications. 35 Exploit New Applications for Our Existing Satellite Technology. We plan to adapt existing products for use in the Internet broadband, cable television, and television news gathering markets, which utilize digital receivers and transmission equipment using many of the same modulation, coding, interface, and protocol technologies as the satellite business. We have adapted some of our products for the television distribution market, including satellite modems that we converted for use in cable television systems. We also recently entered into a strategic relationship with DiviCom Inc., a major producer of compressed digital television systems. Under this arrangement, our strategic partner will utilize our products in cable systems that it markets to cable television system operators. Develop New Products to Exploit New Market Opportunities. We plan to use our international sales force and our research and development capabilities to identify new market opportunities and develop new products to exploit these opportunities. We intend to develop new products to penetrate and increase our presence in the markets for Internet communications, rural telephony for developing markets, high-speed satellite communications, government data equipment, cable television distribution, and private networks for businesses and governments. Provide High-Margin Customized Products to Niche Markets. We design our products so we can adapt them to differing specifications with minimal engineering. We plan to design and produce customized products for niche markets, particularly military and government markets, which require customized technology. Pursue Strategic Acquisitions. We intend to pursue strategic acquisitions of competitive or complementary companies in order to gain market share, increase our revenues, expand our product line, improve our sales force or increase our profitability. PRODUCTS We offer the following product families: Satellite modems and earth stations. Frequency converters. Data, audio, and video broadcast equipment. Digital video broadcast (DVB) and high speed modems. Cable and microwave modems. SATELLITE MODEMS AND EARTH STATIONS We produce satellite modems that are sold individually and earth stations that are a bundled solution built around our satellite modems. Satellite modems transform user information, such as data, video or audio, into a signal that can be further processed for transmission via satellite. We produce several varieties of satellite modems, which operate at different speeds using a variety of modulation techniques. Our earth stations commonly consist of several components, including a satellite modem, a frequency converter, a transceiver, a transmitter, and an antenna. Earth stations serve as an essential link in transmitting signals to, and receiving signals from, satellites. Our earth stations enable users to program power levels and operating parameters in order to compensate for low signal levels, extreme weather conditions, and other variables. We design and manufacture our earth stations using components that we manufacture as well as components that we obtain from other manufacturers. Our Star Network Management System augments these product offerings. The Star Network Management System, which consists of a Windows NT'r' point and click system, is used to remotely monitor and maintain the functioning of an entire network of modems, earth stations, and ancillary equipment. This can be done from a single location, thereby eliminating the need to travel to each remote location. This system provides local and remote modem management, control of the 36 equipment connected to the modems and earth stations, collection of network status and alarm information, remote channel monitoring, and dial-up control. The following diagram illustrates the operation of a standard satellite telephony system: [Picture titled "Typical Telephony Application" that depicts the use of our products to transmit data from a user through an earth station to a satellite, from the satellite to a remote earth station, and finally to the end user.] FREQUENCY CONVERTERS We currently market two varieties of converters used to transmit signals to satellites and three converters used to receive signals relayed from satellites. We also produce a redundancy control unit, which will switch a satellite system to stand-by equipment in the event of a malfunction in a satellite modem or converter. Such redundancy is a critical element for many of our customers, such as rural or international telephony networks, that strive to provide uninterrupted satellite communications services to their customers. Each satellite is configured to receive or transmit a particular radio wave pattern, otherwise called a frequency band, which is typically different from the frequency of the satellite modem. Frequency converters are used to alter the input/output of a satellite modem into a wave pattern that can be interpreted by the particular satellite being used in the satellite system to relay communication signals. DATA, AUDIO AND VIDEO BROADCAST EQUIPMENT Our digital audio distribution products provide radio networks, service providers, and merchandise retailers with a satellite distribution system for the broadcast of in-store advertising and background music. Our data distribution products deliver real-time, high-value data and digital video broadcast services. To date, the primary customers for our data distribution products have been participants in the financial industry. For example, our IntelliCast Digital Data Broadcast Receiver is used by customers, such as Reuters, to distribute financial information, up-to-date news 37 stories or image files of weather information and database updates from a central location to many remote outlets. Our Mediacast Satellite PC/Receiver card allows personal computers to request information over a telephone link and then receive a digital video broadcast of a wide range of data, audio, and video information directly from a satellite. This speeds the reception of information, particularly in regions with underdeveloped telephony, and is often used by Internet service providers. [Picture titled "Typical Broadcast Applications" depicting various uses of our data broadcast receivers to transmit data from a single broadcast source to a satellite from the satellite to multiple receiver sites.] DIGITAL VIDEO BROADCAST (DVB) AND HIGH SPEED MODEMS Our DVB modems facilitate the transmission of high-quality video images among multiple locations via satellite. These modems utilize digital compression technology that allows users to transmit television signals in a smaller bandwidth than is possible using older technology, thereby making television transmission by satellite more economical. Video compression allows for the transmission by satellite of a much higher number of channels than was previously the case, thus producing a significant new market for our products. Satellites are often used in industries where live, high-quality video images are essential, such as direct television broadcasts. Our high-speed digital modems transmit a greater volume of data than standard satellite modems. Our modems are used in large satellite system connections that transmit significant amounts of data at high speeds. Internet service providers and government agencies are principal customers for our high-speed and digital high-speed products. CABLE AND MICROWAVE MODEMS Our cable modems are used primarily in the distribution of digital video for use by cable television distributors and in high-definition television. The design of our cable modems allows for the transmission of digital video on terrestrial, broadband cable and enables system operators to manage and control the available bandwidth. Our microwave modems transmit over microwave frequencies and usually feature high-speed and multidata-rate capabilities that provide a complete point-to-multipoint communication link that facilitates microwave link upgrades. For example, 38 television stations use our microwave modems to transmit audio and video over a microwave link to and from digital news gathering trucks. RESEARCH AND DEVELOPMENT We conduct an active and ongoing research and development program that focuses on advancing technology, developing improved design and manufacturing processes, and improving the overall quality of the products we provide. Our goal is to provide our customers with new solutions that address their needs. Our research and development personnel concentrate on technology for the satellite communications, telecommunications, and cable television industries. Our future growth depends on increasing the market share of our new products, adapting our existing satellite communications products to new applications, and introducing new communications products that will find market acceptance and benefit from our established international distribution channels. Accordingly, we are actively applying our communications technology expertise to improving the performance of our existing products and developing new products to serve existing and new markets. We work closely with our customers and potential customers to assess their needs in order to facilitate our design and development of new products. We believe that this approach minimizes our development risk and improves the potential for market acceptance of our product introductions. Additionally, we use information obtained from our customers and our technological expertise to develop custom-designed products for our customers' special applications. Research and development expenses amounted to $6,730,000 for the nine months ended September 30, 1999, $4,296,000 for the year ended December 31, 1998 and $2,262,000 for the year ended December 31, 1997, $808,000 for the six months ended December 31, 1996 and $1,795,000 for the year ended June 30, 1996. A number of new products were either launched or reached an advanced stage of development during these periods. We estimate that our total research and development expenditures for fiscal 1999 were $9,127,000 and we plan to increase our expenditures for research and development in fiscal 2000. Much of the increase is due to developmental products acquired in the ComStream acquisition, but the remainder is directly related to our ongoing commitment to expand our product line and penetrate new markets. We intend to use a significant portion of the proceeds of this offering to fund our research into Internet-related products for satellite ISP links, and other new telecommunications products. We also plan to target our research and development activities at digital audio, video, and data products. SALES AND MARKETING We sell our products through an international sales force with sales and/or service offices in San Diego, Phoenix, Boca Raton, Beijing, Singapore, London, Amsterdam, and Jakarta. Our direct sales force consists of 14 individuals supported by systems and applications engineers. We focus direct sales activities on expanding our international sales by identifying emerging markets and establishing new customer accounts. Additionally, we directly target certain major accounts that may provide entry into new markets or lead to subsequent distribution arrangements. International representatives, distributors and systems integrators sell our products, supported by our sales and marketing personnel. We participate in approximately six trade shows each year. We also generate new sales leads through advertising in trade magazines, direct mail, and our Web site. We maintain a customer service and support staff that primarily supports customers and distributors and is responsible for after-sale support and installation supervision. In certain instances, we use third-party companies to install and maintain our products at our customers' sites. 39 CUSTOMERS Our customers generally include national and international telecommunications providers, digital television users, including broadcast and cable networks, Internet service providers, financial information providers, systems integrators, and the U.S. government. For the nine months ended September 30, 1999 and the year ended December 31, 1998, no single customer represented more than 10% of our net sales. During the year ended December 31, 1997, one customer represented 14.5% of our net sales. Because of the nature of our business, we anticipate that customers that represent 10% or more of our total revenue will vary from period to period depending upon the placement of significant orders by a particular customer or customers in any given year. Our sales in our principal foreign markets for the periods indicated consisted of the following percentages of our total net sales:
YEAR ENDED DECEMBER 31, ------------------------- REGION 1999* 1998 1997 - ------ ----- ---- ---- Asia................................................. 23% 7% 32% Latin America........................................ 3% 9 12 Europe............................................... 23% 31 7 Others............................................... 7% 3 5 -- -- -- Total Exports.................................... 56% 50% 55% -- -- -- -- -- --
- --------- * Estimated We believe that the amount of our total exports may rise in subsequent periods. We consider our ability to continue to sell our products in developing markets to be important to our future growth. We may not, however, succeed in our efforts to cultivate such markets. COMPETITION We have a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC, and Adaptive Broadband Corp., all of which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than we possess. We estimate that our major competitors in the principal markets in which we compete have the following market shares as compared to our market share:
SATELLITE DIGITAL VIDEO MODEMS & BROADCAST & GOVERNMENT & DATA, AUDIO & COMPETITOR EARTH STATIONS HIGH SPEED MODEMS MILITARY MODEMS VIDEO BROADCAST - ---------- -------------- ----------------- --------------- --------------- Adaptive Broadband............ 19% 30% 35% * Hughes Network Systems........ 19 * * * SSE Telecom................... 8 * 10 * NEC........................... 24 * * * Wegener....................... * * * 25 IDC........................... * * * 25 Radyne ComStream.............. 8 35 35 40
- --------- * Competitor does not participate in product category. ------------------- 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 we cannot assure you that it is accurate. We compete by concentrating our sales efforts in the international market and emphasizing our product features and quality. 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 cost of the competing products generally offered by our major 40 competitors represent major factors in our ability to compete. However, our major competitors have the resources to develop products with features and functions that are competitive with or superior to our products. Competition from current competitors or future entrants in the markets in which we compete could cause us to lose orders or customers or could force us to lower the prices we charge for our products. We believe we are well-positioned to capitalize on the increased demand for satellite ground segment systems and that our future success in this market will be based upon our ability to leverage our competitive advantages, which include the following: An experienced management group, which has extensive technological and engineering expertise and excellent customer relationships. The members of our management team have an average of over 20 years of experience in the satellite communications industry. Our expansive line of well-known, well-respected, off-the-shelf, state-of-the-art equipment that enables us to meet our customers' requirements. Our ability to custom design products for our customers' special applications and to provide a one-stop shopping option to our customers. Our ability to meet the complex satellite ground communications systems requirements of our customers in diverse political, economic, and regulatory environments in various locations around the world. Our worldwide sales and service organization with the expertise to successfully conduct business internationally through sales and service offices staffed by our employees in most of our major markets throughout the world, including in Beijing, Singapore, London, Jakarta, and Amsterdam. Our October 1998 acquisition of ComStream, which: significantly expanded our product lines, enhanced our sales force, increased our market share, and increased our profitability. MANUFACTURING We assemble and test certain of our products at our Phoenix, Arizona and San Diego, California facilities using subsystems and circuit boards that we obtain from subcontractors. We obtain the remainder of our products, completely assembled and tested, from subcontractors. Although we believe that we maintain adequate stock to reduce the procurement lead time for certain components, our 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 unable or unwilling to fulfill our requirements, we could experience an interruption in production until we develop an alternative supply source. We maintain an inventory of certain chips and components and subassemblies to limit the potential for such an interruption. We believe that there are a number of companies capable of providing replacements for the types of chips and customized components and subassemblies used in our products. In 1999, our Phoenix facility was awarded ISO-9001 certification, the international quality control standard for research and development, marketing, sales, manufacturing, and distribution processes. This certification will assist in increasing the acceptance of our products in foreign markets. We intend to pursue certification of our San Diego facility. We cannot provide assurance, however, that certification will be granted. INTELLECTUAL PROPERTY We rely on our proprietary technology and intellectual property to maintain our competitive position. We protect a significant portion of our proprietary technology as trade secrets by relying on confidentiality agreements with our employees and some of our suppliers. We also control access to and distribution of confidential information concerning our proprietary information. We also have patents which protect certain of our proprietary technology. We have been cautious in seeking to obtain patent protection for our products, since patents often provide only 41 narrow protection that may not prevent competitors from developing products that function in a manner similar to those covered by our patents. In addition, some of the foreign countries in which we sell our products do not provide the same level of protection to intellectual property as the laws of the United States provide. We will continue to seek patent protection for our proprietary technology in those cases where we think it can be obtained and will provide us with a competitive advantage. EMPLOYEES As of September 30, 1999, we had 179 full-time employees, including three executive officers, 120 in engineering and manufacturing, 31 in marketing operations, and 28 in administration. These figures include 23 employees who are based outside the United States. None of our employees are represented by a union in collective bargaining with us. We believe that our relationships with our employees are satisfactory. FACILITIES In order to accommodate our recent growth, we moved into new leased facilities in both Phoenix, Arizona and San Diego, California in late 1998. We currently have 76,000 square feet available in Phoenix and 66,400 square feet available in the San Diego facility. The lease for our Phoenix facility expires in July 2008 and we have an option to renew for two consecutive terms of five years each. The lease for our San Diego facility expires in March 2005 and we have an option to renew for two consecutive terms of five years each. We expect these facilities will be adequate for meeting our needs in the immediate future. We also have regional sales and service offices in Beijing, Singapore, London, Jakarta, and Amsterdam. All of these facilities are leased. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 42 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding our executive officers and directors:
NAME AGE POSITION - ---- --- -------- Robert C. Fitting......................... 64 Director, Chief Executive Officer and President Steven W. Eymann.......................... 46 Executive Vice President and Chief Technical Officer Garry D. Kline............................ 49 Vice President of Finance, Chief Financial Officer and Secretary Ming Seong Lim............................ 51 Chairman of the Board Yip Loi Lee............................... 55 Director Robert A. Grimes.......................... 46 Director Dennis W. Elliott......................... 57 Director Kum Chuen Tang............................ 44 Director
------------------- Robert C. Fitting has been Chief Executive Officer since October 1998 and has been President since February 1995. He became a Director 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. Mr. Fitting 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. In August 1984, Mr. Fitting left Comtech, along with Steven Eymann, to start 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. Mr. Fitting left EFData in February 1995 to join our company. Pursuant to our underwriting agreement with HD Brous & Co. Inc., we have agreed to obtain 'key person' life insurance on the life of Mr. Fitting in the amount of $1,000,000. The proceeds of this policy will be payable to us. Steven Eymann has been Chief Technical Officer since October 1998 and has been our 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 in 1974 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 a HP 9825 computer. The DSU-23/29B is a L-Band PN radar for accurate, low-cost altitude direction. In June 1981, Mr. Eymann joined Comtech Data Corporation, where he was Director of Product Development. Mr. Eymann 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, along with Robert Fitting, to start 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. Mr. Eymann left EFData in February 1995 to join our company. Pursuant to our underwriting agreement with HD Brous & Co. Inc., we have agreed to obtain 'key person' life 43 insurance on the life of Mr. Eymann in the amount of $500,000. The proceeds of this policy will be payable to us. Garry D. Kline, Vice President of Finance, Chief Financial Officer and Secretary, joined our company in September 1995. From that time until July 1997 he was Secretary and Controller. From 1987 until September 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. Ming Seong Lim has been a Director and Chairman of the Board since August 13, 1996 and is chairman of the Compensation Committee. He is the Chairman of Stetsys Pte Ltd and Stetsys US, Inc., members of the Singapore Technologies group. He has been Group Director of Singapore Technologies Pte Ltd, since February 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. Yip Loi Lee has been a Director 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, and Vertex Management, Inc. 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 Directors 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 has been 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/high definition television and multimedia since 1990. 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. Kum Chuen Tang has been a director since June 1999. Mr. Tang has been the General Manager of Agilis Communication Technologies Pte Ltd. since January 1999. From July 1997 until December 1998, he was the Deputy General Manager of CET Technologies Pte Ltd. From April 1990 until June 1997, he was employed by Singapore Technologies Electronics Limited, initially as Senior Project Engineer and promoted to Divisional Manager in July 1996. From May 1987 until March 1990, he held various government positions with the Singapore Ministry of Defense. Mr. Tang has a Master of Science degree (IE) from the National University of Singapore and a Bachelor of Engineering degree (First Class Honors) from Monash University. Each director is elected for a period of one year at the annual meeting of shareholders and serves until the next meeting and until his or her successor is duly elected and qualified. A director is elected by a plurality of the votes cast by the shareholders. Officers are elected by, and 44 serve at the discretion of, the Board of Directors. Messrs. Elliott and Grimes are 'independent directors' as defined in the North American Securities Administration Association ('NASAA') Statement of Policy Regarding Loans and Other Material Affiliated Transactions. We will maintain at least two independent directors on the Board of Directors and it is our intention to add a third independent director prior to June 2001. CERTAIN KEY EMPLOYEES Alan Potter has been the Vice President for new business development 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 our company after 10 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. David Koblinski has been general manager of our Phoenix operations since October 1998. Additionally, from 1995 to September 1999 he also served as a Vice President of Operations for our Phoenix facility. Mr. Koblinski's professional career began in 1982 at Comtech Data Corporation, where he held the position of Customer Service Representative. He was responsible for repairs as well as field and telephone support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the Senior Product Manager and Customer Support Manager for EFData Corporation. John Restivo has been Executive Vice President and General Manager of our San Diego operations since March 1999. His duties presently include management of our San Diego facility. Mr. Restivo has a Bachelor of Science degree in Engineering from Florida Institute of Technology. His professional career includes more than thirteen years in engineering and management. He has held a variety of positions, most recently as Chief Technical Officer of Radiation Systems, Inc. Previous experience includes Scientific Atlanta, where he was Director of Engineering and Operations, and Hughes Aircraft Company as a systems engineer. Brian Duggan has been the Vice President of Sales and Marketing since December 1998. Mr. Duggan handles global sales and marketing efforts for our complete equipment line, with all regional sales offices reporting directly to him. Prior to this appointment, Mr. Duggan served as Director of Worldwide Sales for ComStream Corporation. Before joining ComStream in 1995, Mr. Duggan spent eight years as Director of Marketing with Comtech Systems, Inc. He has held various positions with Plessey Electronics Systems Ltd. (UK) in engineering and sales and marketing, and with Datotek Corporation in Texas as Director of Marketing. Mr. Duggan is a graduate of Hatfield College in the United Kingdom, where he majored in engineering. DIRECTOR AND EXECUTIVE COMPENSATION Our policy has been to pay no cash compensation to directors who are our employees or ST affiliates for their service as directors. Outside directors are paid $4,000 per meeting attended and $500 if attendance is via telephone. In April 1999, all directors became eligible to receive stock options. In June 1999, the Board of Directors voted to grant stock options to four directors. Robert Grimes, Dennis Elliot, Kum Chuen Tang, and Yip Loi Lee each received an option to purchase up to 10,000 shares of our common stock at an exercise price of $3.25 per share. The options expire in June 2009. In August 1999, our Board of Directors recognized the significant achievements of our senior management in effecting the ComStream integration by awarding bonuses of $203,900 to Robert C. 45 Fitting, $98,900 to Steven W. Eymann, and $46,700 to Garry D. Kline. In addition, to further the goal of providing senior management an equity stake in our company, the Compensation Committee and the Board of Directors resolved to permit senior management to borrow funds from our company for the purpose of exercising stock options. In October 1999, Messrs. Fitting and Kline borrowed $200,000 and $50,000, respectively, for the purpose of exercising stock options. In November 1999, Mr. Eymann borrowed $100,000 for the purpose of exercising his stock options. No additional loans are available under this arrangement. We recorded the $350,000 in loans made to Messrs. Fitting, Eymann and Kline as compensation expense in 1999. Under the terms of the promissory notes executed by each of Messrs. Fitting, Eymann, and Kline, each promises to pay 50% of the principal amount due with interest on the first anniversary date of the note. The remainder of the principal, plus interest, is due on the second anniversary date of the note. The unpaid principal bears interest at a rate of 5% per annum. If the borrower continues to be employed by us, we will forgive one-half of each loan (including interest) on the first and second anniversaries of the loan and we will provide sufficient bonus compensation at those times to enable the employee to satisfy the resulting income tax obligation. If we sever our relationship with any of Messrs. Fitting, Eymann, or Kline for cause or if any of them voluntarily severs the relationship, any portion of the loan not forgiven will become due and payable. Further, based upon their exercise of the options exercised with the proceeds of these loans, each of Messrs. Fitting, Eymann, and Kline has agreed not to own, operate or be employed by a competing entity during a two-year period commencing from the date of the termination of his employment either involuntarily for cause or voluntarily by the employee. The following table sets forth the compensation for services in all capacities for the period from the year ended June 30, 1996 through December 31, 1998 of our Chief Executive Officer and our Executive Vice President. No other executive officer or employee received total annual salary and bonus of more than $100,000 during the periods presented. 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 12/31/97 111,620 0 1,112 12/31/96 40,000 279,085 435 06/30/96 80,000 0 738
- --------- (1) As a result of a change in fiscal year end, the amounts shown for the year ended December 31, 1996 reflect a period of six months. (2) Matching 401(k) plan contributions. OPTION GRANTS The following table sets forth information regarding options granted to Messrs. Fitting and Eymann during the year ended December 31, 1998. 46 OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF TOTAL OPTIONS OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION GRANT DATE NAME GRANTED IN FISCAL YEAR PRICE DATE PRESENT 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%. Potential gains are net of the exercise price, but before taxes associated with the exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed rates of stock price appreciation are provided in accordance with the rules of the SEC and do not represent our estimate or projection of the future price of our common stock. Actual gains, if any, on stock option exercises will depend upon the future market prices of our common stock. AGGREGATE OPTION EXERCISES IN 1998 AND HOLDINGS AT YEAR-END The following table sets forth information concerning option holdings as of December 31, 1998 with respect to Robert C. Fitting, our Chief Executive Officer and President, and Steven Eymann, our Executive Vice President. Messrs. Fitting and Eymann did not exercise any options during fiscal 1998. FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED, OPTIONS HELD AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Robert C. Fitting............................. 182,585 62,500 $157,418 $47,656 Steven Eymann................................. 182,585 62,500 157,418 47,656
- --------- (1) Based on the December 31, 1998 closing price of our common stock of $3.375 per share on the OTC Bulletin Board, less the per share exercise price. EMPLOYEE COMPENSATION PLANS 1996 INCENTIVE STOCK OPTION PLAN Our shareholders adopted the 1996 Incentive Stock Option Plan, on January 8, 1997, as a means of rewarding certain officers and directors for their efforts in improving our competitive and financial position and also as an incentive to retain these individuals in the future. Our Board of Directors or the compensation committee administers the plan. Each has the authority to determine all matters relating to the plan, including the selection of individuals to be granted options, the number of shares subject to the options, the exercise price, and the term of and method by which the options may be exercised. As of December 31, 1999, options to purchase 1,542,706 shares of common stock were outstanding at a weighted average exercise price of $3.10 per share and options have been exercised to purchase 390,372 shares of common stock. The total number of shares of common stock remaining reserved for issuance under the plan as of December 31, 1999 was 1,790,670. Under the plan, we may not grant options after November 12, 2006. 47 Options granted under the plan may be non-qualified options or options qualifying as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The initial exercise option price of each stock option granted under the plan will not be less than the fair market value (110% of the fair market value if the grant is to any grantee owning more than 10% of our outstanding common stock) of the common stock subject to the option. An option grantee must exercise any option no more than ten years after the date of the grant, except that options granted to persons who own more than 10% of the total combined voting power of our stock or that of an affiliate must be exercised within five years of the grant. Any option granted on or after October 6, 1998 under the plan generally becomes exercisable immediately as to 25% of the shares covered thereby and becomes exercisable for an additional 25% in each of the succeeding three years. An amendment to the plan has accelerated the exercise schedule on certain earlier option grants to match the current schedule or to become immediately exercisable. No options granted under the plan are transferable, except upon the death of the grantee. 1999 EMPLOYEE STOCK PURCHASE PLAN On June 15, 1999, our shareholders adopted the 1999 Employee Stock Purchase Plan, as a means of rewarding and retaining existing employees. The purchase plan allows eligible employees, including officers and directors, to utilize payroll deductions to purchase shares of our common stock. The Board of Directors or a committee of two or more directors, none of whom will be officers or employees, have full authority to administer all aspects of the purchase plan. As of December 31, 1999, 1,000,000 shares are authorized for issuance under the purchase plan. We expect to activate the purchase plan in the first quarter of 2000. Each eligible employee may elect to have from 1% to 15% of his or her salary deducted in each pay period and deposited into a stock purchase account in such employee's name. At the conclusion of each purchase period, the employee may exercise the right to purchase shares of common stock or elect a cash distribution of all amounts held in the stock purchase account. Amounts in such accounts may be used by employees to purchase the largest number of whole shares available at the purchase price. The purchase price for shares of common stock will be the lesser of 85% of the fair market value of the common stock on (a) the first day of the applicable purchase period, or (b) the last day of such period. In the event of termination of a participant's employment of all funds in the employee's stock purchase account will be distributed to such employee in cash, except for termination relating to a normal or early retirement, in which case the balance in the stock purchase account will be used to purchase shares of common stock. EMPLOYEE BENEFIT PLAN We have a qualified contributory 401(k) plan that covers all employees in our Phoenix facility who have attained the age of 18 and are employed at the enrollment date. We provided contributions of $69,403 for the nine months ended September 30, 1999 and $31,690, for the year ended December 31, 1998. Each participant may elect to contribute up to 15% of his or her gross compensation up to the maximum amount allowed by the Internal Revenue Service. We match up to 1% of the employee's salary. We also have a qualified contributory 401(k) plan that covers all full-time employees in our San Diego facility who have been employed continuously for at least 30 days prior to the enrollment date. We provided contributions of $91,691 for the nine months ended September 30, 1999 and $30,450 for the period October 15, 1998 through December 31, 1998. Each participant may elect to contribute up to 15% of his or her gross compensation up to the maximum amount allowed by the Internal Revenue Service. We match $0.35 for every dollar up to 7% of the employee's contribution. 48 EMPLOYMENT AGREEMENTS Under the respective employment agreements between Radyne ComStream and each of Messrs. Fitting and Eymann, they will serve as our Chief Executive Officer and President and Executive Vice President, respectively, until the earlier of June 30, 2000 or such time as our adjusted earnings before interest and taxes exceeds $6,000,000 for a period of four calendar quarters. Pursuant to the agreements, we presently pay Mr. Fitting and Mr. Eymann annual salaries of $200,000 and $150,000, respectively, and have granted them certain of the stock options described in the above table. Each of Mr. Fitting and Mr. Eymann has also agreed that he will not engage in any competitive business until after the second anniversary of his termination of employment, except in the case of involuntary termination without cause. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Lim, Lee, Grimes, and Elliott. There were no interlocking relationships between our company and other entities that might affect the determination of the compensation of our executive officers. Mr. Lim is currently the Chairman of Stetsys Pte Ltd and Stetsys US, Inc. and has been the Group Director of Singapore Technologies Pte Ltd since February 1995. Additionally, Mr. Lee served as a Regional Director of Singapore Technologies Pte Ltd until December 1998. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS Our certificate of incorporation contains a provision that eliminates the personal liability of the members of our Board of Directors for violations of their fiduciary duty of care as a director. However, this provision does not apply where there has been any of the following: 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, or any other violation of Section 719 of the New York Business Corporation Law; or a financial profit or advantage to which the director was not legally entitled. Our certificate of incorporation also contains a provision which allows us, to the fullest extent permitted by Sections 721 through 726 of the New York Business Corporation Law, to indemnify our directors and officers from and against any and all expenses or liabilities arising from or in connection with their serving in such capacities with us. This right of indemnification continues once such a person ceases to be a director or officer of our company. 49 PRINCIPAL SHAREHOLDERS The following table sets forth, as of December 31, 1999, the ownership of our common stock by (i) each person who is known by us to own of record or beneficially more than 5% of our outstanding common stock, (ii) each of our directors and our Chief Executive Officer and Executive Vice President, and (iii) all directors and executive officers of our company as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares indicated subject to applicable community property law.
PERCENTAGE PERCENTAGE OF CLASS OF CLASS NUMBER BEFORE THIS AFTER THIS NAME AND ADDRESS OF SHARES(1) OFFERING(1) OFFERING(1) ---------------- ------------ ----------- ----------- Stetsys US, Inc.(2).................................. 1,180,000 10.99% 8.98% Stetsys Pte Ltd(2)................................... 9,676,800(3) 90.15% 73.68% Robert C. Fitting(4)................................. 238,635(5) 2.20% 1.80% Steven W. Eymann(4).................................. 237,835(6) 2.18% 1.79% Garry D. Kline(4).................................... 42,493(7) * * Ming Seong Lim(2).................................... 0 0 0 Yip Loi Lee(4)....................................... 10,000(8) * * Robert A. Grimes(4).................................. 10,000(8) * * Dennis W. Elliott(4)................................. 10,000(8) * * Kum Chuen Tang(2).................................... 10,000(8) * * All directors and executive officers of the company as a group (eight persons).......... 558,963 5.07% 4.15%
- --------- * Less than one percent. (1) The numbers and percentages shown include the shares of common stock actually owned as of December 31, 1999 and the shares of common stock that the person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of common stock that the identified person or group had the right to acquire within 60 days of December 31, 1999 upon the exercise of options are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person. The percentage shown after this offering does not give effect to exercise of the underwriters' option to purchase an additional 360,000 units in this offering to cover over-allotments or the exercise of the warrants included in the units sold in this offering. (2) The address for each of these shareholders is: c/o Singapore Technologies Pte Ltd, 83 Science Park Drive, #01-01/02 The Curie, Singapore Science Park, Singapore 118258. (3) 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 the sole stockholder. The Minister of Finance (Incorporated) of Singapore owns 100% of the stock of Singapore Technologies Pte Ltd, which in turn owns 100% of Stetsys Pte Ltd. An aggregate of 3,900,000 of the outstanding shares held by Stetsys Pte Ltd. and Stetsys US Inc. are subject to a lock-in agreement required by certain state regulatory authorities, as described in 'Principal Shareholders -- Lock-in Agreements.' (4) The address for each of these shareholders is: c/o Radyne ComStream Inc., 3138 East Elwood Street, Phoenix, Arizona 85034. (5) Includes 105,635 shares underlying exercisable options held by Mr. Fitting. Of the outstanding shares owned by Mr. Fitting, 59,500 shares are, and 40% of any shares acquired by Mr. Fitting upon exercise of options may be, subject to a lock-in agreement required by certain state regulatory authorities, as described in 'Principal Shareholders -- Lock-in Agreements.' (footnotes continued on next page) 50 (footnotes continued from previous page) (6) Includes 169,735 shares underlying exercisable options held by Mr. Eymann. Of the outstanding shares owned by Mr. Eymann, 27,250 shares are, and 40% of any shares acquired by Mr Eymann upon exercise of options may be, subject to a lock-in agreement required by certain state regulatory authorities, as described in 'Principal Shareholders -- Lock-in Agreements.' (7) Includes 14,242 shares underlying exercisable options held by Mr. Kline. Of the outstanding shares owned by Mr. Kline, 11,500 are, and 40% of any shares acquired by Mr. Kline upon exercise of options may be, subject to a lock-in agreement required by certain state regulatory authorities, as described in 'Principal Shareholders -- Lock-in Agreements.' (8) Represents 10,000 shares underlying exercisable options held by each of Messrs. Elliott, Grimes, Lee and Tang. LOCK-IN AGREEMENTS We have entered into lock-in agreements with Stetsys Pte Ltd, Stetsys US Inc. and Messrs. Fitting, Eymann and Kline pursuant to which these shareholders have agreed not sell, pledge, hypothecate, assign, grant any option for the sale of, or otherwise transfer or dispose of an aggregate of 3,998,250 shares of our common stock owned by these shareholders, plus any shares issued to these shareholders with respect to the locked-in shares in any stock dividend, stock split, recapitalization or similar transaction, plus 40% of any shares acquired by these shareholders pursuant to the exercise of any option during the terms of the lock-in agreement. These lock-in agreements were required by certain state regulatory authorities and the terms of these agreements cannot be amended without the consent of these regulatory authorities. In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of our assets or securities (including by way of a tender offer), or any other transaction or proceeding with a person who is not a Promoter (as defined in the North American Securities Administrators Association Statement of Policy on Corporate Securities Definitions) which results in a distribution of our assets or securities while the lock-in agreements are in effect: all holders of our common stock, except the shareholders who are party to the lock-in agreements with respect to the shares they own that are subject to the lock-in agreements, will first share in any such distribution on a per-share basis until they have received an amount equal to the offering price of the units sold in this offering for each share of our common stock that they own, then all of the shareholders who are parties to the lock-in agreements will share in such distribution on a per-share basis with respect to the shares they own that are the subject of the lock-in agreements until they have received an amount equal to the offering price of the units sold in this offering for each such share of common stock, then all of our shareholders will share in any remaining portion of the distribution equally on a per-share basis. The distribution may be made on terms that are more favorable to the shareholders who are party to the lock-in agreements if a majority of the shares of common stock held by our other shareholders vote in favor of, or consent to, such terms. During the term of the lock-in agreements the shareholders who are parties to such agreements cannot vote any of their shares in favor of any dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of our assets or securities (including by way of a tender offer), or any other transaction or proceeding which results in a distribution of our assets or securities unless a majority of our independent directors have approved the transaction. 51 Unless the lock-in agreements terminate sooner, as described below, commencing one year from the date this offering is closed 2 1/2% of the locked-in shares held by the shareholders will be released from the terms of the lock-in agreements each quarter. All shares remaining subject to the lock-in agreements will be released on the second anniversary of the date this offering is closed. The lock-in agreements have a two year term commencing on the closing of this offering, but will terminate earlier if our common stock becomes a 'covered security' as defined under the National Securities Markets Improvement Act of 1996. Our common stock would be a covered security if it were to be listed on a national stock exchange or on Nasdaq's National Market. CERTAIN TRANSACTIONS As disclosed under 'Management -- Director and Executive Compensation,' we made loans of: (1) $200,000 to Robert C. Fitting on October 8, 1999; (2) $100,000 to Steven W. Eymann on November 1, 1999; and (3) $50,000 to Garry D. Kline on October 11, 1999. The proceeds of these loans were used by each of Messrs. Fitting, Eymann, and Kline to exercise stock options in October and November 1999 for an aggregate of 217,851 shares of common stock granted under the 1996 Incentive Stock Option Plan. Sales of products in the ordinary course of business to Agilis Communication Technologies Pte Ltd, an affiliated company under the common control of ST, were $69,000 for the nine months ended September 30, 1999, $65,000 for the year ended December 31, 1998, $540,000 for the year ended December 31, 1997, $375,000 for the six-month period ended December 31, 1996, and $118,900 for the year ended June 30, 1996. Accounts receivable from Agilis were $5,000 at September 30, 1999 and $52,000 at December 31, 1998. Until October 1998, ETS was a wholly owned subsidiary of ST. Sales of products in the ordinary course of business to ETS were $50,000 for the year ended December 31, 1998, $152,000 for the year ended December 31, 1997, $307,300 for the six-month period ended December 31, 1996, and $311,600 for the year ended June 30, 1996. We purchased $22,100 of machinery and equipment and $805,000 in inventory from ETS during the six-month period ended December 31, 1996. We purchased $2,461,000 of inventory from ETS during the year ended June 30, 1996. Prior to January 1997, ETS provided us with management services. Fees for these services were $60,000 for the six-month period ended December 31, 1996 and $120,000 for the year ended June 30, 1996. ST made an unsecured loan of $4,500,000 to us on August 12, 1996. We used the proceeds of this loan to repay a portion of an outstanding loan payable to ETS. We repaid the ETS loan in full on February 10, 1997 with the proceeds of loans from Citibank, N.A. and ST. ST made several loans, totaling $2,100,000, to us in November and December 1996. These loans earned interest of 8% per annum and we repaid them in March 1997 with the proceeds of a new loan of $4,100,000 from ST. This ST loan was ultimately repaid with the proceeds of a rights offering that was completed on June 16, 1997. In such rights offering, ST purchased 1,976,000 shares of our common stock at $2.50 per share, for an aggregate purchase price of $4,940,000. During 1998, we received loans totaling $5,618,272 from ST, which bore interest at rates ranging from 6.625% to 6.844%. We used the proceeds from these loans to repay and terminate a bank line of credit with Bank of America NT & SA, for which ST had provided a non-binding letter of awareness. In October 1998, ST loaned us an additional $10.0 million in connection with the ComStream acquisition. This note bore interest at 6.375% and was repayable out of the proceeds of the rights offering commenced on September 30, 1999. On September 30, 1999, ST instructed us to capitalize the entire $15,618,272 principal amount of the debt we owed to ST in partial exercise of its rights. In October 1999, ST exercised the balance of its rights by paying cash to us in the amount of $423,700. We used these funds, along with $932,200 of cash on hand, to pay the accrued interest due of $1,355,000 to ST as of September 30, 1999. 52 Interest expense on notes payable to ST was $732,000 for the nine months ended September 30, 1999, $581,000 for the year ended December 31, 1998, $148,000 for the year ended December 31, 1997, $205,900 for the six-month period ended December 31, 1996, and $248,400 for the year ended June 30, 1996. Accrued interest on notes payable to ST was $1,355,000 at September 30, 1999. We acquired the assets of Merit Microwave, Inc. in 1995. As a part of this transaction, we hired Peter Weisskopf, the principal shareholder and CEO of Merit, as the president of our Microwave Products Division. We also agreed to pay royalties to Mr. Weisskopf throughout the course of his employment. We paid royalties to Mr. Weisskopf of $5,600 for the year ended December 31, 1997, and $4,600 for the year ended December 31, 1996. His employment with us was terminated in March 1998 and we paid no royalties to Mr. Weisskopf in 1998 or thereafter. We believe that all of the foregoing transactions were on terms no less favorable to us than we could have obtained in arms length transactions with unaffiliated third parties. At the time the transactions described above were entered into we did not have two disinterested independent directors to ratify the transactions, as required by NASAA's Statement of Policy Regarding Loans and Other Material Affiliated Transactions. All future material affiliated transactions and loans will be made or entered into on terms that are no less favorable to us than those that can be obtained from unaffiliated third parties. All future material affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of our independent directors who do not have an interest in the transactions and who have access, at our expense, to our counsel or independent legal counsel. All future loans will be for a bona fide business purpose and will be approved by a majority of the disinterested directors. We have agreed with certain state regulatory authorities that so long as our securities are registered in such states, or one year from the date of this prospectus, whichever is longer, we will not make loans to our officers, directors, employees or principal shareholders, except for loans made in the ordinary course of business, such as travel advances, expense account advances, relocation advances, or reasonable salary advances. 53 DESCRIPTION OF SECURITIES GENERAL We are incorporated in the State of New York. We are authorized to issue 20,000,000 shares of common stock, par value $.002 per share. UNITS Each unit being offered hereby consists of one share of common stock and one redeemable common stock purchase warrant to purchase one share of our common stock. The common stock and the warrants will separate immediately and not trade as a unit. Accordingly we will not isssue unit certificates. COMMON STOCK The following summary description of the common stock is qualified in its entirety by reference to our Certificate of Incorporation. As of December 31, 1999, there were 10,733,977 shares of common stock issued and outstanding. Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. 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 our liquidation, dissolution or winding up 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 shares of common stock are, and the shares of common stock being sold in this offering and the shares of common stock issuable upon exercise of the warrants sold in this offering will be, when issued, validly authorized and issued, fully paid and nonassessable. COMMON STOCK PURCHASE WARRANTS General. The following is a brief summary of the material provisions of the warrants included in the units offered hereby. This summary is qualified in all respects by reference to the actual text of the warrant agreement between us and Continental Stock Transfer and Trust Company as warrant agent. A copy of the warrant agreement is filed as an exhibit to the registration statement of which this prospectus forms a part. Exercise Price and Terms. Each warrant entitles the holder thereof to purchase one share of common stock at a price of $ per share (125% of the public offering price of the units), subject to adjustment in accordance with the anti-dilution and other provisions described below. The exercise price of the warrants is not related to any objective criteria of value and should not be regarded as an indication of any future market price of the common stock. The warrant will be exercisable immediately upon issuance. The warrants will remain exercisable until the earlier of (a) the fifth anniversary of the date of this prospectus or (b) the close of business on the day before the redemption date described below. The holder of any warrant may exercise such warrant by surrendering the certificate representing the warrant to our warrant agent, with the subscription form on the reverse side of the warrant certificate properly completed and executed, together with payment of the exercise price. The warrants may be exercised at any time in whole or in part at the applicable exercise price until expiration or redemption of the warrants. No fractional shares will be issued upon exercise of the warrants. Adjustments. The exercise price and number of shares of our common stock purchasable upon the exercise of the warrants are subject to adjustment upon the occurrence of certain events, including the following: stock dividends, stock splits, combinations or reclassifications of our common stock, and 54 the issuance of rights or warrants to all holders of our common stock to purchase or subscribe for additional shares of our common stock or other securities convertible into common stock at a price below the then current market price of the common stock. Additionally, an adjustment would be made in the case of: a capital reorganization, reclassification or exchange of our common stock, our consolidation or merger with or into another corporation (other than a consolidation or merger in which we are the surviving corporation), or sale of all or substantially all of our assets. These adjustments will enable warrantholders to acquire the kind and number of shares of stock or other securities or property that the holder would have received if he or she had exercised his or her warrants immediately prior to the event that causes the adjustment. No adjustment will be made until the cumulative adjustments in the exercise price per share amount to $.01 or more. No adjustment to the number of shares and exercise price of the shares subject to the warrants will be made for dividends (other than stock dividends), if any, paid on our common stock or for common stock issued pursuant to our 1996 Incentive Stock Option Plan, our 1999 Employee Stock Purchase Plan, or any other employee option plan or employee stock plan that may be adopted in the future, or upon exercise of the warrants, the representative's purchase option or any other option or warrant outstanding as of the date of this prospectus. Redemption Provisions. Commencing one year from the date of this prospectus, or earlier with the consent of HD Brous & Co., Inc., we can redeem the warrants at $.01 per warrant on not less than 30 nor more than 60 days' prior written notice. The warrants may only be redeemed if: from the date our Board of Directors decides to redeem the warrants until the redemption date, there is a current and effective registration statement covering the warrants and the underlying shares, our common stock is listed on any Nasdaq Stock Market, the New York Stock Exchange, or the American Stock Exchange, and the closing sales price of our common stock as reported by Nasdaq equals or exceeds $ per share on each of the 20 consecutive trading days ending not earlier than 5 days prior to the date on which the warrants are called for redemption. In the event that we elect to redeem the warrants, the warrants will be exercisable until the close of business on the day prior to the redemption date. Any warrants that are not exercised by such time will cease to be exercisable and the holder will be entitled only to the redemption price. Transfer, Exchange, and Exercise. The warrants will be issued in registered form and may be presented to our transfer and warrant agent for transfer, exchange, or exercise at any time on or prior to their expiration or redemption. If a market for the warrants develops, the holder may sell the warrants instead of exercising them. There can be no assurance, however, that a market for the warrants will develop or continue. Warrantholder is not a Shareholder. Until a holder exercises his or her warrants, he or she will not have any voting, dividend, or other rights as a shareholder. Modification of Warrants. We and our warrant agent may make such modifications to the warrant agreement as are deemed necessary and desirable and that do not adversely affect the interests of the warrantholders. No other modifications may be made to the warrant agreement or the warrants without the consent of the majority of the warrantholders. Modification of the number of securities purchasable upon the exercise of any warrant, the exercise price, and the acceleration of the expiration date with respect to any warrant will require the consent of the holder of such warrant. Certain Federal Income Tax Considerations. The warrantholder will not recognize a gain or loss upon the exercise of a warrant. If a warrantholder sells his or her warrant or if we redeem a warrant, the holder will recognize a gain or loss in an amount equal to the difference between the amount realized by the holder from the sale or redemption and the holder's adjusted basis in the 55 warrant. Provided that the holder is not a dealer in the warrants and that the common stock would have been a capital asset in the hands of the holder had the warrant been exercised, any gain or loss from the sale or redemption of the warrant will be a long-term or short-term capital gain or loss to the holder depending on whether the warrant had been held for more than one year. Upon the expiration of a warrant, a loss equal to the warrantholder's adjusted basis in the warrant will be a long-term or short-term capital loss, depending on whether the warrant has been held for more than one year. TRANSFER AND WARRANT AGENT We have appointed Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, NY 10004, as transfer agent for the common stock and warrants and as warrant agent for the warrants. NASDAQ SMALLCAP MARKET LISTING Our common stock and warrants have been approved for listing on the Nasdaq SmallCap Market, under the symbols 'RADN' and 'RADNW,' respectively. 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 of the Securities Act or otherwise could materially adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities or debt financing. Upon completion of this offering, there will be approximately 13,133,977 shares of common stock issued and outstanding. Of these shares, we believe that approximately 3,163,742 would be freely transferable immediately. ST and certain of our officers hold 9,906,151 shares, which would be eligible for resale subject to the volume and manner of sale limitations of Rule 144 of the Securities Act. An additional 64,084 shares are 'restricted securities' as that term is defined in Rule 144 and are eligible for sale under the provision of Rule 144(k). A total of 1,790,670 shares of common stock remain reserved for issuance under the 1996 Incentive Stock Option Plan and options to purchase an aggregate of 1,542,706 shares of common stock were outstanding under the plan as of December 31, 1999. All of the shares issuable upon exercise of such options are covered by a currently effective registration statement on Form S-8. The issuance of 1,000,000 shares of our common stock pursuant to our 1999 Employee Stock Purchase Plan is covered by a currently effective registration statement in Form S-8. The shares of common stock issuable under our 1996 Incentive Stock Option Plan and 1999 Employee Stock Purchase Plan will be freely transferable when they are issued, except for shares that may be acquired by our affiliates. These shares will be subject to the volume and manner of sale limitations contained in Rule 144. The shares of common stock outstanding that are deemed to be 'restricted securities' (as that term is defined under Rule 144) or that are owned by our affiliates may only be sold pursuant to an effective registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Restricted shares and shares of common stock held by our affiliates that are not 'restricted' will be eligible for sale, under Rule 144, subject to certain volume and manner of sale limitations prescribed by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including a person who may be deemed an 'affiliate' of the company, who has beneficially owned restricted securities for at least one year may sell, within any three-month period, a number of shares that does not exceed the greater of: (1) 1% of the then outstanding shares of common stock or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144. Sales of shares held by our affiliates that are not 'restricted' are subject to such volume limitations, but are not subject to the holding period requirement. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and availability of current 56 public information about our company. A person who is not deemed to have been an affiliate of our company at any time during the 90 days preceding a sale by such person, and who has beneficially owned the restricted shares for at least two years, is entitled to sell such shares under Rule 144(k) without regard to any of the restrictions described above. Prior to this offering, the public market for our securities has been very limited as trading in our common stock has been infrequent. Following this offering, we cannot predict the effect, if any, that the availability for sale of shares held by our current shareholders will have on the market price from time to time. Nevertheless, sales by our current shareholders of a substantial number of shares of common stock in the public market could materially and adversely affect the market price for our common stock. In addition, the availability for sale of a substantial number of shares of our common stock acquired through the exercise of the warrants or outstanding options could materially adversely affect the market price for our common stock. UNDERWRITING GENERAL We intend to offer our units in the United States through HD Brous & Co., Inc. as the representative of the several underwriters. Subject to the terms and conditions set forth in an underwriting agreement between us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed to purchase from us, the number of units listed next to its name in the following table:
UNDERWRITER NUMBER OF UNITS ----------- --------------- HD Brous & Co., Inc. ....................................... Miller Johnson Kuehn ....................................... American Fronteer Financial Corp. .......................... Solid ISG .................................................. --------- Total................................................. 2,400,000 --------- ---------
The underwriters have agreed, subject to the terms and conditions set forth in the underwriting agreement, to purchase all of the units being sold under the terms of the agreement if any of the units are sold. The units are being offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by the underwriters and subject to approval of legal matters by counsel and other conditions. The underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. We have granted an option to the underwriters to purchase up to an additional 360,000 units at the public offering price set forth on the cover of this prospectus, less the underwriting discount. The underwriters may exercise this option within 45 days after the date of this prospectus solely to cover over-allotments, if any, made on the sale of our units offered by this prospectus. If the underwriters exercise this option, they will each purchase additional units in approximately the same proportion as the amounts set forth in the table above. We will pay the expenses associated with the exercise of this over-allotment option. The underwriters will purchase the units from us at the public offering price set forth on the cover page of this prospectus, less a discount equal to 8% of the public offering price. The underwriters propose initially to offer the units to the public at the public offering price set forth on the cover page of this prospectus. After the initial offering, the underwriters may change the public offering price, concession, and discount. The following table shows the per unit and total underwriting discounts that we will pay to the underwriters. This information assumes either no 57 exercise or full exercise by the underwriters of their over-allotment option and does not include the 2 1/2% non-accountable expense allowance payable to the representative.
PAID BY RADYNE COMSTREAM INC. --------------------------- NO EXERCISE FULL EXERCISE ----------- ------------- Per Unit.................................................... $ $ Total....................................................... $ $
In addition to the underwriting discount, we will pay all other expenses of the offering, which we estimate will be $510,443. We have agreed to indemnify the underwriters against liabilities under the Securities Act or to contribute to payments the underwriters may be required to make in respect of those liabilities. In connection with this offering, we have agreed to sell to the representative, for nominal consideration, a non-redeemable option to purchase from us up to 240,000 shares of common stock at an exercise price of $ per share (165% of the offering price of the units). The representative's purchase option will be exercisable for a period of four years beginning one year after the effective date of this prospectus. During the term of the option, the representative may not sell, transfer, assign, or hypothecate the option, except to officers and employees of HD Brous who are also shareholders of HD Brous, all of whom will be bound by such restrictions. The holders of the representative's purchase option will have no voting, dividend or other rights as shareholders with respect to the shares underlying the option until they exercise such option. We have agreed to register the underlying stock at the holder's request and will bear costs related thereto, other than underwriting discounts and commissions. We also have agreed that for seven years after the effective date of this prospectus, we will give the holders of the representative's purchase option advance notice of our intention to file a registration statement. The holders of the representative's purchase options may require us to include the option and/or the underlying stock in such registration statement at our expense. The holders of the representative's purchase option can be expected to exercise the option at a time when the market price for our common stock is higher than the exercise price of the option. This could adversely affect the terms on which we could obtain additional financing in the future. Any profit that the underwriters receive upon the sale of the shares of common stock issued upon exercise of the option may be deemed to be additional underwriting compensation. We, our executive officers and directors, and ST have agreed that without the prior written consent of HD Brous, for a period of six months after the date of this prospectus we and they will not, directly or indirectly offer, pledge, sell (including a short sale or sale against the box), contract to sell, establish an open 'put equivalent position' within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, grant any option, right for the sale of, or otherwise dispose of or transfer any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock, or publicly announce the intention to do any of the foregoing. Under the underwriting agreement, we have agreed that for two years after the date of this prospectus our Board of Directors will include at least three members who are reasonably acceptable to the representative and who are not (a) an employee or 5% stockholder of our company or (b) an employee, officer, director or beneficial owner of 5% or more of any person that, directly or indirectly, beneficially owns 5% or more of our common stock. H.D. Brous has agreed that Messrs. Lee, Grimes and Elliott are deemed to satisfy this requirement regarding our directors. The underwriting agreement also requires that we maintain key man life insurance policies on the lives of Robert Fitting and Steven Eymann in the amounts of $1,000,000 and $500,000, respectively. Such policies shall be effective for the lesser of the term of their respective employment with our company or three years. Prior to this offering, our common stock has traded on a limited basis on the OTC Bulletin Board. The public offering price of the units will be determined through negotiations between the 58 underwriters and us. The factors to be considered in determining the public offering price, in addition to prevailing market conditions, include: the valuation multiples of publicly traded companies that the underwriters believe to be comparable to us, our financial condition and results, the history of, and the prospects for, our company and the industry in which we compete, an assessment of our management, our past and present operations, an assessment of the prospects for, and timing of, our future revenues, the present state of our development, and the percentage interest of our business being sold as compared to the valuation of our business. We cannot assure you that an active trading market will develop for our common stock and warrants or that our common stock and warrants will trade in the public market subsequent to the offering at or above the public offering price. The underwriters do not expect sales of our units, common stock or warrants to any accounts over which they exercise discretionary authority to exceed 5% of the number of units being offered under this prospectus. Until the distribution of our units, common stock, or warrants is completed, rules of the SEC may limit the ability of the underwriters to bid for and purchase our common stock and warrants. As an exception to these rules, the underwriters are permitted to engage in transactions that stabilize the price of our common stock or warrants. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock or warrants. If the underwriters create a short position in our common stock or warrants in connection with this offering, that is, if they sell more units than are set forth on the cover page of this prospectus, the underwriters may reduce that short position by purchasing our common stock and warrants in the open market. The underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The representative also may impose a penalty bid on selling group members. This means that if the underwriters purchase common stock and warrants in the open market to reduce their short position or to stabilize the price of our common stock and warrants, the representative may reclaim the amount of the selling concession from the selling group members who sold those securities as part of this offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid also might have an effect on the price of our common stock or warrants to the extent that it discourages resales of our common stock or warrants. Neither the underwriters nor we make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock or warrants. In addition, neither the underwriters nor we make any representation that the underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. During 1998, the State of Connecticut Department of Banking and the State of New Jersey Bureau of Securities conducted an examination of books and records and interviewed certain personnel located in HD Brous' offices in those states. Following that examination, the states alleged that HD Brous failed to enforce its procedures to reasonably supervise certain of its sales agents' use of written sales materials, which resulted in violations of those states' securities laws. In order to resolve issues raised as a result of the examination without the expense and delay of 59 an administrative hearing, in August 1998 HD Brous entered into a joint consent order with the states of Connecticut and New Jersey without admitting or denying the allegations and without any hearing or presentation of evidence. Under the consent order, HD Brous agreed to (a) cease and desist from engaging in conduct that would violate Connecticut or New Jersey securities laws by reason of failing to establish written supervisory procedures and a system for applying them to prevent the use of written sales presentations that have not been approved by HD Brous, (b) engage a consultant to review HD Brous' policies and procedures and prepare a written report for HD Brous, and (c) pay an aggregate of $30,000 in administrative fines to the states of Connecticut and New Jersey. LEGAL MATTERS Dorsey & Whitney LLP, New York, New York, will pass upon the validity of the issuance of the units, common stock and warrants offered by this prospectus on our behalf. Greenberg Traurig, LLP Phoenix, Arizona, will pass upon certain legal matters in connection with this offering for the underwriters. EXPERTS The restated consolidated financial statements of Radyne ComStream Inc. as of December 31, 1998 and for the year then ended have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, which is included herein, 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, included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is included herein, and have been so included 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. WHERE YOU CAN FIND MORE INFORMATION We are subject to the information requirements of the Securities Exchange Act of 1934 and file reports and other information with the SEC. You may read and copy any reports or other information concerning us 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 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services and at the Website maintained by the SEC at 'http://www.sec.gov.' Information concerning us is not available from any securities exchange as our common stock is not traded on any securities exchange. We filed a registration statement with respect to the units, common stock, and warrants 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 we file with the SEC. Statements in this prospectus concerning any document filed as an exhibit to this 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 this registration statement. These documents, filed 60 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 our principal executive offices at 3138 East Elwood Street, Phoenix, Arizona 85034 during regular business hours by any interested holder of our stock or his or her representative who has been so designated in writing. The SEC allows us to 'incorporate by reference' information into this prospectus, which means that we can disclose important information to you by referring you to another document filed separately with the SEC, including our annual, quarterly, and current reports. This prospectus incorporates by reference the documents set forth below, which we previously filed with the SEC. These incorporated documents contain important information about our finances and us. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information in this prospectus. The information incorporated by reference is an important part of this prospectus. We incorporate by reference into this prospectus: our Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1998; our quarterly report on Form 10-Q/A for the quarter ended March 31, 1999; our quarterly report on Form 10-Q/A for the quarter ended June 30, 1999; our quarterly report on Form 10-Q for the quarter ended September 30, 1999; and our current 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 reflecting our financial performance during these periods as if our acquisition of ComStream Holdings, Inc. had taken place effective January 1, 1997. Documents incorporated by reference may be obtained through the SEC and are available from us 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 from us by making a request 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. 61 [THIS PAGE INTENTIONALLY LEFT BLANK] RADYNE COMSTREAM INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Reports............................... F-2 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 1998 (Restated) and 1997.................................... F-4 Consolidated Statements of Operations -- 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 Stockholders' Capital Deficiency -- 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 Consolidated Statements of Cash Flows -- Years Ended December 31, 1998 (Restated) and 1997, the Six-Month Period Ended December 31, 1996 and the Year Ended June 30, 1996.......................................... F-7 Notes to Consolidated Financial Statements -- Years Ended December 31, 1998 (Restated) and 1997, the Six-Month Period Ended December 31, 1996 and the Year Ended June 30, 1996.................................... F-8 Unaudited Pro Forma Condensed Combined Statement of Operations for the Year ended December 31, 1998........ F-23 Notes to Unaudited Pro Forma Condensed Combined Statement of Operations................................ F-24 Condensed Consolidated Balance Sheet as of September 30, 1999 (Unaudited)....................................... F-25 Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and 1999 (Unaudited)............................................ F-26 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1999 (Unaudited)............................................ F-27 Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-28
F-1 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-2 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders RADYNE COMSTREAM INC. Phoenix, Arizona We have audited the accompanying balance sheet 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 audit provides 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 Phoenix, Arizona February 4, 1998 F-3 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-4 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-5 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 RECIEVABLE ------------------- 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-6 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-7 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 ----------- ------------------------- A 2MB card.................................................. Jan-99 'CM601' modem modifications................................. Mar-99 'DT 8000' -- a Ku-band 2 Watt earth station................. Dec-98 'DBR 2000' -- a new data broadcast receiver................. Jun-99 'ABR 202' -- a new audio receiver........................... Nov-98 Set Top Box................................................. Jun-99 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. 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. F-8 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 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. 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. F-9 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 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. (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. F-10 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 (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. (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. F-11 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 (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. (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. F-12 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 (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. (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 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 (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. (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. F-14 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 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 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. F-15 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 (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 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 F-16 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 ended June 30, 1996, respectively. Export sales (based on shipping destination) are comprised of the following:
YEAR YEAR SIX-MONTH YEAR ENDED ENDED PERIOD ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1998 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. (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.................... $(14,537,543) $(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. F-17 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 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. (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 F-18 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 statements. Had the Company 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 -------- ---- As reported $(14,537,543) $(1,756,716) Net loss..................................... Pro forma $(15,293,957) $(2,028,121) As reported $ (2.45) $ (.35) Loss per Share -- Basic...................... Pro forma $ (2.58) $ (.40) As reported $ (2.45) $ (.35) Loss per Share -- Diluted.................... 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 --------- ----- --------- -----
A summary of stock options granted at December 31, 1998 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- -------------------------- NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE --------------- ---- ---------------- ----- ---- ----- $2.50............................ 676,957 1 year $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 F-19 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 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. 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 F-20 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 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-21 RADYNE COMSTREAM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 AND 1997 (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-22 RADYNE COMSTREAM INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA).
RAYDNE 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......................... 1,156 1,156 In-process research and development..................... 3,909 (3,909) b Restructuring costs............... 3,100 3,100 Asset impairment charge........... 263 263 -------- -------- -------- Total operating expenses................ 18,255 16,720 (4,065) 30,910 -------- -------- -------- Operating loss.................... (12,952) (8,235) (4,065) (17,122) (3,240) c Interest expense.................. 1,199 3,240 1,200 c 2,399 Other............................. (24) (24) -------- -------- -------- Net loss.......................... $(14,127) $(11,475) $(6,105) $(19,497) -------- -------- ------- -------- -------- -------- ------- -------- Basic net loss per common share... $ (2.38) d $ (3.29) -------- -------- -------- -------- Diluted net loss per common share........................... $ (2.38) d $ (3.29) -------- -------- -------- -------- 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-23 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-24 RADYNE COMSTREAM INC. CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- (UNAUDITED) (AUDITED) ASSETS Current assets: Cash & cash equivalents................................. $ 1,622,256 $ 254,956 Accounts receivable -- trade, net of allowance for doubtful accounts of $784,958 and $632,815............ 6,827,761 7,270,732 Other receivable........................................ 0 1,265,000 Inventories, net........................................ 8,238,202 9,380,478 Prepaids and other current assets....................... 430,536 590,161 ------------ ------------ Total current assets................................ 17,118,755 18,761,327 ------------ ------------ Property and equipment -- net............................... 3,961,371 5,533,645 ------------ ------------ Other assets................................................ 3,888,029 4,895,742 ------------ ------------ Total assets.................................... $ 24,968,155 $ 29,190,714 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' CAPITAL/(DEFICIENCY) Current liabilities: Notes payable under line of credit agreement............ $ 12,920,000 $ 8,000,000 Note payable............................................ 0 7,000,000 Current installments of obligations under capital leases................................................ 64,561 124,891 Accounts payable -- trade............................... 2,512,724 3,291,915 Accounts payable -- affiliates.......................... 0 8,150 Accrued expenses........................................ 7,255,518 9,140,341 Income taxes payable.................................... 15,000 0 ------------ ------------ Total current liabilities........................... 22,767,803 27,565,297 Notes payable to affiliates................................. 0 15,618,272 Obligations under capital leases, excluding current installments.............................................. 76,572 88,588 Accrued stock option compensation........................... 1,108,804 1,155,477 ------------ ------------ Total liabilities................................... 23,953,179 44,427,634 ------------ ------------ Stockholders' capital/(deficiency) Common stock, $.002 par value, 20,000,000 shares authorized, Shares issued and outstanding, 10,151,026 at September 30, 1999 and 5,931,340 at December 31, 1998.................................................. 20,303 11,862 Additional paid-in capital.............................. 21,435,312 6,105,404 Accumulated deficit..................................... (20,440,639) (21,354,186) ------------ ------------ Total stockholders' capital/(deficiency)............ 1,014,976 (15,236,920) ------------ ------------ Total........................................... $ 24,968,155 $ 29,190,714 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-25 RADYNE COMSTREAM INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED ------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ---- ---- (UNAUDITED) Net sales................................................... $39,261,814 $ 9,973,611 Cost of sales............................................... 21,090,713 7,704,856 ----------- ----------- Gross profit............................................ 18,171,101 2,268,755 ----------- ----------- Operating expenses: Selling, general and administrative..................... 9,138,897 2,543,986 Research and development................................ 6,730,223 1,944,809 ----------- ----------- Total operating expenses............................ 15,869,120 4,488,795 ----------- ----------- Income (loss) from operations before interest expense and extraordinary income...................................... 2,301,981 (2,220,040) ----------- ----------- Interest expense, net....................................... 1,561,616 568,592 ----------- ----------- Net Income (loss) before extraordinary income and taxes..... 740,365 (2,788,632) Extraordinary income........................................ 188,182 0 ----------- ----------- Net Income (loss) before provision for income taxes......... 928,547 (2,788,632) ----------- ----------- Provision for income taxes.................................. 15,000 0 ----------- ----------- Net income (loss) available for common stockholders......... $ 913,547 $(2,788,632) ----------- ----------- ----------- ----------- Basic Earnings (loss) per share: Income (loss) before extraordinary items................ $0.12 $(0.47) Extraordinary item...................................... 0.03 -- Net income (loss)....................................... $0.15 $(0.47) Diluted Earnings (loss) per share: Income (loss) before extraordinary items................ $0.11 $(0.47) Extraordinary item...................................... 0.03 -- Net income (loss)....................................... $0.14 $(0.47) Weighted average shares used in computation Basic................................................... $ 5,961,937 $ 5,931,340 ----------- ----------- ----------- ----------- Diluted................................................. $ 6,401,161 $ 5,931,340 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-26 RADYNE COMSTREAM INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ---- ---- (UNAUDITED) Operating activities: Net income (loss)....................................... $ 913,547 $ (2,788,632) Adjustments to reconcile net income (loss) to cash flows used in operating activities: Forgiveness of interest on debt..................... (188,182) 0 Depreciation and amortization....................... 1,812,551 395,653 Increase (decrease) in cash resulting from changes in: Accounts and other receivables.......................... 1,707,971 161,417 Inventories............................................. 1,142,276 1,120,380 Prepaids and other current assets....................... 159,625 (384,813) Other assets............................................ 35,024 0 Accounts payable -- trade............................... (779,191) 354,746 Accounts payable -- affiliates.......................... (8,150) (16,062) Accrued expenses........................................ (1,884,823) 223,070 Accrued stock option compensation....................... (46,673) 0 Income taxes payable.................................... 15,000 (40,736) ----------- ------------ Net cash (used in) provided by operating activities........................................ 2,878,975 (974,977) ----------- ------------ Cash flows from investing activities: Investment in restricted cash........................... 0 (10,000,000) Net proceeds from sale of fixed assets.................. 139,597 0 Capital expenditures.................................... (256,404) (390,098) ----------- ------------ Net cash used in investing activities............... (116,807) (10,390,098) ----------- ------------ Cash flows from financing activities: Net borrowing (payment) on notes payable under line of credit agreements..................................... 4,920,000 (4,000,000) Proceeds from notes payable to affiliates............... 0 15,618,272 Payment of Rights Offering costs........................ (363,629) 0 Payments on note payable................................ (5,962,599) 0 Notes receivable -- employees........................... 0 40,086 Net proceeds from sale of common stock.................. 83,706 0 Principal payments on capital lease obligations......... (72,346) (87,143) ----------- ------------ ----------- ------------ Net cash (used in) provided by financing activities........................................ (1,394,868) 11,571,215 ----------- ------------ Net increase in cash........................................ 1,367,300 206,140 Cash and cash equivalents, beginning of year................ 254,956 569,692 ----------- ------------ ----------- ------------ Cash and cash equivalents, end of period.................... $ 1,622,256 $ 775,832 ----------- ------------ ----------- ------------ Supplemental disclosure of cash flow information: Interest paid........................................... $ 813,096 $ 698,201 Purchase price adjustment to notes payable and goodwill.............................................. $ 515,940 $ 0 Conversion of notes payable to affiliate to common stock in connection with rights offering.................... $15,618,272 $ 0 ----------- ------------ ----------- ------------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-27 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 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, through its wholly owned subsidiary, Stetsys US, Inc. 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. 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. On September 29, 1999, the Company negotiated a reduction in the note due to the seller. This reduction is discussed in Note 9, and resulted in a $516,000 reduction to the purchase price, therefore reducing the original goodwill balance of $2.3 million to $1.784 million. ComStream operates primarily in North America in the satellite communications industry. ComStream designs, markets and manufactures 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 Corp. changed its name to Radyne ComStream Inc. The Company's principal locations are 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:
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS EXCEPT PER SHARE DATA) Net sales...................................... $ 39,825 -------- -------- Gross profit................................... $ 10,738 -------- -------- Net loss....................................... $(12,186) -------- -------- Net loss per common share...................... $ (2.05) -------- --------
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 September 30, 1999 and the results of operations for the three and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998. Such adjustments are of a normal recurring nature. This information should be read in F-28 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) 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. Rapid technological change and short product life cycles characterize the industry in which the Company operates. 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 earth stations, frequency converters, broadcast receivers 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 that extend the useful lives of the assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over an estimated useful life of three to ten years. Equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the assets. (h) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over ten years. F-29 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) (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 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 F-30 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) 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 nine months ended September 30, 1998 have been excluded from the calculations of diluted net loss per common share as their effect is antidilutive. (p) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of accounts receivable, accounts payable and accrued expenses approximates the carrying value due to the short-term nature of these instruments. Management has estimated that the fair values of the notes payable approximate the current balances outstanding, based on currently available rates for debt with similar terms. (q) EMPLOYEE STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options and to adopt the 'disclosure only' alternative treatment under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 requires the use of fair value option valuation models that were not developed for use in valuing employee stock options. Under SFAS No. 123, deferred compensation is recorded for the excess of the fair value of the stock on the date of the option grant, over the exercise price of the option. The deferred compensation is amortized over the vesting period of the option. (r) SEGMENT REPORTING The Company has only one operating business segment, the sale of equipment for satellite and cable communications networks. (s) 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. 3. RIGHTS OFFERING (1999) In October 1998 the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholders, Stetsys US, Inc and Stetsys Pte Ltd ('ST'), 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 ST 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 became effective on September 30, 1999 upon the approval by the Securities and Exchange Commission of the amended Form S-2 Registration Statement which was filed on September 24, 1999. ST instructed the Company to capitalize the entire $15,618,272 principal amount of the debt owed to ST's wholly owned subsidiary, Stetsys US, Inc., in partial exercise of its rights. Subsequent to the end of the period reported on herein, ST exercised the balance of its rights by paying cash to the Company in the amount of $423,700. The Company used these funds, along with $932,200 of cash on hand to pay the accrued interest due to ST as of September 30, 1999. F-31 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) 4. INVENTORIES
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- (UNAUDITED) (AUDITED) Inventories consist of the following: Raw materials and components........................... $ 5,177,165 $ 6,065,751 Work in process........................................ 3,192,695 4,319,338 Finished goods......................................... 971,552 546,858 ----------- ----------- 9,341,412 10,931,947 ----------- ----------- Obsolescence reserve................................... (1,103,210) (1,551,469) ----------- ----------- ----------- ----------- Total.............................................. $ 8,238,202 $ 9,380,478 ----------- ----------- ----------- -----------
5. PROPERTY AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- (UNAUDITED) (AUDITED) Property and equipment consist of the following: Machinery and equipment................................ $ 3,492,200 $ 3,598,732 Furniture and fixtures................................. 2,417,613 2,661,195 Leasehold improvements................................. 445,127 312,425 ----------- ----------- 6,354,940 6,572,352 ----------- ----------- Less accumulated depreciation & amortization........... (2,393,569) (1,038,707) ----------- ----------- ----------- ----------- Total.............................................. $ 3,961,371 $ 5,533,645 ----------- ----------- ----------- -----------
6. RESTRUCTURING COST The accrued restructuring costs in the accompanying condensed consolidated balance sheet at September 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 September 30, 1999 principally consist of the following;
TOTAL ACCRUED RESTRUCTURING COSTS ----- Balance at December 31, 1998................................ $ 3,130,166 Cash paid for lease buyout.................................. (2,443,110) Cash paid for employee termination benefits................. (577,132) ----------- Unaudited balance at September 30,.......................... $ 109,924 ----------- -----------
The $110,000 accrued restructuring charge remaining at September 30, 1999 consists of severance costs (termination of 38 of the technical, sales and administrative staff completed in December 1998) all of which the Company expects to be paid out in the fourth quarter of 1999. F-32 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) 7. ACCRUED EXPENSES
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- UNAUDITED AUDITED Accrued expenses consist of the following: Wages and related payroll taxes........................ $1,341,191 $1,355,316 Interest expense....................................... 1,432,699 803,929 Professional fees...................................... 576,253 378,817 Warranty reserve....................................... 762,086 679,964 Severance.............................................. 220,731 1,282,761 Lease buyout........................................... 0 2,443,110 Customer deposits...................................... 363,539 306,462 Other.................................................. 2,559,019 1,889,982 ---------- ---------- Total.............................................. $7,255,518 $9,140,341 ---------- ---------- ---------- ----------
The severance balance included in accrued expenses at September 30, 1999 consists of approximately $110,000 associated with the restructuring charge in the fourth quarter of 1998, discussed in Note 6, and the remaining $111,000 of severance (for 16 technical staff and management) related to the Company's acquisition of ComStream in October 1998. This $110,000 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 an additional $485,000 prior to September 30, 1999. 8. RELATED PARTY TRANSACTIONS Sales to Agilis Communication Technologies Pte Ltd, a company under common control with Radyne ComStream, for the three months ended September 30, 1999 and 1998 were $29,000 and $14,000, respectively. Cost of such sales for the same periods were $15,000 and $5,000, respectively. For the nine months ended September 30, 1999 and 1998 sales were $69,000 and $163,000, respectively. Cost of such sales for the same periods were $28,000 and $87,000, respectively. Accounts receivable from affiliates at September 30, 1999 and December 31, 1998 was $5,000 and $52,000, respectively. Notes payable to ST and affiliates outstanding at September 30, 1999 and December 31, 1998 were $0 and $15,618,000 respectively. These notes carried interest at rates from 6.375% to 6.844% and were capitalized as part of the Rights Offering. Interest expense on notes payable to affiliates was $261,000 and $100,000 for the three months ended September 30, 1999 and 1998, respectively. For the nine months ended September 30, 1999 and 1998, interest expense on notes payable to affiliates was $732,000 and $266,000, respectively. Accrued interest on notes payable to affiliates was $1,355,000 at September 30, 1999 compared to $581,000 at December 31, 1998. F-33 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) 9. 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 6.94% on balances owed at September 30, 1999). The credit agreement requires the Company to maintain certain financial leverage ratios. At September 30, 1999, the Company was in violation of one such covenant which was waived by the bank. The availability of additional borrowings under the credit agreement expired September 29, 1999, but has been extended verbally, pending preparation of a renewal agreement. The Company owed principal of $12,920,000 under the line of credit as of September 30, 1999 and $8,000,000 as of December 31, 1998. Notes payable to affiliate (ST) outstanding at September 30, 1999 and December 31, 1998 were $0 and $15,618,272 respectively. These notes accrued interest at rates ranging from 6.375% to 6.844% and were paid from the proceeds of the Rights Offering. Of the amount owed at December 31, 1998, $10,000,000 was borrowed in September 1998 for the acquisition of ComStream Holdings, Inc. 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. The Company negotiated a reduction in the note balance due to Spar for the following reasons: (i) a $521,000 reduction for the Company's assumption of $115,000 of liabilities from Spar and the waiver of Spar's obligation to indemnify the Company against a $406,000 claim by a product assembly contractor for costs incurred on ComStream's behalf prior to the acquisition, and (ii) a $516,000 reduction in the note for certain inventory and furniture and equipment erroneously carried on ComStream's pre-closing balance sheet. Because these discrepancies were identified prior to the purchase price allocation, no portion of the Company's purchase price for ComStream was allocated to such inventory, furniture and equipment. Therefore, this $516,000 reduction has resulted in a reduction in goodwill. The note was paid during the quarter ended September 30, 1999. In addition, the Company negotiated a $278,000 reduction in interest on the note ($188,000 of which had been accrued in prior periods and so has been reported as extraordinary income in the current period). 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. 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 for the next twelve months. F-34 RADYNE COMSTREAM INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED) 10. INCOME/(LOSS) PER SHARE A summary of the reconciliation from basic income/(loss) per share to diluted income/(loss) per share follows:
NINE MONTHS ENDED ----------------- SEPTEMBER SEPTEMBER 1999 1998 ---- ---- Net earnings (loss)......................................... 913,547 (2,788,632) --------- ---------- --------- ---------- Basic EPS -- weighted average shares outstanding............ 5,961,937 5,931,340 --------- ---------- --------- ---------- Basic earnings (loss) per share............................. 0.15 (0.47) --------- ---------- --------- ---------- Basic weighted average shares............................... 5,961,937 5,931,340 Effect of diluted stock options............................. 439,224 -- --------- ---------- Diluted EPS -- weighted average shares outstanding.......... 6,401,161 5,931,340 --------- ---------- --------- ---------- Diluted earnings (loss) per share........................... 0.14 (0.47) --------- ---------- --------- ---------- Stock options not included in diluted EPS since antidilutive.............................................. 1,026,086 830,559 --------- ---------- --------- ----------
F-35 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [Color picture insert titled 'Internet Infrastructure' depicting the use of our products to connect an Internet service provider, to a satellite and from the satellite to various end users.] [Color picture insert titled 'Sales and Manufacturing Facilities' consisting of a worldwide map which indicates the locations of both our sales and service offices.] ==================================== =================================== YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER THE UNDERWRITERS NOR WE HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE UNDERWRITERS NOR WE ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. ------------------- TABLE OF CONTENTS
PAGE ---- Summary..................................................... 1 Risk Factors................................................ 6 Use Of Proceeds............................................. 15 Dividend Policy............................................. 15 Capitalization.............................................. 16 Price Range of Common Stock................................. 17 Dilution.................................................... 18 Selected Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Result of Operations........................ 21 Business.................................................... 31 Management.................................................. 43 Principal Shareholders...................................... 50 Certain Transactions........................................ 52 Description of Securities................................... 54 Shares Eligible for Future Sale............................. 56 Underwriting................................................ 57 Legal Matters............................................... 60 Experts..................................................... 60 Where You Can Find More Information......................... 60 Index to Financial Statements............................... F-1
2,400,000 UNITS [RADYNE LOGO] RADYNE COMSTREAM INC. CONSISTING OF 2,400,000 SHARES OF COMMON STOCK AND 2,400,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS TO PURCHASE 2,400,000 SHARES OF COMMON STOCK -------------------- PROSPECTUS -------------------- HD BROUS & CO., INC. FEBRUARY , 2000 ==================================== =================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Except as set forth below, the following fees and expenses will be paid by Radyne ComStream Inc. in connection with the issuance and distribution of the securities registered hereby and do not include underwriting commissions and discounts. All such expenses, except for the SEC registration, NASD filing and Nasdaq listing fees, are estimated. SEC registration fee........................................ $ 9,170 NASD filing fee............................................. 3,329 Nasdaq SmallCap Market listing fee.......................... 10,000 Legal fees and expenses..................................... 296,596 Blue Sky legal and filing fees.............................. 33,770 Accounting fees and expenses................................ 80,000 Transfer and Warrant Agents' fees........................... 3,500 Printing and engraving expenses............................. 73,500 Miscellaneous............................................... 578 -------- Total................................................... $510,443 -------- --------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS New York Business Corporation Law, Article 7, enables a corporation in its original certificate of incorporation, or an amendment thereto validly approved by shareholders, 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 ComStream'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, 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 Sections 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 II-1 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. - ----------- 1.1 -- Form of Underwriting Agreement 2.1* -- Stock Purchase Agreement dated August 28, 1998 between Spar Aerospace Limited and Radyne ComStream Inc. 4.1'D''D''D' -- Form of Common Stock Certificate 4.2 -- Form of Warrant Agreement 4.3 -- Form of Warrant Certificate 4.4'D''D''D' -- Form of Representative's Purchase Option 4.5'D''D''D' -- Form of Lock-Up Agreement 4.6 -- Intentionally omitted 4.7'D''D''D' -- Form of promotional shares lock-in agreement between Radyne ComStream Inc. and each of Stetsys Pte Ltd, Stetsys US Inc., Robert Fitting, Steven Eymann and Garry Kline. 5.1 -- Form of Opinion of Dorsey & Whitney LLP 10.1** -- 1996 Incentive Stock Option Plan 10.2*** -- Employment Agreement with Robert C. Fitting and Steven W. Eymann (Radyne Termsheet) 10.3**** -- Lease for facility in Phoenix, Arizona 10.4***** -- Amendment to 1996 Incentive Stock Option Plan 10.5'D' -- Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 1997 10.6'D' -- First Amendment to lease between ADI Communication Partners L.P. and ComStream dated July 16, 1997 10.7'D' -- Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated November 18, 1998 10.8'D' -- Indemnity Agreement between Pacific Bell Corporation and ComStream dated November 18, 1998 10.9'D' -- Letter Agreement between Spar and Radyne ComStream Inc. dated November 18, 1998 10.10'D''D''D''D''D' -- 1999 Employee Stock Purchase Plan 10.11'D''D''D' -- Uncommitted Line of Credit Facility Letter Agreement, dated as of May 18, 1998, and amended as of September 28, 1998 and September 30, 1999 10.12'D''D''D' -- Stock Purchase Loan Agreement executed by Robert Fitting, dated October 8, 1999 10.13'D''D''D' -- Promissory Note executed by Robert Fitting, dated October 8, 1999 in the amount of $200,000 10.14'D''D''D' -- Stock Purchase Loan Agreement executed by Garry Kline, dated October 8, 1999 10.15'D''D''D' -- Promissory Note executed by Garry Kline, dated October 11, 1999 in the amount of $50,000 10.16'D''D''D' -- Stock Purchase Loan Agreement executed by Steven Eymann, dated November 11, 1999 10.17'D''D''D' -- Promissory Note executed by Steven Eymann, dated November 1, 1999 in the amount of $100,000 10.18'D''D''D' -- General Release and Settlement Agreement between Spar Aerospace Limited and Radyne ComStream Inc. dated September 29, 1999 13.1'D''D' -- Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998 13.2'D''D' -- Report on Form 10-Q/A for the quarter ended March 31, 1999 13.3'D''D' -- Report on Form 10-Q/A for the quarter ended June 30, 1999 13.4'D''D' -- Report on Form 10-Q for the quarter ended September 30, 1999 23.1 -- Consent of KPMG LLP 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of Ernst & Young LLP 23.4'D''D''D' -- Consent of Dorsey & Whitney LLP (contained in the opinion filed as Exhibit 5.1) 24.1'D''D''D' -- Power of Attorney (contained in signature section of Registration Statement)
- --------- * Incorporated by reference from Registrant's Form 8-K filed on August 28, 1998. (footnotes continued on next page) II-2 (footnotes continued from previous page) ** 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). 'D' Incorporated by reference from Registrant's amended Registration Statement on Form S-2, filed on January 11, 1999 and declared effective on September 30, 1999 (File No. 333-70403). 'D''D' Previously filed with Commission and incorporated by reference from Registrant's previously filed documents. 'D''D''D' Previously filed with this Registration Statement. 'D''D''D''D' Incorporated by reference from Registrant's Form 8-A filed November 19, 1999 (File No. 000-11685) 'D''D''D''D''D' Incorporated by reference from Registrant's Form S-8, filed November 5, 1999. 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;' 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. II-3 (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) 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. (6) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Phoenix, state of Arizona on February 3, 2000. 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 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, and February 3, 2000 ......................................... Director (Principal Executive Officer) ROBERT C. FITTING /S/ GARRY D. KLINE Vice President-Finance, Chief Financial February 3, 2000 ......................................... Officer and Secretary (Principal GARRY D. KLINE Financial and Accounting Officer) * Director February 3, 2000 ......................................... ROBERT A. GRIMES * Chairman of the Board of Directors February 3, 2000 ......................................... MING SEONG LIM * Director February 3, 2000 ......................................... YIP LOI LEE * Director February 3, 2000 ......................................... KUM CHUEN TANG * Director February 3, 2000 ......................................... DENNIS ELLIOTT
- --------- * The undersigned by signing his name hereto, does hereby sign this Registration Statement or amendment thereto on behalf of the above indicated directors and officers of Radyne ComStream Inc. pursuant to the power of attorney executed on behalf of each such director and officer. By: /s/ ROBERT C. FITTING ............................ ROBERT C. FITTING ATTORNEY-IN-FACT II-5 EXHIBIT INDEX
EXHIBIT NO. --- 1.1 -- Form of Underwriting Agreement 4.2 -- Form of Warrant Agreement 4.3 -- Form of Warrant Certificate 5.1 -- Form of Opinion of Dorsey & Whitney LLP 23.1 -- Consent of KPMG LLP 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of Ernst & Young LLP
STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as .............................. 'TM' The registered trademark symbol shall be expressed as ................... 'r' The dagger symbol shall be expressed as ................................. 'D' EX-1 2 EXHIBIT 1.1 Exhibit 1.1 2,400,000 Units RADYNE COMSTREAM INC. 2,400,000 UNITS EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK WARRANT UNDERWRITING AGREEMENT FEBRUARY __, 2000 HD Brous & Co., Inc. As Representative of the Several Underwriters referred to herein 40 Cuttermill Road Great Neck, New York 11021 Ladies and Gentlemen: Radyne ComStream Inc., a New York corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representative (the "Representative") an aggregate of 2,400,000 units (the "Units"), each Unit consisting of one share of Common Stock (the "Common Stock") and one redeemable common stock warrant (the "Warrant") (together, the "Firm Securities"). The respective amounts of the Firm Securities to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell, at the Underwriters' option, an aggregate of up to 360,000 additional units (the "Option Securities") as discussed more fully in Section 2 below. The Company further agrees to issue, upon the Closing Date as hereafter defined in Section 2, the Representative's Purchase Option more fully discussed in Section 4(o) below (the "Representative's Purchase Option"). Notwithstanding anything contained herein to the contrary, it is understood and agreed that the units will not be listed on the Nasdaq SmallCap Market, they will not trade as a unit, and no unit certificate will be delivered. The Representative has advised the Company that (a) it is authorized to enter into this Agreement on behalf of the several Underwriters; and (b) the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Securities set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Securities if the Representative elects to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Securities, the Option Securities (to the extent the aforementioned option is exercised), the shares of Common Stock issuable upon exercise of the Warrants, the Representative's Purchase Option and the shares of Common Stock issuable upon exercise of the Representative's Purchase Option are herein collectively called the "Securities." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents, warrants and agrees as follows: (a) FILING OF REGISTRATION STATEMENT. A registration statement on Form S-2 (File No. 333-90731) with respect to the Securities has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. Copies of such registration statement, including any pre-effective and post-effective amendments thereto, the preliminary prospectuses (meeting the requirements of Rule 430A of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to the Representative. Such registration statement, herein referred to as the "Registration Statement," after effectiveness and upon filing of the Prospectus referred to below with the Commission, if required, shall be deemed to include all information incorporated therein by reference and omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below and also any registration statement filed pursuant to Rule 462(b) of the Rules and Regulations with respect to the Securities (a "Rule 462(b) Registration Statement"). The Registration Statement has been declared effective by the Commission under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The form of prospectus first filed by the Company with the Commission pursuant to Rule 424(b) (or if no such filing is required, the form of final prospectus included in the Registration Statement on the effective date) and Rule 430A is herein referred to as the "Prospectus." Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) ORGANIZATION AND QUALIFICATION. The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation. The Company and each of its subsidiaries has full corporate power and authority to conduct all activities that each of them conducts, to own or lease their respective properties, and to conduct their respective businesses as described in the Registration Statement and Prospectus. The Company and each of its subsidiaries is duly qualified to transact business in all jurisdictions in which the conduct of their respective businesses requires such qualification, except where the failure to qualify would not have a material adverse effect upon the business or property of the Company and its subsidiaries, considered as a whole. Complete and correct copies of the Certificate of Incorporation and Bylaws of the Company, and all amendments thereto, have been delivered to you, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or the Option Closing Date, as hereinafter defined. 2 (c) SUBSIDIARIES. The Company's only subsidiaries are those listed on Schedule II hereto (the "Subsidiaries"). Complete and correct copies of the Certificate of Incorporation and Bylaws of each of the Subsidiaries, and all amendments thereto, have been delivered to you, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or Option Closing Date. The issued shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned of record and beneficially by the Company or one of the Subsidiaries, free and clear of any security interests, liens, encumbrances, equities or claims and there are no outstanding options, warrants, or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or ownership interests in any Subsidiary. Except for the Subsidiaries, neither the Company nor any of the Subsidiaries controls, directly or indirectly, or has any direct or indirect interest or investment in any corporation, firm, partnership, association, limited liability company, business trust or other business organization, or owns any shares of stock or any other securities of any other corporation, firm, partnership, association, limited liability company, business trust or other business organization (other than bank certificates of deposit, shares or units of interest in "money market" funds, or as set forth in the Prospectus). Except as otherwise disclosed in the Registration Statement, neither the Company nor any of the Subsidiaries has made any loans (other than advances to employees in the ordinary course of business, none of which are material) to or guaranteed any obligations of, any other corporation, firm, partnership, association, limited liability company, business trust or other business organization. (d) CAPITALIZATION AND LEGALITY OF SECURITIES. The Company has authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all applicable federal and state securities laws; all of the Securities to be issued and sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated herein, will be validly issued, fully paid and nonassessable; no preemptive rights of stockholders exist with respect to any of the Securities or the issue and sale thereof; no stockholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated herein except as disclosed in the Registration Statement; and all necessary and proper corporate proceedings, including the reservation of a sufficient number of shares of Common Stock for issuance upon exercise of the Warrants and the Representative's Purchase Option, have been taken to validly authorize the issuance and sale of such Securities and no further approval or authority of the stockholders or the Board of Directors of the Company is required for the issuance and sale of the Securities to be sold by the Company as contemplated herein. (e) DESCRIPTION OF SECURITIES; RIGHTS TO ACQUIRE SHARES. The Securities conform with the statements concerning them in the Registration Statement in all material respects. Except as specifically disclosed in the Registration Statement and the consolidated financial statements of the Company and the related notes thereto, as of the respective dates therein indicated, the Company does not have outstanding any options or warrants to purchase, any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations 3 convertible into, or any contracts or commitments to issue or sell shares of its capital stock or any such options, warrants, rights, convertible securities or obligations. The descriptions of the Company's stock option and other stock-based plans, and of the options or other rights granted and exercised thereunder, as set forth in the Prospectus, are accurate summaries and fairly present the information required to be shown with respect to such plans and rights in all material respects. The Company and its affiliates are not currently offering any securities other than the Securities except as described in the Registration Statement. (f) USE AND ACCURACY OF REGISTRATION STATEMENT, PRELIMINARY PROSPECTUSES, AND PROSPECTUS. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Securities nor instituted or, to the best knowledge of the Company, threatened or contemplated instituting proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements that are required to be stated or incorporated by reference therein by the Act and the Rules and Regulations and in all respects conform or will conform, as the case may be, to the requirements of the Act and the Rules and Regulations. Neither the Registration Statement nor any amendment thereto, and neither the Prospectus nor any supplement thereto, contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representative specifically for use in the preparation thereof. It is agreed that, except for the information on pages 58 and 59 of the Prospectus relating to determination of the public offering price of the Units and lack of assurance that an active trading market will develop for any of the Securities, the information set forth under the heading "Underwriting" in the Prospectus shall be deemed to be the only written information furnished to the Company by the Underwriters specifically for use in the preparation thereof. (g) FINANCIAL STATEMENTS. The consolidated financial statements of the Company, together with related notes and schedules, as set forth in or incorporated by reference into the Registration Statement or the Prospectus present fairly in all material respects the financial position and the results of operations and cash flows of the Company and its Subsidiaries at the indicated dates and for the indicated periods. Such financial statements, schedules, and related notes have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary and selected financial and statistical data and schedules included in or incorporated by reference into the Registration Statement or the Prospectus present fairly the information shown or incorporated by reference therein and have been compiled on a basis consistent with the financial statements presented therein. No other financial statements or schedules are required to be included in or incorporated by reference into the Registration Statement. 4 (h) LITIGATION. There is no action, suit, investigation or proceeding pending or, to the best knowledge of the Company, after due inquiry, threatened against the Company or its Subsidiaries or any of their respective officers in their capacity as such, before any arbitrator, court or regulatory, governmental or administrative agency, authority or body that might result in a material adverse change in the business, assets or condition of the Company and its Subsidiaries, considered as a whole, except as set forth in the Registration Statement. Neither the Company nor any of its Subsidiaries is subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency, or other governmental body or arbitral forum that might result in a material adverse change in the business, assets or condition of the Company or its Subsidiaries. (i) TITLE TO PROPERTY. The Company and each of its Subsidiaries has good and marketable title to, and valid and enforceable leasehold estates in, all items of property described in the Registration Statement or Prospectus as owned or leased, as the case may be, by each of them or that are material to the conduct of the Company's and its Subsidiaries' respective businesses, considered as a whole, free and clear of all liens, encumbrances, claims, security interests, and other restrictions, other than those described in the Prospectus and those that, individually or in the aggregate, would not have a material adverse effect on the Company and its Subsidiaries, considered as a whole. The leases, licenses or other contracts or instruments under which the Company and each of its Subsidiaries leases, holds or is entitled to use any property, real or personal, are valid, subsisting, and enforceable with only such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company or its Subsidiaries, and all rentals, royalties or other payments accruing thereunder that became due prior to the date of this Agreement have been duly paid, and neither the Company nor its Subsidiaries nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder. Neither the Company nor any of its Subsidiaries has received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to the Company's or its Subsidiaries' owned or leased properties except any such violation that would not have a material adverse effect on the Company or its Subsidiaries. (j) TAXES. The Company and each of its Subsidiaries has filed all federal, state, local, and foreign income tax returns that have been required to be filed and have paid all taxes indicated by said returns and each has paid all tax assessments received by it. There is no income, sales, use, transfer or other tax deficiency or assessment that has been or might reasonably be expected to be asserted or threatened against the Company or any of its Subsidiaries which might result in a material adverse change in the business or condition of the Company or any of its Subsidiaries. The Company and each of its Subsidiaries have paid all sales, use, transfer and other taxes applicable to it and its business and operations. (k) NO MATERIAL CHANGE. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, as they may be amended or supplemented, and except as set forth or contemplated in the Prospectus (i) there has not been and will not have been any material adverse change or any development involving the likelihood of a future material adverse change in or affecting the condition, financial or otherwise, of the 5 Company and its Subsidiaries or the earnings, business affairs, management, or business prospects of the Company and its Subsidiaries, considered as a whole, whether or not occurring in the ordinary course of business, (ii) there has not been and, as of the Closing Date and the Option Closing Date, as the case may be, there will not have been any material transaction entered into by the Company or any of its Subsidiaries, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement and Prospectus as it may be amended or supplemented, (iii) neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its businesses or properties from strike, fire, flood, windstorm, accident or other calamity, (iv) neither the Company nor any of its Subsidiaries has paid and none of them will have paid or declared any dividends or other distribution with respect to the Company's capital stock and neither the Company nor any of its Subsidiaries is in default in the payment of principal of or interest on any outstanding debt obligations, and (v) there has not been and, as of the Closing Date and the Option Closing Date, as the case may be, there will not have been any change in the capital stock (other than the sale of the Securities or the exercise of outstanding stock options or warrants as described in the Registration Statement) or material increase in indebtedness of the Company and its Subsidiaries, considered as a whole. The Company and its Subsidiaries, considered as a whole, do not have any material contingent obligation that is not disclosed in the Registration Statement and Prospectus (or contained or incorporated by reference in the financial statements or related notes thereto), as such may be amended or supplemented. (l) COMPLIANCE WITH CORPORATE DOCUMENTS AND CONTRACTS. Neither the Company nor any of its Subsidiaries is in violation or default under any provision of its respective Certificate of Incorporation or Bylaws or except as disclosed in the Prospectus, any of its material agreements, leases, licenses, contracts, franchises, mortgages, permits, deeds of trust, indentures or other instruments or obligations to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties is bound or may be affected (collectively, "Contracts"). (m) AUTHORIZATION OF AGREEMENTS. The Company has the legal right, corporate power, and authority to enter into this Agreement, the Warrant Agreement with respect to the Warrants (the "Warrant Agreement"), and the Representative's Purchase Option and to perform the transactions contemplated hereby and thereby. This Agreement has been duly authorized, executed, and delivered by the Company and is legally binding upon and enforceable against the Company in accordance with its terms. Each of the Warrant Agreement and the Representative's Purchase Option has been duly authorized and, when executed and delivered by the Company, will be legally binding upon and enforceable against the Company in accordance with its terms. The execution, delivery, and performance of this Agreement, the Warrant Agreement, and the Representative's Purchase Option and the consummation of the transactions herein and therein contemplated do not and will not conflict with or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any Contract to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties may be bound or affected, except where such breach, violation or default would not have a material adverse effect on the business or financial condition of the Company or any of its Subsidiaries, or violate any of the provisions of the Certificate of Incorporation or 6 Bylaws of the Company or any of its Subsidiaries, or violate any order, judgment, statute, rule or regulation applicable to the Company or any of its Subsidiaries of any court or of any regulatory, administrative or governmental body or agency or arbitral forum having jurisdiction over the Company or its Subsidiaries or any of their respective properties. (n) APPROVALS AND CONSENTS. Each approval, registration, qualification, license, permit, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or agency necessary in connection with the execution and delivery by the Company of this Agreement, the Warrant Agreement, and the Representative's Purchase Option and the consummation of the transactions herein or therein contemplated (except such additional actions as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or as may be necessary to qualify the Securities for public offering under state securities or Blue Sky laws) has been obtained or made and each is in full force and effect. (o) INTELLECTUAL PROPERTIES. The Company and its Subsidiaries own or possess adequate and sufficient rights by license agreement or otherwise to use and enjoy the full rights in and to all patents, patent rights, trade secrets, license or royalty arrangements, trademarks and trademark rights, service marks, trade names, copyrights, know-how or proprietary techniques or rights thereto of others, and governmental, regulatory or administrative authorizations, orders, permits, certificates and consents necessary for the conduct of the business of the Company as described in the Prospectus, including, without limitation, for each of the technologies described in the Prospectus. The Company is not aware of any pending or threatened action, suit, proceeding or claim by others, either domestically or internationally, that the Company or any of its Subsidiaries is violating any patents, patent rights, copyrights, trademarks or trademark rights, inventions, service marks, trade names, licenses or royalty arrangements, trade secrets, know how or proprietary techniques or rights thereto of others, or governmental, regulatory or administrative authorizations, orders, permits, certificates and consents, which violation could result in a material adverse effect on the business, operations or financial condition of the Company and the Subsidiaries, considered as a whole. The Company is not aware, after due diligence, of any rights of third parties to, or any infringement of, any of the Company's or its Subsidiaries' patents, patent rights, trademarks or trademark rights, copyrights, licenses or royalty arrangements, trade secrets, know how or proprietary techniques (including but not limited to the technologies described in the Prospectus) as well as processes and substances, or rights thereto of others, which could materially adversely affect the use thereof by the Company or any of its Subsidiaries and that would have a material adverse affect on the Company and its Subsidiaries, considered as a whole. The Company is not aware, after due diligence, of any pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of any of such patents, patent rights, trademarks or trademark rights, copyrights, licenses or royalty arrangements, trade secrets, know how, or proprietary techniques or rights thereto of others. The Company or one of the Subsidiaries possesses those patents that have been previously disclosed to the Representative in writing, and such patents have not expired or been declared invalid in a legal or administrative proceeding. (p) DESCRIPTION OF CONTRACTS. There are no Contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the 7 Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. (q) COMPLIANCE WITH LAW. The Company and each of the Subsidiaries is conducting its business in compliance with all applicable laws, rules, and regulations of the jurisdictions in which it is conducting its business, including, without limitation, all applicable local, state, federal, and foreign environmental laws and regulations, except where the failure to so comply would not have a material adverse effect on the business or financial condition of the Company and its Subsidiaries, considered as a whole. The Company and each of the Subsidiaries possesses adequate certificates or permits issued by the appropriate federal, state, local, and foreign regulatory authorities necessary to conduct their respective businesses and to retain possession of their respective properties, except where the failure to so possess such certificates or permits would not have a material adverse effect on the business or financial condition of the Company or any of the Subsidiaries. Neither the Company nor any of its Subsidiaries has received any notice of any proceeding relating to the revocation or modification of any of these certificates or permits. (r) TRANSACTIONS WITH AFFILIATES. All transactions between the Company or one of the Subsidiaries, on the one hand, and the officers, directors, and affiliates of the Company and its Subsidiaries, on the other hand, have been accurately disclosed in the Prospectus, to the extent required to be disclosed in the Prospectus in accordance with the Act and the Rules and Regulations. Except as disclosed in the Prospectus, neither the Company nor any of its Subsidiaries has outstanding any indebtedness to any officer, director, or beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of 5% or more of the Company's Common Stock. As used in this Agreement, the term "affiliate" shall mean a person or entity controlling, controlled by or under common control with any specified person or entity, or having the ability to direct, directly or indirectly, the management or policies of the controlled person or entity, whether through the ownership of voting securities, by contract, positions of employment, family relationships, service as an officer, director or partner of the person or entity, or otherwise. (s) PROHIBITED PAYMENTS. Neither the Company nor any of its Subsidiaries, nor any of their respective directors or officers acting in any capacity on behalf of the Company or its Subsidiaries, nor, to the Company's knowledge after due inquiry, any of its or its Subsidiaries' foreign sales agents, directly or indirectly, has (i) used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; (iv) made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment or (v) failed to disclose any such contributions, gifts, or other payments in violation of applicable law. (t) INDEPENDENT ACCOUNTANTS. Each of KPMG LLP, Deloitte & Touche LLP, and Ernst & Young, LLP, who have certified the financial statements filed with the Commission as part of or incorporated by reference into the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. 8 (u) INTERNAL ACCOUNTING CONTROLS. The Company and its Subsidiaries maintain a system of internal accounting controls which, taken as a whole, is sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as specifically disclosed in the Prospectus, neither the Company nor any of its Subsidiaries, nor any of their respective employees or agents has made any payment or transfer of any funds or assets of the Company and its Subsidiaries, conferred any personal benefit by the use of the assets of the Company and its Subsidiaries or received any funds, assets, or personal benefit in violation of any law, rule, or regulation, which is required to be stated in the Prospectus or necessary to make the statements therein not misleading. (v) INSURANCE. The Company maintains insurance of the types and in the amounts that it deems adequate for its business and which is customary for companies in its industry, including, but not limited to, general liability insurance and insurance covering all real and personal property owned or leased by the Company and its Subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (w) LOCK-UP AGREEMENTS. Except for offers and sales of Common Stock in connection with stock option or other stock-based plans described in the Registration Statement or upon exercise of the Warrants, the Company has taken all appropriate steps reasonably necessary or appropriate to assure that no offering, sale or other disposition of any Common Stock of the Company or securities exercisable or convertible into Common Stock of the Company will be made for a period of six (6) months after the date of this Agreement, directly or indirectly, by the Company, or any of its affiliates, directors or executive officers set forth in Schedule III hereto, otherwise than hereunder or with the prior written consent of the Representative. (x) BOARD OF DIRECTORS. The Company's Board of Directors consists of those persons listed in the Prospectus. Except as disclosed in the Prospectus, none of such persons is employed by the Company nor is any of them affiliated with the Company, except for service on its Board of Directors. (y) ELIGIBILITY TO USE FORM S-2. The Company is eligible to use Form S-2 for the registration of the Securities. (z) DIRECTED OFFERS. Neither the Company, nor to its knowledge, after due and diligent inquiry, any person other than any Underwriter, has made any representation, promise or warranty, whether verbal or in writing, to anyone, whether an existing shareholder or not, that any of the Securities will be reserved for or directed to them during the proposed public offering. 9 (aa) STABILIZATION. Neither the Company nor any person that controls, is controlled by or is under common control with the Company has taken or will take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in the stabilization or manipulation of the price of any security in order to facilitate the sale or resale of any of the Securities. (bb) UNAUTHORIZED ARRANGEMENTS. Except for Common Stock issued in connection with the exercise of options and except as otherwise disclosed in the Registration Statement, the Company has not, since the filing of the Registration Statement (i) sold, bid for, purchased, attempted to induce any person to purchase, or paid anyone any compensation for soliciting purchases of, its capital stock, or (ii) paid or agreed to pay to any person any compensation for soliciting another person to purchase any securities of the Company, except for the sale of Securities under this Agreement. (cc) FINDER OR BROKER. The Company has not retained or dealt with any broker or finder with respect to the transactions contemplated hereby, and the Company knows of no outstanding claims for services in the nature of a finder's fee or origination fee with respect to the sale of the Securities. The Company will indemnify and hold harmless the Underwriters with respect to any claim for a finder's fee by any party claiming to be owed such fee based on contacts, conversations or arrangements with the Company. (dd) EMPLOYMENT AGREEMENTS. The employment agreements between the Company and its officers named under the caption "Management -- Employment Agreements" in the Prospectus are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity, and public policy considerations. Except for such employment agreements, the Company does not have any employment, severance or similar agreement with any officers, directors or employees that are required to be disclosed in the Prospectus and are not so disclosed. (ee) CLASSIFICATION AS A "C" CORPORATION. The Company is classified as a "C" corporation with the Internal Revenue Service. (ff) NASD AFFILIATIONS. Except as previously disclosed in writing by the Company to the Representative or in the Registration Statement, no officer, director or stockholder of the Company has any NASD affiliation and the Company has no management or financial consulting agreement with any third party. (gg) COMPANY NOT AN INVESTMENT COMPANY. The Company is not, and upon receipt of the proceeds from the sale of the Securities will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (hh) OFFERING MATERIALS. The Company has not distributed and will not distribute prior to the Closing Date or the Option Closing Date, as the case may be, any offering material in connection with the offering and sale of the Securities other than the Registration 10 Statement, any Preliminary Prospectus, the Prospectus, and the other materials permitted by the Act. (ii) EXCHANGE ACT REGISTRATION AND NASDAQ LISTING. As of the Effective Date (as defined in Section 6(a)) each of the Common Stock and the Warrants have been or will be registered under Section 12(g) of the Exchange Act and have been or will be approved for listing and trading on The Nasdaq Stock Market Inc. ("Nasdaq") SmallCap Market. 2. PURCHASE, SALE, AND DELIVERY OF THE SECURITIES. (a) PURCHASE AND SALE OF THE FIRM SECURITIES. On the basis of the representations, warranties, and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase on the Closing Date (as defined in Section 2(c)), at the gross price per Unit indicated in the Prospectus (the "Initial Price") less the Underwriters' discount of eight and three quarter percent (8 1/4%) of the Initial Price, the number of Firm Securities set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) PURCHASE AND SALE OF THE OPTION SECURITIES. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase the Option Securities at the Initial Price, less the Underwriters' discount of eight percent (8%) of the Initial Price. The maximum number of Option Securities to be sold by the Company is equal to 360,000 Units, subject to adjustment as provided in Section 9. The option granted hereby may be exercised in whole or in part, but only once, and at any time upon written notice given within 45 days after the Effective Date by the Representative on behalf of the several Underwriters, to the Company setting forth the number of Option Securities as to which the several Underwriters are exercising the option, the names and denominations in which the Option Securities are to be registered, and the time and date at which certificates therefor are to be delivered. The closing for the Option Securities shall occur no earlier than either the Closing Date or the second business day after the exercise of such option and no later than the tenth business day after the date of such exercise (such date being herein referred to as the "Option Closing Date"). Except as otherwise agreed by the Underwriters in writing, the number of Option Securities to be purchased by each Underwriter shall be in the same proportion to the total number of Option Securities being purchased as the number of Firm Securities being purchased by such Underwriter bears to the total number of the Firm Securities, adjusted by the Representative in such manner as to avoid fractional shares. The option with respect to the Option Securities granted hereunder may be exercised solely to cover over-allotments in the sale of the Firm Securities by the Underwriters or to permit purchases by the Underwriters to the extent permitted by law. The Representative, on behalf of the several Underwriters, may cancel such option at any time, in whole or in part, prior to its expiration, by giving written notice of such cancellation to the Company. (c) PAYMENT FOR AND DELIVERY OF THE SECURITIES. Payment for the Firm Securities to be sold hereunder is to be made by certified or bank cashier's check(s) drawn to the order of the Company and payable in New York clearing house funds or similar next day funds, 11 or by wire transfer of next day funds to an account specified in writing by the Company, against delivery of certificates for the Firm Securities to the Representative for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Greenberg Traurig, One East Camelback Road, Phoenix, Arizona 85012 at 10:00 a.m., Eastern time, on February __, 2000, or at such other time and date as the Representative shall designate, such time and date being herein referred to as the "Closing Date." As used herein, the term "business day" means a day on which the New York Stock Exchange, Inc. is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed. The certificates for the Firm Securities shall be in definitive form with engraved borders and will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the two business days prior to the Closing Date, and will be made available for inspection by the Representative not later than 2:00 p.m., Eastern time, on the business day immediately preceding the Closing Date at the offices of Greenberg Traurig noted above. To the extent, if any, that the option described in Section 2(b) is exercised, payment for and delivery of the Option Securities shall be made on the Option Closing Date in the manner and at the times and places described above for the Closing Date with respect to the Firm Securities. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Securities as soon as the Representative deems it advisable to do so. The Firm Securities are to be initially offered to the public at the Initial Price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Securities are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that the Representative will act on behalf of the Underwriters in the offering and sale of the Securities, in accordance with an Agreement Among Underwriters entered into by the Representative and the several other Underwriters on or prior to the date hereof. The Representative shall have the right to associate with other underwriters and dealers as it may determine and shall have the right to grant to such persons such concessions out of the underwriting discount to be received by the Underwriters as it may determine, under and pursuant to a Selected Dealers' Agreement. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) RULE 424(B) PROSPECTUS AND AMENDMENTS TO REGISTRATION STATEMENT. The Company shall (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (b) NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT AND STOP ORDERS. The Company shall advise the Representative promptly and shall confirm such advice in writing 12 (i) when the Registration Statement has become effective, (ii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or (iii) of the issuance by the Commission or any state securities commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company shall use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) BLUE SKY QUALIFICATIONS. The Company shall cooperate with the Representative in endeavoring to qualify the Securities for sale under the securities laws of such jurisdictions as the Representative may have designated in writing and shall make such applications, file such documents, furnish such information and take such other actions as may be required by federal or state securities laws or regulations (including, but not limited to, complying with any stock escrow requirements and appointing additional independent directors that have been disclosed to the Company by counsel for the Underwriters prior to the Company's execution of this Agreement) whether before, during or after the offering. The Company shall, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may request for distribution of the Securities. (d) FILINGS UNDER THE ACT AND EXCHANGE ACT. The Company shall file such registration statements and take such other action as may be necessary to register the Common Stock and the Warrants pursuant to Section 12(g) of the Exchange Act, such registration statement to become effective simultaneously with the effectiveness of the Registration Statement, and shall thereafter keep such registration effective. The Company shall file such amendments or supplements to the Registration Statement or such subsequent registration statements as may be necessary to maintain, at all times during the term of the Warrant Agreement, a current and effective registration statement covering the issuance of the shares of Common Stock upon exercise of the Warrants. The Company shall comply with the Act, the Rules and Regulations, the Exchange Act, the rules and regulations promulgated under the Exchange Act, the applicable rules and regulations of Nasdaq, and applicable state securities laws so as to permit the continuance of sales of and dealings in the Securities in compliance with applicable provisions of such laws, rules, and regulations, including the filing with the Commission and Nasdaq of all reports required to be so filed, and the Company will deliver to the holders of the Securities all reports required to be provided to such holders pursuant to such laws, rules, or regulations. (e) NASDAQ LISTING. The Company shall qualify the Securities, including the Common Stock and the Warrants, for trading on the Nasdaq SmallCap Market and shall use its best efforts to maintain such qualification for not less than five (5) years, unless the Securities are subsequently listed on the Nasdaq National Market, the American Stock Exchange, or the New York Stock Exchange. (f) COPIES OF PROSPECTUSES AND REGISTRATION STATEMENT. The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may request. The Company will deliver to, or 13 upon the order of, the Representative, during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may request. The Company will deliver to the Representative, at or before the Closing Date, five signed copies of the Registration Statement and all amendments thereto, including all exhibits filed therewith, and any information incorporated by reference therein, and will deliver to the Representative such number of copies of the Registration Statement, without exhibits, but including any information incorporated by reference, and of all amendments thereto, as the Representative may request. (g) COMPLIANCE WITH THE ACT AND THE EXCHANGE ACT. Within the time during which a Prospectus relating to the Securities is required to be delivered under the Act, the Company shall use its best efforts to comply with all requirements imposed upon it by the Act and the Exchange Act, as such acts may from time to time be hereafter amended, and by the rules and regulations promulgated under such acts, as from time to time in force to permit the continuance of sales of or dealings in the distribution of the Securities as contemplated by the provisions therein, in this Agreement, and in the Prospectus. If during such period any event as to which the Company has knowledge occurs as a result of which the Prospectus as then amended or supplemented includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or to supplement the Prospectus to comply with the Act, the Company shall notify the Representative promptly and shall amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to comply with the Act or to correct such statement or omission or otherwise to effect such compliance, and will furnish without charge to the Representative as many copies of such amended or supplemented Prospectus as the Representative may from time to time reasonably request. (h) LISTING IN SECURITIES MANUAL; INVESTOR RELATIONS FIRM. The Company shall, as soon as practicable after the Closing Date, use its reasonable best efforts to obtain listing on an expedited basis in Standard and Poor's Corporation Records or such other recognized securities manuals for which it may qualify for listing, and the Company shall use its reasonable best efforts to maintain such listings for at least five (5) years after the Closing Date. The Company further agrees at any time during the five (5) year period following the Closing Date, to engage within sixty (60) days of a written request by the Representative, the services of an investor relations firm reasonably acceptable to the Representative, which will act as investor relations liaison during such five (5) year period, which spokesperson is not required to be the same person during the duration of the five (5) year period, to consult with and advise the Company regarding communications and relations with stockholders and the financial and investment communities. (i) SECTION 11(A) EARNINGS STATEMENT. The Company will make generally available to its stockholders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement in reasonable detail covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will 14 advise the Representative in writing when such statement has been so made available and will furnish the Representative with a true and correct copy thereof. (j) INFORMATION TO THE REPRESENTATIVE. The Company will, for a period of five years from the Closing Date, deliver to the Representative copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange or Nasdaq pursuant to the requirements of such exchange or Nasdaq or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representative similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. The Company will also use its best efforts to cause its officers, directors and beneficial owners of 10% or more of any of its registered securities to deliver to the Representative a copy of any of the Commission Forms 3, 4, and 5 filed with the Commission and the Company shall deliver to the Representative copies of all such forms received by it. (k) USE OF PROCEEDS. The Company shall apply the net proceeds of the sale of the Securities sold by it in accordance with the statements under the caption "Use of Proceeds" in the Prospectus. The Company shall not apply any portion of the proceeds of the offering to pay any amount to any officer, director, or 5% stockholder of the Company. (l) RESTRICTIONS ON SALES. Except for offers and sales of Common Stock in connection with stock option or other stock-based plans described in the Registration Statement or upon exercise of the Warrants, for a period of six (6) months from the Effective Date the Company shall not sell or otherwise dispose of any Common Stock (or securities convertible into or exercisable for Common Stock) of the Company or any subsidiary of the Company without the Representative's prior written consent. The Company shall cause each of its officers, directors, and five percent (5%) stockholders listed on Schedule III hereto to agree in writing that such person will not, during the six-month period immediately following the Effective Date, offer, pledge, sell (which term includes a short sale or sale against the box), contract to sell, grant any option for the sale of, or otherwise transfer or dispose of, directly or indirectly, any shares of the Company's Common Stock, without the Representative's prior written approval. The Company shall furnish the Representative with an executed copy of each such agreement in the form attached as Exhibit "A" hereto (the "Lock-up Agreements"). (m) INSPECTION OF DOCUMENTS. Through and including the Option Closing Date, the Company has made and shall make original documents and other information relating to the Company's affairs available upon request to the Underwriters and to their counsel at the Company's office for inspection and copies of any such documents will be furnished upon request to the Underwriters and to their counsel. Included within the documents made available have been at least the Certificate of Incorporation and all amendments thereto, the Bylaws and all amendments thereto, minutes of all of the meetings of the incorporators, directors and stockholders, all financial statements and copies of all Contracts to which the Company or its Subsidiaries is a party or in which the Company or its Subsidiaries has an interest. (n) TRANSFER AND WARRANT AGREEMENT. The Company has appointed Continental Stock Transfer & Trust Company as the Company's transfer and warrant agent. 15 Unless the Representative otherwise consents in writing, the Company will continue to retain a transfer and warrant agent reasonably satisfactory to the Representative for a period of five years following the Closing Date. The Company will make arrangements to have available at the office of the transfer and warrant agent sufficient quantities of the Company's Common Stock and Warrant certificates as may be needed for the quick and efficient transfer of the Securities as contemplated hereunder and for the five-year period following the Closing Date. (o) REPRESENTATIVE'S PURCHASE OPTION. At the Closing, the Company shall, for an aggregate of $100, deliver to the Representative the Representative's Purchase Option in the form attached hereto as Appendix "B" to purchase an aggregate of 240,000 shares of Common Stock. The Representative's Purchase Option will be exercisable for a four-year term, commencing one year from the Effective Date of the offering, at an exercise price equal to 165% of the Initial Price of the Firm Securities. The Representative's Purchase Option shall not be redeemable by the Company. (p) INDEPENDENT DIRECTORS. The Company shall, for a period of two years after the Effective Date, cause at least three persons who are reasonably acceptable to the Representative and who are not otherwise "affiliated" with the Company to serve as directors of the Company (the "Outside Directors"). Furthermore, for a period of two years after the Closing Date the Company shall cause at least one Outside Director to serve as the chair of each committee of the Company's Board of Directors. For purposes of this Section 4(p), a person shall be deemed to be "affiliated" with the Company if (i) that person is an employee or officer (other than Chairman of the Board of the Company) of the Company or (ii) that person, directly or indirectly, beneficially owns (as defined in Rule 13d-3 under the Exchange Act) 5% or more of the Company's Common Stock or (iii) that person is an employee, officer, director, or beneficial owner of 5% or more of any person that, directly or indirectly, beneficially owns 5% or more of the Company's Common Stock. The Representative agrees that, as of the date of this Agreement, Yip Loi Lee, Robert A. Grimes, and Dennis W. Elliott meet the definition of Outside Directors for purposes of this Section 4(p). (q) UNDERTAKINGS. The Company will comply with the provisions of all undertakings contained in the Registration Statement or made in connection with any application to register or qualify any of the Securities under state securities or Blue Sky laws. (r) KEY PERSON LIFE INSURANCE. The Company shall use its best efforts to obtain on or before the Closing Date and to maintain thereafter for the lesser of (i) three years, or (ii) the term of their respective employment with the Company, key person life insurance policies insuring the lives of Robert L. Fitting and Steven W. Eymann, with the Company named as sole beneficiary, in a policy amount of not less than $1,000,000 and $500,000, respectively. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses, and fees in connection with the offering or incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: (a) all expenses (including any transfer taxes) incurred in connection with the delivery to the several Underwriters of the Securities sold hereunder; (b) all fees and expenses (including, without limitation, fees, disbursements, and expenses of the Company's accountants, counsel, and other experts, but excluding fees and expenses of counsel for the Underwriters) in 16 connection with the preparation, printing, filing, delivery, and shipping of the Registration Statement (including the financial statements included or incorporated by reference therein and all amendments and exhibits thereto), Preliminary Prospectuses, and the Prospectus as amended or supplemented, this Agreement, the Warrant Agreement, the Representative's Purchase Option, and other underwriting documents including Underwriters' Questionnaires, Underwriters' Power of Attorney, Blue Sky Memoranda, Agreement Among Underwriters, Selected Dealers' Agreement, Invitation Telecopy, and any letters transmitting the offering materials to the Underwriters or selling group members (including costs of mailing and shipment), the stock and warrant certificates, and any supplements or amendments thereto; (c) all Blue Sky and other regulatory filing fees and fees and disbursements of counsel to the Company and counsel to the Underwriters incurred in connection with the qualification of the Securities and their components under the applicable state securities laws; (d) filing and listing fees of the Commission, NASD, Nasdaq, and any other similar entity in connection with the offering; (e) the cost of printing certificates representing the Securities comprising the Units and issuable upon the exercise of the Warrants; (f) the fees, disbursements, costs, and charges of any transfer agent, warrant agent, and registrar; (g) the costs of advertising (such as "tombstone ads"), including but not limited to the cost of placing a tombstone ad in The Wall Street Journal, as well as any other advertising undertaken at the Company's request; (h) the costs of preparing, printing, and distributing two bound volumes to each of the Representative and its counsel; (i) all costs of holding informational meetings and "road shows;" and (j) all other costs and expenses incident to the performance of its obligations under this Agreement that are not otherwise provided for in this Section 5. The Company shall use a printer and warrant agent acceptable to the Representative. Any transfer taxes imposed on the sale of the Securities to the several Underwriters will be paid by the Company. The Company shall pay to the Representative a non-accountable expense allowance of two and one half percent (2 1/2%) of the gross amount raised hereunder, including upon the sale of any Option Securities, payable at the closing(s). The Company has advanced, on a nonaccountable basis, Ten Thousand Dollars ($10,000.00) to the Representative on or before the date hereof (the "Deposit"), which shall be credited to the allowance noted above. This expense allowance is in addition to the Underwriters' discount. The Underwriters shall be responsible for the fees and disbursements of their counsel, except for the fees and costs of such counsel incurred in connection with the qualification of the Securities and their components under the applicable state securities laws as otherwise noted in this Section 5. The Company shall not be required to pay for any of the Underwriters' other expenses, except that if this offering shall not be consummated because the conditions in Section 7 hereof are not satisfied, or because this Agreement is terminated by the Representative pursuant to Section 6 hereof, except if such termination is caused by the failure of the condition set forth in Section 6(e) hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, then the Company shall reimburse the several Underwriters for out-of-pocket expenses, including fees and disbursements of counsel, incurred in connection with investigating, marketing, and proposing to market the Securities or in contemplation of performing their obligations hereunder, up to a maximum of Thirty Thousand Dollars ($30,000.00). The Deposit shall be credited against any such payment. In the event that this offering shall not be consummated or this Agreement is terminated as described in the preceding sentence and the Deposit exceeds the Underwriters' out-of-pocket expenses, the Representative shall promptly refund such excess to the Company. 17 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Securities on the Closing Date and the Option Securities, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement shall have become effective not later than 5:30 p.m., Eastern time, on the date of this Agreement, or such later date and time as may be consented to in writing by the Representative (the "Effective Date"). No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the best knowledge of the Company, after due inquiry, shall be contemplated by the Commission or any state securities commission. Any request of the Commission or any such authorities for additional information to be included in the Registration Statement or Prospectus or otherwise shall have been complied with to the reasonable satisfaction of counsel for the Representative. (b) REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH AGREEMENT. The representations and warranties of the Company in this Agreement shall be true and correct on and as of the Closing Date or the Option Closing Date, as the case may be, with the same effect as if made on the Closing Date or the Option Closing Date, as the case may be, and the Company shall have complied with all the agreements and satisfied all the obligations required to be performed or satisfied by it at or prior to the Closing Date or the Option Closing Date, as the case may be. (c) NO UNTRUE STATEMENTS. The Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements that are required to be stated or incorporated by reference therein by the Act and the Rules and Regulations and in all respects shall conform to the requirements of the Act and the Rules and Regulations. The Registration Statement and the Prospectus and any amendments or supplements thereto shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and, since the Effective Date, there shall not have occurred any event required to be set forth in an amended or supplemented Prospectus that has not been so set forth (except any such statement or omission based upon information furnished in writing by or on behalf of any Underwriter through the Representative for inclusion in the Registration Statement). (d) NO MATERIAL CHANGE. Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, as they have been amended or supplemented, and except as set forth or contemplated in the Prospectus (i) there has not been any material adverse change or any development involving the likelihood of a future material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries, considered as a whole, or the earnings, business affairs, management, or business prospects of the Company and its Subsidiaries, considered as a whole, whether or not occurring 18 in the ordinary course of business, (ii) there has not been any material transaction entered into by the Company or any of its Subsidiaries, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement and Prospectus as it may be amended or supplemented, (iii) neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its businesses or properties from strike, fire, flood, windstorm, accident or other calamity, (iv) neither the Company nor any of its Subsidiaries has paid or declared any dividends or other distribution with respect to the Company's capital stock and neither the Company nor any of its Subsidiaries is in default in the payment of principal of or interest on any outstanding debt obligations, (v) there has not been any change in the capital stock (other than the sale of the Securities or the exercise of outstanding stock options or warrants as described in the Registration Statement) or material increase in indebtedness of the Company and its Subsidiaries, considered as a whole, and (vi) there have been no actions, suits, proceedings or investigations pending before any arbitrator, court or regulatory, governmental or administrative agency, authority or body or, to the knowledge of the Company, threatened, to which the Company or any of its Subsidiaries is a party or of which the business or property of the Company or any of its Subsidiaries is the subject and which, if adversely decided, could have a material adverse affect on the business, property, condition (financial or otherwise), results of operations or general affairs of the Company, and there shall have been no material adverse development in any such suits, actions, proceedings or investigations. Neither the Company nor any of its Subsidiaries has any material contingent obligation that is not disclosed in the Registration Statement and Prospectus (or contained or incorporated by reference in the financial statements or related notes thereto), as such may be amended or supplemented. (e) NASD. The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of the Securities by the Underwriters. No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date, or the Option Closing Date, as the case may be, for any member firm of the NASD to execute transactions (as principal or as agent) in the Securities and no proceedings for the purpose of taking such action shall have been instituted or shall be pending, or, to the best of the Underwriters' or the Company's knowledge, shall be contemplated by the Commission or the NASD. Each of the Company and the Representative represents at the date of this Agreement, and shall represent as of the Closing Date or Option Closing Date, as the case may be, that it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. (f) OPINION OF COMPANY COUNSEL. The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Dorsey & Whitney LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) The Company and ComStream Corp. ("ComStream") (A) have been duly incorporated and are validly existing as a corporation in good standing under the laws of their respective jurisdictions of incorporation, with full corporate power and corporate authority to own or lease their respective properties and to conduct their respective businesses as described in the Registration Statement and Prospectus, and (B) to such counsel's knowledge are 19 duly qualified as a foreign corporation to transact business in all jurisdictions in which the conduct of their respective businesses requires such qualification, except where the failure to qualify would not have a material adverse affect upon the business or financial condition of the Company or ComStream. (ii) The issued shares of capital stock of each Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable, and, except as described in the Registration Statement and the Prospectus, are owned of record and beneficially by the Company. (iii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; all of the outstanding shares of Common Stock of the Company issued subsequent to December 16, 1994 (A) have been duly authorized and validly issued and are fully paid and nonassessable, (B) conform to the description set forth in the Prospectus, (C) do not have any, and to such counsel's knowledge were not issued in violation of any, preemptive rights under the Company's Certificate of Incorporation or Bylaws or any other agreement known to such counsel, and (D) to such counsel's knowledge, have been issued in compliance with all federal and state securities laws. (iv) The Company has authorized and reserved for issuance the shares of Common Stock issuable (A) upon exercise of all outstanding options or warrants (other than the Warrants) in accordance with the terms of the applicable options or warrants, (B) upon exercise of the Warrants, pursuant to the terms of the Warrants and the Warrant Agreement, and (C) upon exercise of the Representative's Purchase Option. All of the Securities to be issued and sold by the Company pursuant to this Agreement, the Warrant Agreement, and the Representative's Purchase Option have been duly authorized and, when issued and paid for as contemplated herein or upon exercise of the Warrants or the Representative's Purchase Option, will be validly issued, fully paid and nonassessable. Further, (X) to such counsel's knowledge no preemptive rights of stockholders exist with respect to any of the Securities or the issue and sale or exercise thereof; (Y) to such counsel's knowledge no stockholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated herein; and (Z) no further approval or authority of the stockholders or the Board of Directors of the Company is required for the issuance and sale of the Securities to be sold by the Company as contemplated herein. (v) The certificates evidencing the Securities to be delivered hereunder are in due and proper form under New York law and the Securities conform in all material respects to the description thereof contained in the Prospectus. (vi) The Registration Statement has become effective under the Act and no stop order proceedings with respect thereto have been instituted or are 20 pending or threatened under the Act and nothing has come to such counsel's attention to lead them to believe that such proceedings are contemplated; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b). (vii) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the Rules and Regulations (except that such counsel need express no opinion as to the financial statements, schedules, and other financial and statistical information included or incorporated by reference therein). (viii) Such counsel (i) requested that the Company provide it with copies of all Contracts; (ii) met with officers of the Company to discuss whether all Contracts were in fact delivered to such counsel; and (iii) reviewed all Contracts that were so delivered, and discussed the materiality of such Contracts to the Company and its business with officers of the Company, to determine whether such Contracts were required to be filed or incorporated by reference as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus as required under the Act and the Rules and Regulations. Based upon the foregoing procedures, such counsel does not know of any Contracts of a character required to be filed or incorporated by reference as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus that are not so filed or incorporated by reference or described as required, and each description of such Contracts that is included in the Registration Statement or the Prospectus fairly presents in all material respects the information required under the Act and the Rules and Regulations. (ix) To the best of such counsel's knowledge, there is no action or suit pending before any court of the United States or any foreign jurisdiction of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations; to the best of such counsel's knowledge, there is no action, suit or proceeding threatened against the Company or any of its Subsidiaries before any U.S. or foreign court or regulatory, governmental or administrative agency or body or arbitral forum of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations; to the best of such counsel's knowledge, neither the Company nor any of its Subsidiaries is a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body or agency or arbitral forum of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations, in each case which is not so disclosed in the Prospectus. (x) The execution and performance of this Agreement, the Warrant Agreement, and the Representative's Purchase Option and the consummation of 21 the transactions herein and therein contemplated do not and will not conflict with or result in the breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any Contract to which the Company or ComStream is a party or by which the Company or ComStream or any of their respective properties may be bound or affected, except where such breach, violation or default would not have a material adverse effect on the business or financial condition of the Company or ComStream, or violate any of the provisions of the Certificate of Incorporation or Bylaws of the Company or ComStream or, to the best of such counsel's knowledge, violate any statute, judgment, decree, order, rule or regulation known to such counsel or any court or of any governmental, regulatory or administrative body or agency or arbitral forum having jurisdiction over the Company or any of its Subsidiaries or any of their respective properties. (xi) Neither the Company nor any of its Subsidiaries is in violation or default under any provision of any of their respective Certificate of Incorporation or Bylaws. (xii) The Company has the legal right, power, and authority to enter into this Agreement, the Warrant Agreement, and the Representative's Purchase Option on behalf of itself and to perform the transactions contemplated hereby and thereby. Each of this Agreement, the Warrant Agreement, and the Representative's Purchase Option has been duly authorized, executed, and delivered by the Company. Each of this Agreement, the Warrant Agreement, and the Representative's Purchase Option is the legal, valid, and binding obligation of the Company, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency, and equitable principles, except to the extent that the enforceability of the indemnification provisions of this Agreement and the Representative's Purchase Option may be limited by consideration of public policy under federal and state securities laws. (xiii) To the best of such counsel's knowledge, all approvals, consents, orders, authorizations, designations, registrations, permits, qualifications, licenses, declarations or filings by or with any regulatory, administrative or governmental body necessary in connection with the execution and delivery by the Company of this Agreement, the Warrant Agreement, and the Representative's Purchase Option and the consummation of the transactions herein and therein contemplated (other than as may be required by the NASD or state securities or "Blue Sky" laws and regulations, as to which such counsel need express no opinion) have been obtained or made and are in full force and effect. (xiv) No transfer taxes are required to be paid under New York state law in connection with the sale and delivery of the Securities to the Underwriters hereunder. (xv) Upon the Closing, the Company will be classified as a "C" corporation with the Internal Revenue Service. 22 As to factual matters, such counsel may rely on certificates obtained from directors and officers of the Company, its stockholders, and from public officials. Matters stated to counsel's knowledge shall be made after due and diligent inquiry of the attorneys in such firm who have given substantive attention to representation of the Company in connection with this public offering, and the opinion shall so note that requirement. In addition to the matters set forth above, the Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a letter from Dorsey & Whitney LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, substantially in the form as set forth in Exhibit C attached hereto. Such counsel shall permit Greenberg Traurig, LLP, to rely upon the opinions and letters required by this Section 6(f) in rendering its opinion under Section 6(h). (g) Opinion of Special Company Counsel. The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Rackinsons Solicitors, special counsel for ComStream UK Limited, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, substantially to the effect that: (i) ComStream UK Limited (A) has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and corporate authority to own or lease its properties and to conduct its business as described in the Registration Statement and Prospectus, and (B) is duly licensed or qualified as a foreign corporation to transact business in all jurisdictions in which the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse affect upon the business or financial condition of the Company and its Subsidiaries, considered as a whole. (ii) The issued shares of capital stock of ComStream UK Limited have been duly authorized and validly issued and are fully paid and nonassessable. (h) OPINION OF REPRESENTATIVE'S COUNSEL. The Representative shall have received from Greenberg Traurig, LLP, counsel for the Representative, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect that: (i) the Company is a validly organized and existing corporation under the laws of the State of New York; (ii) to the best of such counsel's knowledge, the Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; to the best of such counsel's knowledge, the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and nonassessable; all of the Securities conform to the description thereof contained in the Prospectus; the Securities to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and nonassessable when issued and paid for as contemplated by this Agreement; and to the best of such counsel's knowledge, no preemptive rights of stockholders exist with respect to any of the Securities or the issue and sale thereof; (iii) the Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act; (iv) the 23 Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations thereunder (except that such counsel need express no opinion as to the financial statements, schedules, and other financial or statistical information included or incorporated by reference therein); and (v) this Agreement has been duly authorized, executed and delivered by the Company. In rendering such opinion, Greenberg Traurig, LLP may rely as to all matters governed other than by federal laws on the opinion of counsel referred to in Section 6(f). In addition to the matters set forth above, such opinion shall also include a statement to the effect that they have participated in the preparation of the Registration Statement and the Prospectus and nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, the Prospectus or any amendment thereto contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules, and other financial information included or incorporated by reference therein). With respect to such statement, Greenberg Traurig, LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (i) BLUE SKY MEMORANDUM. The Representative and the Company shall have received from Greenberg Traurig, LLP, at or prior to the Closing Date, a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Underwriters of the Securities under the state securities or Blue Sky laws of such jurisdictions as the Representative may have designated to the Company. (j) ACCOUNTANTS' LETTERS. The Representative shall have received on the date hereof and on the Closing Date and the Option Closing Date, as the case may be, a signed letter from each of KPMG LLP and Deloitte & Touche LLP, auditors for the Company, dated the date hereof, the Closing Date, and the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter signed by such firm and dated and delivered to the Representative on the dates noted above the following matters: (i) They are independent public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations. (ii) The consolidated financial statements and schedules included in the Registration Statement and Prospectus or incorporated by reference therein and covered by their reports therein set forth comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Rules and Regulations. 24 In addition to the matters set forth under clauses (i) and (ii) above, the signed letters from KPMG LLP dated the date hereof, the Closing Date, and the Option Closing Date, as the case may be, also shall confirm, on the basis of a review in accordance with the procedures set forth in each such letter signed by such firm the following matters: (X) On the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the minutes of meetings and consents of the stockholders and Board of Directors of the Company and the committees of such board subsequent to September 30, 1999, as set forth in the minute books of the Company, inquiries of officers and other employees of the Company who have responsibilities for financial and accounting matters with respect to transactions and events subsequent to September 30, 1999, and such other specified procedures and inquires to a date not more than five days prior to the date of such letter, nothing has come to their attention which in their judgment would indicate that (A) with respect to the period subsequent to September 30, 1999, there were, as of the date of the most recent available monthly consolidated financial statements of the Company and, as of a specified date not more than five days prior to the date of such letter, any changes in the capital stock or long-term indebtedness of the Company or payment or declaration of any dividend or other distribution, or decrease in net current assets, total assets or net stockholder's equity, in each case as compared with the amounts shown in the most recent audited consolidated financial statements included in or incorporated by reference into the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter or (B) during the period from September 30, 1999, to the date of the most recent available monthly unaudited consolidated financial statements of the Company and to a specified date not more than five days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues or total or per share net income, except for decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter. (Y) Stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings and other financial information pertaining to the Company set forth in or incorporated by reference into the Registration Statement and the Prospectus, which have been specified by the Representative, to the extent that such amounts, numbers, and percentages and information may be derived from the general accounting and financial records of the Company and its subsidiaries or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified reasonings, inquiries, and other appropriate procedures specified by the Representative (which procedures do not constitute an examination in accordance with generally accepted auditing 25 standards) set forth in such letter heretofore delivered, and found them to be in agreement. (Z) Such other matters as may be reasonably requested by the Underwriters. All such letters shall be in form and substance satisfactory to the Representative and its counsel. (k) OFFICERS' CERTIFICATES. The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them jointly and severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to the best of their knowledge, after due inquiry, contemplated or threatened by the Commission or any state securities commissions. (ii) They do not know of any investigation, litigation, or proceeding instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; they do not know of any Contract or other document required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and correct in all material respects as of the Closing Date or the Option Closing Date, as the case may be, as if such representations and warranties were made as of such date. (iii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were and are correct, in all material respects, and such Registration Statement and Prospectus do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, in their opinion, since the effective date of the Registration Statement, no event has occurred which should be set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (l) EXCHANGE ACT REGISTRATION AND NASDAQ LISTING. On each of the Effective Date, the Closing Date, and the Option Closing Date, each of the Common Stock and the Warrants shall be (i) registered under Section 12(g) of the Exchange Act, and (ii) listed for trading on the Nasdaq SmallCap Market. (m) LOCK-UP AGREEMENTS. The Representative shall have received the Lock-up Agreements, in form and substance satisfactory to the Representative, as required by Section 4(l) of this Agreement. 26 (n) OTHER AGREEMENTS. The Company shall have executed and delivered to the Representative the Warrant Agreement and the Representative's Purchase Option. (o) FURTHER ASSURANCES. The Company shall have furnished to the Representative such further certificates and documents confirming the representations, warranties and covenants contained herein and related matters as the Representative may reasonably have requested. The opinions, certificates, and other documents described in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all respects satisfactory to the Representative and to Greenberg Traurig, LLP, counsel for the Representative. If any of the conditions herein provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the Securities required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless each Underwriter and its respective affiliates, directors, officers, partners, employees, agents, counsel, and representatives, (collectively, "Underwriter Parties") against any losses, claims, damages or liabilities to which such Underwriter Parties or any one or more of them may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any failure by the Company or any of its affiliates, directors, officers, employees, agents, counsel, and representatives (collectively, the "Company Parties") to perform any obligation hereunder or any other agreement among any of the Company Parties and any of the Underwriter Parties, (ii) any untrue statement or alleged untrue statement of any material fact contained in or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus, any Rule 462(b) Registration Statement, or any amendment or supplement thereto, or (iii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and will reimburse each Underwriter Party for any legal or other expenses incurred by such Underwriter Party in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that (X) the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement, or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, 27 the Prospectus, any Rule 462(b) Registration Statement, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Underwriters specifically for use in the preparation thereof (which the parties hereto agree is limited solely to that information contained on the cover page of the Prospectus or Preliminary Prospectus and in the section thereof entitled "Underwriting"), and (Y) such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter Party from whom the person asserting any such loss, claim, damage or liability purchased the Securities which are the subject thereof if such person did not receive a copy of the Prospectus (or the Prospectus as amended or supplemented) at or prior to the confirmation of the sale of such Securities to such person in any case where such delivery is required by the Act and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented). This indemnity agreement will be in addition to any liability that the Company may otherwise have. (b) INDEMNIFICATION BY THE UNDERWRITERS. Each Underwriter will severally indemnify and hold harmless the Company Parties against any losses, claims, damages or liabilities to which the Company Parties or any one or more of them may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any failure by the Underwriter Parties to perform any obligations hereunder or any other agreement among any of the Underwriter Parties and any of the Company Parties, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, any Rule 462(b) Registration Statement, or any amendment or supplement thereto, or (iii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse any legal or other expense reasonably incurred by the Company Parties in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus, any Rule 462(b) Registration Statement, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through such Underwriter specifically for use in the preparation thereof (which the parties hereto agree is limited solely to that information set forth under the heading "Underwriting" in the Prospectus, except for the information on pages 58 and 59 of the Prospectus relating to determination of the public offering price of the Units and lack of assurance that an active trading market will develop for any of the Securities. This indemnity agreement will be in addition to any liability that such Underwriter may otherwise have. (c) CLAIMS. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or 8(b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was 28 unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability that it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or 8(b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by the Representative in the case of parties indemnified pursuant to Sections 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) CONTRIBUTION. If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting fees, discounts, and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement 29 of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Subsection 8(d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Securities purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) CONSENT TO VENUE AND SERVICE OF PROCESS. In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him, her, or it by any other contributing party, and consents to the service of such process and agrees that any other contributing party may join him, her, or it as an additional defendant in any such proceeding in which such other contributing party is a party. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Securities that such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or the failure to occur of a condition precedent to the closing), the Representative on behalf of the Underwriters, shall use its best efforts to procure as soon as possible but not later than five business days thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Securities or Option Securities, as the case may be, that the defaulting Underwriter or Underwriters failed to purchase. If during such period the Representative shall not have procured such other Underwriters, or any others, to purchase the Firm Securities or Option Securities, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters then (a) if the aggregate number of Securities with respect to which such default shall occur does not exceed 10% of the Firm Securities or Option Securities, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, to take up and pay for (in the respective proportions that the aggregate amount of Securities set forth opposite their respective names in Schedule I hereto bears to the aggregate 30 amount of Securities set forth opposite the names of all such other Underwriters) the Firm Securities or Option Securities, as the case may be, that such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Securities with respect to which such default shall occur exceeds 10% of the Firm Securities or Option Securities, as the case may be, covered hereby, the Company or the Representative on behalf of the Underwriters will have the right, by written notice given within the next 24-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the nondefaulting Underwriters or the Company, except to the extent provided in Section 8 and Section 5 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as the Representative may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied, or telegraphed and confirmed as follows: if to the Underwriters, to HD Brous & Co., Inc., 40 Cuttermill Road, Great Neck, New York 11021; Telephone: (516) 773-1800; Fax: (516) 773-1829; Attention: Mr. Howard D. Brous, with a copy to Greenberg Traurig, LLP, One East Camelback Rd., Suite 1100, Phoenix, Arizona 85012-1656; Telephone: (602) 263-2300; Fax: (602) 263-2350; Attention: Robert S. Kant, Esq.; if to the Company, to Radyne ComStream Inc., 3138 E. Elwood Street, Phoenix, Arizona 85034; Telephone: (602) 437-9620; Fax: (602) 437-4811; Attention: Robert C. Fitting, Chief Executive Officer, with a copy to Dorsey & Whitney, 250 Park Avenue, New York, New York 10177; Telephone: (212) 415-9311; Fax: (212) 953-7201; Attention: John B. Wade, III, Esq. 11.TERMINATION. This Agreement may be terminated by the Representative by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Securities are released by the Representative for sale by notice to the Underwriters, or (ii) 11:30 a.m., New York time, on the first business day following the date of this Agreement; or (b) at any time prior to the Closing itself if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company, or the earnings, business affairs, management or business prospects of the Company, whether or not arising in the ordinary course of business, including a material decline in the price of Company's Common Stock on or prior to the Closing Date; (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change on the financial markets or economic conditions would, in reasonable judgment of the Representative, make the offering or delivery of the Securities impracticable; (iii) suspension of trading in securities on the New York Stock Exchange, Inc. or 31 the Nasdaq Stock Market, Inc. or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on such exchange or trading market; (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority that in the reasonable opinion of the Representative materially and adversely affects or will materially or adversely affect the business or operations of the Company; (v) declaration of a banking moratorium by either federal or New York authorities; or (vi) the taking of any action by any federal, state, local, or foreign government or agency in respect of its monetary or fiscal affairs that in the reasonable opinion of the Representative has a material adverse effect on the securities markets in the United States or the prospects of the Company; or (c) as provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by the Representative, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Securities, upon the occurrence at any time at or prior to the Option Closing Date of any of the events described in Section 11(b) above or as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the Underwriter Parties and Company Parties referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Securities merely because of such purchase. 13. MISCELLANEOUS. The reimbursement, indemnification, and contribution agreements contained in Sections 5 and 8 of this Agreement and the representations and warranties contained in Section 1 of this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter Party, or by or on behalf of any Company Party, and (c) delivery of and payment for the Securities under this Agreement. This Agreement and any notices delivered hereunder may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and any and all notices may be delivered by telecopy and shall be effective upon receipt, with the original of such document to be deposited promptly in the U.S. Mail. This Agreement and all disputes and controversies relating hereto or in connection with the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the State of New York. 32 If the foregoing agreement is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, RADYNE COMSTREAM INC. By:________________________ Robert C. Fitting, Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of____________, 2000. HD Brous & Co., Inc. As Representative of the several Underwriters listed on Schedule I HD Brous & Co., Inc. By:_____________________________________ Howard D. Brous, Chairman 33 SCHEDULE I SCHEDULE OF UNDERWRITERS
UNDERWRITER NUMBER OF FIRM SECURITIES TO BE PURCHASED - ----------- ----------------------------------------- HD Brous & Co., Inc. Miller Johnson Kuehn American Fronteer Financial Corp Solid ISG --------- Total 2,400,000
SCHEDULE II SUBSIDIARIES ComStream Corp. ComStream UK Limited* ComStream Israel* - --------------- * Wholly owned subsidiary of ComStream Corp. SCHEDULE III OFFICERS, DIRECTORS, AND STOCKHOLDERS WHO SHALL SIGN LOCK-UP AGREEMENTS Robert C. Fitting Steven W. Eymann Garry D. Kline Ming Seong Lim Yip Loi Lee Kum Chuen Tang Robert A. Grimes Dennis W. Elliott Stetsys Pte Ltd Stetsys US, Inc. EXHIBIT A FORM OF LOCK-UP AGREEMENT _______________, 2000 HD Brous & Co., Inc. As Representative of the Several Underwriters c/o HD Brous & Co., Inc. 40 Cuttermill Road Great Neck, New York 11021 RE: RADYNE COMSTREAM INC. (THE "COMPANY") Ladies & Gentlemen: The undersigned is or may become an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Units consisting of Common Stock and Warrants (the "Offering") for which you will act as the representative of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of HD Brous & Co., Inc. (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract, or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for, or convertible into, shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date six (6) months after the date of the Prospectus. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock, or securities convertible into, or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. By: ______________________________ (Print name of stockholder) Signature: _______________________ Indicate how shares held: ________ __________________________________ __________________________________ __________________________________ (indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) EXHIBIT B FORM OF REPRESENTATIVE'S PURCHASE OPTION Void after 5:00 p.m. New York Time, on ______________, 2005. Option to Purchase 240,000 Shares of Common Stock. REPRESENTATIVE'S PURCHASE OPTION OF RADYNE COMSTREAM INC. This is to certify that, FOR VALUE RECEIVED, HD BROUS & CO., INC., or assigns (the "Holder"), is entitled to purchase, subject to the provisions of this Option, from RADYNE COMSTREAM INC., a New York corporation (the "Company"), 240,000 fully paid, validly issued, and nonassessable shares of the Company's Common Stock, par value $.002 per share ("Common Stock") at a price of $__________ per share at any time or from time to time during the period from ____________, 2001 to ____________, 2005, but not later than 5:00 p.m. New York City Time, on ____________, 2005. The number of shares of Common Stock to be received upon the exercise of this Option and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Option Shares" and the exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." This Option, together with options of like tenor, constituting in the aggregate options (the "Options") to purchase 240,000 shares of Common Stock, was originally issued pursuant to an underwriting agreement between the Company and HD Brous & Co., Inc. ("Brous"), in connection with a public offering through Brous of 2,400,000 shares of Common Stock and warrants to purchase 2,400,000 shares of Common Stock, in consideration of $100 for the Options. 1. EXERCISE OF OPTION. (a) This Option may be exercised in whole or in part at any time or from time to time on or after ____________, 2001 and until ____________, 2005 (the "Exercise Period"), subject to the provisions of Section 10(b) hereof; provided, however, that (i) if ------------- either such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety, resulting in any distribution to the Company's stockholders, prior to ____________, 2005, the Holder shall have the right to exercise this Option commencing at such time through ____________, 2005 into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Option might have been exercisable immediately prior thereto. This Option may be exercised by presentation and surrender hereof to the Company at its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form attached as Exhibit A hereto duly executed and accompanied by payment of the Exercise Price for the number of Option Shares specified in such form. As soon as practicable after each such exercise, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificate for the Option Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Option should be exercised in part only, the Company shall, upon surrender of this Option for cancellation, execute and deliver a new Option evidencing the rights of the Holder thereof to purchase the balance of the Option Shares purchasable thereunder. Upon receipt by the Company at its office, or by the stock transfer agent of the Company at its office, of this Option in proper form for exercise, together with the payment of the Exercise Price or the "Notice of Exchange" specified in Section 1(b), the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. (b) At any time during the Exercise Period, the Holder may, at its option, exchange this Option, in whole or in part (an "Option Exchange"), into the number of Option Shares determined in accordance with this Section 1(b), by surrendering this Option at the principal office of the Company or at the office of its stock transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Option Shares to be exchanged, and the date on which the Holder requests that such Option Exchange occur (the "Notice of Exchange"). The Option Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares issuable upon such Option Exchange and, if applicable, a new Option of like tenor evidencing the balance of the shares remaining subject to this Option, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Option Exchange, this Option shall represent the right to subscribe for and acquire the number of Option Shares (rounded to the next highest integer) equal to (i) the number of Option Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Option Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a share of Common Stock. Current market value shall have the meaning set forth Section 3 below, except that for purposes hereof, the date of exercise, as used in such Section 3, shall mean the Exchange Date. 2. RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Option such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of the Options. 3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Option. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (a) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq National Market, the current market value shall be the last reported sale price of the Common Stock on such exchange or market on the last business day prior to the date of exercise of this Option or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or market; or (b) If the Common Stock is not so listed or admitted to unlisted trading privileges, but is traded on the Nasdaq SmallCap Market, the current market value shall be the average of the closing bid and asked prices for such day on such market and if the Common Stock is not so traded, the current market value shall be the mean of the last reported bid and asked prices reported by the OTC Bulletin Board or the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Option; or (c) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Option, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF OPTION. This Option is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Options of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. This Option is not transferable (other than by will, pursuant to the laws of descent and distribution, or by the operation of law) and may not be assigned, transferred, or hypothecated except to officers and employees of Brous who are also shareholders of Brous. Upon surrender of this Option to the Company at its principal office or at the office of its stock transfer agent, if any, with the Assignment Form attached as Exhibit B hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Option in the name of the assignee named in such instrument of assignment and this Option shall promptly be cancelled. This Option may be divided or combined with other Options that carry the same rights upon presentation hereof at the principal office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Options are to be issued and signed by the Holder hereof. The term "Option" as used herein includes any Options into which this Option may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Option, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Option, if mutilated, the Company will execute and deliver a new Option of like tenor and date. 5. RIGHTS OF THE HOLDER. Until the Holder exercises this Option pursuant to Section 1, the Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Option and are not enforceable against the Company except to the extent set forth herein. 6. ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Options shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (b) Whenever the Exercise Price payable upon exercise of each Option is adjusted pursuant to Section 6(a) above, the number of Option Shares purchasable upon exercise of this Option shall simultaneously be adjusted by multiplying the number of Option Shares initially issuable upon exercise of this Option by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (c) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least one cent ($0.01) in such price; provided, however, that any adjustments which by reason of this Section 6(c) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section 6 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 6, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any federal income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Options). (d) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly but no later than 10 days after any request for such an adjustment by the Holder, cause a notice setting forth the adjusted Exercise Price and adjusted number of Option Shares issuable upon exercise of each Option, and, if requested, information describing the transactions giving rise to such adjustments, to be mailed to the Holders at their last addresses appearing in the Company's records, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 6, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (e) In the event that at any time, as a result of an adjustment made pursuant to Section 6(a) above, the Holder of this Option thereafter shall become entitled to receive any shares of capital stock of the Company other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Sections 6(a) to 6(d), inclusive above. (f) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Option, Options theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Options initially issuable pursuant to this Agreement. 7. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section 6, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with - its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the holder or any holder of an Option executed and delivered pursuant to Section 1 and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder or any such holder. 8. NOTICES TO OPTION HOLDERS. So long as this Option shall be outstanding, (a) if the Company shall pay any dividend or make any distribution upon the Common Stock or (b) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights or (c) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least 15 days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. 9. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Option) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Option at any time prior to the expiration of the Option, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Option immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Option. The foregoing provisions of this Section 9 shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Section 6 hereof. 10. REGISTRATION UNDER THE SECURITIES ACT OF 1933. (a) The Company shall advise the Holder of this Option or of the Option Shares or any then holder of Options or Option Shares (such persons being collectively referred to herein as "Holders") by written notice at least thirty (30) days prior to the filing of any post-effective amendment to the Company's Registration Statement No. 333-90731 on Form S-2 ("Registration Statement"), declared effective by the Securities and Exchange Commission on ____________, 2000 or of any new registration statement (other than a Form S-8 or Form S-4 or a successor form) or post-effective amendment thereto under the Securities Act of 1933 (the "Act") covering securities of the Company and will for a period of six years, commencing one year from the effective date of the Registration Statement, upon the request of any such Holder, include in any such post-effective amendment or registration statement such information as may be required to permit a public offering of the Option Shares. The Company shall supply prospectuses and other documents as the Holder may reasonably request in order to facilitate the public sale or other disposition of the Option Shares, use its reasonable best efforts to qualify the Option Shares for sale in such states as any such Holder shall reasonably designate and do any and all other acts and things which may be reasonably necessary or desirable to enable such Holders to consummate the public sale or other disposition of the Option Shares, and furnish indemnification in the manner as set forth Section 10(c)(iii). Such Holders shall furnish information and indemnification as set forth in Section 10(c)(iv), except that the maximum amount which may be recovered from the Holder shall be limited to the amount of net proceeds received by the Holder from the sale of the Option Shares. The Company's obligations to include the Option Shares in a public offering under this Section 10(a) shall be subject to the provisions of Section 10(f), below. (b) If any majority holder (as defined in Section 10(d) below) shall give notice to the Company at any time during the four-year period commencing one year from the effective date of the Registration Statement to the effect that such holder contemplates (i) the transfer of all or any part of his, her, or its Option Shares, or (ii) the exercise and/or conversion of all or any part of his, her, or its Options and the transfer of all or any part of the Option Shares under such circumstances that a public offering (within the meaning of the Act) of Option Shares will be involved, and desires to register under the Act the Option Shares, then the Company shall, within sixty (60) days after receipt of such notice, prepare and file a post-effective amendment to the Registration Statement or a new registration statement on Form S-1, S-3 or such other form as the holder requests and for which the Company and the proposed transaction qualify, pursuant to the Act, to the end that the Option Shares may be sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become effective and continue to be effective (including the taking of such steps as are necessary to obtain the removal of any stop order) for the lesser of (A) 180 days or (B) the date on which the holder has advised the Company that all of the Option Shares have been sold; provided that such Holders shall furnish the Company with appropriate information (relating to the intentions of such Holders) in connection therewith as the Company shall reasonably request in writing. Subject to applicable state law, in the event the registration statement is not declared effective under the Act within 180 days after the majority holder first gives notice to the Company of his, her, or its desire to register Option Shares under the Act, then at the Holders' request, the Company shall purchase the Options from the Holders for a per share price equal to the fair market value of the Common Stock less the per share Exercise Price. Notwithstanding the foregoing, if the Company shall furnish to Holders requesting registration of Option Shares pursuant to this Section 10(b) a certificate signed by the President of the Company stating that a Blackout Period (as defined in Section 10(e)) is in effect, the Company shall have the right to defer such filing during the term of such Blackout Period. The Holder may, at its option, request the registration of the Option Shares in a registration statement made by the Company as contemplated by Section 10(a) or in connection with a request made pursuant to this Section 10(b) prior to the acquisition of the Option Shares upon exercise of the Option and even though the Holder has not given notice of exercise of the Option. If the Company determines to include securities to be sold by it in any registration statement originally requested pursuant to this Section 10(b), such registration shall instead be deemed to have been a registration under Section 10(a) and not under this Section 10(b). The Holder may thereafter at its option, exercise the Options at any time or from time to time subsequent to the effectiveness under the Act of the registration statement in which the Option Shares were included. (c) The following provisions of this Section 10 shall also be applicable: (i) Within ten days after receiving any such notice pursuant to Section 10(b), the Company shall give notice to the other Holders of Options and Option Shares, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein Option Shares of such other Holders, provided that they shall furnish the Company with such appropriate information in connection therewith as the Company shall reasonably request in writing to enable the Company to effect such registration. Following the effective date of such post-effective amendment or registration, the Company shall upon the request of any owner of Options and/or Option Shares forthwith supply such a number of prospectuses meeting the requirements of the Act, as shall be reasonably requested by such owner to permit such Holder to make a public offering of all Option Shares from time to time offered or sold to such Holder, provided that such Holder shall from time to time furnish the Company with such appropriate information in connection therewith as the Company shall request in writing to enable the Company to effect such registration. The Company shall also use its reasonable best efforts to qualify the Option Shares for sale in such states as such majority Holder shall reasonably designate. (ii) The Company shall bear the entire cost and expense of any registration of securities initiated by it under Section 10(a) notwithstanding that Option Shares subject to this Option may be included in any such registration. The Company shall also comply with one request for registration made by the majority holder pursuant to Section 10(b) at its own expense and without charge to any Holder of any Options and/or Option Shares; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 10(b) if the registration request is subsequently withdrawn at the request of the majority holder, in which case the Holders participating in such offering and favoring such withdrawal shall bear such expenses; provided further, however, that if such registration request has been withdrawn by virtue of a material adverse change in the condition, business, or prospects of the Company from that known to the majority holder at the time of its request, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 10(b). The Company shall comply with one additional request made by the majority holder pursuant to Section 10(b) (and not deemed to be pursuant to Section 10(a)) at the sole expense of such majority holder. Any Holder whose Option Shares are included in any such registration statement pursuant to this Section 10 shall, however, bear the fees of his, her, or its own counsel and any registration fees, transfer taxes or underwriting discounts or commissions applicable to the Option Shares sold by him, her, or it pursuant thereto. (iii) The Company shall indemnify and hold harmless each such Holder and each underwriter, within the meaning of the Act, who may purchase from or sell for any such Holder any Option Shares from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereto or any registration statement under the Act or any prospectus included therein required to be filed or furnished by reason of this Section 10 or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such Holder or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any such Holder or underwriter within the meaning of such Act provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Holder or any other Holder, specifically for use in the preparation thereof. (iv) Each Holder severally, but not jointly, shall indemnify and hold harmless the Company and each person who controls the Company, within the meaning of the Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereto or any registration statement under the Act or any prospectus included therein required to be filed or furnished by reason of this Section 10 or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided, however, that each Holder will be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Holder specifically for use in the preparation thereof. In no event, however, shall the liability of any Holder for indemnification under this Section 10 exceed the net proceeds received by such Holder from the sale of such Holder's Option Shares. (v) Neither the giving of any notice by any such majority holder nor the making of any request for prospectuses shall impose upon such majority holder making such request any obligation to sell any Option Shares, or exercise any Options. (d) The term "majority holder" as used in this Section 10 shall include any owner or combination of owners of Options or Option Shares in any combination if the holdings of the aggregate amount of (i) the Options held by him, her, or among them, plus (ii) the Options which he, she, or they would be holding if the Options for the Option Shares (provided such person can demonstrate to the Company's reasonable satisfaction that he, she, or it owns such Option Shares) owned by him, her, or among them had not been exercised, would constitute a majority of the Options originally issued. (e) The term "Blackout Period" as used in this Section 10 means any period (i) beginning on the date on which the Company notifies the Holders that the Board of Directors of the Company, in its good faith judgment, has determined that (A) disclosures in the registration statement could have an adverse effect on the Company's ability to engage in a merger, acquisition, or similar transaction, or (B) financial statements with respect to the Company that may be required to utilize a registration statement pursuant to Section 10(b) are unavailable; and (ii) ending on the date (1) with respect to Section 10(e)(i)(A) above, upon the earliest to occur of (x) the consummation of such merger, acquisition, or similar transaction, (y) the date on which the Company terminates discussions or any definitive agreement with respect to such merger, acquisition, or similar transaction, or (z) 180 days after the date on which the Company notifies the Holders of the Board of Directors' determination pursuant to Section 10(e)(i)(A); and (2) with respect to Section 10(e)(i)(B) above, as soon as financial statements sufficient to permit Company to file or permit the utilization of a registration statement under the Act have become available. (f) In the event the offering in which Option Shares are to be included pursuant to Section 10(a) is to be underwritten, the Company shall furnish the Holders with a written statement of the managing or principal underwriter as to the Maximum Includable Securities (as defined in Section 10(f)(iii), below) as soon as practicable after the Holder's request to have Option Shares included in such offering, as provided for in Section 10(a). If the total number of securities proposed to be included in such registration statement is in excess of the Maximum Includable Securities, the number of securities to be included within the coverage of such registration statement shall be reduced to the Maximum Includable Securities as follows: (i) no reduction shall be made in the number of shares of capital stock or other securities to be registered for the account of the Company or for the account of any of the Company's securityholders that have the right to require the Company to initiate the registration of such securities; and (ii) the number of Option Shares and other securities that may be included in the registration, if any, shall be allocated among the Holders of this Option and/or the Option Shares and holders of other securities (the "Other Holders") requesting inclusion on a pro rata basis, with the number of each type or class of securities of each Holder and Other Holder thereof included in the registration to be that number determined by multiplying (A) the total number of such type or class of security included in the Maximum Includable Securities less (B) the number of such type or class of security to be registered for the account of the Company or other securityholders that have the right to require the Company to initiate the registration, by a fraction, the numerator of which will be the total number of such type or class of security that such Holder or Other Holder owns, and the denominator of which will be the total number of such type or class of security owned by all Holders and Other Holders that have requested inclusion of such type or class of security in the registration. (iii) "Maximum Includable Securities" shall mean the maximum number of shares of each type or class of the Company's securities that a managing or principal underwriter, in its good faith judgment, deems practicable to offer and sell at that time in a firm commitment underwritten offering without materially and adversely affecting the marketability or price of the securities of the Company to be offered. When more than one type or class of the Company's securities are to be included in a registration, the managing or principal underwriter of the offering shall designate the maximum number of each such type or class of securities that is included in the Maximum Includable Securities. (g) The Company's agreements with respect to Option Shares under this Section 10 shall continue in effect regardless of the exercise and surrender of this Option. 11. OPTIONS NOT REDEEMABLE. Except as otherwise set forth herein, the Company shall not have the right to redeem this Option without the consent of the Holder. IN WITNESS WHEREOF, the Company has caused this Option to be executed by a duly authorized officer as of this _____ day of ____________, 2000. RADYNE COMSTREAM INC. By: _____________________________________ Its: ____________________________________ EXHIBIT A PURCHASE FORM Dated ____________, ____ The undersigned hereby irrevocably elects to exercise the within Option to the extent of purchasing _______ shares of Common Stock and hereby makes payment of _______ in payment of the actual exercise price thereof. ---------------- INSTRUCTIONS FOR REGISTRATION OF STOCK Name _______________________________________ (Please typewrite or print in block letters) Address ______________________________ ______________________________ ______________________________ Signature _____________________________ EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________________ hereby sells, assigns and transfers unto Name ____________________________________ (Please typewrite or print in block letters) Address ______________________________ ______________________________ ______________________________ the right to purchase Common Stock represented by this Option to the extent of ______ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint _______________________________ as attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Date ____________, ____ Signature _____________________________ Signature(s) guaranteed by:* ________________________________ *THE SIGNATURE(S) MUST BE GUARANTEED BY A BANK, SAVINGS AND LOAN ASSOCIATION, STOCKBROKER, OR CREDIT UNION WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTY MEDALLION PROGRAM PURSUANT TO SECURITIES EXCHANGE ACT RULE 17Ad-15. NOTARIZATION BY A NOTARY PUBLIC IS NOT ACCEPTABLE. REPRESENTATIVE'S PURCHASE OPTION TO PURCHASE COMMON STOCK OF RADYNE COMSTREAM INC. EXHIBIT C FORM OF LETTER FROM DORSEY & WHITNEY, LLP [_____________], 2000 H.D. Brous & Co., Inc. 40 Cuttermill Road Great Neck, NY 11021 Re: RADYNE COMSTREAM INC. Ladies and Gentlemen: We have acted as counsel to Radyne ComStream, Inc. (the "Company") in connection with the public offering by the Company of units, each unit consisting of one share of the Company's common stock and one warrant to purchase one share of common stock pursuant to the underwriting agreement dated as of _______________ ___, 2000, by and between the Company and H.D. Brous & Co., Inc., as representative of the several underwriters listed in such underwriting agreement (the "Underwriting Agreement"). This letter is being delivered pursuant to Section 6(f) of the Underwriting Agreement. All capitalized terms used herein and not defined herein have the meanings assigned to such terms in the Underwriting Agreement. In connection with the preparation of the Registration Statement and the Prospectus we have participated in various discussions and meetings with representatives of the Company, representatives of the Company's independent public accountants and your representatives. We have also examined copies of the documents incorporated by reference into the Registration Statement, and filed as exhibits thereto, certain minutes of meetings of the Board of Directors and shareholders of the Company, as set forth in the Company's minute books, and other documents furnished to us by the Company. Although we assume no responsibility for, and cannot guarantee, the accuracy, completeness or fairness of any of the statements contained in the Registration Statement and the Prospectus, during the course of the above-described procedures, nothing has come to our attention which would cause us to believe that the Registration Statement, or any amendment thereto, at the time the Registration Statement or amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that we make no statement herein as to financial statements and schedules, or other financial information or statistical data and information included or incorporated by reference in the Registration Statement. This letter is being furnished to you solely for your benefit in connection with the transactions described in the Underwriting Agreement. This letter may not be relied upon by you for any other purpose, and may not be relied upon by, nor may copies be delivered to, any other person without our prior written consent. Very truly yours, EX-4 3 EXHIBIT 4.2 EXHIBIT 4.2 WARRANT AGREEMENT THIS WARRANT AGREEMENT ("Agreement") is dated as of this ____ day of ____________, 2000, by and between Radyne ComStream Inc., a New York corporation (the "Company") and Continental Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). W I T N E S S E T H: WHEREAS, in connection with a public offering of up to 2,760,000 units (the "Units"), each Unit consisting of one share of common stock, par value $.002 per share of the Company (the "Common Stock") and one Redeemable Common Stock Purchase Warrant (the "Warrants") to purchase one share of Common Stock, pursuant to an underwriting agreement (the "Underwriting Agreement") dated as of ____________, 2000, between the Company and HD Brous & Co., Inc. (the "Representative"), the Company may issue up to 2,760,000 Warrants; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange, and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants, and the Warrant Agent, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located at the date of this Agreement at 2 Broadway, 19th floor, New York, New York 10004. (b) "Effective Date" shall mean the date that the Registration Statement is declared effective by the Securities and Exchange Commission (the "Commission"). (c) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (ii) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Purchase Price; provided, however, that, subject to Section 5 of this Agreement, if payment shall be made by personal or corporate check, the exercise of the Warrant 1 shall not be effective until the Warrant Agent shall be satisfied that the check shall have cleared; provided, further, that if such payment is made prior to the Warrant Expiration Date or the expiration of a period during which a reduced Purchase Price is in effect pursuant to Section 10(f) of this Agreement and the check shall not have cleared until after the Warrant Expiration Date or expiration of such period of a reduced Purchase Price, then the Warrant shall be deemed to have been exercised immediately prior to 5:00 p.m. Eastern time on the Warrant Expiration Date or expiration of such period of a reduced Purchase Price, as the case may be. (d) "Purchase Price" shall mean the purchase price per share to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be ____________________ dollars ($______) per share, subject to adjustment from time to time pursuant to the provisions of Section 10 of this Agreement. (e) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants, in accordance with the terms of this Agreement, which price shall be one cent ($.01) per Warrant. The Redemption Price shall not be subject to adjustment pursuant to this Agreement. (f) "Registration Statement" shall mean the Company's registration statement on Form S-2, File No. 333-90731, which was declared effective by the Commission on February __, 2000. (g) "Registered Holder" shall mean, as to any Warrant and as of any particular date, the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Section 7 of this Agreement. (h) "Transfer Agent" shall mean Continental Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. (i) "Warrant Certificate" shall mean the certificates for the Warrants in the form attached as Exhibit A to this Agreement. (j) "Warrant Expiration Date" shall mean 5:00 p.m. Eastern time on the first to occur of (i) ____________, 2005, or (ii) the business day immediately preceding the Redemption Date, as defined in Section 9(b) of this Agreement; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, the Warrant Expiration Date shall be the next day which is not such a date. The Company shall have the right to extend the Warrant Expiration Date upon notice to all Registered Holders. (k) "Warrant Shares" shall mean the shares of Common Stock issuable upon exercise of the Warrants. 2. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant Agent to act as agent of the Company for the Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the terms and conditions set forth in this Agreement. 2 3. WARRANTS AND ISSUANCE OF WARRANTS CERTIFICATES. (a) Each Warrant initially shall entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase upon the exercise thereof one share of Common Stock, subject to modification and adjustment as provided in Section 10 of this Agreement, at any time until 5:00 p.m., Eastern time, on the Warrant Expiration Date. (b) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants initially issuable pursuant to the Underwriting Agreement shall be executed by the Company and delivered to the Warrant Agent. Upon written order of the Company signed by its President or Chairman or a Vice President and by its Secretary or an Assistant Secretary or its Treasurer or an Assistant Treasurer given on or subsequent to the Separation Date, the Warrant Certificates shall be countersigned, issued, and delivered by the Warrant Agent. (c) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing the shares of Common Stock issuable upon the exercise of Warrants in accordance with this Agreement. (d) From time to time up to the Warrant Expiration Date, the Warrant Agent shall countersign Warrant Certificates in required whole number denominations and deliver to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder or otherwise issuable pursuant to the Underwriting Agreement; (ii) those issued upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder; (iii) those issued upon any transfer or exchange pursuant to Section 7 of this Agreement; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 8 of this Agreement; and (v) at the option of the Company, in such form as may be approved by the Board of Directors to reflect any adjustment or change in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants made pursuant to Section 10 of this Agreement. In addition, at the discretion of the Company, the Company may authorize the issuance of additional Warrants, which shall be subject to the provisions of this Agreement. 4. FORM AND EXECUTION OF WARRANT CERTIFICATES. (a) The Warrant Certificates shall be in registered form only. The text of the Warrant Certificates shall be substantially in the form attached as Exhibit A to this Agreement, the provisions of which are hereby incorporated herein, and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or trading market on which the Warrants may be listed, or to conform to usage or to the requirements of Section 4(b) of this Agreement. The Warrant 3 Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer or exchange in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrant Certificates shall be numbered serially with the letter R or other letters acceptable to the Company and the Warrant Agent. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed the Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Section 5 of this Agreement. 5. EXERCISE. Each Warrant may be exercised by the Registered Holder thereof at any time, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of those securities upon the exercise of the Warrant as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deliver the proceeds received from the exercise of a Warrant to the Company. As soon as practicable following confirmation from the Company of the receipt of payment of the Purchase Price, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise plus a certificate for any remaining unexercised Warrants of the Registered Holder, unless prior to the date of issuance of such certificates the Company shall instruct the Warrant Agent to refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. Notwithstanding the foregoing, in the case of payment made in the form of a check drawn on an account of the Representative or such other investment banks and brokerage houses as the Company shall approve in writing to the Warrant Agent, by the Representative or such other investment bank or brokerage house, certificates shall immediately be issued without prior notice to the Company or any delay. 6. RESERVATION OF SHARES; LISTING AND REGISTRATION; PAYMENT OF TAXES. (a) The Company has reserved and covenants that it shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable 4 upon the exercise of all outstanding Warrants. The Company covenants that all Warrant Shares shall, at the time of delivery in accordance with this Agreement, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Company shall promptly pay or discharge). Prior to the issuance of any shares of Common Stock upon exercise of the Warrants, the Company shall secure the listing of such shares on any and all national securities exchanges or approved for quotation on the level of The Nasdaq Stock Market, Inc. upon which any of the other shares of the Common Stock are then listed or quoted. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Company will use its reasonable best efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. Without limiting the foregoing, so long as any unexpired Warrants remain outstanding, the Company shall file such post-effective amendments to the Registration Statement or supplements to the Prospectus filed pursuant to the Securities Act of 1933, as amended (the "Act"), with respect to the Warrants (or such other registration statements or post-effective amendments or supplements) as may be necessary to permit trading in the Warrants and to permit the Company to deliver to each person exercising a Warrant a prospectus meeting the requirements of Section 10(a)(3) of the Act, and otherwise complying therewith; and the Company will, from time to time, furnish the Warrant Agent with such prospectuses in sufficient quantity to permit the Warrant Agent to deliver such a prospectus to each holder of a Warrant upon the exercise thereof. The Company will keep a copy of this Agreement on file with the Transfer Agent for the Common Stock and with every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance, or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company shall authorize the Transfer Agent to comply with all such proper requisitions. The Company will supply such Transfer Agent with duly executed certificates for such purpose and will itself provide or otherwise make available any cash as provided in Section 11 of this Agreement. The Company shall file with the 5 Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants. 7. EXCHANGE AND REGISTRATION OF TRANSFER. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office and, upon satisfaction of the terms and provisions of this Agreement, the Company shall execute and the Warrant Agent shall countersign, issue, and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to all Warrant Certificates presented for registration of transfer, exchange, or exercise, the subscription form on the reverse thereof shall be duly endorsed or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) A reasonable service charge may be imposed upon the Registered Holder by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchanges, registration or transfer of Warrant Certificates. (e) All Warrant Certificates surrendered for exercise or for exchange and all Warrant Certificates surrendered in the case of mutilated Warrant Certificates shall be promptly cancelled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or its resignation as Warrant Agent, or, with the prior written consent of the Representative, disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. 8. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or 6 mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. 9. REDEMPTION. (a) Commencing twelve (12) months from the Effective Date or earlier with the consent of the Representative, the Company shall have the right, on not less than thirty (30) nor more than sixty (60) days notice given prior to the Redemption Date (as defined in Section 9(b)), at any time to redeem all, but not less than all, of the then-outstanding Warrants at the Redemption Price, provided that (i) the Market Price (as defined below) of the Common Stock shall equal or exceed $__________ per share (as such amount shall be proportionately adjusted to reflect any increase or decrease in the number of shares of Common Stock outstanding that occurs as a result of any stock split, reverse stock split, stock dividends, combination or exchange of shares, consolidation, subdivision, or any like capital adjustment subsequent to the date of this Agreement), (ii) there is, on the date on which the Company's Board of Directors adopts a resolution approving and authorizing such redemption (the "Board Resolution"), a current and effective registration statement or a post-effective amendment to the Registration Statement covering the issuance of the Warrant Shares, and (iii) the Warrant Shares are listed for trading on the Nasdaq SmallCap Market, the Nasdaq National Market, the American Stock Exchange, or the New York Stock Exchange. For the purpose of this Section 9, the term "Market Price" shall mean, if the Common Stock is listed on the Nasdaq Stock Market or the New York or American Stock Exchange, the last reported sales price (or, if no sale is reported on any such trading day, the average of the closing bid and asked prices) on the principal market for the Common Stock or, if the Common Stock is not so listed or traded, the last reported bid price of the Common Stock, for each trading day of the 20 trading day period ending within five trading days prior to the date of the Board Resolution. Notice of redemption shall be mailed by first class mail, postage prepaid, not later than five business days (or such longer period to which the Representative may consent) after the date of the Board Resolution. (b) If the conditions set forth in Section 9(a) of this Agreement are met and the Company desires to exercise its right to redeem the Warrants, it shall request the Representative or the Warrant Agent to mail the notice of redemption referred to in Section 9(a) to each of the Registered Holders of the Warrants, first class, postage prepaid, not earlier than the sixtieth (60th) day nor later than the thirtieth (30th) day before the date fixed for redemption (the "Redemption Date"), at their last addresses as shall appear on the records maintained pursuant to Section 7(b) of this Agreement. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. The Warrant Agent agrees to mail such notice if requested by the Company or the Representative. 7 (c) The notice of redemption shall specify (i) the Redemption Price, (ii) the Redemption Date, (iii) the place where the Warrant Certificates shall be delivered for redemption, and (iv) that the right to exercise the Warrants shall terminate at 5:00 p.m. Eastern time on the business day immediately preceding the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder (A) to whom notice was not mailed or (B) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Representative or the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) If the Warrants shall have been redeemed, any right to exercise a Warrant shall terminate at 5:00 p.m. Eastern time on the business day immediately preceding the Redemption Date. After such time, Registered Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price without interest, subject to the provisions of applicable laws relating to the treatment of abandoned property. In the event that the Warrants or the Warrant Shares shall not be subject to a current and effective registration statement under the Act at any time subsequent to the date of the Board Resolution, and prior to the Redemption Date, the notice of redemption shall not be effective and shall be deemed for all purposes not to have been given. Nothing in the preceding sentence shall be construed to prohibit or restrict the Company from thereafter calling the Warrants for redemption in the manner provided for, and subject to the provisions of, this Section 9. (e) From and after the Redemption Date, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the Redemption Price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants to be redeemed, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the Redemption Price, shall cease. 10. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS. (a) In case the Company shall, at any time or from time to time after the date of this Agreement, pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, subdivide or reclassify its outstanding Common Stock into a greater number of shares, or combine or reclassify its outstanding Common Stock into a smaller number of shares or otherwise effect a combination of shares or reverse split, the Purchase Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised immediately prior to such time, he would have owned upon such exercise and been entitled to receive upon such dividend, 8 subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed in this Section 10(a) shall occur. (b) In case the Company shall, at any time or from time to time after the date of this Agreement, issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (or having a conversion price per share) less than the current market price of the Common Stock (as defined in Section 10(e) of this Agreement) on the record date mentioned below, the Purchase Price shall be adjusted so that the same shall equal the price determined by multiplying the Purchase Price in effect immediately prior to the date of such issuance by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the record date mentioned below plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants, the Purchase Price shall be readjusted to the Purchase Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) In case the Company shall, at any time or from time to time after the date of this Agreement, distribute to all holders of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions paid out of current earnings or surplus and dividends or distributions referred to in Section 10(a) of this Agreement) or subscription rights or warrants (excluding those referred to in Section 10(b) of this Agreement), then in each such case the Purchase Price in effect thereafter shall be determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined in Section 10(e) of this Agreement), less the aggregate fair market value (as determined by the Company's Board of Directors) of said assets or evidences of indebtedness so distributed or of such rights or warrants, and of which the denominator shall be the total number of shares or Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) Whenever the Purchase Price payable upon exercise of each Warrant is adjusted pursuant to Sections 10(a), (b) or (c) of this Agreement, the number of shares of Common Stock purchasable upon exercise of each Warrant shall simultaneously be adjusted 9 by multiplying the number of shares issuable upon exercise of each Warrant in effect on the date thereof by the Purchase Price in effect on the date thereof and dividing the product so obtained by the Purchase Price, as adjusted. (e) For the purpose of any computation pursuant to Sections 10(b), and (c) of this Agreement, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for thirty (30) consecutive trading days commencing forty-five (45) trading days before such date. The closing price for each day shall be the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the last reported high bid and low asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, if the Common Stock is admitted to trading or listing on the New York or American Stock Exchange or on The Nasdaq Stock Market if included in such system or if not listed or admitted to trading on such exchange or system, the average of the highest bid and lowest asked prices as reported by Nasdaq or the National Quotation Bureau, Inc. or another similar organization if Nasdaq is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors of the Company. (f) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least one cent ($0.01) in such price; provided, however, that any adjustments which by reason of this Section 10(f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 10 shall be made to the nearest cent or to the nearest one-tenth of a share, as the case may be. Notwithstanding anything in this Section 10 to the contrary, the Company may, upon notice to the Registered Holders of the Warrants, in its sole discretion, reduce the Purchase Price of the Warrants, and, if such reduction is not otherwise required by this Section 10, such reduction (i) will not, unless the Board of Directors otherwise determines, result in any change in the number or class of shares of Common Stock issuable upon exercise of such Warrants, and (ii) may be of limited duration, in which event the reduction in Purchase Price shall not apply to any Warrants exercised after the expiration of the time during which the reduced Purchase Price is in effect. (g) The Company may retain a firm of independent public accountants (which may be the regular accountants employed by the Company) of recognized standing selected by the Board of Directors of the Company to make any computation required by this Section 10, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (h) In the event that at any time, as a result of an adjustment made pursuant to Section 10(a) of this Agreement, the holder of any Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Sections 10(a) to (f), inclusive, of this Agreement. 10 (i) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 10, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 11 of this Agreement, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (j) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock), or in case of any sale or conveyance to another corporation of the assets of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provisions shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 10. The Company shall not effect any such consolidation, merger or sale unless, prior to or simultaneously with the consummation thereof, the successor (if other than the Company) resulting from such consolidation or merger or the corporation purchasing assets or other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that, as a result of any merger, consolidation or similar transaction, all of the holders of Common Stock receive and are entitled to receive no consideration other than cash in respect of their shares of Common Stock, then, at the effective time of the transaction, the rights to purchase Common Stock pursuant to the Warrants shall terminate, and 11 the holders of the Warrants shall, notwithstanding any other provisions of this Agreement or the Warrants, receive in respect of each Warrant to purchase one (1) share of Common Stock, upon presentation of the Warrant Certificate, the amount by which the consideration per share of Common Stock payable to the holders of Common Stock at such effective time exceeds the Purchase Price in effect on such effective date, without giving effect to the transaction. In the event that, subsequent to such effective time, additional cash or other consideration is payable to the holders of Common Stock of record as of such effective time, the same consideration shall be payable to the holders of the Warrants to the extent that the total cash then received by the holders of Common Stock exceeds the Purchase Price in effect at such effective date, without giving effect to the transaction, with the same effect as if the Warrants had been exercised on and as of such effective time. In the event of any merger, consolidation, sale or lease of substantially all of the Company's assets or reorganization whereby the Company is not the surviving corporation, in lieu of the foregoing provisions of this Section 10(j), the Company may provide in the agreement relating to the transaction that each Warrant shall become, be converted into or be exchanged for, such securities of the surviving or acquiring corporation or other entity as has a value equal to the value of the Warrants (which shall not exceed the amount by which the consideration to be received per share of Common Stock (valued on such date as the Company's Board of Directors shall determine) exceeds the Purchase Price of the Warrant), the value of the Warrants and securities being issued in exchange therefor to be determined by the Company's Board of Directors, such determination to be final, binding, and conclusive on the Company and the holders of the Warrants. In the event that, in such a transaction, the value of the consideration to be received per share of Common Stock is not greater than the exercise price of the Warrants, the Warrants shall terminate and no consideration will be paid in respect thereof. (k) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Sections 3(d) and 10(i) of this Agreement, continue to express the Purchase Price, the number of shares purchasable thereunder and the Redemption Price, as were expressed in the Warrant Certificates when the same were originally issued. (l) After any adjustment of the Purchase Price pursuant to this Section 10, the Company will promptly prepare a certificate signed by the Chairman, President, Vice President or Treasurer, of the Company setting forth (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the registered holder of each Warrant shall then be entitled, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by first class mail to the Representative and to each Registered Holder of Warrants at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, constitute prima facie evidence of the facts stated therein. 12 (m) As used in this Section 10, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the Effective Date and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the Effective Date or, in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Section 10(j) of this Agreement, the stock, securities or property provided for in such section or, in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (n) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to this Section 10, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (o) In lieu of an adjustment pursuant to Section 10(b) of this Agreement, if the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase Common Stock or securities convertible into or exchangeable for or carrying a right or warrant to purchase Common Stock, the Company may concurrently therewith grant to each Registered Holder, as of the record date for such transaction of the Warrants then outstanding, the rights or warrants to which each Registered Holder would have been entitled if, on the record date used to determine the stockholders entitled to the rights or warrants being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his Warrants. If the Company exercises such right no adjustment that otherwise might be called for pursuant to said Section 10(b) shall be made. 11. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 10 of this Agreement, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (a) If the Common Stock is listed on the New York or American Stock Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market, the current market value shall be the reported last sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant, or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system; or 13 (b) If the Common Stock is not listed or admitted to unlisted trading privileges, the current market value shall be the last reported bid price reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (c) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid prices are not so reported, the current value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 12. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained in this Agreement be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 13. RIGHTS OF ACTION. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. 14. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his acceptance of the Warrants, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true, and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 of this Agreement. 14 15. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. 16. CONCERNING THE WARRANT AGENT. (a) The Warrant Agent shall act hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions of this Agreement. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. (b) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. The Warrant Agent shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own gross negligence or willful misconduct. (c) The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. (d) Any notice, statement, instrument, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, its Secretary, or Assistant Secretary, unless other evidence in respect thereof is specifically prescribed in this Agreement. The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. (e) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder. The Company further agrees to indemnify the Warrant Agent and save it harmless against any and all costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses, and liabilities arising as a result of the Warrant Agent's gross negligence or willful misconduct. 15 (f) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own gross negligence or willful misconduct), after giving thirty (30) days' prior written notice to the Company. At least fifteen (15) days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such under this Agreement, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of fifteen (15) days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be either (i) a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or (ii) a stock transfer company. After the Company receives acceptance in writing of such appointment by the new warrant agent, such new warrant agent shall be vested with the same powers, rights, duties, and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason, it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. (g) Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. (h) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 17. MODIFICATION OF AGREEMENT. The Warrant Agent and the Company may, by supplemental agreement, make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant 16 Certificates representing not less than fifty percent (50%) of the Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed or are made in compliance with applicable law; and provided, further, that Section 9 may not be modified or amended without the consent of the Representative. 18. NOTICES. All notices provided for in this Agreement shall be in writing signed by the party giving such notice, and, unless otherwise expressly provided in this Agreement, delivered personally or sent by overnight courier or messenger against receipt thereof or sent by registered or certified mail (air mail if overseas), return receipt requested, or by facsimile transmission or similar means of communication. Notices sent by facsimile transmission or similar means of communication shall be confirmed by acknowledged receipt or by registered or certified mail, return receipt requested. Notices shall be deemed to have been received on the date of personal delivery or telecopy or, if sent by certified or registered mail, return receipt requested, shall be deemed to be delivered on the third business day after the date of mailing. Notices shall be sent to the Registered Holders at their respective addresses on the Warrant Agent's warrant register, to the Company at 3138 E. Elwood Street, Phoenix, Arizona 85034, telecopier (602) 437-4811, Attention: Robert C. Fitting, President and Chief Executive Officer, and to the Warrant Agent at its Corporate Office, attention Compliance Department, telecopier (212) 509-5151. Either party may, by like notice, change the address, person or telecopier number to which notice should be given. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements entered and to be performed wholly within such State, without regard to principles of conflicts of laws. The parties hereby (a) irrevocably consent and agree that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought exclusively in any federal or state court situated in New York County, New York, (b) irrevocably submit to and accept, with respect to their respective properties and assets, generally and unconditionally, the in personam jurisdiction of the aforesaid courts, and (c) agree that any process in any action commenced in such court under this Agreement may be served upon such party personally, by certified or registered mail, return receipt requested, or by overnight courier service which obtains evidence of delivery, with the same full force and effect as if personally served upon such party in New York City, in addition to any other method of service permitted by law. 20. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent, and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 21. TERMINATION. This Agreement shall terminate at the close of business on the Expiration Date or such earlier date upon which all Warrants have been exercised, except that 17 the Warrant Agent shall account to the Company for cash held by it, and the provisions of Section 16 of this Agreement shall survive any such termination. 22. COUNTERPARTS. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. RADYNE COMSTREAM INC. By: -------------------------------------- Robert C. Fitting, President and CEO CONTINENTAL STOCK TRANSFER & TRUST COMPANY By: -------------------------------------- , Authorized Officer 18 EXHIBIT A (FORM OF FACE OF WARRANT CERTIFICATE) No. R- Warrant to Purchase [------------] Shares of Common Stock Void after ____________, 2005 (or earlier upon redemption). RADYNE COMSTREAM INC. REDEEMABLE COMMON STOCK PURCHASE WARRANT This certifies that FOR VALUE RECEIVED ____________________ or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one (1) fully paid and nonassessable share of Common Stock, par value $.002 per share (the "Common Stock"), of Radyne ComStream Inc., a New York corporation (the "Company"), at any time until the Expiration Date, as hereinafter defined, by delivery of this Warrant, with the Subscription Form on the reverse hereof duly executed, at the corporate office of Continental Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $______, subject to adjustment as provided in the Warrant Agreement (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check or by personal or corporate check made payable to the order of the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated as of ____________, 2000, by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such WARRANTS. THE TERM "EXPIRATION DATE" SHALL MEAN 5:00 P.M. EASTERN TIME ON ____________, 2005 or earlier upon redemption as hereinafter provided. If such date shall in the State of New York be a holiday or a day on which the banks are authorized or required to close, then the 1 Expiration Date shall mean 5:00 p.m. Eastern time the next following day which in the State of New York is not a holiday or a day on which banks are authorized or required to close. Under certain circumstances as provided in the Warrant Agreement, the period during which the Warrant may be exercised may be extended. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. The Company has covenanted and agreed that it will file a registration statement and use its reasonable best efforts to cause the same to become effective and to keep such registration statement current while any of the Warrants are outstanding. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon payment by the Registered Holder of any tax or other governmental charge imposed in connection therewith for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Commencing ____________, 2001, or earlier as provided in the Warrant Agreement, this Warrant may be redeemed at any time at the option of the Company, at a redemption price of $.01 per Warrant, provided the "Market Price" (as defined in the Warrant Agreement) for the Common Stock shall equal or exceed $_____ per share, subject to adjustment. Notice of redemption shall be given not earlier than the 60th day nor later than the 30th day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after 5:00 p.m. Eastern time on the business day immediately preceding the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $.01 per Warrant upon surrender of this Warrant Certificate. This Warrant may only be called for redemption if, on the date on which the Company's Board of Directors approves and authorizes the redemption of the Warrants, (i) the issuance of the shares of Common Stock upon exercise of this Warrant is subject to a current and effective registration statement and (ii) the shares of Common Stock are listed for trading on the Nasdaq Stock Market, the American Stock Exchange, or the New York Stock Exchange. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon 2 made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to principles of conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. RADYNE COMSTREAM INC. Dated: By: ------------------------- ------------------------------- Its: ------------------------------- By: ------------------------------- Its: ------------------------------- Countersigned: CONTINENTAL STOCK TRANSFER & [Seal] TRUST COMPANY as Warrant Agent By: ------------------------------- Authorized Officer 3 (FORM OF REVERSE OF WARRANT CERTIFICATE) RADYNE COMSTREAM INC. SUBSCRIPTION FORM (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANTS) THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise ____________ Warrants represented by this Warrant Certificate to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (please print or type name and address) Please insert Social Security or other identifying number - ----------------------------------- and be delivered to - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. Dated: X --------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- Address ----------------------------------- Taxpayer Identification Number ----------------------------------- Signature Medallion Guaranteed ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO ASSIGN WARRANTS) FOR VALUE RECEIVED, ______________________________________ hereby sells, assigns and transfers unto - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (please print or type name and address) Please insert Social Security or other identifying number - ------------------------------ _________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ____________________________________________________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: X --------------------------- ----------------------------------- ----------------------------------- Signature Medallion Guaranteed ----------------------------------- THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR MIDWEST STOCK EXCHANGE. EX-4 4 EXHIBIT 4.3 (FORM OF FACE OF WARRANT CERTIFICATE) No. R- Warrant to Purchase [------------] Shares of Common Stock Void after ____________, 2005 (or earlier upon redemption). RADYNE COMSTREAM INC. REDEEMABLE COMMON STOCK PURCHASE WARRANT This certifies that FOR VALUE RECEIVED ______________________ or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one (1) fully paid and nonassessable share of Common Stock, par value $.002 per share (the "Common Stock"), of Radyne ComStream Inc., a New York corporation (the "Company"), at any time until the Expiration Date, as hereinafter defined, by delivery of this Warrant, with the Subscription Form on the reverse hereof duly executed, at the corporate office of Continental Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $______, subject to adjustment as provided in the Warrant Agreement (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check or by personal or corporate check made payable to the order of the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated as of ____________, 2000, by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 p.m. Eastern time on ____________, 2005 or earlier upon redemption as hereinafter provided. If such date shall in the State of New York be a holiday or a day on which the banks are authorized or required to close, then the Expiration Date shall mean 5:00 p.m. Eastern time the next following day which in the State of New York is not a holiday or a day on which banks are authorized or required to close. Under certain circumstances as provided in the Warrant Agreement, the period during which the Warrant may be exercised may be extended. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. The Company has covenanted and agreed that it will file a registration statement and use its reasonable best efforts to cause the same to become effective and to keep such registration statement current while any of the Warrants are outstanding. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon payment by the Registered Holder of any tax or other governmental charge imposed in connection therewith for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Commencing ____________, 2001, or earlier as provided in the Warrant Agreement, this Warrant may be redeemed at any time at the option of the Company, at a redemption price of $.01 per Warrant, provided the "Market Price" (as defined in the Warrant Agreement) for the Common Stock shall equal or exceed $_____ per share, subject to adjustment. Notice of redemption shall be given not earlier than the 60th day nor later than the 30th day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after 5:00 p.m. Eastern time on the business day immediately preceding the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $.01 per Warrant upon surrender of this Warrant Certificate. This Warrant may only be called for redemption if, on the date on which the Company's Board of Directors approves and authorizes the redemption of the Warrants, (i) the issuance of the shares of Common Stock upon exercise of this Warrant is subject to a current and effective registration statement and (ii) the shares of Common Stock are listed for trading on the Nasdaq Stock Market, the American Stock Exchange, or the New York Stock Exchange. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to principles of conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. RADYNE COMSTREAM INC. Dated: By: _____________________________ ____________________________________ Its: ____________________________________ By: ____________________________________ Its: ____________________________________ Countersigned: CONTINENTAL STOCK TRANSFER & [Seal] TRUST COMPANY as Warrant Agent By: ______________________________ Authorized Officer (FORM OF REVERSE OF WARRANT CERTIFICATE) RADYNE COMSTREAM INC. SUBSCRIPTION FORM (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANTS) THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise ____________ Warrants represented by this Warrant Certificate to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (please print or type name and address) Please insert Social Security or other identifying number __________________________________ and be delivered to ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. Dated: X _____________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ Address _________________________________________ Taxpayer Identification Number _________________________________________ Signature Medallion Guaranteed ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO ASSIGN WARRANTS) FOR VALUE RECEIVED, __________________________________________ hereby sells, assigns and transfers unto ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (please print or type name and address) Please insert Social Security or other identifying number __________________________________ _________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ____________________________________________________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: X __________________________________ _________________________________________ _________________________________________ _________________________________________ Signature Medallion Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR MIDWEST STOCK EXCHANGE. EX-5 5 EXHIBIT 5.1 EXHIBIT 5.1 [LETTERHEAD OF DORSEY & WHITNEY LLP] February 7, 2000 The Board of Directors Radyne Comstream Inc. 3138 East Elwood Street Phoenix, Arizona 85034 Ladies and Gentlemen: We are acting as counsel to Radyne Comstream, Inc., a New York corporation (the "Company"), in connection with the Registration Statement on Form S-2 (Commission File No. 333-90731), as amended (the "Registration Statement"), filed by the Company under the Securities Act of 1933, as amended, and the rules and regulations thereunder, relating to the registration of (i) 2,760,000 units, including units to cover overallotments, consisting of 2,760,000 shares (the "Shares"), of the Company's common stock, $0.002 par value per share (the "Common Stock") and redeemable Common Stock Purchase Warrants (the "Warrants") to purchase 2,760,000 shares of Common Stock, for sale by the underwriters (as such term is described in the Registration Statement), (ii) 2,760,000 shares of Common Stock issuable upon exercise of the Warrants, (iii) an option to HD Brous & Co., as the representative of several underwriters, to purchase 240,000 shares of Common Stock (the "Representative's Purchase Option"), and (iv) 240,000 shares of Common Stock issuable upon exercise of the Representative's Purchase Option. As such counsel, we have participated in the preparation of the Registration Statement, and have reviewed the corporate proceedings of the Company in connection therewith and have also examined and relied upon originals or copies, certified or otherwise authenticated to our satisfaction of all such corporate records, documents, agreements, instruments relating to the Company and certificates of public officials and of representatives of the Company, and have also made such investigations of law and have discussed with representatives of the Company and such other persons such questions of fact, as we have deemed proper and necessary as a basis for rendering this opinion. Based upon, and subject to, the foregoing, we are of the opinion that: (i) the Shares, the Warrants, the shares of Common Stock issuable upon exercise of the Warrants, the Representative's Purchase Option, and the shares of Common Stock issuable upon exercise of the Representative's Purchase Option have been duly authorized; (ii) the Shares, when duly delivered and paid for, pursuant to the terms of a validly authorized and executed underwriting agreement, substantially in the form attached as Exhibit 1.1 to the Registration Statement, will be duly and validly issued, fully paid and non-assessable; (iii) the Warrants, when duly delivered and paid for, pursuant to the terms of a validly authorized and executed underwriting agreement, substantially in the form attached as Exhibit 1.1 to the Registration Statement, and a validly authorized and executed warrant agreement, substantially in the form attached as Exhibit 4.2 to the Registration Statement (the "Warrant Agreement"), will constitute legal, valid and binding obligations of the Company, enforceable (except as may be limited by applicable bankruptcy, insolvency or similar laws affecting the rights of creditors generally) as to the Company in accordance with its terms; (iv) the shares of Common Stock issuable upon exercise of the Warrants, pursuant to the terms of a validly authorized and executed Warrant Agreement, will be duly and validly issued, fully paid and non-assessable; and (v) the Representative's Purchase Option, when duly delivered and paid for, pursuant to the terms of validly authorized and executed underwriting agreement, substantially in the form attached as Exhibit 1.1 to the Registration Statement, and a validly authorized and executed representative's purchase option, substantially in the form attached as Exhibit 4.4 to the Registration Statement, will constitute legal, valid and binding obligations of the Company, enforceable (except as may be limited by applicable bankruptcy, insolvency or similar laws affecting the rights of creditor generally) as to the Company in accordance with its terms. (vi) the shares of Common Stock issuable upon exercise of the Representative's Purchase Option, pursuant to the terms of a validly authorized and executed Representative's Purchase Option, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. In giving the foregoing consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ Dorsey & Whitney LLP EX-23 6 EXHIBIT 23.1 Exhibit 23.1 Independent Auditors' Report The Board of Directors and Stockholders Radyne ComStream Inc.: We consent to the use 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, included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. KPMG LLP Phoenix, Arizona February 4, 2000 1 EX-23 7 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion and incorporation by reference in this Amendment No. 3 to the Registration Statement No. 333-90731 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. for the year ended December 31, 1998, and to the reference to us under the heading "Experts" in the Prospectus, which is part of such Registration Statement. DELOITTE & TOUCHE Phoenix, Arizona February 4, 2000 EX-23 8 EXHIBIT 23.3 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. 3 to the Registration Statement (Form S-2) and related Prospectus of Radyne ComStream Inc. for the registration of 2,760,000 units, consisting of 2,760,000 shares of common stock and 2,760,000 redeemable common stock purchase warrants to purchase 2,760,000 shares of 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. ERNST & YOUNG San Diego, California February 4, 2000 [Letterhead of Dorsey & Whitney LLP] KEVIN T. COLLINS (212) 415-9319 February 7, 2000 VIA EDGAR Securities and Exchange Commission 450 5th Street, NW Washington, D.C. 20549 Re: Radyne ComStream Inc. File No. 333-90731 Dear Sir/Madame: On behalf of our client, Radyne ComStream Inc., attached is Amendment No. 3 to the Registration Statement on Form S-2 to be filed via edgar. An additional filing fee of $2,035 was paid to Mellon Bank on February 7. Please do not hesitate to contact me with any questions or comments you may have at (212) 415-9319, or John B. Wade III at (212) 415-9311. Thank you. Very truly yours, /s/ KEVIN T. COLLINS Kevin T. Collins Attachments -----END PRIVACY-ENHANCED MESSAGE-----